<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30,
1998 REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
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 the Proxy Statement/Prospectus.
------------------------------
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. / /
------------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER UNIT OFFERING PRICE FEE(2)
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per
share 20,715,607 shares (2) (2) $33,591.88
</TABLE>
(1) Represents the estimated maximum number of shares of Wisdom Holdings, Inc.
("Wisdom") common stock that may be issued upon consummation of the mergers
described in this Registration Statement. The number of shares of Wisdom
common stock to be registered pursuant to this Registration Statement is
based upon the aggregate number of shares of Gentle Dental Service
Corporation and Dental Care Alliance, Inc. common stock expected to be
outstanding immediately prior to the effective time of the mergers.
(2) Pursuant to Rule 457(f)(1) under the Securities Act of 1933, as amended, the
registration fee is based on the average of the bid and asked prices on
October 26, 1998 of the Gentle Dental common stock on the Nasdaq SmallCap
Market-Registered Trademark- and of the Dental Care Alliance common stock on
the Nasdaq National Market-Registered Trademark- and computed based on
8,973,727 shares of Gentle Dental common stock and 7,031,066 shares of
Dental Care Alliance common stock outstanding as of September 30, 1998,
representing the estimated maximum number of shares of Gentle Dental common
stock and Dental Care Alliance common stock that may be exchanged in the
mergers for shares of Wisdom Holdings common stock being registered.
------------------------------
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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- --------------------------------------------------------------------------------
<PAGE>
[GENTLE DENTAL LOGO] [DCA LOGO]
MERGERS PROPOSED--YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Gentle Dental Service Corporation and Dental Care
Alliance, Inc., have agreed on a combination of Gentle Dental Service
Corporation and Dental Care Alliance, Inc. This proposed transaction will create
one of the largest dental practice management companies in the nation. The new
company will be an effective competitor on many fronts, with affiliated dental
practices in California, Florida, Georgia, Hawaii, Idaho, Indiana, Michigan,
Oregon and Washington. We believe that this proposed combination will position
us to grow and improve our prospects as the dental practice management business
evolves and continues to consolidate.
In the proposed combination, Gentle Dental and Dental Care Alliance will each
become a wholly-owned subsidiary of a new corporation to be headquartered in El
Segundo, California and named "Wisdom Holdings, Inc." The new company is a
Delaware corporation. Each share of Gentle Dental common stock that you hold
will be converted automatically into the right to receive one share of common
stock of the new company. Each share of Gentle Dental preferred stock will be
converted into the right to receive one share of preferred stock of the new
company with the same rights, preferences and privileges as to the new company
as the shares of preferred stock had as to Gentle Dental. Each share of Dental
Care Alliance common stock that you hold will be converted into the right to
receive 1.67 shares of common stock of the new company. The new company will not
issue fractional shares but will pay cash instead based on the fair market value
of Gentle Dental common stock prior to the combination.
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 Agreement and Plan of Reorganization and Merger. 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 Agreement and Plan of
Reorganization and Merger.
See "Risk Factors" beginning on page 14 for a discussion of certain factors
which stockholders of Gentle Dental and Dental Care Alliance should consider in
connection with their vote.
The dates, times and places of the meetings are as follows:
FOR GENTLE DENTAL FOR DENTAL CARE ALLIANCE
SHAREHOLDERS: STOCKHOLDERS:
, 1998 a.m., local time , 1998 a.m., local time
This document provides you with detailed information about these meetings and
the proposed combination. You can also get information about our companies from
publicly available documents that our companies have filed with the Securities
and Exchange Commission. We encourage you to read this entire document
carefully.
We strongly support this combination of our companies and join with members of
our Boards of Directors in enthusiastically recommending that you vote in favor
of the Agreement and Plan of Reorganization and Merger.
[SIGNATURE] [SIGNATURE]
Michael T. Fiore Dr. Steven R. Matzkin
Co-Chairman, Chief Executive Officer Chairman, Chief Executive Officer and
and President President
Gentle Dental Service Corporation Dental Care Alliance, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS JOINT PROXY
STATEMENT-PROSPECTUS OR DETERMINED IF THIS JOINT PROXY STATEMENT-PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
JOINT PROXY STATEMENT-PROSPECTUS DATED , 1998
AND FIRST MAILED TO STOCKHOLDERS ON , 1998
<PAGE>
[GENTLE DENTAL LOGO]
GENTLE DENTAL SERVICE CORPORATION
------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
El Segundo, California
, 1998
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 , , 1998, 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 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 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 the Agreement and Plan of
Reorganization and Merger.
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 , 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 Agreement and Plan of Reorganization and Merger 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 Agreement and Plan of Reorganization and 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 Agreement
and Plan of Reorganization and 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
, 1998
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 , 1998, 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 the Agreement and Plan of
Reorganization and Merger.
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 , 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. FOR YOUR
CONVENIENCE, WE HAVE INCLUDED AN INDEX OF FREQUENTLY USED CAPITALIZED TERMS IN
THIS JOINT PROXY STATEMENT-PROSPECTUS IN AN INDEX OF DEFINED TERMS, WHICH IS
PRINTED AS THE LAST ITEM IN THE SUMMARY SECTION OF THIS JOINT PROXY
STATEMENT-PROSPECTUS.
TABLE OF CONTENTS
SUMMARY
RISK FACTORS
THE MEETINGS
THE MERGERS
INFORMATION ABOUT OUR COMPANIES
ADDITIONAL INFORMATION
FINANCIAL INFORMATION
APPENDICES
<PAGE>
TABLE CONTENTS
<TABLE>
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PAGE
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<S> <C>
SUMMARY
The Companies............................................................................................. 1
The Stockholders' Meetings................................................................................ 1
Record Date; Vote Required................................................................................ 1
Our Reasons for the Mergers............................................................................... 2
Our Recommendations to Stockholders....................................................................... 2
Risk Factors.............................................................................................. 2
The Mergers............................................................................................... 3
General................................................................................................. 3
Exchange of Shares...................................................................................... 3
Opinions of Financial Advisors.......................................................................... 4
Stock Options and Other Stock Rights.................................................................... 4
Management and Operations after the Mergers............................................................. 4
What We Need to do to Complete the Mergers.............................................................. 5
Termination of the Agreement; Expenses.................................................................. 5
Stockholders' Agreement................................................................................. 6
Waiver and Amendment.................................................................................... 6
Accounting Treatment.................................................................................... 6
Regulatory Approvals.................................................................................... 6
Interests of Directors and Officers in the Merger that are Different From Your Interests................ 7
Appraisal Rights........................................................................................ 7
Certain Federal Income Tax Consequences................................................................. 7
Certain Differences in the Rights of Stockholders......................................................... 7
Selected Unaudited Comparative Per Share Data............................................................. 8
Summary Consolidated Pro Forma Financial and Operating Data............................................... 9
Index of Defined Terms.................................................................................... 13
RISK FACTORS
Forward-Looking Statements May Not Prove Accurate......................................................... 14
Ability to Integrate the Operations of Gentle Dental and Dental Care Alliance; Rapid Growth............... 14
Expansion Program......................................................................................... 15
Risks Associated with Expansion within Existing Markets................................................... 15
Additional Management and Staffing of Dental Practices.................................................... 16
Availability of Financing................................................................................. 16
Dependence on Affiliated Dental Practices................................................................. 16
Risks Associated with Notes, Advances and Management Fee Receivables from Affiliated Professional
Associations............................................................................................ 17
Government Regulation..................................................................................... 17
Dependence on Third-Party Payors; Risks Associated with Managed Care...................................... 20
Competition............................................................................................... 20
Dependence upon Key Personnel............................................................................. 21
Availability of Dental Professionals...................................................................... 21
Risks Associated with Management Agreements and other Intangible Assets................................... 21
Potential Liability and Insurance......................................................................... 22
Geographic Concentration.................................................................................. 22
Shares Eligible for Future Sale........................................................................... 22
Common Stock Put Rights................................................................................... 23
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
No Prior Markets Possible Volatility of Stock Price....................................................... 23
Certain Anti-Takeover Provisions.......................................................................... 24
Year 2000 Risks and Preparedness.......................................................................... 24
THE MEETINGS
Gentle Dental Special Meeting............................................................................. 25
General................................................................................................. 25
Matters to be Considered................................................................................ 25
Proxies................................................................................................. 25
Solicitation of Proxies................................................................................. 25
Record Date and Voting Rights........................................................................... 26
Recommendation of Gentle Dental Board................................................................... 27
Independent Auditors.................................................................................... 27
Dental Care Alliance Special Meeting...................................................................... 27
General................................................................................................. 27
Matters to be Considered................................................................................ 27
Proxies................................................................................................. 27
Solicitation of Proxies................................................................................. 28
Record Date and Voting Rights........................................................................... 28
Recommendation of Dental Care Alliance Board............................................................ 29
Independence Auditors................................................................................... 29
THE MERGERS
General................................................................................................... 30
Background of the Mergers................................................................................. 30
Recommendation of the Gentle Dental Board and Reasons for the Merger...................................... 32
Recommendation of the Dental Care Alliance Board and Reasons for the Merger............................... 33
Opinion of Gentle Dental's Financial Advisor.............................................................. 35
Opinion of Dental Care Alliance's Financial Advisors...................................................... 39
Structure of the Mergers.................................................................................. 45
Exchange of Stock; Treatment of Options and Other Rights to Acquire Gentle Dental Capital Stock........... 45
Exchange of Certificates; Fractional Shares............................................................... 47
Effective Time............................................................................................ 48
Representations and Warranties............................................................................ 49
Conduct of Business Pending the Mergers and Other Agreements.............................................. 49
Conditions to Consummation of the Mergers................................................................. 51
Regulatory Approvals Required for the Mergers............................................................. 53
Certain Federal Income Tax Consequences................................................................... 54
Accounting Treatment...................................................................................... 55
Termination of the Merger Agreement....................................................................... 56
Waiver and Amendment of the Agreement..................................................................... 56
Employee Benefits and Plans............................................................................... 57
Stock Exchange Listing.................................................................................... 58
Expenses.................................................................................................. 58
Interests of Certain Persons in the Merger................................................................ 58
Restrictions on Resales by Affiliates..................................................................... 59
The Stockholder Agreements................................................................................ 60
</TABLE>
ii
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<TABLE>
<CAPTION>
PAGE
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OPERATIONS AND MANAGEMENT OF WISDOM HOLDINGS AFTER THE MERGER
Operations................................................................................................ 61
Executive Officers........................................................................................ 61
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, 1997 Statement of Operations Compared to Year Ended December 31, 1996
Statement of Operations.............................................................................. 67
Six Months Ended June 30, 1997 Statement of Operations Compared to Six Months Ended June 30, 1998
Statement of Operations.............................................................................. 69
Liquidity and Capital Resources....................................................................... 70
Recent Developments................................................................................... 71
Certain Transactions Regarding Gentle Dental.......................................................... 73
Gentle Dental's Principal Shareholders.................................................................... 77
Gentle Dental's Management and Additional Information................................................... 79
Directors and Executive Officers...................................................................... 79
Classified Board...................................................................................... 81
Board Committees...................................................................................... 81
Additional Information................................................................................ 82
Information About Dental Care Alliance.................................................................... 82
General................................................................................................. 82
Dental Care Alliance Selected Consolidated Financial Data............................................... 84
Dental Care Alliance's Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................................ 85
Overview.............................................................................................. 85
Acquisitions.......................................................................................... 89
Results of Operations................................................................................. 89
Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997....................... 89
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996........................... 90
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995............................... 91
Seasonality........................................................................................... 92
Quarterly Financial Information....................................................................... 92
Liquidity and Capital Resources....................................................................... 93
Inflation............................................................................................. 94
Dental Care Alliance's Management and Additional Information............................................ 95
Directors and Executive Officers...................................................................... 95
Executive Compensation................................................................................ 96
Option Grants......................................................................................... 97
Employment Agreements................................................................................. 98
Certain Transactions Regarding Dental Care Alliance................................................... 99
Dental Care Alliance's Principal Stockholders......................................................... 101
DESCRIPTION OF WISDOM HOLDINGS CAPITAL STOCK
Wisdom Holdings Common Stock.............................................................................. 102
</TABLE>
iii
<PAGE>
<TABLE>
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PAGE
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<S> <C>
Wisdom Holdings Preferred Stock........................................................................... 102
DESCRIPTION OF GENTLE DENTAL CAPITAL STOCK
Gentle Dental Common Stock................................................................................ 103
Gentle Dental Preferred Stock............................................................................. 103
CERTAIN DIFFERENCES BETWEEN WASHINGTON AND DELAWARE CORPORATE LAWS
Amendment of Articles/Certificates of Incorporation....................................................... 107
Right to Call Special Meeting of Shareholders............................................................. 107
Indemnification of Officers, Directors and Employees...................................................... 108
Provisions Affecting Control Share Acquisitions and Business Combinations................................. 108
Mergers, Sales of Assets and other Transactions........................................................... 110
Action Without a Meeting.................................................................................. 110
Class Voting.............................................................................................. 111
Transactions with Officers or Directors................................................................... 111
Dissenters' or Appraisal Rights........................................................................... 112
Dividends................................................................................................. 112
ADDITIONAL INFORMATION
Dissenters' Appraisal Rights.............................................................................. 113
Legal Matters............................................................................................. 114
Experts................................................................................................... 114
Stockholder Proposals..................................................................................... 115
Where You Can Find More Information....................................................................... 116
Forward-Looking Statements................................................................................ 118
INDEX OF FINANCIALS
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................................................................................................ B-1
Appendix C................................................................................................ C-1
Appendix D................................................................................................ D-1
Appendix E................................................................................................ E-1
</TABLE>
iv
<PAGE>
SUMMARY
THIS BRIEF SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THE JOINT PROXY
STATEMENT-PROSPECTUS. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THE ENTIRE JOINT PROXY
STATEMENT-PROSPECTUS, APPENDICES AND THE OTHER DOCUMENTS TO WHICH THIS DOCUMENT
REFERS IN ORDER TO FULLY UNDERSTAND THE AGREEMENT AND PLAN OF REORGANIZATION AND
MERGER. SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 118.
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 June
30, 1998, our total assets were $90.8 million, and our total shareholders'
equity was $35.9 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 and Michigan. At June 30, 1998,
our total assets were $31.5 million and our total stockholders' equity was $26.1
million.
THE STOCKHOLDERS' MEETINGS (PAGE 25)
GENTLE DENTAL SHAREHOLDERS. The Gentle Dental special meeting will be held on
, 1998 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 , , 1998 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.
RECORD DATE; VOTE REQUIRED (PAGE 26)
GENTLE DENTAL SHAREHOLDERS. You can vote on the Agreement and Plan of
Reorganization and Merger 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 , 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. In order to approve the Agreement and Plan of Reorganization
and Merger, the holders of a majority of the outstanding shares of Gentle Dental
common stock and Gentle Dental Series D preferred stock, voting together as a
single class, must vote in its favor. In addition, in order to approve the
Agreement and Plan of Reorganization and Merger, the holders of a majority of
the outstanding shares of Gentle Dental Series A, Series C and Series D
preferred stock, voting as separate classes, must vote in its favor. You can
vote your shares by attending the Gentle Dental meeting and voting in person or
you can mark the enclosed proxy card with your vote, sign it and mail it in the
enclosed return envelope. You can revoke your proxy as late as the date of the
meeting either by sending in a new proxy or by attending the meeting and voting
in person.
1
<PAGE>
Certain officers, directors and significant shareholders of Gentle Dental have
entered into Stockholders' Agreements in which they have agreed to vote "FOR"
the adoption and approval of the Agreement and Plan of Reorganization and
Merger. These officers, directors and significant shareholders collectively hold
a sufficient number of outstanding shares of Gentle Dental common stock and
preferred stock to cause Gentle Dental to approve the Agreement and Plan of
Reorganization and Merger. See "The Merger--The Stockholders' Agreements."
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 , 1998. You can cast one vote for each share of Dental Care
Alliance common stock that you owned at that time. In order to approve the
Agreement and Plan of Reorganization and Merger, the holders of a majority of
the shares of Dental Care Alliance common stock outstanding must vote in its
favor. You can vote your shares by attending the Dental Care Alliance meeting
and voting in person, or by marking the enclosed proxy card with your vote,
signing it and mailing it in the enclosed return envelope. You can revoke your
proxy as late as the date of the meeting either by sending in a new proxy or by
attending the meeting and voting in person.
Certain officers and directors of Dental Care Alliance have entered into
Stockholders' Agreements in which they have agreed to vote "FOR" the adoption
and approval of the Agreement and Plan of Reorganization and Merger. These
officers and directors collectively hold a sufficient number of outstanding
shares of Dental Care Alliance common stock to cause Dental Care Alliance to
approve the Agreement and Plan of Reorganization and Merger. See "The
Merger--Stockholders' Agreements."
OUR REASONS FOR THE MERGERS (PAGES 32 AND 33)
Our companies are proposing to combine because we believe that together we can
create a larger and more stable company that will provide significant benefits
to our stockholders. For instance, the larger size of the newly combined company
should help us to reduce duplicate costs. We also believe that the new company
can do a better job of increasing our revenues than we could if we did not
merge. We believe that 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 our businesses and the advice of our financial and legal
advisors and of our independent public accountants. To review our reasons for
the combination between Gentle Dental and Dental Care Alliance and the factors
we considered in greater detail, as well as how we came to agree on the
combination, please see pages through .
OUR RECOMMENDATIONS TO STOCKHOLDERS (PAGES 32 AND 33)
GENTLE DENTAL SHAREHOLDERS. The Board of Directors of Gentle Dental believes
that the Agreement and Plan of Reorganization and Merger is fair to you and in
your best interests, and recommends that you vote "FOR" the proposal to approve
the Agreement and Plan of Reorganization and Merger.
DENTAL CARE ALLIANCE STOCKHOLDERS. The Board of Directors of Dental Care
Alliance believes that the Agreement and Plan of Reorganization and Merger is
fair to you and in your best interests, and unanimously recommends that you vote
"FOR" the proposal to approve the Agreement and Plan of Reorganization and
Merger.
2
<PAGE>
RISK FACTORS (PAGE 14)
In deciding whether to vote for the approval of the Agreement and Plan of
Reorganization and Merger, you should carefully evaluate the information
provided in the section entitled "Risk Factors" in addition to the other
information described in this Joint Proxy Statement-Prospectus.
THE MERGERS (PAGE 30)
WE HAVE ATTACHED THE AGREEMENT AND PLAN OF REORGANIZATION AND MERGER TO THIS
DOCUMENT AS APPENDIX A WHICH DESCRIBES THE COMBINATION BETWEEN OUR COMPANIES.
PLEASE READ THE 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 wholly-owned acquisition 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 the end of 1998.
EXCHANGE OF SHARES (PAGE 45)
GENTLE DENTAL SHAREHOLDERS. As a Gentle Dental shareholder, 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.
Following the mergers, you will be entitled to exchange your shares of Gentle
Dental common stock and preferred stock for shares of the new company's common
stock or preferred stock, as the case may be, by sending your Gentle Dental
common stock and preferred stock share certificates and a form that we will send
to you to , which will then exchange them for shares of the new
company's common stock and preferred stock, as the case may be. For more
information on how this exchange procedure works, see "Exchange of Certificates;
Fractional Shares" on page 47 of this document. For example, if you owned ten
shares of Gentle Dental common stock, after the mergers you will send in the
letter of transmittal and your old Gentle Dental certificates and in exchange
you will receive ten shares of the new company's common stock.
DENTAL CARE ALLIANCE STOCKHOLDERS. As a Dental Care Alliance stockholder, 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. Following
the mergers, you will be entitled to exchange your shares of Dental Care
Alliance common stock for shares of the new company's common stock by sending
your Dental Care Alliance common stock share certificates and a form that we
will send to you to , which will then exchange them for 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 47 of
this document. For example, if you owned ten shares of Dental Care Alliance
common stock, after the mergers you will send in the letter of transmittal and
your old Dental Care Alliance certificates and in exchange you will receive 16
shares of the new company's common stock and a check for the market value of
seven-tenths of a share of Gentle Dental common stock.
Shares of Gentle Dental common stock are quoted on the Nasdaq Small Cap Market.
Shares of Dental Care Alliance common stock are quoted on the Nasdaq National
Market. On October 15, 1998, the last trading day before we announced the
execution of the Agreement and Plan of Reorganization and Merger, the average of
the closing bid and ask prices of Gentle Dental common stock on the Nasdaq Small
Cap Market was $5.6875 per share and the average of the closing bid and ask
prices of Dental Care Alliance common stock on the Nasdaq National Market was
$9.6250 per
3
<PAGE>
share. On , 1998, the average of the closing bid and ask prices of
Gentle Dental common stock on the Nasdaq Small Cap Market was $ per share
and the average of the closing bid and ask prices of Dental Care Alliance common
stock on the Nasdaq National Market was $ per share.
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 stock broker, in major newspapers such as THE
WALL STREET JOURNAL and on the Internet.
In addition, each share of Gentle Dental preferred stock that is outstanding
immediately prior to the completion of the mergers will become one share of
preferred stock of the new company having the same terms.
OPINIONS OF FINANCIAL ADVISORS (PAGES 35 AND 39)
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 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 this
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 is fair to the holders of Dental Care
Alliance common stock 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 this opinion.
STOCK OPTIONS AND OTHER STOCK RIGHTS
(PAGE 45)
GENTLE DENTAL STOCK OPTIONS AND OTHER STOCK RIGHTS. Upon completion of the
mergers, each option, warrant, convertible security or other right to acquire
Gentle Dental common stock that is outstanding and unexercised immediately
before completing the mergers will become an option, warrant, convertible
security or other right to purchase or acquire the same number of shares of the
new company's common stock at the same exercise or conversion price. The options
will continue to be governed by the terms of Gentle Dental's stock option plans.
DENTAL CARE ALLIANCE STOCK OPTIONS AND OTHER STOCK RIGHTS. Upon completion of
the mergers, each option, warrant or other right to acquire Dental Care Alliance
common stock that is outstanding and unexercised immediately before completing
the mergers will become an option, warrant or other right to purchase that
number of shares of the new company's common stock that is equal to 1.67
multiplied by the number of shares underlying each option, warrant or other
right. The options will continue to be governed by the terms of Dental Care
Alliance's stock option plans.
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
4
<PAGE>
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. For example, we believe that the combination will allow us
to eliminate certain duplicate expenses. We also expect to recognize a one-time
charge to earnings related to expenses and costs of integrating our two
companies in the year in which we complete the mergers.
WHAT WE NEED TO DO TO COMPLETE THE MERGERS (PAGE 51)
The completion of the mergers depends on a number of conditions being met. In
addition to our compliance with the Agreement and Plan of Reorganization and
Merger, these include:
- - Approval of the Agreement and Plan of Reorganization and Merger by both the
Gentle Dental shareholders and the Dental Care Alliance stockholders.
- - Approval of certain federal and state regulatory authorities as to certain
transactions contemplated by the Agreement and Plan of Reorganization and
Merger and expiration of all applicable statutory waiting periods.
- - Receipt by each of Gentle Dental and Dental Care Alliance of a legal opinion
that, for United States federal income tax purposes, Gentle Dental
shareholders and Dental Care Alliance stockholders who exchange their shares
for shares of the new company's common or preferred stock, as applicable, will
not recognize any gain or loss as a result of the mergers, except in
connection with the payment of cash instead of fractional shares. These
opinions will be subject to various limitations and we recommend that you read
a fuller description of tax consequences provided in this document on page
.
- - Receipt of letters from our independent accountants that the mergers will
qualify for "pooling of interests" accounting treatment. While our companies'
receipt of such letters are a condition to completion of the mergers, there is
no assurance that the Securities and Exchange Commission will not come to a
different conclusion which would require the new company to account for the
mergers under the purchase method of accounting.
- - Approval by the Nasdaq National Market of the listing of shares of the new
company's common stock to be issued as a result of each merger.
- - The absence of any injunction or legal restraint blocking either merger or
government proceedings trying to block either merger.
- - Entering into employment agreements with certain officers and certain other
agreements.
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 AGREEMENT; EXPENSES (PAGE 56)
We can agree at any time to terminate the Agreement and Plan of Reorganization
and Merger 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 Agreement and Plan of Reorganization and Merger
if:
- - Any government agency denies an approval we need to compete the mergers, and
that denial has become final and nonappealable, or if any governmental entity
issues a final, non-appealable order blocking the mergers.
- - The mergers have not been completed by March 31, 1999, unless the failure to
complete the mergers by that time is due to a knowing action or inaction in
violation of the Agreement and Plan of Reorganization and Merger to the
detriment of the other party by the party that wants to terminate the
agreement.
- - The other party breaches our agreement (and does not correct the breach
properly) in a way that would entitle the party that wants to terminate the
agreement to not complete the mergers, as long as the party looking to
terminate the
5
<PAGE>
agreement has not materially breached the agreement.
- - Our stockholders do not approve the mergers.
- - One party accepts an acquisition proposal from a third party, fails to
recommend the mergers to its stockholders or withdraws or modifies a
recommendation in a manner adverse to the other party.
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 Agreement and Plan of Reorganization and Merger 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. However, if either of our board 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.
STOCKHOLDERS' AGREEMENT (PAGE 60)
Certain officers, directors and significant shareholders of Gentle Dental and
certain officers and directors of Dental Care Alliance have entered into a
Stockholders' Agreement in which they have agreed to vote "FOR" adoption and
approval of the Agreement and Plan of Reorganization and Merger. 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.
WAIVER AND AMENDMENT (PAGE 57)
We can agree to amend the Agreement and Plan of Reorganization and Merger, and
each of us can waive our right to require the other party to adhere to the terms
and conditions of the 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.
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.
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.
6
<PAGE>
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER THAT ARE DIFFERENT FROM YOUR
INTERESTS (PAGE 58)
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 agreement 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 Merger--Interests of Certain Persons in the Merger"
at page of this document. The members of our boards knew about these
additional interests, and considered them, when they approved the Agreement and
Plan of Reorganization and Merger.
APPRAISAL RIGHTS (PAGE 113)
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 and NOT VOTING YOUR SHARES IN FAVOR OF THE MERGERS. 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES (PAGE 54)
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.
Our obligation to complete the mergers depends on our receipt of 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 SHOULD CONSULT
YOUR OWN TAX ADVISOR FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE
MERGERS.
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 Care Alliance Restated Certificate of Incorporation
and the Dental Care Alliance By-laws. Upon our completing the combination of our
companies, 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.
7
<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.
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 that we have presented in our prior Securities and Exchange
Commission filings, which is included elsewhere in this Joint Proxy
Statement-Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- JUNE 30,
1995 1996 1997 1998
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
INCOME (LOSS) PER SHARE--BASIC
Dental Care Alliance, Inc.--Historical.................................. $ 0.02 $ -- $ 0.07 $ 0.22
Gentle Dental Service Corporation--Historical........................... $ 0.19 $ (1.18) $ (0.91) $ (0.01)
Combined--Pro forma..................................................... $ 0.04 $ (0.25) $ 0.22 $ 0.19
INCOME (LOSS) PER SHARE--DILUTED
Dental Care Alliance, Inc.--Historical.................................. $ 0.02 $ -- $ 0.07 $ 0.22
Gentle Dental Service Corporation--Historical........................... $ 0.19 $ (1.18) $ (0.91) $ (0.01)
Combined--Pro forma..................................................... $ 0.04 $ (0.25) $ 0.22 $ 0.17
At end of period:
BOOK VALUE PER SHARE
Dental Care Alliance, Inc.--Historical.................................. $ 0.08 $ 0.16 $ 3.52 $ 3.74
Gentle Dental Service Corporation--Historical........................... $ 2.79 $ 1.41 $ 1.26 $ 4.39
Combined--Pro forma..................................................... $ 0.53 $ 0.42 $ 1.77 $ 3.13
</TABLE>
8
<PAGE>
SUMMARY CONSOLIDATED PRO FORMA FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following consolidated 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
consolidated 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 consolidated pro forma 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 pooling
of interests mergers between Gentle Dental Service Corporation and Dental Care
Alliance, Inc. as if they had merged on January 1, 1995. The pro forma financial
data for the years ended December 31, 1997 and the six months ended June 30,
1998 include the results of all practices acquired (from an accounting point of
view) or expected to be acquired by the companies as if they 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
consolidated pro forma 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,
nor are the statements necessarily indicative of the company's future results of
operations or financial position.
9
<PAGE>
WISDOM HOLDINGS, INC.
SUMMARY PRO FORMA STATEMENTS OF OPERATIONS
(IN 000S)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------------- JUNE 30,
1995 1996 1997 1998
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Dental group net patient service revenue................................ $ -- $ 3,701 $ 133,336 $ 68,922
Net management fees (support services revenue and management fees)...... 10,557 12,349 15,638 14,184
--------- --------- ---------- -----------
Net revenues.......................................................... 10,557 16,050 148,974 83,106
Clinical salaries and benefits.......................................... -- 1,717 61,006 31,830
Practice nonclinical salaries and benefits.............................. 2,819 4,801 21,848 12,717
Dental supplies and lab expenses........................................ 1,633 3,007 15,769 9,217
Practice occupancy expenses............................................. 911 1,670 8,603 4,821
Practice selling, general and administrative expenses................... 1,311 1,900 13,272 7,532
Corporate selling, general and administrative expenses.................. 2,513 3,259 10,345 5,834
Corporate restructure and merger costs.................................. -- -- 1,809 --
Depreciation and amortization........................................... 503 1,017 5,951 3,203
--------- --------- ---------- -----------
Total operating expenses.............................................. 9,690 17,371 138,603 75,154
--------- --------- ---------- -----------
Operating income (loss)............................................... 867 (1,321) 10,371 7,952
Interest expense, net................................................... (284) (728) (4,905) (1,510)
Other expense, net...................................................... (92) (48) (211) (10)
--------- --------- ---------- -----------
Income (loss) before income taxes and minority
interest............................................................ 491 (2,097) 5,255 6,432
Income tax expense/(benefit)............................................ 234 (619) 2,102 2,550
Minority interest....................................................... 9 8 -- --
--------- --------- ---------- -----------
Net income (loss)..................................................... 248 (1,486) 3,153 3,882
Dividends on redeemable convertible preferred stock..................... -- (246) (100) --
Adjustment to redemption value of common redeemable and preferred
stock................................................................. 86 (282) (45) (12)
--------- --------- ---------- -----------
Net income (loss) attributable to common stock........................ $ 334 $ (2,014) $ 3,008 $ 3,870
--------- --------- ---------- -----------
--------- --------- ---------- -----------
Net income (loss) per share:
Basic................................................................... $ 0.04 (0.25) 0.22 0.19
Diluted................................................................. $ 0.04 (0.25) 0.22 0.17
Shares outstanding:
Basic................................................................... 7,713 8,101 13,750 20,844
Diluted................................................................. 7,833 8,101 19,375 26,485
Other information:
Patient level revenues(1)............................................... $ 20,544 27,000 156,237 89,225
</TABLE>
- ------------------------
(1) Includes revenue of all acquired practices.
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<PAGE>
WISDOM HOLDINGS, INC.
SUMMARY PRO FORMA BALANCE SHEET DATA
(IN 000S)
<TABLE>
<CAPTION>
JUNE 30,
1998
----------
<S> <C>
Working capital....................................................................................... $ 22,827
Total assets.......................................................................................... 159,044
Long-term debt, excluding current maturities.......................................................... 64,844
Redeemable common stock............................................................................... 2,142
Shareholders' equity.................................................................................. $ 68,076
</TABLE>
11
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
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 October 15,
1998)............................. 5 7/8 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 Agreement and Plan of Reorganization and
Merger 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 October 15,
1998)............................ 10 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 Agreement and
Plan of Reorganization and Merger that restrict the ability of Dental Care
Alliance to pay dividends.
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INDEX OF DEFINED TERMS
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Accel Entities.............................. 80
Acquiring Person............................ 110
Acquisition Scenario........................ 38
Agreement................................... 25
at-will..................................... 77
Base Scenario............................... 38
broker non-votes............................ 26
cause....................................... 77
Closing Date................................ 48
Code........................................ 33
Commission.................................. 30
Convertible Notes........................... 106
Credit Agreement............................ 96
Delaware Law................................ 28
Dental Care Alliance Board.................. 27
Dental Care Alliance By-Laws................ 45
Dental Care Alliance Certificate............ 45
Dental Care Alliance Common Stock........... 30
Dental Care Alliance Exchange Ratio......... 30
Dental Care Alliance Merger................. 30
Dental Care Alliance Merger Sub............. 30
Dental Care Alliance Option Plans........... 47
Dental Care Alliance Record Date............ 28
Dental Care Alliance Special Meeting........ 27
Dental Director............................. 85
Dissenting Shareholders..................... 46
Dissenting Shares........................... 46
EBIT........................................ 38
EBITDA...................................... 37
Effective Time.............................. 30
EITF........................................ 68
EMS......................................... 101
EPS......................................... 37
Exchange Agent.............................. 47
Exchange Fund............................... 47
Gentle Dental After-Acquired Shares......... 116
Gentle Dental Articles...................... 105
Gentle Dental Board......................... 25
Gentle Dental By-Laws....................... 45
Gentle Dental Capital Stock................. 30
Gentle Dental Certificate................... 45
Gentle Dental Common Stock.................. 30
Gentle Dental Exchange Ratio................ 30
Gentle Dental Merger........................ 30
Gentle Dental Merger Sub.................... 30
Gentle Dental Option Plans.................. 46
Gentle Dental Preferred Stock............... 50
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Gentle Dental Record Date................... 26
Gentle Dental Series A Preferred............ 30
Gentle Dental Series B Preferred............ 30
Gentle Dental Series C Preferred............ 30
Gentle Dental Series D Preferred............ 30
Gentle Dental Special Meeting............... 25
good reason................................. 77
Governmental Authority...................... 49
HMOs........................................ 20
Incentive Plan.............................. 64
IRS......................................... 54
Knox-Keene Act.............................. 19
LQA......................................... 37
LTM......................................... 37
Managed Dental Centers...................... 84
Marketplace................................. 90
Material Adverse Effect..................... 49
Meetings.................................... 27
Mergers..................................... 30
Modification................................ 75
Named Executive Officers.................... 98
Net Collected Revenues...................... 88
New Benefit Plans........................... 50
Oregon and Washington Professional
Corporations.............................. 75
PAs......................................... 17
qualified director.......................... 113
qualified shares............................ 113
Registrable Shares.......................... 102
Registration Statement...................... 45
Securities Act.............................. 21
Selected Companies.......................... 37
Selected Transactions....................... 37
Sprout...................................... 63
Standard Management Agreements.............. 85
Stockholders................................ 102
Synergies................................... 43
Washington Law.............................. 25
Wisdom Holdings Board....................... 30
Wisdom Holdings By-Laws..................... 45
Wisdom Holdings Capital Stock............... 30
Wisdom Holdings Certificate................. 45
Wisdom Holdings Common Stock................ 30
Wisdom Holdings Series A Preferred.......... 30
Wisdom Holdings Series B Preferred.......... 30
Wisdom Holdings Series C Preferred.......... 30
Wisdom Holdings Series D Preferred.......... 30
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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 Proxy Statement-Prospectus,
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.
ABILITY TO INTEGRATE THE OPERATIONS OF GENTLE DENTAL AND DENTAL CARE ALLIANCE;
RAPID GROWTH
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. In addition, there
is no assurance that we will be able to successfully integrate the
administrative operations of Gentle Dental and Dental Care Alliance or that such
operating efficiencies or successful integration will be realized in the time
frame currently anticipated.
Gentle Dental and Dental Care Alliance each are experiencing a period of
rapid growth with a substantial increase in the number of dental practices we
manage. Our strategy will call for future growth, partly through affiliations
with additional dental practices. These affiliations will place strains on the
new company's management, operations and systems. Our ability to manage our
growth and compete effectively will depend upon our ability to hire, train and
assimilate additional management and other employees and to expand, improve and
effectively utilize our operating, management, marketing, information and
financial systems to accommodate expanded operations. Any failure by our
management to anticipate, implement and manage effectively the changes required
to sustain growth, may have a material adverse effect on the new company's
business, financial condition and results of operations.
Our expansion into new markets will require us to maintain and establish
payor and customer relationships and to convert the patient tracking and
financial reporting systems of new dental practices to our systems. Significant
delays or expenses with regard to this process could have a material adverse
effect on the integration of additional dental practices and on the new
company's business, financial condition and results of operations. There can be
no assurance that we will be able to maintain or establish payor and customer
relationships, convert management information systems or integrate new practices
into our combined network.
The integration of additional dental practices typically requires the
implementation and centralization of purchasing, accounting, human resources,
management information systems, cash management and other systems, which may be
difficult, costly and time-consuming. Our operating results in fiscal quarters
immediately following a new dental practice affiliation may be adversely
affected while we attempt to complete the integration process. We may encounter
significant unanticipated costs or other problems associated with the
integration of future affiliations into our combined network of affiliated
dental practices. There can be no assurance that future affiliations will not
have a material adverse effect on the new company's business, financial
condition and results of operations, particularly during the period immediately
following completion of such affiliations.
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EXPANSION PROGRAM
One of our primary business strategies will be to increase revenue and
expand the markets we serve by acquiring certain operating assets and entering
into long-term management service agreements with additional dental practices.
Our strategy will include growth through affiliation with dental practices in
areas where Gentle Dental and Dental Care Alliance currently operate and in new
markets. The success of our affiliation strategy will depend on a number of
factors, including (i) regulatory requirements, (ii) the availability of
financing to fund the affiliation strategy on acceptable terms, (iii) the
ability to successfully integrate additional dentists and dental practices or
offices, (iv) the ability to affiliate with dentists to open new dental sites
and the ability to obtain locations in suitable markets, and (v) the ability to
identify and affiliate with suitable existing dental practices on favorable
terms. Competition for such affiliations has increased significantly in recent
years and may increase further in the future due to ongoing consolidation in the
dental practice management services industry. As a result of such competition,
there may be fewer attractive affiliation opportunities than we have encountered
in the past, or the price of affiliations may increase significantly. In
implementing our affiliation strategy, we will compete with other dental
practice management companies, some of which may have greater financial
resources. No assurances can be given that we will be able to complete the
affiliations necessary for our expansion plans, that such affiliations will be
on favorable terms, or that we will be able to successfully integrate newly
affiliated dental practices. Failure to complete future affiliations or to
successfully integrate dental practices could have a material adverse effect on
the new company's business, financial condition and results of operations.
We may in the future enter new markets in which we will have limited or no
previous presence or experience. Our past experience reflects initial periods in
which certain dental practices within new geographic markets contribute
minimally to operating results. Initial profitability, if any, at the regional
level may be low because of the time and capital required to develop a network
of offices and practitioners.
We will devote substantial time and resources to identifying potential
affiliation targets, negotiating terms of affiliations and integrating dental
practices into our combined network, all of which may distract management
resources from the day-to-day operations of the new company. Delays in
completing affiliations could cause fluctuations in quarterly earnings and
corresponding fluctuations in the market price of the new company's common
stock. Further, the financial results and the market value of the new company's
common stock in the fiscal quarters immediately following an affiliation may be
adversely affected during the period in which we are implementing our operating
model at newly affiliated dental practices. We intend to use the new company's
common stock as part of the consideration for affiliations with additional
dental practices. There can be no assurance that fluctuations in the market
price of the new company's common stock will not adversely affect our ability to
use common stock for affiliations. In addition, the issuance of common stock as
part of the purchase price for new affiliations will result in dilution of the
beneficial ownership interests and voting power of the holders of the new
company's common stock prior to the completion of such affiliations.
RISKS ASSOCIATED WITH EXPANSION WITHIN EXISTING MARKETS
We will also seek to increase revenue and profitability in existing markets
by expanding the operations of existing affiliated dental practices by adding
more general dentists, specialists and hygienists, by establishing new dental
offices and by improving the efficiency of the existing affiliated dental
practices. We will be subject to risks associated with this growth strategy,
including the risk that we will be unable to successfully expand the operations
of the affiliated dental practices, establish new dental offices or increase
efficiency through management of existing affiliated dental practices. In
addition, establishing new dental offices will require significant capital
expenditures to furnish the new offices with appropriate equipment, materials
and supplies and such offices may be staffed with one or more dentists who have
no existing patient base and, as a result, may require us to make significant
advertising and marketing expenditures to attract patients on behalf of such
offices.
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ADDITIONAL MANAGEMENT AND STAFFING OF DENTAL PRACTICES
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.
AVAILABILITY OF 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.
These requirements may cause us to incur long-term and short-term indebtedness
or result in the public or private issuance, from time to time, of additional
equity or debt securities. 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. In addition, offerings of equity securities other than common
stock could be required to the extent that the new company's common stock fails
to maintain a market value sufficient to warrant its use for future financing
needs. 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.
DEPENDENCE ON 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 practices of our affiliated
dentists. Our profitability will be dependent on the revenue and expenses of the
affiliated dental practices and, therefore, the performance of these dental
practices will be essential to the new company's success. Revenue and expenses
of the affiliated dental practices are affected by a number of factors,
including the ability to attract and retain high quality dental practitioners
and other personnel, marketing, pricing, patient visits, compensation expenses
and other expenses of these dental practices. From time to time, we enter into
or amend management agreements and the affiliated dental practices enter into or
amend employment agreements, which have a material impact on certain of these
factors. 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 1.9% of the
new company's pro forma revenues for the year ended December 31, 1997, and 1.7%
of its pro forma revenues for the six months ended June 30, 1998, terminate
between 1998 and 2005. Any material loss of revenue or increase in the expenses
of the affiliated dental practices or the expiration and termination of
management agreements could have a material adverse effect on the new company.
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RISKS ASSOCIATED WITH NOTES, ADVANCES AND MANAGEMENT FEE RECEIVABLES FROM
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 dental practices under management. These loans are evidenced by notes
and secured by the dental assets of such dental practices under management, some
of which are intangible and not readily convertible into cash, and are
personally guaranteed by the dentists who own the affiliated dental practices.
Such loans are recorded on Dental Care Alliance's balance sheet as "Notes
Receivable from PAs" until repaid. At December 31, 1997 and June 30, 1998, Notes
Receivable from PAs were $914,026 and $3,104,027, respectively. 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, in the event that the percentage of
revenue retained by any affiliated dental practices after payment of management
fees to the new company is not sufficient to pay its expenses, as is often the
case with newly integrated dental practices under management and occurs from
time to time with other dental practices under management, the new company may
elect to advance funds to cover such expenses. Such advances are recorded on
Dental Care Alliance's balance sheet as "Advances to PAs" until repaid. At
December 31, 1997 and June 30, 1998, Advances to PAs were $483,421 and
$1,361,517, respectively. 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 results of operations and financial condition. Further, any decision
by the new company to continue to make loans or advances to affiliated dental
practices or the sustained inability of affiliated dental practices to collect
patient receivables with the result that the relevant affiliated dental practice
is unable to pay its 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
which events could have a material adverse effect on the new company's 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 herein.
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.
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.
Although we believe that the Gentle Dental and Dental Care Alliance
operations comply in all material respects with the above-described laws to
which they are subject, there can be no assurance that a
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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. 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. Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for or in order to induce (i) the referral of a
person for services; (ii) the furnishing or arranging for the furnishing of
items or services; or (iii) 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.
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.
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
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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 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"). 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., a wholly owned subsidiary of Gentle
Dental, and Capitol Dental Care, Inc., a pending Gentle Dental acquisition,
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, and generate periodic financial reports
for submission to the Office of Medical Assistance Programs. They are also
required to establish and maintain restricted reserve funds and maintain net
worth in contractually specified amounts. Failure to maintain adequate financial
solvency or otherwise comply with contractual terms 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 10.7% of its pro forma revenues for the six
months ended June 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
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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 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.
DEPENDENCE ON THIRD-PARTY PAYORS; RISKS ASSOCIATED WITH MANAGED CARE
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 payments 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 of these agreements could materially and
adversely affect the new company's business, financial condition and results of
operations.
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
("HMOs"), 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, which 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, and 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.
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.
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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. We believe that cost, location,
hours of operation and quality of dental services are the principal factors
affecting competition for patients. We expect that the ability to meet the needs
of managed care payors will increasingly be a factor in competing for patients
covered by managed care reimbursement arrangements. 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
materially adversely affect the new company's business, financial condition and
results of operations.
DEPENDENCE UPON 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.
AVAILABILITY OF DENTAL PROFESSIONALS
Our business is dependent on the recruitment and retention of general
dentists, specialists, hygienists and dental assistants to join the affiliated
dental practices. While Gentle Dental and Dental Care Alliance have been
successful in assisting their affiliated dental practices with recruiting and
retaining such professionals, no assurances can be given that we will be able to
continue to do so on terms similar to current arrangements. Substantially all
dentists practicing within the Gentle Dental and Dental Care Alliance networks
of affiliated dental practices have entered into employment or similar
agreements or independent contractor agreements with their affiliated dental
practices. Such agreements typically contain noncompetition agreements following
termination of the employment agreement within a specified geographic area,
usually a specified number of miles from the offices of the relevant affiliated
dental practices. Although Wisdom Holdings, in conjunction with the affiliated
dental practices, endeavors to maintain and renew agreements with affiliated
dentists, in the event that a significant number of such dentists terminate or
do not renew such agreements, or in the event the non-competition agreements are
determined to be unenforceable or more limited in scope than their terms, the
new company's business, financial condition and results of operations could be
materially and adversely affected.
RISKS 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 June 30, 1998, on a pro forma basis,
the new company would have had approximately $159.0 million of total assets (of
which approximately $93.7 million were intangible assets) and approximately
$68.1 million in total stockholders' equity. We expect such amounts 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 value
of the management agreements will be realized. When factors indicate that the
amount allocable to one or 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 reduction is recognized.
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The new company will own all or substantially all of the operating assets
used by the affiliated dental practices it manages but, except as permitted by
law, will not employ or contract with dentists, or control the provision of
dental care. Therefore, effective and continued performance of dentists
providing services for affiliated dental practices is essential to the new
company's long-term success. Because we derive our revenues through management
agreements, any material decline in revenue by one or more affiliated dental
practices could have a material adverse effect on the new company's business,
financial condition and results of operations, and any management agreement
termination by one of the affiliated dental practices could have such a material
adverse effect on the new company's business, financial condition and results of
operations. In the event of a breach of a management agreement by any affiliated
dental practice, there can be no assurance that the legal remedies available to
the new company will be adequate to compensate it or cover its damages resulting
from such breach.
POTENTIAL LIABILITY AND INSURANCE
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 medical
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.
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
Sales of substantial amounts of the new company's common stock in the public
market following the mergers could adversely affect the price of its common
stock. 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.
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. 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.
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COMMON STOCK PUT RIGHTS
A total of 180,712 shares of the new company's common stock that is expected
to be issued in the mergers (as well as 100,000 shares of the new company's
common stock that will be subject to a warrant granted to ServiceMaster Venture
Fund, L.L.C. in 1995 by Gentle Dental and which will be assumed by the new
company in the merger) will be subject to certain "put" rights described below
to be assumed by the new company in the mergers. Of these, put rights issued to
dentists in connection with Gentle Dental affiliations cover a total of 80,712
shares. These put rights will give the holders the right to require the new
company to repurchase shares of the new company's common stock at prices ranging
from $13.38 to $19.62 per share. One such holder will have assumed put rights
with respect to 11,820 shares that can be exercised in varying amounts in 1999
and 2000. All other dentist put rights to be assumed will become exercisable
between January 2000 and January 2003 and will expire if not exercised within 60
days of the exercise date. The dentist put rights with respect to all but 20,000
shares will terminate if the new company completes a public offering of its
common stock at a price greater than $20.00 per share. Pursuant to the terms of
these dentist put rights, the new company could be required to repurchase 2,754
shares of the new company's common stock at an aggregate purchase price of
approximately $50,000 in 1999, 40,849 shares of its common stock at an aggregate
purchase price of approximately $576,000 in 2000, 29,681 shares of its common
stock at an aggregate purchase price of approximately $438,000 in the year 2001,
and 3,714 shares of its common stock at an aggregate purchase price of
approximately $51,000 in each of 2002 and 2003. The new company will also assume
a put right granted to ServiceMaster which will allow ServiceMaster to require
Wisdom Holdings to repurchase 100,000 shares currently held by Service Master
and an additional 100,000 shares ServiceMaster may acquire upon exercise of a
warrant, if by June 21, 2001, the new company has not made a public offering of
its common stock with a per share price of at least $22.00 and net proceeds to
the new company of at least $10 million. This put right may not be exercised
before June 21, 2001, and will expire upon the earlier of the completion of a
public offering meeting the requirements previously described or June 21, 2003.
The per share price applicable to ServiceMaster's put right is 20 times the new
company's average adjusted net income per share on a pro forma basis, giving
effect to the mergers, for the two most recent fiscal years preceding
ServiceMaster's exercise of the right.
Shares subject to put rights are classified as "redeemable common stock" on
the new company's pro forma balance sheet. If holders of the new company's
common stock subject to put rights elect to exercise those rights, the new
company will have to pay those holders the applicable repurchase price in cash
in exchange for the delivery of the holders' shares, and such an election could
have a material adverse effect on the new company's business, financial
condition and operating results. There can be no assurance that the new company
will have sufficient capital resources to honor the outstanding put rights and
the new company's use of cash to honor outstanding put rights would also reduce
funds otherwise available to it for operations or future dental practice
affiliations.
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the mergers, there has been no public market for the new company's
common stock and 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 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
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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 Delaware 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 Wisdom
Holdings.
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 the dental practice management
business is dependent on computer applications, such as management information
systems and financial and accounting systems. Based upon confirmations received
from significant management information systems and financial and accounting
systems software licensors, certain of our significant systems are currently
Year 2000 compliant or are expected to be Year 2000 compliant by April 1999. We
are in the process of verifying that our other management information systems
and financial and accounting systems will be Year 2000 compliant. We expect that
we may have to incur internal staff costs as well as consulting and other
expenses related to Year 2000 system preparations. As part of these
preparations, we have contacted or intend to contact vendors, third-party and
governmental payors and other third parties upon whose services we rely to
ensure Year 2000 compliance. We have contacted certain of our significant
vendors who 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 or of our management information systems or financial or accounting
systems 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.
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THE MEETINGS
GENTLE DENTAL SPECIAL MEETING
GENERAL
This Joint Proxy Statement-Prospectus is first being mailed by Gentle Dental
to the holders of its common stock and preferred stock on or about ,
1998, and is accompanied by the notice of the Special Meeting of Shareholders of
Gentle Dental (the "Gentle Dental Special Meeting") and a form of proxy that is
solicited by the Board of Directors of Gentle Dental (the "Gentle Dental Board")
for use at the Gentle Dental Special Meeting to be held on , 1998, at
a.m., local time, , Los Angeles, 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 (the
"Agreement"), 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 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 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 Agreement and the transactions contemplated thereby. The Gentle
Dental Board 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 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 (the
"Washington Law"), and the rules of the Nasdaq Small Cap Market, ,
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 (the "Gentle Dental Record Date"). 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 and Gentle Dental Series C Preferred at the Gentle
Dental Record Date will be entitled to notice of and to vote at the Gentle
Dental Special Meeting regarding the 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 held by
one holder of record, 100 shares of Gentle Dental Series C Preferred held by one
holder of record and shares of Gentle Dental Series D Preferred 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 Captial 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 voted in matters where discretionary voting by the broker is
not allowed ("broker non-votes").
The affirmative vote of a majority of the outstanding shares of Gentle
Dental Common Stock and Gentle Dental Series D Preferred entitled to vote,
voting together as single class, is required to approve the 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, Gentle
Dental Series C Preferred and Gentle Dental Series D Preferred entitled to vote,
voting as separate classes, is required to approve the Agreement and the
transactions contemplated thereby. Each share of Gentle Dental Capital Stock is
entitled to one vote regarding the Agreement and the transactions contemplated
thereby.
ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS VOTES AGAINST
APPROVAL OF THE AGREEMENT. ACCORDINGLY, THE GENTLE DENTAL BOARD 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, representing all of the Series A preferred
stock entitled to vote, 100 shares of Gentle Dental Series C Preferred,
representing all of the Gentle Dental Series C Preferred entitled to vote, and
shares of Gentle Dental Series D Preferred, representing approximately
% of the Gentle Dental Series D Preferred 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 "Information about Gentle
Dental--Principal Shareholders" on page .
RECOMMENDATION OF GENTLE DENTAL BOARD
The Gentle Dental Board has approved the Agreement and the transactions
contemplated thereby. The Gentle Dental Board believes that the Agreement and
the transactions contemplated thereby are in the best interests of Gentle Dental
and Gentle Dental shareholders and recommends that the Gentle Dental
shareholders vote "FOR" approval of the 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 and will have an opportunity to make a statement if such representative
so desires, and to respond to appropriate questions raised at such meeting.
DENTAL CARE ALLIANCE SPECIAL MEETING
GENERAL
This Joint Proxy Statement-Prospectus is first being mailed by Dental Care
Alliance to the holders of common stock on or about , 1998, 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
(the "Dental Care Alliance Board") for use at the special meeting of Dental Care
Alliance stockholders (the "Dental Care Alliance Special Meeting" and, with the
Gentle Dental Special Meeting, the "Meetings"), to be held on ,
, 1998, 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 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 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
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
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nothing is specified, the proxies will be voted in favor of approval of the
Agreement and the transactions contemplated thereby. The Dental Care Alliance
Board is unaware of any other 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
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
"Delaware Law"), the Dental Care Alliance by-laws, as amended, and the rules of
the Nasdaq National Market, , 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 (the "Dental Care Alliance
Record Date"). 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
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
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 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 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
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owned by him or her which such director or officer is entitled to vote for
approval of the Agreement and the transactions contemplated thereby.
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--Principal
Stockholders" on page .
RECOMMENDATION OF DENTAL CARE ALLIANCE BOARD
The Dental Care Alliance Board has unanimously approved the Agreement and
the transactions contemplated thereby. The Dental Care Alliance Board believes
that the Agreement and the transactions contemplated thereby are in the best
interests of Dental Care Alliance and Dental Care Alliance stockholders and
recommends that the Dental Care Alliance stockholders vote "FOR" approval of the
Agreement and the transactions contemplated thereby. See "The
Mergers--Recommendation of the Dental Care Alliance Board and Reasons for the
Mergers" on page .
INDEPENDENT AUDITORS
A representative of PricewaterhouseCoopers, LLP, independent certified
public accountants of Dental Care, will be present at the Dental Care Alliance
Special Meeting and will have an opportunity to make a statement if such
representative so desires, and 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 AGREEMENT
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE AGREEMENT (AS DEFINED HEREIN).
THE AGREEMENT IS ATTACHED AS APPENDIX A TO THIS JOINT PROXY
STATEMENT-PROSPECTUS. THE AGREEMENT 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 (THE "COMMISSION") ON OCTOBER 30, 1998, OF EACH OF GENTLE
DENTAL AND DENTAL CARE ALLIANCE.
GENERAL
The Wisdom Holdings, Inc. Board of Directors (the "Wisdom Holdings Board"),
the Gentle Dental Board and the Dental Care Alliance Board have each approved
the Agreement, which provides for the merger of (i) Wisdom Holdings Acquisition
Corp. I, a Delaware corporation and wholly-owned subsidiary of Wisdom Holdings,
Inc. (the "Gentle Dental Merger Sub") with and into Gentle Dental (the "Gentle
Dental Merger") and (ii) Wisdom Holdings Acquisition Corp. II, a Delaware
corporation and wholly-owned subsidiary of Wisdom Holdings, Inc. ("Dental Care
Alliance Merger Sub") with and into Dental Care Alliance (the "Dental Care
Alliance Merger") at the effective time (the "Effective Time"). The Gentle
Dental Merger and the Dental Care Alliance Merger are sometimes collectively
referred to as the "Mergers." With certain limited exceptions described below,
each share of common stock of Gentle Dental ("Gentle Dental Common Stock")
outstanding at the Effective Time will be exchanged into the right to receive
one share of the common stock ("Gentle Dental Exchange Ratio"), $.001 par value,
of Wisdom Holdings ("Wisdom Holdings Common Stock") and each share of common
stock of Dental Care Alliance ("Dental Care Alliance Common Stock") outstanding
at the Effective Time will be exchanged into the right to receive 1.67 shares of
Wisdom Holdings Common Stock ("Dental Care Alliance Exchange Ratio"). Each
outstanding share of Gentle Dental Series A Preferred, Series B Preferred,
Series C Preferred and Series D Preferred, $.001 par value ("Gentle Dental
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred," respectively), outstanding at the Effective Time, will be exchanged
for one share of Wisdom Holdings Series A Preferred, Series B Preferred, Series
C Preferred and Series D Preferred, respectively (as defined herein below). The
Gentle Dental Series A Preferred, Series B Preferred, Series C Preferred and
Series D Preferred are sometimes collectively referred to herein as "Gentle
Dental Preferred Stock." The Gentle Dental Series A Preferred, Series B
Preferred, Series C Preferred and Series D Preferred together with the Gentle
Dental Common Stock are sometimes together referred to herein as the "Gentle
Dental Capital Stock." The Wisdom Holdings Series A Preferred, the Series B
Preferred, the Series C Preferred and the Series D Preferred together with the
Wisdom Holdings Common Stock are sometimes together referred to herein as the
"Wisdom Holdings Capital Stock." At the Effective Time, each of Gentle Dental
and Dental Care Alliance will become wholly-owned subsidiaries of Wisdom
Holdings
This section of the Joint Proxy Statement-Prospectus describes certain
aspects of the Mergers, including the material provisions of the Agreement.
Certain capitalized terms used herein without definition shall have the meanings
ascribed to them in the Agreement.
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 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 believed
that Dental Care Alliance's planned expansion of its business could be enhanced
significantly through strategic
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combinations with appropriate existing dental practice management companies. The
Dental Care Alliance Board 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 the respective companies 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 problems and
differences in business philosophy. No discussions are ongoing at this time.
On July 15, 1998, Mr. Fiore, Dr. Matzkin and certain members of the Gentle
Dental Board and the Dental Care Alliance Board 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
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 for each of Gentle Dental and Dental Care
Alliance 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 retained Salomon Smith Barney Inc. as its financial
advisor, and Dental Care Alliance retained Raymond James & Associates, Inc. as
its financial advisor.
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 each of Gentle
Dental and Dental Care Alliance 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
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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 Donaldson, Lufkin and Jenrette Securities Corporation
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 their findings to
their 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 other of the company. On October 13, 1998, the Board of Directors
of Dental Care Alliance met to discuss and review the terms of the proposed
business combination of the two companies and the various transactions
contemplated as a result of the combination. The Dental Care Alliance Board 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 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
reviewed in detail the terms of the proposed combination and the fairness
opinion provided by Salomon Smith Barney Inc. regarding the fairness of the
Gentle Dental Exchange Ratio to the shareholders of Gentle Dental as
contemplated by the Agreement. After a discussion and review of the terms of the
Agreement and the related documents previously presented to the Gentle Dental
Board, the Gentle Dental Board approved and authorized the execution of the
Agreement and the related agreements and transactions contemplated thereby.
On October 15, 1998, the Dental Care Alliance Board 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 also
reviewed the fairness opinion provided to Dental Care Alliance by Raymond James
& Associates, Inc. regarding the fairness of the Dental Care Alliance Exchange
Ratio to the stockholders of Dental Care Alliance as contemplated by the
Agreement. After further discussion and review of the terms of the Agreement and
the related documents previously presented to the Dental Care Alliance Board,
the Dental Care Alliance Board authorized and approved the execution of the
Agreement and the related agreements and transactions contemplated thereby.
During the evening of October 15, 1998, the parties executed the Agreement
and the parties announced the proposed business combination on the morning of
October 16, 1998.
RECOMMENDATION OF THE GENTLE DENTAL BOARD AND REASONS FOR THE MERGER
The Gentle Dental Board believes that the Gentle Dental Merger is fair to,
and in the best interests of, Gentle Dental and the Gentle Dental shareholders.
Accordingly, the Gentle Dental Board has approved the Agreement, and recommends
that the Gentle Dental shareholders vote for the approval and adoption of the
Agreement, the Gentle Dental Merger and the agreements and transactions
contemplated thereby.
The Gentle Dental Board believes that the consummation of the Gentle Dental
Merger 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.
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In reaching its decision to approve the Agreement, the Gentle Dental Merger
and the agreements and transactions contemplated thereby, the Gentle Dental
Board consulted with Gentle Dental's management, as well as with its financial
and legal advisors and considered a variety of factors, including the following:
- The Gentle Dental Board's 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 Gentle Dental Board
took into account the results of Gentle Dental's due diligence review of
Dental Care Alliance's business.
- 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 and
elimination of duplicative corporate expenses, increased access to capital
and increased attractiveness to dental practices which are affiliation
candidates.
- The structure of the combination and the terms of the Agreement and the
Stockholders' Agreements, which were reciprocal in nature, including the
fact that the fixed Gentle Dental Exchange Ratio 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 the
Gentle Dental Merger is intended to qualify as either a reorganization
under Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), 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-
Chairman, President and Chief Dental Officer of the combined company after
the Mergers. See "Management and Operations after the Merger."
- The written opinion of Salomon Smith Barney Inc. that, as of October 15,
1998, the Gentle Dental Exchange Ratio was fair from a financial point of
view to the shareholders of Gentle Dental. See "--Opinion of Gentle
Dental's Financial Advisors."
- The belief of Gentle Dental's senior management and the Gentle Dental
Board that Gentle Dental and Dental Care Alliance share a compatible
business culture and that their respective managements possess
complementary skills and expertise.
The foregoing discussion of the information and factors considered by the
Gentle Dental Board is not intended to be exhaustive but includes all material
factors considered by the Gentle Dental Board. In reaching its determination to
approve and recommend the Mergers, the Gentle Dental Board 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
recommends that Gentle Dental shareholders vote for approval and adoption of the
Agreement.
RECOMMENDATION OF THE DENTAL CARE ALLIANCE BOARD AND REASONS FOR THE MERGER
The Dental Care Alliance Board has approved and adopted the Agreement and
believes that the Dental Care Alliance Merger is fair to and in the best
interests of Dental Care Alliance and its stockholders. Accordingly, the Dental
Care Alliance Board has unanimously approved the Agreement and
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unanimously recommends that the stockholders vote for the approval of the
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 Dental Care Alliance Merger, including the Dental Care
Alliance Exchange Ratio, are the result of arm's length negotiations between
representatives of Gentle Dental and Dental Care Alliance. In reaching its
decision to approve the Agreement, the Dental Care Alliance Board, 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 Dental Care Alliance Exchange Ratio. The Dental Care Alliance
Board concluded that the Dental Care Alliance Merger is 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 Agreement and to recommend
to its stockholders the adoption of the Agreement, the Dental Care Alliance
Board considered a number of factors, both from a short-term and long-term
perspective, including, without limitation, those set forth in "Background of
the Merger," "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 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 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 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 Dental Care Alliance Exchange Ratio was fair to
the stockholders of Dental Care Alliance from a financial point of view.
See "--Opinion of Dental Care Alliance's Financial Advisor."
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- The Dental Care Alliance Board's belief that the analyses of Raymond James
& Associates, Inc. supported the Dental Care Alliance Board's conclusion
that the Dental Care Alliance Merger is 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 Dental Care Alliance Board that the receipt of the new
company's common stock in the Dental Care Alliance Merger 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").
In view of the variety of factors considered by the Dental Care Alliance
Board in connection with its evaluation of the Dental Care Alliance Merger, the
Dental Care Alliance Board 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 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 instructed Salomon Smith Barney Inc. to
evaluate the fairness, from a financial point of view, of the Gentle Dental
Exchange Ratio. At the October 14, 1998 meeting of the Gentle Dental Board,
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
Gentle Dental Exchange Ratio was fair, from a financial point of view to Gentle
Dental's shareholders.
THE FULL TEXT OF SALOMON SMITH BARNEY INC.'S WRITTEN OPINION DATED OCTOBER
15, 1998 IS ATTACHED AS APPENDIX B TO THIS JOINT PROXY STATEMENT-PROSPECTUS 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 JOINT PROXY STATEMENT-PROSPECTUS 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, of the Gentle Dental Exchange Ratio 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 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
Gentle Dental Merger and participated in discussions concerning the
determination of the Gentle Dental Exchange Ratio, Salomon Smith Barney Inc. was
not asked to and did not recommend the Gentle Dental 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: (i) reviewed the Agreement; (ii) 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; (iii) examined certain publicly available business and
financial information relating to Gentle
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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 Gentle Dental Merger; (iv) reviewed the financial terms of
the Gentle Dental Merger as set forth in the 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; (v) 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; (vi) evaluated the potential
pro forma financial impact of the Mergers on Gentle Dental; and (vii) conducted
such other studies, analyses, inquiries and investigations as Salomon Smith
Barney Inc. 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, 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
of 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 as to the fairness, from a financial point of view, of the Gentle
Dental Exchange Ratio. As described above, certain
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of the analyses performed by Salomon Smith Barney Inc. relied on estimates of
future financial performance provided by the managements of Gentle Dental and
Dental Care Alliance. Analyses based on forecasts of future results are not
necessarily indicative of actual future results, and may be significantly more
or less favorable than suggested by such analyses. 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 their accuracy.
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 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. (the "Selected Companies").
Salomon Smith Barney Inc. compared market values (as of October 10, 1998) as a
multiple of estimated calendar years 1998 and 1999 earnings per share ("EPS"),
and enterprise value (market value, plus total debt, less cash) as a multiple of
last 12 months ("LTM") earnings before interest, taxes, depreciation and
amortization ("EBITDA"), last quarter annualized ("LQA") EBITDA, and 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 were obtained from reports published by the First Call Corporation.
Applying the foregoing high and low range of multiples for the Selected
Companies to corresponding financial data for Dental Care Alliance of (i)
estimated calendar 1998 EPS of 15.3x to 20.7x resulted in an equity reference
range for Dental Care Alliance of approximately $7.96 to $10.76 per share, (ii)
estimated calendar 1999 EPS of 10.5x to14.3x resulted in an equity reference
range for Dental Care Alliance of approximately $7.59 to $10.27 per share, (iii)
LTM EBITDA of 8.5x to 11.5x resulted in an equity reference range for Dental
Care Alliance of approximately $4.56 to $5.82 per share, (iv) LQA EBITDA of 7.1x
to 9.5x resulted in an equity reference range for Dental Care Alliance of
approximately $6.82 to $8.88 per share, and (v) pro forma LQA EBITDA of 7.1x to
9.5x resulted in an equity reference range for Dental Care Alliance of
approximately $8.47 to $11.11 per share.
Salomon Smith Barney Inc. noted that none of the Selected Companies was
identical to Dental Care Alliance and that, accordingly, any analysis of the
Selected Companies necessarily involved complex considerations and judgments
concerning differences in financial and operating characteristics and other
factors that would necessarily affect the public trading values of the Selected
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 dental practice management industry since November 1996 (the
"Selected Transactions"). The 12 transactions included in the Selected
Acquisitions were: (i) the acquisition of Valley Forge Dental Associates. Inc.
by Monarch Dental Corporation; (ii) the acquisition of MedCath Incorporated by
KKR 1996 Fund, L.P. and Welsh, Carson, Anderson & Stowe VII, L.P.; (iii) the
acquisition of First Physician Care, Inc. by PhyCor, Inc.; (iv) the acquisition
of Spectrum Emergency Care, Inc. by Laidlaw Inc.; (v) the acquisition of Talbert
Medical Management Holdings Corporation by MedPartners, Inc.; (vi) the
acquisition of Health Partners, Inc. by FPA Medical Management, Inc.; (vii) the
acquisition of EmCare Holdings Inc. by Laidlaw Inc.; (viii) the acquisition of
OccuSystems, Inc. by CRA Managed Care, Inc.; (ix) the acquisition of InPhyNet
Medical Management Inc. by MedPartners, Inc.; (x) the
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acquisition of American Ophthalmic Incorporated by Physicians Resource Group,
Inc.; (xi) the acquisition of AHI Healthcare Systems, Inc. by FPA Medical
Management, Inc. and (xii) the acquisition of STAT Healthcare, Inc. by American
Medical Response, Inc.
Salomon Smith Barney Inc. compared purchase prices in the 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 Selected Transactions were based on information
available at the time of announcement of the 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). Applying the foregoing
high and low range of multiples for the Selected Transactions to corresponding
financial data for Dental Care Alliance of (i) LTM net income of 30.4x to 41.2x
resulted in an equity reference range for Dental Care Alliance of $8.16 to
$11.04 per share, (ii) LTM EBIT of 17.7x to 23.9x resulted in an equity
reference range for Dental Care Alliance of $7.15 to $9.33 per share, (iii) LTM
EBITDA of 11.7x to 15.9x resulted in an equity reference range for Dental Care
Alliance of $5.92 to $7.67 per share, (iv) LQA EBITDA of 12.6x to 17.0x resulted
in an equity reference range for Dental Care Alliance of $11.39 to $15.07 per
share and (v) estimated calendar year 1998 EPS of 21.1x to 28.5x resulted in an
equity reference range for Dental Care Alliance of $10.96 to $14.83 per share.
Salomon Smith Barney Inc. noted that none of the Selected Transactions was
identical to the transactions contemplated by the 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 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 (the
"Acquisition Scenario") and the other assuming that such acquisitions were not
consummated (the "Base Scenario").
For the Base Scenario, this analysis indicated (i) 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%, (ii) 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 (iii) 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%. For the Acquisition
Scenario, this analysis indicated (i) 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%, (ii) 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 (iii) 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%.
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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 (i) 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 (ii) 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 Gentle Dental Exchange Ratio,
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 the 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 of the Mergers. The fee payable to
Salomon Smith Barney Inc. is currently estimated to be approximately $1.0
million. 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 in the past provided investment banking
services to Gentle Dental unrelated to the Mergers, for which services Salomon
Smith Barney Inc. has received compensation. In addition, Salomon Smith Barney
Inc. and its affiliates (including Citigroup Inc. and its affiliates) may
maintain relationships with Gentle Dental or Dental Care Alliance.
OPINION OF DENTAL CARE ALLIANCE'S FINANCIAL ADVISORS
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 Dental Care Alliance Exchange Ratio, 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
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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
PROXY STATEMENT. DENTAL CARE ALLIANCE STOCKHOLDERS ARE URGED TO READ THIS
OPINION IN ITS ENTIRETY. RAYMOND JAMES & ASSOCIATES, INC.'S OPINION, WHICH IS
ADDRESSED TO THE DENTAL CARE ALLIANCE BOARD, IS DIRECTED ONLY TO THE FAIRNESS OF
THE DENTAL CARE ALLIANCE EXCHANGE RATIO 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 PROXY STATEMENT. THE SUMMARY OF THE OPINION OF RAYMOND JAMES &
ASSOCIATES, INC. SET FORTH IN THIS PROXY STATEMENT 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 Dental Care Alliance Exchange Ratio to Dental
Care Alliance stockholders from a financial point of view and were provided to
the Dental Care Alliance Board. 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 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's 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 or Dental Care Alliance management would
have been willing to agree to a different Dental Care Alliance 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; discussed the past and current operations and
financial condition and the prospects of
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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 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
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 the Mergers.
HISTORICAL STOCK PERFORMANCE ANALYSIS. Raymond James & Associates, Inc.
described for the Dental Care Alliance Board the relative range of implied
Dental Care Alliance 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. These implied Dental Care
Alliance Exchange Ratios were calculated by dividing the price per share for
Dental Care Alliance Common Stock by the price per share for Gentle Dental
Common Stock. During the time period used for the analysis, the implied Dental
Care Alliance Exchange Ratio 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 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
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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 earnings before interest, taxes, depreciation
and amortization ("EBITDA"); target company enterprise value to target company
earnings before interest and taxes ("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 Dental Care Alliance Merger. 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 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 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, and 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.
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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.
DENTAL CARE ALLIANCE DISCOUNTED CASH FLOW ANALYSIS. Raymond James &
Associates, Inc. presented to the Dental Care Alliance Board 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 Dental Care Alliance Exchange Ratio of 1.67 in the
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 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
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Care Alliance Board 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 Mergers (the "Synergies") 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 Synergies estimate in its
analysis and has not undertaken any independent verification of the Synergies
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 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 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 in the
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, 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 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 and has received
customary fees for such services. Raymond James & Associates, Inc. has acted as
financial advisor to the Dental Care Alliance Board 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
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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.
STRUCTURE OF THE MERGERS
FORMATION OF WISDOM HOLDINGS. Prior to the execution of the Agreement,
Wisdom Holdings was formed as a Delaware corporation and subsequently formed two
acquisition subsidiaries, Gentle Dental Merger Sub and Dental Care Alliance
Merger Sub in order to effectuate the Gentle Dental Merger and the Dental Care
Alliance Merger. The Certificate of Incorporation of Wisdom Holdings (the
"Wisdom Holdings Certificate") 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 Delaware law. Additionally, the Wisdom
Holdings Certificate and the By-Laws of Wisdom Holdings, as amended (the "Wisdom
Holdings By-Laws"), provides for a staggered board of directors comprised of
between and members. The form of the Wisdom Holdings Certificate is
set forth as Exhibit 3.1 to the Registration Statement (as defined herein), 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
Agreement, simultaneously with the Dental Care Alliance Merger and in accordance
with Washington Law, at the Effective Time, Gentle Dental Merger Sub will merge
with and into Gentle Dental. Gentle Dental will be the surviving corporation in
the Gentle Dental Merger, and will continue its corporate existence under
Washington Law. At the Effective Time, the separate corporate existence of
Gentle Dental Merger Sub will terminate. As a result of the Gentle Dental
Merger, the Articles of Incorporation of Gentle Dental (the "Gentle Dental
Certificate") and the By-Laws of Gentle Dental (the "Gentle Dental By-Laws")
existing prior to the Gentle Dental Merger will be the Articles of Incorporation
and the By-Laws in place prior to the Gentle Dental Merger.
THE DENTAL CARE ALLIANCE MERGER. Subject to the terms and conditions of the
Agreement, simultaneously with Gentle Dental Merger and in accordance with
Delaware Law, at the Effective Time, Dental Care Alliance Merger Sub 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 Delaware Law. At the Effective Time, the separate corporate
existence of Dental Care Alliance Merger Sub will terminate. As a result of the
Dental Care Alliance Merger, the Certificate of Incorporation of Dental Care
Alliance ("Dental Care Alliance Certificate") and the By-Laws of Dental Care
Alliance ("Dental Care Alliance By-Laws") existing prior to the Dental Care
Alliance Merger will be the Certificate of Incorporation and the By-Laws of
Dental Care Alliance following the Dental Care Alliance Merger.
EXCHANGE OF STOCK; TREATMENT OF OPTIONS AND OTHER RIGHTS TO ACQUIRE GENTLE
DENTAL CAPITAL STOCK
THE GENTLE DENTAL EXCHANGE. At the Effective Time, each share of Gentle
Dental Common Stock outstanding, other than such shares in respect of which
dissenters' rights shall have been properly
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demanded in accordance with Chapter 23B.13 of the Washington Law ("Dissenting
Shares") will be exchangeable into one share of Wisdom Holdings Common Stock.
Notwithstanding any other provision of the Agreement, Dissenting Shares will
not be exchanged for Gentle Dental Common Stock. Holders of Dissenting Shares
("Dissenting Shareholders") 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 Law, provided that if any Dissenting Shareholder subsequently
delivers a written withdrawal of such holders' demand for appraisal of such
shares, or if any holder fails to establish such holders' entitlement to
dissenters' rights as provided in Chapter 23B.13 of the Washington Law, 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 Holdings Common Stock on the terms provided in the
Agreement. See "Dissenters' Appraisal Rights."
Each stock option or other right to acquire Gentle Dental Common Stock
granted under Gentle Dental's option plans (the "Gentle Dental Option Plans") or
other such rights that are outstanding and unexercised immediately prior to the
Effective Time 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, 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 Gentle Dental Exchange Ratio.
Each share of Gentle Dental Series A preferred stock issued and outstanding
prior to the Effective Time ("Gentle Dental Series A Preferred") shall be
converted into and exchanged for one share of Wisdom Holdings Series A preferred
stock ("Wisdom Holdings Series A Preferred"). The terms of the Wisdom Holdings
Series A Preferred will be substantially the same as the terms of the Gentle
Dental Series A Preferred. Each share of Gentle Dental Series B preferred stock
issued and outstanding prior to the Effective Time ("Gentle Dental Series B
Preferred") shall be converted into and exchanged for one share of Wisdom
Holdings Series B preferred stock ("Wisdom Holdings Series B Preferred"). The
terms of the Wisdom Holdings Series B Preferred will be substantially the same
as the terms of the Gentle Dental Series B Preferred. Each share of Gentle
Dental Series C preferred stock issued and outstanding prior to the Effective
Time ("Gentle Dental Series C Preferred") shall be converted into and exchanged
for one share of Wisdom Holdings Series C preferred stock ("Wisdom Holdings
Series C Preferred"). The terms of the Wisdom Holdings Series C Preferred will
be substantially the same as the terms of the Gentle Dental Series C Preferred.
Each share of Gentle Dental Series D preferred stock issued and outstanding
prior to the Effective Time ("Gentle Dental Series D Preferred") shall be
converted into and exchanged for one share of Wisdom Holdings Series D preferred
stock ("Wisdom Holdings Series D Preferred"). The terms of the Wisdom Holdings
Series D Preferred will be substantially the same as the terms of the Gentle
Dental Series D Preferred. 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, each share of
Dental Care Alliance common stock outstanding will be converted into and
exchanged for the right to receive a number of
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shares of Wisdom Holdings Common Stock equal to the Exchange Ratio (1.67),
subject to customary antidilution adjustments as provided in the 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) 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 (the "Dental Care Alliance
Option Plans") or otherwise, outstanding and unexercised immediately prior to
the Effective Time 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 Dental Care Alliance
Option Plans. The Dental Care Alliance Option Plans will be assumed by Wisdom
Holdings. In each case, (i) 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
(ii) 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, 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, 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 Dental Care Alliance Exchange
Ratio.
EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
At or prior to the Effective Time, 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 (the "Exchange
Agent"), for the benefit of the holders of certificates of Gentle Dental Common
Stock, certificates representing the shares of Wisdom Holdings Capital Stock
(the "Exchange Fund") to be issued pursuant to the Agreement in exchange for
outstanding shares of Gentle Dental Capital Stock.
As soon as is practicable after the Effective Time, 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, Wisdom Holdings will deposit, or cause to
be deposited, with [Exchange Agent], or another bank or trust company reasonably
acceptable to each of Gentle Dental and Dental Care Alliance (the "Exchange
Agent"), 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 (such certificates and cash
being referred to herein as the "Exchange Fund") to be issued and delivered
pursuant to the Agreement in exchange for outstanding shares of Dental Care
Alliance Common Stock.
As soon as is practicable after the Effective Time, 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.
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NEITHER GENTLE DENTAL CAPITAL STOCK NOR DENTAL CARE ALLIANCE COMMON STOCK
SHOULD BE RETURNED WITH THE ENCLOSED PROXY 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.
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, dividends or other distributions declared after the
Effective Time 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, 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. 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. 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 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 Common 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 Common Stock, on the other. See "Certain Differences Between Washington
and Delaware Corporate Laws."
EFFECTIVE TIME
The Effective Time 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"). The
Closing Date will occur on a date to be specified by the parties, which date
shall be 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 Agreement. Gentle Dental and
Dental Care Alliance each anticipate that the Mergers will be consummated during
the fiscal quarter ending December 31, 1998. However, the consummation of the
Mergers could be delayed if there is a delay in obtaining the Requisite
Regulatory Approvals (as defined therein). 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 Agreement may
be terminated by either Gentle Dental or Dental Care Alliance,
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unless the failure to effect the Mergers by such date is due to the failure of
the party seeking to terminate the 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."
REPRESENTATIONS AND WARRANTIES
The Agreement contains representations and warranties of Gentle Dental, on
the one hand, and Dental Care Alliance, on the other, as to, among other things:
(i) 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); (ii) 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); (iii) ownership of outstanding shares of capital
stock by each party of its subsidiaries; (iv) the corporate power and authority
of each party to execute and deliver the Agreement and to consummate the
transactions contemplated thereby; (v) the compliance of the 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; (vi)
absence of any required governmental and third-party approvals other than those
specified in the Agreement; (vii) the timely filing of required regulatory
reports and other regulatory matters; (viii) each party's financial statements
and filings with the Commission (including that such information is a fair
presentation of the financial condition and results of operations thereof and is
in compliance with GAAP); (ix) the absence of certain changes in each party's
business since December 31, 1997; (x) the absence of legal proceedings and
injunctions; (xi) the filing and accuracy of each party's tax returns and the
absence of other tax liabilities; (xii) each party's employee benefit plans and
related matters (including operation and administration of such plans in
accordance with applicable law); (xiii) each party's compliance with applicable
law; (xiv) the absence of material defaults under material contracts; (xv) the
absence of undisclosed liabilities; (xvi) insurance; (xvii) the absence of
environmental liabilities; (xviii) "Year 2000" risk management plan; (xix) the
assets of each party; and (xx) qualification of the Mergers as reorganizations
under Section 368(a) of the 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 Agreement, prior to the Effective Time, each of Gentle
Dental and Dental Care Alliance have agreed to, and to cause their respective
subsidiaries to, (i) 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 and
(ii) 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 Agreement or that is reasonably likely to
have a Material Adverse Effect (as defined in the Agreement) on it or its
subsidiaries taken as a whole.
Gentle Dental and Dental Care Alliance have also agreed to use their
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 Agreement. Each of Gentle Dental and Dental Care Alliance
has agreed to 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 (collectively, "Government Authority"). Gentle Dental and
Dental Care Alliance have each agreed upon request to furnish to
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the other party all information concerning themselves and their subsidiaries,
directors, officers and stockholders and such other matters as may be necessary
or advisable in connection with the transactions contemplated by the Agreement.
Wisdom Holdings Capital Stock to be issued in the Merger is to be approved for
listing on the Nasdaq National Market, subject to official notice of issuance,
prior to the Effective Time. 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 (the "New Benefit Plans") 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 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 Agreement.
Wisdom Holdings has agreed to take, prior to the Effective Time, such action
as required to amend and restate the Wisdom Holdings Certificate 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 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:
(i) 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 Agreement, or take any action that is reasonably likely to
have a Material Adverse Effect (as defined in the Agreement), on it or its
subsidiaries;
(ii) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money;
(iii) 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;
(iv) 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;
(v) 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;
(vi) 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;
(vii) 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;
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(viii) 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 or (iv) for grants of awards to newly hired
employees consistent with past practice.
(ix) 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;
(x) 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 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);
(xi) settle any claim, action or proceeding involving money damages,
except in the ordinary course of business consistent with past practice;
(xii) take any action that would prevent or impede the Mergers from
qualifying (i) for "pooling of interests" accounting treatment or (ii) as
reorganizations within the meaning of Section 368 of the Code or as
transfers to a controlled corporation qualifying under Section 351 of the
Code;
(xiii) amend its Articles or Certificate of Incorporation, as the case may
be, or its By-Laws, as the case may be;
(xiv) 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 Agreement being or becoming untrue in any material respect at any time
prior to the Effective Time, or in any of the conditions to the Mergers set
forth in the Agreement not being satisfied or in a material violation of any
provision of the Agreement, except, in every case, as may be required by
applicable law or regulation;
(xv) implement or adopt any change in its accounting principles,
practices or methods, other than as may be required by GAAP; or
(xvi) 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:
(i) the 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;
(ii) 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
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Mergers shall have been authorized for listing on the Nasdaq National
Market, subject to official notice of issuance;
(iii) 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;
(iv) the Registration Statement (as defined herein) of which this Joint
Proxy Statement-Prospectus forms 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
Commission;
(v) all 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;
(vi) as of the Effective Time, the employment agreements of certain
officers of Gentle Dental and Dental Care Alliance as set forth the
Agreement shall have been terminated and new employment agreements shall be
entered into between Wisdom 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 Agreement and
incorporated therein.
(vii) 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;
(viii) 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;
(ix) 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, substantially to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion which are
consistent with the state of facts existing at the Effective Time; (a) each
of the Gentle Dental Merger and the Dental Care Alliance Merger constitutes
(i) a "reorganization" within the meaning of Section 368 of the Code and
Wisdom Holdings and, respectively, Gentle Dental and Gentle Dental Merger
Sub and Dental Care Alliance and Dental Care Alliance Merger Sub will each
be 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 and (b) no gain or loss will be recognized by stockholders
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;
(x) 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 the pooling letters are a condition to closing, there can be no
assurance that the Commission will not come to a different conclusion and
require the new company to account for the Mergers under the purchase method
of accounting;
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(xi) the representations and warranties of the other party to the
Agreement shall be true and correct as of the date of the 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 (as
such term is defined in the Agreement) on such party;
(xii) counsel to Dental Care Alliance shall have delivered to Gentle
Dental its opinion, dated as of the Effective Time, and counsel to Gentle
Dental shall have delivered to Dental Care Alliance its opinion, dated as of
the Effective Time;
(xiii) Gentle Dental and Dental Care Alliance shall each have received a
letter from Wisdom Holdings independent auditors dated as of the date on
which the Registration Statement shall become effective, and a date shortly
prior to the Effective Time, in accordance with Statement of Accounting
Standards No. 72;
(xiv) Wisdom Holdings, Gentle Dental Merger Sub and Dental Care Alliance
Merger Sub shall have adopted all resolutions necessary and sufficient to
effectuate the appointment of directors set forth in the Agreement;
(xv) 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 Agreement; and
(xvi) each party shall have performed in all material respects all
obligations required to be performed by it under the Agreement at 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 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 Agreement to perform
or observe covenants and agreements of such party set forth therein.
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 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 Joint Proxy Statement-Prospectus 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
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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 Code, 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 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, 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.
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:
(i) 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 Holding Acquisition Corp. I,
Dental Care Alliance and Wisdom Holding Acquisition Corp. II will each be a
party to the reorganization within the meaning of Section 368(b) of the Code
or (B) transfers to a controlled corporation qualifying under Section 351 of
the Code, and
(ii) 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 in exchange for shares of Gentle Dental Common Stock or Gentle
Dental Series D Preferred 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 (the "IRS") or the courts, and the
parties do not intend to request a ruling from the IRS with respect to the
Mergers. Accordingly, there can be no assurance that the IRS 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 IRS,
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
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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.
The adjusted tax basis of the Wisdom Holdings Common Stock or Series D
Preferred 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 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 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 Preferred 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. 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 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 may be subject to backup withholding at a rate of 31% with respect to
dividends, unless the stockholder (i) is a corporation or comes within certain
other exempt categories and, when required, demonstrates that fact or (ii)
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
IRS. A Wisdom Holdings stockholder who does not 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 IRS. The information reporting rules will apply to dividends on Wisdom
Common Stock and Wisdom Holdings Series D Preferred unless the stockholder is a
corporation or is otherwise exempt from those rules.
ACCOUNTING TREATMENT
The parties anticipate that the Mergers will be accounted for as "pooling of
interests" transactions under GAAP. 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 for (in the case of Dental Care Alliance stockholders), 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 Mergers will be accounted for as a "pooling
of interests." See "--Conditions to Consummation of the Mergers."
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The unaudited pro forma financial information contained in this Joint Proxy
Statement-Prospectus has been prepared assuming that the transaction will
qualify as a "pooling of interests" accounting method to account for the
Mergers. See "Summary--Unaudited Comparative Per Share Data" and "Unaudited Pro
Forma Condensed Combined Financial Information."
TERMINATION OF THE MERGER AGREEMENT
The 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:
(i) 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;
(ii) by either the Gentle Dental Board or Dental Care Alliance Board
(provided that the terminating party is not then in material breach of any
representation, warranty, covenant or other agreement contained in the
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 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;
(iii) by either the Gentle Dental Board or Dental Care Alliance Board 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;
(iv) by either the Gentle Dental Board or Dental Care Alliance Board 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 Agreement;
(v) 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
(vi) by written notice of Gentle Dental or Dental Care Alliance if
either receives an Acquisition Proposal, as defined in the Agreement, and
outside counsel advises that to proceed with the Mergers would violate
either the Gentle Dental Board's or the Dental Care Alliance Board's
fiduciary duty 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
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 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.
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WAIVER AND AMENDMENT OF THE AGREEMENT
WAIVER AND AMENDMENT. At any time prior to the Effective Time, any
provision of the Agreement may be (i) waived by the party benefited by the
provision or (ii) amended or modified by an agreement in writing between the
parties to the Agreement except, following the meetings of the respective
stockholders of Gentle Dental and Dental Care Alliance, the Agreement may not be
amended if such amendment would violate either Washington Law or Delaware 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 (i) 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 in accordance with the
policies of Wisdom Holdings with respect to such stock option plan, and (ii)
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 Gentle Dental Option Plans and in Dental Care Alliance
Option Plans a notice setting forth such participant's rights pursuant thereto
and the grants pursuant to the Gentle Dental Option Plans and the Dental Care
Alliance 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 the Gentle Dental Option Plan and the Dental Care Alliance
Option Plan to ensure that Gentle Dental stock options and Dental Care Alliance
stock options which 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 Agreement. As soon as practicable
after the Effective Time, Wisdom Holdings will file a registration statement
with respect to the shares of Gentle Dental Common Stock or Dental Care Alliance
Common Stock subject to such options (if any) 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.
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STOCK EXCHANGE LISTING
Wisdom Holdings has agreed to cause the shares of Wisdom Holdings Common
Stock and Wisdom Holdings Preferred 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 and
Wisdom Holdings Preferred Stock be authorized for listing on Nasdaq, subject to
official notice of issuance.
EXPENSES
The 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 MERGER
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. 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 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. Fiore,
Van Eerden, Tse, 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 agreement with Wisdom Holdings for Dr. Matzkin
will have certain modifications from the previous employment agreement with
Dental Care Alliance. 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. 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.
STOCK-BASED RIGHTS. The Agreement provides that, at the Effective Time,
each outstanding stock option to acquire shares of Gentle Dental Common Stock
granted under the Gentle Dental Stock Plans or Dental Care Alliance Common Stock
under Dental Care Alliance Stock 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 Wisdom Holdings Common
Stock. Any existing plans 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 Common Stock held by them
following the Effective Time and all 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
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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 Agreement 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. A 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 they will vote or direct the vote of all such
outstanding shares of Dental Care Alliance Common Stock over which they have
voting control in favor of the approval and adoption of the 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 112,755 of Mr Fiore's shares and 16,691 of Mr.
Sadler's shares are now subject to the repurchase option. 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.
RESTRICTIONS ON RESALES BY AFFILIATES
The issuance of shares of Wisdom Holdings Capital Stock to holders of Gentle
Dental Capital Stock and the issuance of shares of Wisdom Holdings Common Stock
to holders of Dental Care Alliance Common Stock in the Mergers have been
registered under the Securities Act of 1933, as amended (the "Securities Act").
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, 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 will, under existing law, require either (i) the
further registration under the Securities Act of the shares of Gentle Dental or
Dental Care Alliance Capital Stock to be transferred, (ii) compliance with Rule
145 promulgated under the Securities Act (permitting limited sales under certain
circumstances) or (iii) 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 the Gentle Dental Common 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 the transfer agent with respect to the Wisdom
Holdings stock to be received by persons subject to the restrictions described
above, and the certificates for such stock will be appropriately legended.
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. Commission
guidelines indicate 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.
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Each of Gentle Dental and Dental Care Alliance has agreed in the 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 Merger 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 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 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 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 the record date, each have agreed, as a condition to Gentle Dental
and Dental Care Alliance entering into the 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 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 Merger (except for certain provisions which will survive the
completion of the Mergers) and the date on which the 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 shareholders. 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.
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OPERATIONS AND MANAGEMENT OF WISDOM HOLDINGS
AFTER THE MERGER
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. 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 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.................... 51 Senior Vice President/ Development Vice Chairman of the Board of
Gentle Dental
Norman R. Huffaker................. 51 Chief Financial Officer and Chief Financial Officer of Gentle
Treasurer Dental
Randy Henry........................ 48 Chief Operating Officer Chief Operating Officer of Gentle
Dental
David P. Nichols................... 40 Vice President of Finance/East Chief Financial Officer of Dental
Care Alliance
Mitchell B. Olan................... 39 Vice President of Operations/ East Chief Operating Officer of Dental
Care Alliance
Kevin Webb......................... 39 Vice President of Operations/
Northwest
Arnold Albert...................... 48 Vice President of Operations/
Northern California
Kenneth Davis...................... 46 Vice President of Operations/
Southwest
</TABLE>
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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 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............................. 44 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 will be comprised of three classes of directors. The
first class will serve until the annual meeting of stockholders held in 1999 and
will initially consist of and . The second
class of directors shall serve until the annual meeting of stockholders held in
2000 and shall initially consist of and .
The third class of directors shall serve until the annual meeting of
stockholders held in 2001 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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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 September 30, 1998, giving
effect to the Mergers as if completed on such date, by (i) each person we
believe will own benefically more than five percent of the Wisdom Holdings
Common Stock, (ii) each director of Wisdom Holdings, and (iii) the named
executive officers of Wisdom Holdings.
<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)................................. 30,575 *
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)........................................ 1,400 *
H. Wayne Posey (7)(18)......................................... 29,017 *
Robert F. Raucci (4)(19)....................................... 42,505 *
Curtis Lee Smith, Jr. (4)(19).................................. 763,145 3.68%
All directors and officers as a group (13 persons) (20)........ 10,021,905 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 the beneficial owner identified above 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. (collectively "Sprout"); 380,033
shares of Wisdom Holdings Series D Preferred which are presently
convertible into the same number of shares of Wisdom Holdings Common Stock;
and 1,140,063 shares of Wisdom Holdings Common Stock which Sprout would
hold if it converted the present outstanding principal amounts of
convertible notes issued by Gentle Dental, which notes have been assumed by
Wisdom Holdings. 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 LBO Plans Management Corporation
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<PAGE>
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.
(4) The address of the beneficial owner identified above is c/o Dental Care
Alliance, Inc., 1343 Main Street, 7th floor, Sarasota, Florida 34236.
(5) The address of the beneficial owner identified above 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 of Wisdom Holdings Series D Preferred which
are presently convertible into the same number of shares of Wisdom Holdings
Common Stock, and 1,628,664 shares of Wisdom Holdings Common Stock which CB
Capital Investors, L.P. would hold if it converted the present outstanding
principal amounts of convertible notes issued by Gentle Dental, which notes
have been assumed by Wisdom Holdings.
(7) The address of the beneficial owner identified above 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 September 30, 1998.
(10) Includes 27,700 shares subject to options exercisable within 60 days after
September 30, 1998 and 2,875 shares subject to an exercisable warrant.
(11) Includes 5,564 shares subject to options exercisable within 60 days after
September 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 95,720 shares subject to repurchase by Wisdom Holdings at a
price of $0.225 per share, which rights lapse at a rate of 2,735 shares
per month until August 31, 2001, at which time Wisdom Holdings' rights
will have lapsed as to all such 95,720 shares.
(13) Includes 96,152 shares subject to options exercisable within 60 days after
September 30, 1998.
(14) Includes 13,360 shares issuable upon exercise of options exercisable
within 60 days after September 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 Corporation (collectively
"Sprout"); 380,033 shares of Wisdom Holdings Series D Preferred
convertible into the same number of shares of common stock; and 1,140,063
shares of Wisdom Holdings Common Stock which Sprout would hold if it
converted the present outstanding principal of convertible notes issued by
Gentle Dental, which notes have been assumed by Wisdom Holdings. DLJ
Capital Corporation 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 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.
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<PAGE>
(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. These shares consist of
1,085,767 shares of Wisdom Holdings Series D Preferred convertible into
the same number of shares of Wisdom Holdings Common Stock and 1,628,664
shares of Wisdom Holdings Common Stock which CB Capital Investors, L.P.
would hold if it converted the present outstanding principal amounts of
convertible notes issued by Gentle Dental, which notes have been assumed
by Wisdom Holdings.
(17) Includes 1,400 shares subject to options exercisable within 60 days after
September 30, 1998.
(18) Includes 2,782 shares subject to options exercisable within 60 days after
September 30, 1998.
(19) Includes 8,350 shares subject to options exercisable within 60 days of
September 30, 1998.
(20) Includes 4,234,527 shares of Wisdom Holdings Series D Preferred
(convertible into Wisdom Holdings Common Stock on a 1:1 basis) and common
shares issuable on demand pursuant to convertible debt; 2,875 shares
subject to exercisable warrants; 171,448 shares subject to options
exercisable within 60 days after September 30, 1998; 126,946 shares
subject to repurchase by Wisdom Holdings and 126,946 shares subject to
repurchase by Wisdom Holdings if certain performance targets are not met.
Also includes 95,720 shares subject to repurchase by Wisdom Holdings at a
price of $0.225 per share, which repurchase rights lapse at a rate of
2,735 shares per month until October 31, 2000, at which time Wisdom
Holdings' repurchase rights will have lapsed as to all such 95,720 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 81 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) 998-0587.
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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 six month periods ended
June 30, 1998 and 1997. The financial data presented below for the six month
period ended 1998 and at June 30, 1998 are unaudited and were prepared by
management of Gentle Dental on the same basis as the audited Consolidated
Financial Statements included elsewhere 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 six months ended June 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 herein.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
YEARS ENDED DECEMBER 31, JUNE 30, JUNE 30,
------------------------------- 1997 1998
1995 1996 1997 (UNAUDITED) (UNAUDITED)
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Dental group net patient service revenue................... $ -- $ 3,701 $ 29,327 $ 11,070 $ 38,503
Net management fees........................................ 9,781 10,712 14,076 6,357 935
--------- --------- --------- ----------- -----------
Net revenues............................................. 9,781 14,413 43,403 17,427 39,438
Clinical salaries and benefits............................. -- 1,493 13,701 5,147 17,664
Practice nonclinical salaries and benefits................. 2,418 4,279 8,177 3,443 5,885
Dental supplies and lab expenses........................... 1,633 2,830 6,271 2,689 4,549
Practice occupancy expenses................................ 911 1,563 3,527 1,482 2,262
Practice selling, general and administrative............... 1,311 1,805 4,912 2,040 3,820
Corporate selling, general and administrative.............. 2,153 2,998 5,700 2,233 2,785
Corporate restructure and merger costs..................... 1,809
Depreciation and amortization.............................. 482 990 1,847 816 1,584
--------- --------- --------- ----------- -----------
Total operating expenses................................. 8,908 15,958 45,944 17,850 38,549
--------- --------- --------- ----------- -----------
Operating income (loss).................................. 873 (1,545) (2,541) (423) 889
Interest income (expense), net............................. (290) (749) (653) 193 (1,043)
Other (expense)/income--net................................ (92) (48) (74) 9 (7)
--------- --------- --------- ----------- -----------
Income (loss) before income taxes and minority
interest............................................... 491 (2,342) (3,268) (625) (161)
Income tax expense/(benefit)............................... 234 (655) (81) 0 (65)
--------- --------- --------- ----------- -----------
Net income (loss)........................................ 257 (1,687) (3,187) (625) (96)
Dividends on redeemable convertible preferred stock........ (240) (932) 541
Accretion of redeemable common stock....................... (91) (34) 19 (12)
--------- --------- --------- ----------- -----------
Net income (loss) attributable to common stock........... $ 257 $ (2,018) $ (4,153) $ (1,185) $ (108)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Net income (loss) per share:
Basic...................................................... $ 0.19 (0.86) (0.91) (0.32) (0.01)
Diluted.................................................... $ 0.19 $ (0.86) $ (0.91) $ (0.32) $ (0.01)
Shares outstanding:
Basic...................................................... 1,380 2,355 4,559 3,735 7,932
Other information:
Diluted.................................................... 1,380 2,355 4,559 3,735 7,932
Patient level revenues(1).................................. $ 16,029 $ 21,424 $ 55,616 $ 40,335
</TABLE>
- ------------------------------
(1) Includes revenue of all acquired practices.
66
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30,
1998
(UNAUDITED)
-----------
<S> <C>
Balance Sheet Data:
Working capital...................................................................................... $ 10,824
Total assets......................................................................................... 90,836
Long-term debt, including current maturities......................................................... 36,038
Redeemable common stock.............................................................................. 2,142
Shareholders equity.................................................................................. 35,916
</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
Joint Proxy Statement/Prospectus.
RESULTS OF OPERATIONS
To provide a more meaningful comparison, the following discussion generally
compares (i) expenses to (ii) the total of dental practice net patient service
revenue of consolidated and unconsolidated affiliated dental practices. 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 (the "EITF") of the Financial Accounting Standards Board. In those
instances where such consolidation requirements are not met, Gentle Dental (i)
reports net management fees revenue and (ii) 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 EITF consolidation requirements 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 EITF consolidation requirements. The remaining dental practice, acquired
effective April 1, 1997, that had not met the EITF consolidation requirements.
YEAR ENDED DECEMBER 31, 1997 STATEMENT OF OPERATIONS COMPARED TO YEAR ENDED
DECEMBER 31, 1996 STATEMENT OF OPERATIONS
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 directly attributable to five affiliations completed in 1996 and
six affiliations completed in 1997, representing 23 clinical locations. These
affiliations have management agreements that meet the EITF 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.
If all affiliated dental practices met the EITF consolidation requirements,
total dental practice net patient revenue reported would have been $25.1 million
for the year ended December 31, 1996 and $56.0 million for the year ended
December 31, 1997, representing a 121% increase.
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<PAGE>
CLINICAL SALARIES AND BENEFITS. Clinical salaries and benefits costs
include all patient service provider staff compensation (including dentists,
hygienists and assistants) and related payroll costs at the consolidated
affiliated dental practices. Clinical salaries and benefits costs 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 costs as a
percentage of dental practice net patient revenue for the years ended December
31, 1996 and 1997 were 40.3% and 47.4%, respectively. The addition of affiliated
dental practices with Gentle Dental in 1996 and 1997 contributed to such
increase.
PRACTICE NONCLINICAL SALARIES AND BENEFITS. Practice nonclinical salaries
and benefits costs include all staff compensation (other than dentists,
hygienists and dental assistants) and related payroll costs at the dental
facilities. Total nonclinical salary costs increased 91.1% 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 attributable to the addition of costs from
affiliations completed during 1996 and 1997. If all Gentle Dental revenue had
been reported at the dental practice net patient revenue level, practice
clinical salaries and benefits costs as a percentage of total revenue for the
years ended December 31, 1996 and 1997 would have been 17.0% and 14.6%,
respectively.
DENTAL SUPPLIES AND LAB COSTS. Total 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. If all Gentle Dental revenue had
been recorded at the dental group net patient service revenue level, dental
supplies and lab costs as a percentage of total revenue for the year ended
December 31, 1996 and 1997 would have been 11.3% and 11.2%, respectively.
PRACTICE OCCUPANCY. 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 in occupancy expenses was primarily
attributable to the addition of costs from affiliations completed during 1996
and 1997. If all Gentle Dental revenue had been recorded at the dental practice
net patient service revenue level, practice occupancy cost as a percentage of
total revenue for the years ended December 31, 1996 and 1997 would have been
6.2% and 6.3%, respectively. The slight increase in comparable costs was due to
higher rent, as a percentage of revenue, at new affiliated dental practices.
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
clinical office level. 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. If all Gentle Dental revenue had
been recorded at the dental group net patient service revenue level, practice
selling, general and administrative expenses as a percentage of total revenue
for the years ended December 31, 1996 and 1997 would have been 7.2% and 8.8%,
respectively. The addition of affiliated dental practices in 1996 and 1997
contributed to such increase.
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total 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. If all Gentle Dental revenue had been recorded at the dental practice
net patient service revenue level, corporate selling, general and administrative
expenses as a percentage of total revenue for the years ended December 31, 1996
and 1997 would have been 11.9% and 10.2%, respectively. 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. Total depreciation and amortization expense
for the years ended December 31, 1996 and 1997 were $1.0 million and $1.8
million, respectively. This increase was primarily due to the addition of
affiliated dental practices in 1996 and 1997.
68
<PAGE>
INTEREST EXPENSE. Total interest expense decreased 12.9% 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 partly
offset by additional debt incurred to complete additional dental practice
affiliations in 1997.
PROVISION (BENEFIT) FOR INCOME TAXES. For the years ended December 31, 1996
and 1997, Gentle Dental recognized a tax benefit resulting from its taxable
losses for those years. The effective tax rate for the tax benefit was lower
than the statutory rate due to the tax-free merger structure for certain dental
practice affiliations. As a result, the amortization of certain intangible
assets reduced earnings, but was not deductible for tax purposes.
SIX MONTHS ENDED JUNE 30, 1997 STATEMENT OF OPERATIONS COMPARED TO SIX MONTHS
ENDED JUNE 30, 1998 STATEMENT OF OPERATIONS
DENTAL PRACTICE NET PATIENT SERVICE REVENUE. If all the affiliated dental
practices were accounted for on a consolidated basis, total dental practice net
patient revenue reported would have been $23.6 million for the six months ended
June 30, 1997 and $40.3 million for the six months ended June 30, 1998,
representing a 70.7% increase. This increase is directly attributed to nine
affiliations completed during the year ended December 31, 1997 and four
affiliations completed during the six months ended June 30, 1998, representing
27 clinical locations.
CLINICAL SALARIES AND BENEFITS. If all affiliated dental practices were
accounted for on a consolidated basis, clinical salaries and benefits costs
would have been $11.3 million for the six months ended June 30, 1997 and $18.5
million for the six months ended June 30, 1998. Practice clinical salaries and
benefits costs as a percentage of dental practice net patient revenue for the
six months ended June 30, 1997 and 1998 were 47.9% and 46.0%, respectively. This
decrease was the result of the new management service agreements entered into as
of January 1, 1998 with certain affiliations located in Oregon and Washington.
Also, the addition of affiliated dental practices with Gentle Dental in 1997 and
the six months ended June 30, 1998 contributed to such decrease.
PRACTICE NONCLINICAL SALARIES AND BENEFITS. Total nonclinical salary costs
increased 70.9% from $3.4 million for the six months ended June 30, 1997 to $5.9
million for the six months ended June 30, 1998. This increase was primarily
attributable to the addition of costs from affiliations completed during 1997
and the six months ended June 30, 1998. If all Gentle Dental revenue had been
reported at the dental practice net patient revenue level, practice nonclinical
salaries and benefits costs as a percentage of total revenue for the six months
ended June 30, 1997 and 1998 would have been 14.6% for both periods.
DENTAL SUPPLIES AND LAB COSTS. Total dental supplies and lab costs
increased 69.2% from $2.7 million for the six months ended June 30, 1997 to $4.5
million for the six months ended June 30, 1998. The addition of affiliated
dental practices in 1997 and 1998 contributed to such increase. If all Gentle
Dental revenue had been recorded at the dental group net patient service revenue
level, dental supplies and lab costs as a percentage of total revenue for the
six months ended June 30, 1997 and 1998 would have been 11.4% and 11.3%,
respectively.
PRACTICE OCCUPANCY. Practice occupancy expenses increased 52.6% from $1.5
million for the six months ended June 30, 1997 to $2.3 million for the six
months ended June 30, 1998. This increase was primarily attributable to the
addition of costs from affiliations completed during 1997 and the six months
ended June 30, 1998. If all Gentle Dental revenue had been recorded at the
dental practice net patient service revenue level, practice occupancy cost as a
percentage of total revenue for the six months ended June 30, 1997 and 1998
would have been 6.3% and 5.6%, respectively. The expense mix of affiliated
dental practices affiliating with Gentle Dental in 1997 and 1998 contributed to
the decrease in this percentage.
69
<PAGE>
PRACTICE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Practice selling,
general and administrative expenses increased 87.7% from $2.0 million for the
six months ended June 30, 1997 to $3.8 million for the six months ended June 30,
1998. If all Gentle Dental revenue had been recorded at the dental group net
patient service revenue level, practice selling, general and administrative
expenses as a percentage of total revenue for the six months ended June 30, 1997
and 1998 would have been 11.5% and 9.7%, respectively. The expense mix of
affiliated dental practices affiliating with Gentle Dental in 1997 and 1998
contributed to such decrease.
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total corporate
selling, general and administrative expenses increased 24.2% from $2.2 million
for the six months ended June 30, 1997 to $2.8 million for the six months ended
June 30, 1998. If all Gentle Dental revenue had been recorded at the dental
practice net patient service revenue level, corporate selling, general and
administrative expenses as a percentage of total revenue for the six months
ended June 30, 1997 and 1998 would have been 9.4% and 6.9%, respectively. The
increase in total expense is a result of Gentle Dental implementing
infrastructure required to accommodate expected future growth.
DEPRECIATION AND AMORTIZATION. Total depreciation and amortization expense
for the six months ended June 30, 1997 and 1998 was $816,000 and $1.6 million,
respectively. The increase was primarily due to the addition of affiliated
dental practices in 1997 and 1998.
INTEREST EXPENSE. Total interest expense increased from $193,000 for the
six months ended June 30, 1997 to $1.0 million for the six months ended June 30,
1998. This increase in interest expense was due to additional debt incurred to
complete certain dental practice affiliations in 1997 and 1998.
INCOME TAX (BENEFIT) EXPENSE. For the six months ended June 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 six months
ended June 30, 1998, Gentle Dental recognized a tax benefit resulting from its
taxable loss as management believe that Gentle Dental would be able to utilize
available tax loss carryforwards. The effective tax rate for the tax benefit was
lower than the statutory rate due to Gentle Dental's tax-free merger structure
for certain dental practice affiliations, resulting in amortization of certain
intangible assets which are not deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, Gentle Dental's cash and cash equivalents were $16.2
million and working capital was $10.8 million. The increase in cash equivalents
and working capital at December 31, 1997 was the result of a $45 million private
placement of debt and Gentle Dental Preferred Stock during the six months ended
June 30, 1998.
Net cash used in operations was $842,000 and $1.8 million for the six-month
periods ended June 30, 1997 and 1998, respectively. Net cash used in investing
activities, principally dental practice affiliations, was $3.1 million and $15.5
million for the six-month periods ending June 30, 1997 and 1998, respectively.
Net cash provided from financing activities was $2.5 million and $33.3 million
for the six-month periods ended June 30, 1997 and 1998, respectively.
On January 1, 1998, Gentle Dental and certain affiliations in Washington and
Oregon entered into asset purchase and management service agreements. Under the
terms of such management service 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 an aggregate of $575,000 in cash in
18 monthly installments. The new management service agreements meet the EITF
consolidation requirements.
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<PAGE>
During the six months ended June 30, 1998, Gentle Dental completed six
dental practice affiliation transactions. These affiliations represent the
purchased assets of 21 clinical locations for $13.8 million in cash, 378,987
shares of Gentle Dental Common Stock valued at $2.8 million, liabilities
incurred or assumed of $11.2 million (of which $6.5 million was paid in July
1998) and additional future consideration based upon financial performance
targets. Such affiliations were accounted for using the purchase method of
accounting.
On July 28, 1998, Gentle Dental completed the affiliation of a dental
practice located in Northern California, representing one clinical office
location. The purchase price for this affiliation totaled $1.5 million in cash.
This affiliation was accounted for using the purchase method of accounting.
On July 31, 1998, Gentle Dental completed the acquisition of all the stock
of Dedicated Dental Systems, Inc., a Bakersfield, California company which owns
and operates eleven staff model dental offices pursuant to a license granted
under the Knox-Keene Act. Also, pursuant to the terms of three asset purchase
agreements, Gentle Dental completed the acquisition of the non-professional
assets of related dental practices operating at four locations in southern
California. The aggregate purchase price for these affiliations consisted of
$16.4 million in cash and 705,101 shares of Gentle Dental Common Stock valued at
$5.8 million.
RECENT DEVELOPMENTS
On October 30, 1998, Gentle Dental acquired all of the issued and
outstanding shares of stock of Capitol Dental Care, Inc., an Oregon corporation,
and purchased substantially all 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 $800,000.00, 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, $1.7
million pursuant to a promissory note payable in equal quarterly installments of
principal and interest over a three year term and bearing interest at the annual
rate of 8%. Dental Management of Oregon, P.C., can earn additional cash
consideration if its earnings increase over a two-year period pursuant to a
formula described in the acquisition agreements.
Capitol Dental Care, Inc. provides capitated dental services under the
Oregon Health Plan pursuant to 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 June
30, 1998, Gentle Dental had accrued $1.4 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
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<PAGE>
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 during 1998.
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
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 at a rate of one share of Gentle Dental
Series B Preferred 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 and Gentle Dental Series C
Preferred, 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, all of which
is issued and outstanding; 70,000 shares of Gentle Dental Series B Preferred,
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, all of which is issued and outstanding; and 2,000,000
shares of Gentle Dental Series D Preferred of which 1,628,663 shares are issued
and outstanding. The shares of convertible Gentle Dental Series B Preferred 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, and the shares of
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Gentle Dental Series D Preferred 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 and Gentle Dental Series C Preferred 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 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.
YEAR 2000 COMPLIANCE. Gentle Dental has purchased software that runs on its
computer network which it believes is Year 2000 compliant. Gentle Dental is
currently evaluating its key suppliers to determine whether they are Year 2000
compliant and to determine the impact, if any, on the financial position and
results of operations. Currently, the Year 2000 issues are not expected to
materially impact the financial position and results of operations of Gentle
Dental.
CERTAIN TRANSACTIONS REGARDING GENTLE DENTAL
The outstanding capital stock of certain professional corporations located
in Oregon and Washington (the "Oregon and Washington Professional Corporations")
is owned in whole or in part by Dany Y. Tse and Gerald R. Aaron. Gentle Dental
is a party to certain management agreements with each of the Oregon and
Washington 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 the
Oregon and Washington 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: (i)
approximately $1.8 million in cash offset by approximately $1.8 million of
Gentle Dental receivables due from such Oregon and Washington Professional
Corporations; (ii) 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 (iii) 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 (the "Modification"). 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 common stock at an aggregate exercise
price of $150,000. On the same date,
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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 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 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 common stock for $88,868. The purchase price was paid in part in the form of
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 converted into 395,541 shares of 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. 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 these employment
agreements, the annual base salaries of Messrs. Fiore, Tse and Van Eerden are
$250,000, $243,000, 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
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cause. The employment agreement for Dr. Tse provides for an initial term through
June 30, 2003, subject to a renewal term through June 30, 2008, and further
provides 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.
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." If Dr. Tse voluntarily terminates
his employment for "good reason" prior to July 1, 2001, Dr. Tse will be entitled
to enter into a 12-month consulting agreement at his base salary; upon
termination of the 12-month consulting agreement, Dr. Tse will be entitled to
severance payments for 24 months based on his base salary. If Dr. Tse
voluntarily terminates his employment for "good reason" after July 1, 2001, Dr.
Tse will be entitled to enter into a 12-month consulting agreement at his base
salary; upon termination of the 12-month consulting agreement, Dr. Tse will be
entitled to severance payments for 12 months based on his base salary. If Gentle
Dental terminates Dr. Tse's employment without "cause" after April 30, 2002, Dr.
Tse will be entitled to receive severance payments based on his base salary for
the period through June 30, 2003. For purposes of each of the employment
agreements, "cause" means (i) 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; (ii) any breach by employee of certain sections of the
employment agreement relating to covenants of non-solicitation, non-competition
and confidentiality; (iii) 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 (iv) 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. Employee shall
not be considered to have been terminated for "cause" if terminated by Gentle
Dental solely (a) as a result of employee's bad judgment or negligence, (b)
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, (c) 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 (d)
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 (i) 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, (ii) a demotion in position from
the employee's positions with Gentle Dental as of the date the employment
agreement was executed, or (iii) 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.
The above-described transactions with related parties were on terms the
Gentle Dental Board 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. The policy provides that any transaction between Gentle
Dental and (i) an officer, director, or principal shareholder of Gentle Dental
or (ii) 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 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.
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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, and will entitle Mr. Fiore to severance
payments based on his base salary for a period 36 months, if he is terminated
during the initial year of the agreement's term, and for a period 24 months if
he is terminated at any time during the remainder of its term.
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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 September 30, 1998 by (i) each
person known by Gentle Dental to own beneficially more than five percent of
Gentle Dental Common Stock, (ii) each director of Gentle Dental, and (iii) the
Chief Executive Officer and each other named executive officer. 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.
<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 30.20%
3000 Sand Hill Road
Bldg. 3, Suite 170
Menlo Park, CA 94025
CB Capital Investors, L.P. Corp.(3)............................................... 2,714,431 23.22%
Accel V L.P. and certain related entities(4) ..................................... 814,246 8.79%
c/o Accel Partners
428 University Avenue
Palo Alto, CA 94301
Bessemer Venture Partners GMS(5) ................................................. 610,684 6.64%
83 Walnut Street
Wellesley Hills, MA 02181
Michael T. Fiore(6)............................................................... 356,772 3.97%
Dany Y. Tse, DMD(7)............................................................... 629,378 6.92%
Grant M. Sadler(8)................................................................ 395,541 4.41%
L. Theodore Van Eerden(9)......................................................... 30,575 *
Norman R. Huffaker(10)............................................................ 5,564 *
Randy Henry....................................................................... -- *
Gerald R. Aaron, DDS(11).......................................................... 11,250 *
Kenneth D. Hooten(12)............................................................. 200,000 2.20%
Paul H. Keckley(13)............................................................... 1,400 *
Craig W. Wong, DMD(14)............................................................ 90,100 1.00%
Wayne Posey(15)................................................................... 29,017 *
Robert Finzi(16).................................................................. 3,169,658 30.20%
Kathleen D. La Porte(17).......................................................... 3,169,658 30.20%
Eric Green(18).................................................................... 2,714,431 23.22%
All directors and officers as a group (13 persons)(19)............................ 7,633,686 56.58%
</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 1,085,767 shares of Gentle Dental Series D Preferred which are
presently convertible into the same number of shares of Gentle Dental
Common Stock, and 1,628,664 shares of Gentle Dental
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Common Stock which CB Capital Investors, L.P. would hold if it converted
the present outstanding principal amounts of a convertible note issued by
Gentle Dental.
(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.L.P. and DLJ Capital Corp. (collectively "Sprout");
380,033 shares of Gentle Dental Series D Preferred which are presently
convertible into the same number of shares of Gentle Dental Common Stock;
and 1,140,063 shares of Gentle Dental Common Stock which Sprout would hold
if it converted the present outstanding principal of convertible notes
issued by Gentle Dental, which notes have been assumed by Wisdom Holdings.
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 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.
(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. (collectively
"Accel Entities"); 72,383 shares of Gentle Dental Series D Preferred which
are presently convertible into the same number of shares of Gentle Dental
Common Stock; and 217,155 shares of common stock which Accel Entities would
hold if it converted the present outstanding principal of convertible notes
issued by Gentle Dental, which notes have been assumed by Wisdom Holdings.
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 Accel Entities and disclaim beneficial ownership of the shares held by
the Accel Entities except to the extent of their respective pecuniary
interests.
(5) Consists of 393,530 shares presently held by Bessemer Ventures Partners;
54,288 shares of Series D Preferred which are presently convertible into
the same number of shares of Gentle Dental Common Stock; and 162,866 shares
of Gentle Dental Common Stock which Bessemer Ventures Partners would hold
if it converted the present outstanding principal of convertible notes
issued by Gentle Dental, which notes have been assumed by Wisdom Holdings.
(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 subject to options exercisable within 60 days after
September 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 155,169 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 October 31, 2000, at which time Gentle Dental's rights will have
lapsed as to all such 170,169 shares.
(9) Includes 27,700 shares subject to options exercisable within 60 days after
September 30, 1998, and 2,875 shares subject to an exercisable warrant.
(10) Includes 5,564 shares subject to options exercisable within 60 days after
September 30, 1998.
(11) Includes 9,000 shares subject to options exercisable within 60 days after
September 30, 1998.
(12) Includes 200,000 shares beneficially owned by ServiceMaster Venture Fund
L.L.C. of which 100,000 shares are subject to an exercisable 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 1,400 shares subject to options exercisable within 60 days after
September 30, 1998.
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(14) Includes 3,200 shares subject to options exercisable within 60 days of
September 30, 1998, and 6,900 shares subject to an exercisable warrant.
(15) Includes 2,782 shares subject to options exercisable within 60 days after
September 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 4,234,527 shares of Gentle Dental Series D Preferred (convertible
into Gentle Dental Common Stock on a 1:1 basis) and common shares issuable
pursuant to convertible notes; 139,446 shares subject to options
exercisable within 60 days after September 30, 1998; 144,275 shares
subject to exercisable 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.
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
Dany Y. Tse, DMD.................. 48 Co-Chairman of the Board, President of Clinical Services Council and
Co-Founder
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...................... 44 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
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President and Chief Operating Officer, and as President of its principal
subsidiary, Comprehensive Cancer Centers, Inc.
DANY Y. TSE, DMD. Dr. Tse has served as Co-Chairman of the Board and
President of Clinical Services Council since November 1997. Dr. Tse served as
Chairman of the Board since December 1996 and, as President and Chief Executive
Officer of Gentle Dental from March 1996 until November 1997. He previously
served as Chairman of the Board from inception in December 1992 to March 1996.
Dr. Tse is a licensed dentist in Oregon and Washington.
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 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.
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. 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.
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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 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
Gentle Dental Restated Articles of Incorporation provide for three classes
of directors. Directors Fiore, Finzi, Posey and Kaiser have been appointed as
Class II directors and will serve until the meeting of shareholders in 2001;
directors Sadler, Van Eerden, Tse and Aaron have been appointed to serve in
Class III until the meeting of shareholders in 1999; and directors La Porte,
Hooten, Keckley and Wong have been appointed to serve in Class I until the
annual meeting of shareholders in 2000. 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, Van Eerden and Tse, has all of
the authority of the Board of Directors except as limited by applicable law. The
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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
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 ("Managed Dental
Centers") operated by 38 professional corporations and associations ("PAs").
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 PAs 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 PAs are responsible for compliance with state and local
regulations of the practice of dentistry and with licensing and certification
requirements, and each PA is responsible for acquiring and maintaining
professional liability insurance.
Almost all of its management agreements provide that Dental Care Alliance
(i) 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, (ii) provide, maintain and repair all
offices, equipment and furnishings, (iii) employ all non-professional personnel
necessary for the operation of the managed dental centers, (iv) provide payroll
services, (v) implement standard business systems and procedures and provide or
facilitate systems and efficiencies training, (vi) order all general business
inventory and supplies required by the managed dental centers and handle
accounts payable, (vii) establish and maintain information systems and provide
accounting and bookkeeping services, (viii) monitor compliance with rules and
regulations applicable to the managed dental centers' business, (ix) provide
marketing assistance and (x) provide assistance in billing and collections, all
to the extent permitted by law.
These management agreements also provide that the PAs are responsible for,
among other things, (i) employing and supervising all dentists and dental
hygienists, (ii) complying with all laws, rules and regulations relating to
dentists and dental hygienists, (iii) participating in quality
assurance/utilization
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review programs, (iv) maintaining proper dental patient records, (v) 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
(vi) any other requirements to carry out the practice of dentistry.
As compensation for its management services under the Standard Management
Agreements (as herein defined), the PAs pay Dental Care Alliance a management
fee equal to 67%-74% of the net collected revenues earned by the PA. Dental Care
Alliance pays all of the operating and nonoperating expenses incurred by the PAs
except for (i) salaries and benefits to the dentists and dental hygienists, (ii)
licensing fees paid to Dental Care Alliance, (iii) debt and asset carrying costs
related to the acquisition of the dental practice and (iv) any other direct cost
to the PA 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 (each, a
"Dental Director"). The primary purpose of the 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 PAs in their region with hiring, training
and supervision of dental professionals. Dental Care Alliance believes that
close relationships among the Dental Directors, the PAs 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 six month periods ended June 30, 1997 and 1998 and at June 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 six months ended June 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>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
------------------------------------------------------- ---------------------
1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ----------
1993
-----------
(UNAUDITED) (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 $2,471,759 $11,802,583
Consulting and licensing
fees........................ -- 42,763 262,769 347,600 290,885 161,885 294,133
----------- --------- --------- --------- --------- --------- ----------
Total revenues............ 83,700 716,067 776,474 1,637,428 7,879,078 2,633,644 12,096,716
Managed dental center
expenses(1):
Staff salaries and
benefits.................. -- -- -- 223,657 2,021,497 601,383 3,321,912
Dental supplies............. -- -- -- 79,448 650,444 213,334 831,074
Laboratory fees............. -- -- -- 98,222 971,024 373,010 1,311,487
Marketing................... -- -- -- 38,128 414,519 176,627 423,613
Occupancy................... -- -- -- 106,501 998,141 333,085 1,278,186
Other....................... -- -- -- 57,182 851,631 326,494 828,240
----------- --------- --------- --------- --------- --------- ----------
Total managed dental
center expenses......... -- -- -- 603,138 5,907,256 2,023,933 7,994,512
----------- --------- --------- --------- --------- --------- ----------
83,700 716,067 776,474 1,034,290 1,971,822 609,711 4,102,204
Salaries and benefits......... 8,339 408,716 400,669 521,683 786,795 373,016 786,414
General and administrative.... 16,064 204,901 234,577 260,558 600,657 135,970 820,226
Advisory services(2).......... -- -- 127,768 -- -- -- --
Depreciation and
amortization................ -- 15,150 22,106 27,654 163,681 41,578 389,751
----------- --------- --------- --------- --------- --------- ----------
Operating income (loss)... 52,297 87,300 (8,646) 224,395 420,689 59,147 2,105,813
Interest income (expense),
net......................... -- 22,584 6,494 20,781 263,568 36,464 392,955
----------- --------- --------- --------- --------- --------- ----------
Income (loss) before
income taxes and
minority interest....... 52,297 109,884 (2,152) 245,176 684,257 95,611 2,498,768
Provision for income taxes.... -- 19,919 -- 35,500 263,952 36,000 964,025
Minority interest............. -- 2,440 8,654 7,674 -- -- --
----------- --------- --------- --------- --------- --------- ----------
Net income (loss)......... $ 52,297 $ 87,525 $ (10,806) $ 202,002 $ 420,305 $ 59,611 $1,534,743
----------- --------- --------- --------- --------- --------- ----------
----------- --------- --------- --------- --------- --------- ----------
</TABLE>
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<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
------------------------------------------------------- ---------------------
1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ----------
1993
-----------
(UNAUDITED)
(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) (106,000) (60,000) --
----------- --------- --------- --------- --------- --------- ----------
Net income (loss) applicable
to common stock............. $ 52,297 $ 127,476 $ 74,903 $ 4,280 $ 309,805 $ (10,889) $1,534,743
----------- --------- --------- --------- --------- --------- ----------
----------- --------- --------- --------- --------- --------- ----------
Net income (loss) per common
share:
Basic....................... $ .02 $ -- $ 0.07 $ -- $ .022
Diluted..................... $ .02 $ -- $ 0.07 $ -- $ .022
Weighted average common shares
outstanding
Basic....................... 3,791,610 3,829,029 4,610,331 4,131,510 6,977,843
Diluted..................... 3,864,291 3,873,747 4,697,080 4,218,979 7,076,495
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------- AT JUNE 30,
1998
1993 -----------
----------- (UNAUDITED)
(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 1$1,694,762
Total assets.................. 187,203 466,820 524,543 3,122,939 28,554,487 31,553,532
Long-term debt, including
current maturities.......... 22,100 209,437 163,745 214,002 1,012,111 2,147,251
Redeemable common and
preferred securities........ -- -- -- 1,593,799 -- --
Stockholders' equity.......... 47,845 118,400 296,837 632,285 24,553,825 26,902,952
</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 PA
to a percentage of net patient revenues from each PA. 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 PA's financial statements. See "Dental Care Alliance 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 PAs 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 management
agreements
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to manage five practices in Michigan and 12 in Florida. As of June 30, 1998,
Dental Care Alliance provided management and licensing services to 49 managed
dental centers, 32 of which are located in Florida, nine of which are located in
Michigan and eight of which are located in Georgia. In addition, Dental Care
Alliance provides only licensing services to three dental centers in Florida as
of June 30, 1998.
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, as
defined in the management agreements, 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 ("Net Collected Revenues") and
Dental Care Alliance would assume responsibility for the payment of the
non-professional expenses of the Managed Dental Centers (the "Standard
Management Agreements"). 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 Standard Management Agreements, except that management fees
have ranged from 67% to 74% of 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 PA provides for a management fee based
upon net profits or net patient revenue. In the "net profits" type of management
agreement, both the PA 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 PA located in Port Charlotte, Florida
contributed approximately 18% and 9% to Dental Care Alliance's revenues in 1996
and 1997. The Flint Management Agreement has a term of 25 years and provides for
a management fee equal to 74% of the Net Collected Revenues earned by the
associated PA. The Port Charlotte Management Agreement expires in 2003 and
provides for a management fee of 55% of the net profits of the associated PA. In
addition, the Port Charlotte management agreement provides that the PA 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 PA has indicated that it may
seek to terminate the agreement, but has not definitively notified Dental Care
Alliance that it will do so. Dental Care Alliance earned fees of $121,900 for
the year ended December 31, 1997 and $83,500 for the six months ended June 30,
1998.
All patient revenues are billed to patients and providers under the
authority and identification numbers of the individual PAs. Patient revenues and
receivables are recorded on the accounts of the PAs. Funds are dispersed
initially to pay all the professional costs of the PAs. Thereafter, funds are
disbursed to Dental Care Alliance under the terms of the management agreements.
Any remaining funds are retained by the PA. If funds are insufficient to pay
Dental Care Alliance under the terms of the relevant
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management agreement, a payable from the PA 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
PA 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 PA or
has assisted the PA 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 PAs acquire the dental assets of such
Managed Dental Centers. In addition, due to changing market conditions, Dental
Care Alliance has begun compensating PAs for the execution of management
agreements.
Dental Care Alliance from time to time has made loans to newly formed PAs
with which it has entered into management agreements to purchase the dental
assets of the related dental practices. In return the PAs execute promissory
notes to Dental Care Alliance in the amount of such loans. At June 30, 1998, the
total outstanding balance of such loans was $793,444. 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 PAs 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 PAs, although it is not obligated contractually or otherwise to make
such advances. The extension of loans and advances to the PAs 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 PAs
are guaranteed by the relevant PA 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 June 30, 1998, the total outstanding balance of such advances was
$1,361,517. There have been no revisions to the terms of any such loans or
advances. The PAs are current in the payment of their loans or advances and
Dental Care Alliance believes that the financial condition of the PAs 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 PA and the estimated fair market value of the assets to be owned or
owned by such PA. 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 PAs' 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 PA 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 PAs. Dental Care
Alliance also analyzes any historical trends of the PAs relating to bad debts or
the inability of the PAs to generate collectible patient receivables. Dental
Care Alliance assesses the guaranty of its PA 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 PA owner in the
business community and the length and quality of the PAs' relationship with
Dental Care Alliance are examined by Dental Care Alliance to assess the PA
owners as guarantors of
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the loans and advances. Dental Care Alliance may modify the terms of management
agreements prospectively if the PA does not perform at a level sufficient to
repay the advances.
None of the PA owners are officers, directors or employees of Dental Care
Alliance. Dr. Dennis A. Corona, the owner of PAs operating a majority of the
Managed Dental Centers, owns 1% of Dental Care Alliance Common Stock. In
addition, five Managed Dental Centers in Michigan are owned by PAs commonly
controlled by Dr. Ross Johnson.
The PAs are primarily liable for repayment of the notes and advances to
Dental Care Alliance with the PA owners being secondarily liable for repayment
under the notes and advances. The PAs and PA 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 PAs or PA owners are insufficient to pay the
outstanding balances under the notes or advances upon any default.
The PAs 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 PAs,
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 $62,000 as of June 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 PAs that have acquisition loans from Dental
Care Alliance and for most PAs with working capital advances provide that the
PAs 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 PA at a price equal to 60% of the annualized
gross revenues of such PA owner over the previous 24 months, minus any
liabilities, including outstanding indebtedness, if any, to Dental Care Alliance
of the PA at the date of purchase. In such event, Dental Care Alliance would
evaluate whether, at its option, to have another PA owner or other licensed
dentist assume control of the practice and continue to generate management fees
or to liquidate the assets of such PA.
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 PAs, not Dental Care Alliance. Dental Care Alliance has recorded
goodwill and other intangible assets in cases where Dental Care Alliance has
paid a PA 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.
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
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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. ("Marketplace") pursuant to the merger
of Marketplace 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. All shares of Marketplace common stock were converted into the
right to receive, in the aggregate, eighty thousand (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 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 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 (i) $2,400,000 in cash; (ii) 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 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
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
MANAGEMENT FEES. Management fees increased 377.5% from $2.5 million for the
six months ended June 30, 1997 to $11.8 million for the six months ended June
30, 1998. Revenues at existing practices grew nine percent to approximately $2.7
million, while the balance of the increase relates to the addition of 37 Managed
Dental Centers since January 1, 1997.
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CONSULTING AND LICENSING FEES. Consulting and licensing fees increased
81.7% from $161,885 for the six months ended June 30, 1997 to $294,133 for the
six months ended June 30, 1998. The increase is attributable to the addition of
37 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 $2.0 million for the six months ended June 30, 1997 to $8.0 million for the
six months ended June 30, 1998. As a percentage of net patient revenue at
Managed Dental Centers, Managed Dental Center expenses decreased from 57% to
48%. The decrease is due to economies in purchasing of dental supplies and
laboratories (3%), reduced marketing expenditures (3%) in new affiliations with
established reputations and other general and administrative expenses (3%).
SALARIES AND BENEFITS. Salaries and benefits increased 110.8% from $373,016
for the six months ended June 30, 1997 to $786,414 for the six months ended June
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 37 Managed Dental Centers. As a percentage of net
patient revenue, salaries and benefits decreased from 11% to 5%.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
503.2% from $135,970 for the six months ended June 30, 1997 to $820,226 for the
six months ended June 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 37 Managed Dental Centers. As a
percentage of the net patient revenue, general and administrative increased from
4% to 5%.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 837.4% from $41,578 for the six months ended June 30, 1997 to $389,751
for the six months ended June 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 37 additional Managed
Dental Centers. As a percentage of net patient revenue, depreciation and
amortization increased from 1% to 2%.
INTEREST INCOME, NET. Interest income, net increased from $36,464 for the
six months ended June 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.
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 PAs. 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
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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.
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.
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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,
1997 1997 1998 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Number of Managed Dental Centers(1)..................... 20 29 44 49
Net patient revenue at Managed Dental Centers(2)........ $ 3,190,620 $3,868,333 $ 6,799,853 $ 9,942,993
Total revenues.......................................... 2,256,950 2,970,038 4,932,971 7,163,745
Managed dental center expenses.......................... 1,753,070 2,130,256 3,266,401 4,728,111
Operating income........................................ 115,246 246,296 909,898 1,195,915
Net income.............................................. 75,648 285,046 700,928 833,815
</TABLE>
- ------------------------
(1) Presented as of the end of the period.
(2) Net patient revenue is the total amount of revenue recorded by the PAs
during the period. Revenue is included from and after the date on which the
relevant PA executed a management agreement with Dental Care Alliance.
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 six months ended June 30, 1998 was $75,873, $270,121
$557,767 and $203,133, respectively. Net cash provided by operating activities
for the years ended December 31, 1995, 1996 and 1997 and the six months ended
June 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 six months ended June 30, 1998 was ($5,649), ($487,858),
($2.0 million) and ($11.8 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 six
months ended June 30, 1998, the investing activities included $8,667,063 related
primarily to the purchase of management agreements, $1,811,857 related to the
purchase of non-dental assets, $920,000 related to satisfaction of outstanding
obligations on acquisitions and affiliations and $450,000 related to an increase
in notes receivable to PAs.
Cash (used in) provided by financing activities for the and the years ended
December 31, 1995, 1996 and 1997 and the six months ended June 30, 1998 was
($69,926), $1,428,803, $20,572,424 and $257,044, 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 PAs and
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$167,945 in net repayment of debt. For the six months ended June 30, 1998 Dental
Care Alliance had $1,216,062 in net proceeds on long-term debt offset by
$878,096 in working capital advances to PAs.
In August 1997, Dental Care Alliance entered into a revolving line of credit
(the "Credit Agreement") which provides for an aggregate of $1.2 million. Under
the terms of the Credit Agreement, Dental Care Alliance may use up to $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 June 30, 1998, Dental Care Alliance had no outstanding
balances against the Revolving Note.
Dental Care Alliance previously has made loans to various PAs in connection
with the PAs' acquisition of assets of dental practices and has made working
capital advances to various PAs 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 PA 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 PAs 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.
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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................ 39 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 Named Executive
Officers (as defined herein).
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 $12.00 per share of Dental Care Alliance
Common Stock.
(3) See "Dental Care Alliance's Management and Additional
Information--Employment Agreements" for information regarding current and
future compensation arrangements.
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OPTION GRANTS
The following table sets forth certain information with respect to options
to purchase shares of Dental Care Alliance Common Stock granted to the Named
Executive Officers during 1997 and represents all options granted by Dental Care
Alliance to such executive officers during such period. In accordance with rules
promulgated by the Commission, the table also describes the hypothetical gains
that would exist for the respective options based on assumed rates of annual
compound stock appreciation of 5% and 10% from the date of grant to the end of
the option term. These hypothetical gains are based on assumed rates of
appreciation and, therefore, the actual gains, if any, on stock option exercises
are dependent on the future performance of Dental Care Alliance Common Stock,
overall stock market conditions, and the executive officer's continued
employment with Dental Care Alliance. As a result, the amounts reflected in this
table may not necessarily be achieved.
OPTION/SAR GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED (#) FISCAL YEAR (%) ($/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 SARs. 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 (the "Incentive 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 SARs. 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 (i) hold the offices of Co-Chairman, President and
Chief Dental Officer of Wisdom Holdings, (ii) 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, (iii) receive an automobile allowance of $1,000 per month and
(iv) be subject to covenants prohibiting disclosure of confidential information
of Wisdom Holdings and competition with, or solicitation of employees of, Wisdom
Holdings.
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 PA 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 ("EMS").
Certain Managed Dental Centers have entered into capitalized equipment leases
with EMS. Amounts paid by such Managed Dental Centers to EMS 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
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<PAGE>
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 (the "Dental Care Alliance
Stockholders' Agreement") among Dental Care Alliance and Dr. Matzkin, Mr. Smith,
Mr. Raucci, the SRM 1993 Children's Trust and Crescent International Holdings,
Inc. (collectively, the "Stockholders") initially entered into in connection
with the sale of Dental Care Alliance's Series A Preferred Stock in October
1996, each stockholder received (i) "piggyback" registration rights, (ii) a
right of first refusal with respect to a greater than 50% share transfer by a
stockholder prior to a Qualified Initial Public Offering (as defined in the
Dental Care Alliance Stockholders' Agreement), (iii) co-sale rights to
participate on a pro rata basis in certain resales of Dental Care Alliance
Common Stock by other Stockholders (other than in connection with a Qualified
Initial Public Offering) and (iv) participation rights with respect to certain
issuances of securities by Dental Care Alliance made prior to a Qualified
Initial Public Offering. In addition, Stockholders 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 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 (collectively, "Registrable
Shares"), (i) "piggyback" registration rights, and (ii) 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 "Dental Care Alliance's Management and Additional
Information--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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<PAGE>
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 (i)
each person known by Dental Care Alliance to own beneficially more than 5% of
Dental Care Alliance Common Stock, (ii) 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 (collectively, the
"Named Executive Officers"; see "--Executive Compensation"), (iii) each director
and (iv) 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................... 1,529,148 21.7%
Curtis Lee Smith, Jr.(4)................... 453,640 6.4%
Robert F. Raucci(5)........................ 22,119 *
Mitchell B. Olan(6)........................ 157,582 2.2%
David P. Nichols(7)........................ 52,243 *
Crescent International Holdings Limited.... 593,119 8.4%
All directors and executive officers as a
group (6 persons)(8)..................... 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) 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.
(5) 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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<PAGE>
(6) 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.
(7) 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.
(8) 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 the
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 ("Delaware Law"), and is qualified in its entirety by reference to the
Wisdom Holdings Certificate.
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 the Wisdom Holdings Certificate, Wisdom Holdings' Board 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, shares
of Wisdom Holdings Series A Preferred, Wisdom Holdings Series B Preferred,
Wisdom Holdings Series C Preferred and Wisdom Holdings Series D Preferred 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, Gentle Dental Series B Preferred, Gentle Dental
Series C Preferred and Gentle Dental Series D Preferred, as the case may be. The
rights, preferences and privileges of the outstanding series of each Gentle
Dental Preferred Stock is described below. See "Description of Gentle Dental
Preferred Stock--Gentle Dental Preferred Stock."
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<PAGE>
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 ("Washington Law"), and is qualified in its entirety by
reference to the Gentle Dental's Restated Articles of Incorporation, as amended
(the "Gentle Dental Articles").
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, 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 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: 100 shares of Gentle Dental Series A Preferred, all
of which are issued and outstanding; 70,000 shares of Gentle Dental Series B
Preferred, 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; 100 shares of Gentle Dental Series C Preferred, all of which
are issued and outstanding; and 2,000,000 shares of Gentle Dental Series D
Preferred, of which 1,628,664 shares are issued and outstanding.
GENTLE DENTAL SERIES A PREFERRED. The Gentle Dental Series A Preferred
ranks senior to the Gentle Dental Common Stock regarding liquidation, is equal
in preference with the Gentle Dental Series C Preferred but junior to all other
series of Gentle Dental Preferred. 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 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 preference junior to the Gentle Dental
Series A Preferred, 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. The shares of
Gentle Dental Series A Preferred have no conversion rights but may be redeemed
at the option of Gentle Dental under certain circumstances and must be redeemed
by Gentle
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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 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 will be entitled to elect one additional individual to the Gentle
Dental Board of Directors.
GENTLE DENTAL SERIES B PREFERRED. Although there presently are no shares of
Gentle Dental Series B Preferred outstanding, if certain events of default on
Gentle Dental's 7% Convertible Subordinated Notes (the "Convertible Notes")
occur, the Convertible Notes then outstanding will automatically convert into
shares of Gentle Dental Series B Preferred at a rate of one share of Gentle
Dental Series B Preferred for each $1,000 in principal and accrued but unpaid
interest on such Convertible Notes, subject to adjustment for any
recapitalization, subdivision or recombination. The Gentle Dental Series B
Preferred 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 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 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 of $1,000, plus an additional amount, which amount
varies depending upon, among other things, (i) whether there exists an event of
default under the securities purchase agreement between Gentle Dental and the
holders of Gentle Dental Series B Preferred and (ii) the interest rate
applicable to the convertible subordinated notes of Gentle Dental, 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 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 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. 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 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 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
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 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 Washington Law, holders of
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Gentle Dental Series B Preferred 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
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 into shares of Gentle Dental Common Stock.
GENTLE DENTAL SERIES C PREFERRED. The Gentle Dental Series C Preferred
ranks senior to the Gentle Dental Common Stock, equal to the Gentle Dental
Series A Preferred 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 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, an amount equal to $1.00 per share of such Gentle
Dental Series C Preferred, subject to adjustment in the event of any change in
the number and kind of shares of Gentle Dental Series C Preferred for any
recapitalization, subdivision or recombination. There is no dividend preference
for the holders of Gentle Dental Series C Preferred. The shares of series
preferred stock have no conversion rights. Upon the occurrence of certain
events, the holders of outstanding shares of Gentle Dental Series C Preferred
shall be entitled to elect one member of the Gentle Dental Board of Directors.
The holders of the Gentle Dental Series C Preferred generally are not entitled
to a shareholder's vote, except for a vote required under Washington Law or
under the Gentle Dental Articles. The holders of Gentle Dental Series C
Preferred are entitled to a separate vote on the Agreement and Mergers. The
shares of Gentle Dental Series C Preferred 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. The Gentle Dental Series D Preferred
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 Gentle Dental Series C Preferred, but ranks junior to the
Gentle Dental Series B Preferred, 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 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.
The holders of Gentle Dental Series D Preferred shall be entitled to
receive, when, as and if declared by the Gentle Dental Board, a cumulative
dividend of $.64 each dividend period, commencing February 17, 1999. In
addition, holders of Gentle Dental Series D Preferred 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 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. The redemption price per share is $9.21, plus
accumulated but unpaid 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 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.
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Each holder of a share of Gentle Dental Series D Preferred 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 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 Washington Law, the holders of Gentle Dental Series D
Preferred 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 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 into shares of Gentle Dental Common Stock.
7% CONVERTIBLE SUBORDINATED NOTES. On May 18, 1998 Gentle Dental issued
$25,500,000 of Convertible Notes and on June 3, 1998, Gentle Dental issued an
additional $4,500,000 of Convertible Notes. The Convertible 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 Notes. If certain
events of default occur, the Convertible Notes then outstanding will
automatically convert into shares of Gentle Dental Series B Preferred at a rate
of one share of Gentle Dental Series B Preferred for each $1,000 in principal
of, and accrued but unpaid interest on the Convertible Notes, subject to
adjustment for any recapitalization, subdivision or recombination. Under the
securities purchase agreement between Gentle Dental and the holders of the
Convertible Notes, the consent of the holders of a majority of the Gentle Dental
Common Stock equivalents issuable upon conversion of the Convertible Notes, is
required for approval of the Agreement and Mergers. In addition, Chase Venture
Capital Associates, one of the holders of the Convertible Notes, or its
successors or assigns, must consent to the Agreement and Mergers.
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CERTAIN DIFFERENCES BETWEEN WASHINGTON
AND DELAWARE CORPORATE LAWS
Washington Law governs the rights of Gentle Dental shareholders and Delaware
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.
Washington Law and Delaware 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 Law, 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, 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, is specified by the Board of Directors
as a condition to its recommendation of such amendment or is called for by a
provision of Washington Law. Under Washington Law and the Gentle Dental
Articles, each separate class or series of capital stock is entitled to a class
vote on certain extraordinary transactions, such as the Mergers and related
transactions described in the Agreement. See "--Class Voting" below.
Under Delaware Law, amendments to the Dental Care Alliance and Wisdom
Holdings Certificate 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 Delaware 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 Delaware Law.
Amendments to the Articles of Dental Care Alliance 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 will
require the affirmative vote of at least a majority of the outstanding Wisdom
Holdings Capital Stock to approve an amendment. Also, under Delaware Law and the
Wisdom Holdings Certificate, 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 SHAREHOLDERS
Washington Law 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,
Washington Law 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 Delaware Law, a special meeting of shareholders 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. Dental Care Alliance's Certificate provides that
special meetings may be called 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, only the Wisdom Holdings Board of Directors,
an authorized committee of members of the Board of Directors or
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any other persons specified in any amendments to or designations under the
Wisdom Holdings' Certificate may call special meetings of the stockholders.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND EMPLOYEES
Under Washington Law, 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 Washington Law 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 authorize the corporation to indemnify any of its directors to
the fullest extent permitted by its By-laws (the "Gentle Dental By-Laws") and
Washington Law, including an advance of expenses. Generally, the Gentle Dental
By-Laws provide that Gentle Dental shall indemnify its directors, officers and
employees to the fullest extent permitted by Washington Law, 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 Delaware 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 Certificate and Dental Care Alliance Certificate each provide for the
indemnification of directors and officers to the fullest extent authorized by
Delaware Law.
PROVISIONS AFFECTING CONTROL SHARE ACQUISITIONS AND BUSINESS COMBINATIONS
Washington Law 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 (an "Acquiring Person") 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 Washington State 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 domestic
corporations with their principal executive offices in Washington and either a
majority or over 1,000 of their employees residing in the State of Washington.
Gentle Dental does not believe that it
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currently meets these standards or that it is subject to the statute. A
corporation may not "opt out" of this statute.
Section 203 of Delaware 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 Washington Law, 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 provide
for the affirmative vote of shareholders holding a majority of the outstanding
voting shares to approve such a transaction.
Washington Law 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 provide for the
affirmative vote of shareholders holding a majority of the outstanding voting
shares to approve such a transaction.
Under Delaware 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. The Dental Care Alliance Certificate does
not contain a provision requiring a higher percentage of stockholder votes
to approve such a transaction. The Wisdom Holdings Certificate of
Incorporation does not require a higher percentage, except as described
under "--Comparison of Rights of Gentle Dental Shareholders" and "Wisdom
Holdings Stockholders--Interested Shareholders" above.
ACTION WITHOUT A MEETING
Under Washington Law, 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
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shareholders entitled to vote thereon. The Gentle Dental By-Laws provide for
shareholder action without a meeting and by written consent.
Under the Delaware 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 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 Washington Law, 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 authorize the issuance of
future series of Gentle Dental Preferred Stock. Generally, each series is vested
with class voting rights regarding (i) the issuance or authorization of any
additional class of equity stock ranking prior to the series affected and (ii)
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, one hundred shares of Gentle Dental
Series C Preferred and 1,628,633 shares of Gentle Dental Series D Preferred are
presently issued and outstanding and each series is entitled to such class vote
to approve the Agreement and Mergers.
Delaware 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, Wisdom
Holdings Series C Preferred and Wisdom Holdings Series D Preferred that will be
deemed outstanding at the Effective Time will each be entitled to a class vote
regarding (i) 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 (ii) 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
Washington Law 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: (i) it is approved by
a majority of qualified directors (but no fewer than two); (ii) it is approved
by the affirmative vote of the majority of all qualified shares after notice and
disclosure to the shareholders; or (iii) 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 Delaware 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,
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are met. Under Delaware 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).
DISSENTERS' OR APPRAISAL RIGHTS
Under Washington Law, 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 Delaware 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 Washington Law, 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, (i) the corporation would not
be able to pay its debts as they become due in the usual course of business or
(ii) 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.
Delaware 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, Delaware 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' APPRAISAL RIGHTS
The Agreement constitutes a plan of merger for which shareholder approval is
required under Washington Law. Pursuant to Section 23B.3.010 through 23B.13.310
of Washington Law, any shareholder of Gentle Dental who gives proper notice and
who does not vote in favor of the Merger will, upon proper demand, have the
right under Washington Law 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 Agreement. As provided
in Section 23B.13.030 of Washington Law, 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 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 AGREEMENT WILL CONSTITUTE A WAIVER OF
DISSENTERS' RIGHTS. A VOTE AGAINST THE 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 of Washington Law 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 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 Agreement. The
notice will provide, among other things:
- (i) the form of payment demand (including the date of the first
announcement to the shareholders of the terms of the Mergers),
- (ii) where the payment demand must be delivered,
- (iii) when and where the certificated shares must be deposited, and
- (iv) 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 Washington Law 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 defined 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
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estimates to be the fair value of their shares of Gentle Dental Common Stock,
together with any interest 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 as the date of the first
shareholders Gentle Dental ("Gentle Dental After-Acquired Shares"), Wisdom
Holdings may elect to withhold the payment described in the preceding paragraph
and to offer to pay fair value for the 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 Washington Law, a copy of which is
attached to this Joint Proxy Statement-Prospectus as Appendix D.
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.
EXPERTS
The Consolidated Financial Statements of Gentle Dental and its subsidiaries,
as of December 31, 1996 and 1997 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, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and
114
<PAGE>
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 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. 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 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,
1997 and 1996 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, LLP, independent certified public accountants, 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, independent certified
public accountants, 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, 1996 and 1997 and for the
years ended December 31, 1996 and 1997 have been incorporated by reference
herein in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, 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, independent certified public accountants, 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. at December 31,
1996, and for the year then ended, have been audited by Ernst & Young LLP,
independent auditors, and at December 31, 1997, and for the year then ended, by
PricewaterhouseCoopers LLP, independent auditors 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 Commission. Any such
proposals must be submitted to the Secretary of Wisdom no later than January 1,
1999 in order to be considered for inclusion in the corporation's 1999 proxy
materials.
115
<PAGE>
As of the date of this Joint Proxy Statement-Prospectus, the Gentle Dental
Board and the Dental Care Alliance Board know of no matters that will be
represented for consideration at the Gentle Dental Special Meeting or the Dental
Care Alliance Special Meeting, other than as described in this Joint Proxy
Statement-Prospectus. If any other matters shall properly come before either of
such Special Meetings or any 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.
WHERE YOU CAN FIND MORE INFORMATION
Wisdom Holdings has filed with the 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"). 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 Joint Proxy Statement-Prospectus.
In addition, Gentle Dental and Dental Care Alliance file reports, proxy
statements and other information with the Commission under the 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.
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 Joint Proxy Statement-Prospectus. 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 Joint Proxy Statement-Prospectus,
except for any information that is superseded by information that is included
directly in this document.
116
<PAGE>
This Joint Proxy Statement-Prospectus 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
</TABLE>
The description of Gentle Dental Common Stock set forth in the Gentle Dental
Registration Statement filed under Section 12 of the 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 5, 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
</TABLE>
Gentle Dental incorporates by reference additional documents that it may
file with the Commission between the date of this Joint Proxy
Statement-Prospectus and the date of the Gentle Dental Special Meeting. 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 Joint Proxy Statement-Prospectus 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 the Commission's
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 Joint Proxy Statement-Prospectus. You can obtain documents
incorporated by reference in this Joint Proxy Statement-Prospectus 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 , 1998
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.
117
<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 Joint Proxy Statement-Prospectus 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 Joint Proxy Statement-Prospectus (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 (i) statements relating to the cost
savings estimated to result from the Mergers, (ii) statements relating to the
restructuring charges estimated to be incurred in connection with the merger and
(iii) 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: (a) expected cost
savings from the merger may not be fully realized or realized within the
expected time frame; (b) revenues following the merger may be lower than
expected; (c) costs or difficulties related to the integration of the businesses
of Gentle Dental and Dental Care Alliance may be greater than expected; (d)
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; (e) legislative or regulatory changes may adversely
affect the business in which Gentle Dental and Dental Care Alliance are engaged;
(f) technological changes may be more difficult or expensive than anticipated;
and (g) changes may occur in the securities markets.
118
<PAGE>
INDEX OF FINANCIALS
<TABLE>
<CAPTION>
<S> <C>
WISDOM HOLDINGS, INC.
Unaudited Pro Forma Condensed Combined Financial Information............................................... F-2
GENTLE DENTAL SERVICE CORPORATION
Report of KPMG Peat Marwick LLP............................................................................ F-10
Report of Pricewaterhouse LLP.............................................................................. F-11
Consolidated Balance Sheets as of December 31, 1996 and 1997............................................... F-12
Consolidated Statements of Operations for the years ended December 31, 1996 and 1997....................... F-14
Consolidated Statement of Shareholders' Deficit for the years ended December 31, 1996 and 1997............. F-15
Consolidated Statement of Cash Flows for the years ended December 31, 1996 and 1997........................ F-17
Notes to Consolidated Financial Statements................................................................. F-19
DENTAL CARE ALLIANCE, INC.
Report of Price Waterhouse LLP............................................................................. F-39
Consolidated Balance Sheets as of December 31, 1996 and 1997............................................... F-40
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997................. F-41
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997....... F-42
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997................. F-43
Notes to Consolidated Financial Statements................................................................. F-44
Unaudited Consolidated Balance Sheet as of June 30, 1998................................................... F-66
Unaudited Consolidated Statements of Operations for the three months ended June 30, 1997 and 1998 and for
the six months ended June 30, 1997 and 1998.............................................................. F-67
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1998............ F-68
Notes to Unaudited Interim Financial Statements............................................................ F-69
CAPITOL DENTAL CARE, INC. AND DENTAL MAINTENANCE OF OREGON, P.C.
Report of KPMG Peat Marwick LLP............................................................................ F-71
Combined Balance Sheets as of December 31, 1997 and 1996................................................... F-72
Combined Statements of Operations for the years ended December 31, 1997 and 1996........................... F-73
Combined Statements of Shareholders' Equity for the years ended December 31, 1997 and 1996................. F-74
Combined Statements of Cash Flows for the years ended December 31, 1997 and 1996........................... F-75
Notes to Combined Financial Statements..................................................................... F-76
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL AND OPERATING DATA
The Unaudited Pro Forma Combined Balance Sheet and Pro Forma Combined
Statement 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 six month period ended June 30, 1998 and the
financial statements of the entities involved in affiliations completed during
1997 and 1998, and the Pending Affiliations. The Pro Forma Consolidated
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
Consolidated Financial Data for the year ended December 31, 1997 and the six
month period ended June 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 Consolidated Statement of Operations Data for the year ended
December 31, 1997 and the six month period ended June 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 affiliations and the Pending Affiliations (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
Consolidated 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 CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(IN 000'S)
<TABLE>
<CAPTION>
PRIVATE
PLACEMENT
FINANCING
AND
COMPLETED PROFORMA
ACQUISITIONS ADJUSTMENTS
GDSC (A)(K) (B)
--------- ------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents.............................................................. $ 16,243 804 (804)
Accounts receivable.................................................................... 8,146 1,915 (324)
Other current assets................................................................... 3,973 140 66
--------- ------ ------
Total current assets................................................................... 28,362 2,859 (1,062)
Property and equipment................................................................. 14,213 3,362 (2,696)
Intangible assets...................................................................... 47,198 1,129 22,857
Other long-term assets................................................................. 1,063 106 (56)
--------- ------ ------
Total assets......................................................................... $ 90,836 7,456 19,043
--------- ------ ------
--------- ------ ------
Current liabilities.................................................................... $ 17,538 2,046 (897)
Long-term liabilities and capital lease obligations, net............................... 35,115 2,208 16,773
Other long-term obligations............................................................ 125 0 0
Redeemable common stock................................................................ 2,142 0 0
Shareholders' equity................................................................... 35,916 3,202 3,167
--------- ------ ------
Total liabilities, redeemable stock and shareholders' equity......................... $ 90,836 7,456 19,043
--------- ------ ------
--------- ------ ------
<CAPTION>
PENDING PROFORMA
ACQUISITIONS ADJUSTMENTS
SUB-TOTAL (C)(K) (D)
----------- ------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents.............................................................. 16,243 4,659 (4,609)
Accounts receivable.................................................................... 9,737 246 0
Other current assets................................................................... 4,179 703 (600)
----------- ------ ------
Total current assets................................................................... 30,159 5,608 (5,209)
Property and equipment................................................................. 14,879 713 (256)
Intangible assets...................................................................... 71,184 1,169 8,024
Other long-term assets................................................................. 1,113 793 (666)
----------- ------ ------
Total assets......................................................................... 117,335 8,283 1,893
----------- ------ ------
----------- ------ ------
Current liabilities.................................................................... 18,687 868 (129)
Long-term liabilities and capital lease obligations, net............................... 54,096 978 8,131
Other long-term obligations............................................................ 125 0 0
Redeemable common stock................................................................ 2,142 0 0
Shareholders' equity................................................................... 42,285 6,437 (6,109)
----------- ------ ------
Total liabilities, redeemable stock and shareholders' equity......................... 117,335 8,283 1,893
----------- ------ ------
----------- ------ ------
<CAPTION>
GDSC WISDOM
PROFORMA DCA PROFORMA
----------- --------- -----------
Cash and cash equivalents.............................................................. 16,293 9,033 25,326
Accounts receivable.................................................................... 9,983 5,206 15,189
Other current assets................................................................... 4,282 449 4,731
----------- --------- -----------
Total current assets................................................................... 30,558 14,688 45,246
Property and equipment................................................................. 15,336 2,736 18,072
Intangible assets...................................................................... 80,377 13,288 93,665
Other long-term assets................................................................. 1,240 821 2,061
----------- --------- -----------
Total assets......................................................................... 127,511 31,533 159,044
----------- --------- -----------
----------- --------- -----------
Current liabilities.................................................................... 19,426 2,993 22,419
Long-term liabilities and capital lease obligations, net............................... 63,205 1,639 64,844
Other long-term obligations............................................................ 125 808 933
Redeemable common stock................................................................ 2,142 0 2,142
Shareholders' equity................................................................... 42,613 26,093 68,076
----------- --------- -----------
Total liabilities, redeemable stock and shareholders' equity......................... 127,511 31,533 159,044
----------- --------- -----------
----------- --------- -----------
</TABLE>
F-3
<PAGE>
WISDOM HOLDINGS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(IN 000'S)
<TABLE>
<CAPTION>
PRIVATE
PLACEMENT
FINANCING
AND
COMPLETED PROFORMA PENDING PROFORMA
ACQUISITIONS ADJUSTMENTS ACQUISITIONS ADJUSTMENTS
GDSC (A) (B) SUB-TOTAL (C) (D)
--------- ------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dental group net patient service
revenue................................. $ 38,503 15,791 5,243 59,537 9,385 0
Net management fees....................... 935 2,999 (2,998) 936 0 0
--------- ------ ------ ----------- ------ ------
Net revenues............................ 39,438 18,790 2,245 60,473 9,385 0
Clinical salaries and benefits............ 17,664 6,584 1,779(f) 26,027 6,078 (275)(f)
Practice nonclinical salaries and
benefits................................ 5,885 2,917 (405)(g) 8,397 586 0
Dental supplies and lab expenses.......... 4,549 1,923 (50)(g) 6,422 429 0
Practice occupancy expenses............... 2,262 976 (24)(g) 3,214 183 0
Practice selling, general and
administrative.......................... 3,820 1,931 (175)(g) 5,576 636 (45)(g)
Corporate selling, general and
administrative.......................... 2,785 1,460 (121)(g) 4,124 0 0
Corporate restructure and merger costs.... 0 0 0 0 0 0
Depreciation and amortization............. 1,584 430 525(h) 2,539 88 133(h)
--------- ------ ------ ----------- ------ ------
Total operating expenses................ 38,549 16,221 1,529 56,299 8,000 (187)
--------- ------ ------ ----------- ------ ------
Operating income (loss)................. 889 2,569 716 4,174 1,385 187
Interest expense, net..................... 1,043 210 (160)(g) 1,919 (115) 0
826(g)
Other expense, net........................ 7 (62) 64(g) 9 1 0
--------- ------ ------ ----------- ------ ------
Income (loss) before income taxes....... (161) 2,421 (14) 2,246 1,499 187
Income tax expense/(benefit).............. (65) 23 941(g) 899 1 673(g)
--------- ------ ------ ----------- ------ ------
Net income (loss)....................... (96) 2,398 (955) 1,347 1,498 (486)
Accretion of redeemable common stock...... 12 0 0 12 0 0
--------- ------ ------ ----------- ------ ------
Net income (loss) attributable to common
stock................................. $ (108) 2,398 (955) 1,335 1,498 (486)
--------- ------ ------ ----------- ------ ------
--------- ------ ------ ----------- ------ ------
Net income (loss) per share :
Basic..................................... $ (0.01) 0.15
Diluted................................... $ (0.01) 0.13
Shares outstanding :
Basic..................................... 7,932 1,199(k) 0 9,131 60(k)
Diluted................................... 7,932 1,199(k) 5,477(l) 14,608 60(k)
Other information :
Patient level revenues (n)................ $ 40,345 21,034 0 61,379 9,385 0
<CAPTION>
COMPLETED PROFORMA
GDSC ACQUISITIONS ADJUSTMENTS DCA POOLING
PROFORMA DCA (A) (B) PROFORMA ADJUSTMENTS
----------- --------- --------------- --------------- ----------- -------------
<S> <C>
Dental group net patient service
revenue................................. 68,922 0 0 0 0 0
Net management fees....................... 936 12,097 1,151 0 13,248 0
----------- --------- ----- ----- ----------- -------------
Net revenues............................ 69,858 12,097 1,151 0 13,248 0
Clinical salaries and benefits............ 31,830 0 0 0 0 0
Practice nonclinical salaries and
benefits................................ 8,983 3,322 412 0 3,734 0
Dental supplies and lab expenses.......... 6,851 2,143 223 0 2,366 0
Practice occupancy expenses............... 3,397 1,278 146 0 1,424 0
Practice selling, general and
administrative.......................... 6,167 1,252 113 0 1,365 0
Corporate selling, general and
administrative.......................... 4,124 1,607 103 0 1,710 0
Corporate restructure and merger costs.... 0 0 0 0 0 0
Depreciation and amortization............. 2,760 390 28 35(h) 453 (10)(h)
----------- --------- ----- ----- ----------- -------------
Total operating expenses................ 64,112 9,992 1,025 35 11,052 (10)
----------- --------- ----- ----- ----------- -------------
Operating income (loss)................. 5,746 2,105 126 (35) 2,196 10
Interest expense, net..................... 1,804 (393) 27 72(g) (294) 0
Other expense, net........................ 10 0 0 0 0 0
----------- --------- ----- ----- ----------- -------------
Income (loss) before income taxes....... 3,932 2,498 99 (107) 2,490 10
Income tax expense/(benefit).............. 1,573 964 51 (41)(g) 974 3(i)
----------- --------- ----- ----- ----------- -------------
Net income (loss)....................... 2,359 1,534 48 (66) 1,516 7
Accretion of redeemable common stock...... 12 0 0 0 0 0
----------- --------- ----- ----- ----------- -------------
Net income (loss) attributable to common
stock................................. 2,347 1,534 48 (66) 1,516 7
----------- --------- ----- ----- ----------- -------------
----------- --------- ----- ----- ----------- -------------
Net income (loss) per share :
Basic..................................... 0.26 0.22 0.22
Diluted................................... 0.20 0.22 0.21
Shares outstanding :
Basic..................................... 9,191 6,978 6,978 4,675(m)
Diluted................................... 14,668 7,076 7,076 4,741(m)
Other information :
Patient level revenues (n)................ 70,764 16,743 1,719 0 18,462 0
<CAPTION>
WISDOM
PROFORMA
-----------
Dental group net patient service
revenue................................. 68,922
Net management fees....................... 14,184
-----------
Net revenues............................ 83,106
Clinical salaries and benefits............ 31,830
Practice nonclinical salaries and
benefits................................ 12,717
Dental supplies and lab expenses.......... 9,217
Practice occupancy expenses............... 4,821
Practice selling, general and
administrative.......................... 7,532
Corporate selling, general and
administrative.......................... 5,834
Corporate restructure and merger costs.... 0
Depreciation and amortization............. 3,203
-----------
Total operating expenses................ 75,154
-----------
Operating income (loss)................. 7,952
Interest expense, net..................... 1,510
Other expense, net........................ 10
-----------
Income (loss) before income taxes....... 6,432
Income tax expense/(benefit).............. 2,550
-----------
Net income (loss)....................... 3,882
Accretion of redeemable common stock...... 12
-----------
Net income (loss) attributable to common
stock................................. 3,870
-----------
-----------
Net income (loss) per share :
Basic..................................... 0.19
Diluted................................... 0.17
Shares outstanding :
Basic..................................... 20,844
Diluted................................... 26,485
Other information :
Patient level revenues (n)................ 89,225
</TABLE>
F-4
<PAGE>
WISDOM HOLDINGS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN 000'S)
<TABLE>
<CAPTION>
PRIVATE
PLACEMENT
FINANCING
AND
COMPLETED PROFORMA
ACQUISITIONS ADJUSTMENTS
GDSC (A) (B) SUB-TOTAL
--------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Dental group net patient service revenue................................ $ 29,327 50,678 10,486 114,119
23,628(e)
Net management fees..................................................... 14,076 6,438 (5,997) 1,890
(12,627)(e)
--------- ------ ------------- -----------
Net revenues.......................................................... 43,403 57,116 15,490 116,009
Clinical salaries and benefits.......................................... 13,701 21,263 2,949(f) 48,256
10,343(e)
Practice nonclinical salaries and benefits.............................. 8,177 9,100 (810)(g) 16,467
Dental supplies and lab expenses........................................ 6,271 6,188 (107)(g) 12,352
Practice occupancy expenses............................................. 3,527 2,961 (46)(g) 6,442
Practice selling, general and administrative............................ 4,912 5,631 (1,045)(g) 10,157
659(g)
Corporate selling, general and administrative........................... 5,700 2,919 (297)(g) 8,322
Corporate restructure and merger costs.................................. 1,809 0 0 1,809
Depreciation and amortization........................................... 1,847 1,188 1,810(h) 4,924
79(h)
--------- ------ ------------- -----------
Total operating expenses.............................................. 45,944 49,250 13,535 108,729
--------- ------ ------------- -----------
Operating income (loss)............................................... (2,541) 7,866 1,955 7,280
Interest expense, net................................................... 653 732 454(b) 4,071
2,232(b)
Other expense, net...................................................... 74 (136) 318(g) 256
--------- ------ ------------- -----------
Income (loss) before income taxes..................................... (3,268) 7,270 (1,049) 2,953
Income tax expense/(benefit)............................................ (81) 211 1,039(g) 1,169
--------- ------ ------------- -----------
Net income (loss)..................................................... (3,187) 7,059 (2,088) 1,784
Dividends on redeemable convertible preferred stock..................... 932 0 (932)(j) 0
Accretion of redeemable common stock.................................... 34 0 0 34
--------- ------ ------------- -----------
Net income (loss) attributable to common stock........................ $ (4,153) 7,059 (1,156) 1,750
--------- ------ ------------- -----------
--------- ------ ------------- -----------
Net income (loss) per share:
Basic................................................................... $ (0.91) .30
Diluted................................................................. $ (0.91) .27
Shares outstanding:
Basic................................................................... 4,559 1,165(k) 134(l) 5,858
Diluted................................................................. 4,559 1,165(k) 5,612(l) 11,336
Other information:
Patient level revenues (n).............................................. $ 55,616 61,900 0 117,516
<CAPTION>
PENDING PROFORMA
ACQUISITIONS ADJUSTMENTS GDSC
(C) (D) PROFORMA DCA
------------- ------------- ----------- ---------
<S> <C>
Dental group net patient service revenue................................ 19,217 0 133,336 0
Net management fees..................................................... 0 0 1,890 7,879
------ ------ ----------- ---------
Net revenues.......................................................... 19,217 0 135,226 7,879
Clinical salaries and benefits.......................................... 13,300 (550)(f) 61,006 0
Practice nonclinical salaries and benefits.............................. 1,075 0 17,542 2,021
Dental supplies and lab expenses........................................ 749 0 13,101 1,621
Practice occupancy expenses............................................. 353 0 6,795 998
Practice selling, general and administrative............................ 1,348 (91)(g) 11,414 1,267
Corporate selling, general and administrative........................... 0 0 8,322 1,387
Corporate restructure and merger costs.................................. 0 1,809 0
Depreciation and amortization........................................... 153 265(h) 5,342 164
------ ------ ----------- ---------
Total operating expenses.............................................. 16,978 (376) 125,331 7,458
------ ------ ----------- ---------
Operating income (loss)............................................... 2,239 376 9,895 421
Interest expense, net................................................... (265) 869(g) 4,675 (264)
Other expense, net...................................................... (17) 17(g) 256 0
------ ------ ----------- ---------
Income (loss) before income taxes..................................... 2,521 (510) 4,964 685
Income tax expense/(benefit)............................................ 585 (219)(g) 1,973 264
------ ------ ----------- ---------
Net income (loss)..................................................... 1,936 (729) 2,991 421
Dividends on redeemable convertible preferred stock..................... 0 0(j) 0 100
Accretion of redeemable common stock.................................... 0 0 34 11
------ ------ ----------- ---------
Net income (loss) attributable to common stock........................ 1,936 (729) 2,957 310
------ ------ ----------- ---------
------ ------ ----------- ---------
Net income (loss) per share:
Basic................................................................... .50 0.07
Diluted................................................................. .37 0.07
Shares outstanding:
Basic................................................................... 60(k) 5,918 4,610
Diluted................................................................. 60(k) 11,396 4,698
Other information:
Patient level revenues (n).............................................. 19,217 0 136,733 10,588
<CAPTION>
COMPLETED PROFORMA
ACQUISITIONS ADJUSTMENTS DCA POOLING
(A) (B) PROFORMA ADJUSTMENTS
--------------- ------------- ----------- -------------
Dental group net patient service revenue................................ 0 0 0 0
Net management fees..................................................... 5,869 0 13,748 0
----- ------ ----------- ------
Net revenues.......................................................... 5,869 0 13,748 0
Clinical salaries and benefits.......................................... 0 0 0 0
Practice nonclinical salaries and benefits.............................. 2,285 0 4,306 0
Dental supplies and lab expenses........................................ 1,047 0 2,668 0
Practice occupancy expenses............................................. 810 0 1,808 0
Practice selling, general and administrative............................ 591 0 1,858 0
Corporate selling, general and administrative........................... 636 0 2,023 0
Corporate restructure and merger costs.................................. 0 0 0 0
Depreciation and amortization........................................... 274 181(h) 619 (10)(
f)
----- ------ ----------- ------
Total operating expenses.............................................. 5,643 181 13,282 (10)
----- ------ ----------- ------
Operating income (loss)............................................... 226 (181) 466 10
Interest expense, net................................................... 216 278(b) 230
Other expense, net...................................................... (45) 0 (45) 0
----- ------ ----------- ------
Income (loss) before income taxes..................................... 55 (459) 281 10
Income tax expense/(benefit)............................................ 25 (164)(i) 125 (i
)
4(f
)
----- ------ ----------- ------
Net income (loss)..................................................... 30 (295) 156 6
Dividends on redeemable convertible preferred stock..................... 0 0 100 0
Accretion of redeemable common stock.................................... 0 0 11 0
----- ------ ----------- ------
Net income (loss) attributable to common stock........................ 30 (295) 45 6
----- ------ ----------- ------
----- ------ ----------- ------
Net income (loss) per share:
Basic................................................................... .01
Diluted................................................................. .01
Shares outstanding:
Basic................................................................... 80 4,690 3,142(m
)
Diluted................................................................. 80 4,778 3,201(m
)
Other information:
Patient level revenues (n).............................................. 8,916 0 19,504 0
<CAPTION>
WISDOM
PROFORMA
-----------
Dental group net patient service revenue................................ $ 133,336
Net management fees..................................................... 15,638
-----------
Net revenues.......................................................... 148,974
Clinical salaries and benefits.......................................... 61,006
Practice nonclinical salaries and benefits.............................. 21,848
Dental supplies and lab expenses........................................ 15,769
Practice occupancy expenses............................................. 8,603
Practice selling, general and administrative............................ 13,272
Corporate selling, general and administrative........................... 10,345
Corporate restructure and merger costs.................................. 1,809
Depreciation and amortization........................................... 5,951
-----------
Total operating expenses.............................................. 138,603
-----------
Operating income (loss)............................................... 10,371
Interest expense, net................................................... 4,905
Other expense, net...................................................... 211
-----------
Income (loss) before income taxes..................................... 5,255
Income tax expense/(benefit)............................................ 2,102
-----------
Net income (loss)..................................................... 3,153
Dividends on redeemable convertible preferred stock..................... 100
Accretion of redeemable common stock.................................... 45
-----------
Net income (loss) attributable to common stock........................ 3,008
-----------
-----------
Net income (loss) per share:
Basic................................................................... .22
Diluted................................................................. .22
Shares outstanding:
Basic................................................................... 13,750
Diluted................................................................. 19,375
Other information:
Patient level revenues (n).............................................. $ 156,237
</TABLE>
F-5
<PAGE>
WISDOM HOLDINGS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(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
Corporate restructure and merger costs.............................. -- -- -- --
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)
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 CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(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
Corporate restructure and merger costs............................... -- --
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)
--------- --------- ------ -----------
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
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 CONSOLIDATED FINANCIAL DATA
The accompanying pro forma consolidated financial data presents the pro
forma financial position of Wisdom as of June 30, 1998 and the pro forma results
of operations for the years ended December 31, 1995, 1996, and 1997 and the six
month period ended June 30, 1998.
The pro forma consolidated 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 October 22, 1998, Gentle Dental acquired 20
dental practices in acquisitions accounted for as purchases and had additional
acquisitions pending. The accompanying Pro Forma Consolidated Balance Sheet as
of June 30, 1998 includes the effect of the 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 and the Pending Affiliations, as if they
had been completed at June 30, 1998. The accompanying Pro Forma Consolidated
Statements of Operations for the six months ended June 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 October 22, 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 Consolidated
Balance Sheet and Pro forma Consolidated Statements of Operations are as
follows:
a) Reflects certain balance sheet and statement of operations items associated
with acquired (from an accounting point of view) dental practices or
acquired dental practice management companies for completed transactions
during the period from January 1, 1997 to October 29, 1998. The balance
sheet reflects the pro forma effect of the acquisitions assuming that such
transactions which closed subsequent to June 30, 1998 were consummated on
June 30, 1998. The statements of operations reflect the pro forma effect of
the acquisitions assuming that such transactions had occurred on January 1,
1997.
b) Reflects the statement of operations impact of the issuance of convertible
debt and convertible preferred stock in May and June of 1998 as if such debt
and preferred stock had been issued on January 1, 1997. Also, reflects the
balance sheet and related statement of operations impact of adjustments
necessary to reflect the acquisition costs and intangible assets associated
with the completed acquisitions. These costs include interest expense
associated with the cost of the transaction, amortization associated with
intangible assets and the tax effect thereof. Intangible assets include the
value assigned to management agreements and other acquired intangible
assets.
c) Reflects certain balance sheet and related statement of operations items
associated with the pending dental practice acquisitions.
d) Reflects the balance sheet and related statement of operations impact of
adjustments necessary to reflect the acquisition costs and intangible assets
associated with the pending dental practice acquisitions. Acquisition costs
include interest expense associated with the cost of the transaction,
amortization associated with intangible assets and the tax effect thereof.
Intangible assets include the value assigned to management agreement and
other acquired intangible assets.
e) Reflects adjustments necessary to show the impact of consolidating the
results of operations of certain previously unconsolidated dental practices.
Also reflects the reduction of clinical salaries and benefits
F-8
<PAGE>
associated with the amendments made to the underlying management agreements
with these dental practices assuming that such transactions had occurred on
January 1, 1997.
f) Reflects the changes in compensation paid to former dentist owners of dental
practices acquired.
g) Reflects the impact of reducing or changing certain expenses of acquired
dental practices that are expected to be nonrecurring.
h) Reflects changes in depreciation and amortization expenses associated with
conforming the accounting policies and methodologies of the completed and
pending dental practice acquisitions with those of the Company, based upon
the fair value of assets acquired for acquisitions accounted for as
purchases and historical cost for the merger of Gentle Dental and Dental
Care Alliance.
i) Reflects the change in income tax expense assuming a 40% income tax rate on
income before income taxes.
j) Reflects the elimination of dividends on shares of redeemable preferred
stock assuming that such redeemable preferred stock was converted into
common stock on January 1, 1997.
k) Reflects shares issued in connection with acquisitions.
l) Reflects dilutive shares as a result of pro forma adjustments resulting in
income and dilutive effect of preferred stock and convertible debt.
m) Reflects additional shares issued based upon exchange ratio of 1.67 shares
per share of DCA common stock.
n) Includes patient service revenue for affiliated dental practices, including
consolidated and unconsolidated practices. Practices which have affiliated
with DCA, but are not accounted for as acquisitions, had patient revenue of
$25 million for the year ended December 31, 1997 and $4 million for the six
months ended June 30, 1998, prior to the date of affiliation with DCA. Such
amounts are not included in the patient level revenue as reported.
F-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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 generally
range from 3 to 15 years.
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.
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.
F-21
<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)
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").
(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
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)
(3) BUSINESS COMBINATIONS AND DENTAL PRACTICE ACQUISITIONS (CONTINUED)
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 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
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)
(3) BUSINESS COMBINATIONS AND DENTAL PRACTICE ACQUISITIONS (CONTINUED)
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>
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.
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)
(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-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)
(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-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)
(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 1997 at a
purchase price of $.225 per share 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-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)
(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-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)
(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-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)
(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-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)
(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-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)
(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-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)
(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-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)
(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-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)
(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-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)
(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-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)
(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-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)
(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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<PAGE>
DENTAL CARE ALLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------- JUNE 30,
1998
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................ $ 20,367,722 $ 9,032,998
Consulting and license fees receivable........................................... 64,116 29,569
Management fee receivable from PAs............................................... 914,026 3,104,027
Advances to PAs, net............................................................. 483,421 1,361,517
Acquisition accounts receivable.................................................. -- 600,000
Other current assets............................................................. 254,412 449,474
Current portion of long-term notes receivable from PA's.......................... 83,522 110,585
------------- -------------
TOTAL CURRENT ASSETS........................................................... 22,167,219 14,688,170
Property and equipment, net........................................................ 1,113,050 2,736,150
Intangible assets, net............................................................. 4,747,303 13,287,742
Long-term notes receivable from PAs, less current portion.......................... 313,940 682,859
Other assets....................................................................... 212,975 138,611
------------- -------------
TOTAL ASSETS................................................................... $ 28,554,487 $ 31,533,532
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 638,030 $ 830,857
Accrued payroll and payroll related costs........................................ 64,933 168,089
Other accrued liabilities........................................................ 412,952 619,010
Acquisition and affiliation obligations payable.................................. 920,000 600,000
Income taxes payable............................................................. 179,367 267,104
Current portion of long-term debt and capital leases............................. 195,193 508,348
------------- -------------
TOTAL CURRENT LIABILITIES...................................................... 2,410,475 2,993,408
Deferred income taxes.............................................................. 773,269 808,269
Long-term debt, less current portion............................................... 816,918 1,638,903
------------- -------------
TOTAL LIABILITIES.............................................................. 4,000,662 5,440,580
Commitments and contingencies...................................................... -- --
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized, 6,977,700 and
6,978,065 issued and outstanding, respectively................................. 69,777 69,781
Additional paid-in capital......................................................... 24,126,009 24,130,389
Retained earnings.................................................................. 358,039 1,892,782
------------- -------------
TOTAL STOCKHOLDERS' EQUITY..................................................... 24,553,825 26,092,952
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $ 28,554,487 $ 31,533,532
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
DENTAL CARE ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- ---------------------------
1997 1998 1997 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Management fees......................................... $ 1,351,768 $ 6,990,212 $ 2,471,759 $ 11,802,583
Consulting and licensing fees........................... 77,195 173,533 161,885 294,133
------------ ------------ ------------ -------------
TOTAL REVENUES...................................... 1,428,963 7,163,745 2,633,644 12,096,716
Managed dental center expenses:
Staff salaries and benefits........................... 331,101 2,102,204 601,383 3,321,912
Dental supplies....................................... 131,756 471,103 213,334 831,074
Laboratory fees....................................... 200,754 707,000 373,010 1,311,487
Marketing............................................. 79,567 223,403 176,627 423,613
Occupancy............................................. 176,193 753,874 333,085 1,278,186
Other................................................. 183,420 470,527 326,494 828,240
------------ ------------ ------------ -------------
TOTAL MANAGED DENTAL CENTER EXPENSES................ 1,102,791 4,728,111 2,023,933 7,994,512
------------ ------------ ------------ -------------
326,172 2,435,634 609,711 4,102,204
Salaries and benefits................................... 192,296 476,227 373,016 786,414
General and administrative.............................. 68,269 496,893 135,970 820,226
Depreciation and amortization........................... 35,167 266,599 41,578 389,751
------------ ------------ ------------ -------------
295,732 1,239,719 550,564 1,996,391
OPERATING INCOME.................................... 30,440 1,195,915 59,147 2,105,813
Interest income, net.................................... 21,528 161,648 36,464 392,955
------------ ------------ ------------ -------------
INCOME BEFORE INCOME TAXES.............................. 51,968 1,357,563 95,611 2,498,768
Provision for income taxes.............................. 18,979 523,748 36,000 964,025
------------ ------------ ------------ -------------
NET INCOME.............................................. 32,989 833,815 59,611 1,534,743
Adjustment to redemption value of common and
preferred securities.............................. (10,500) -- (10,500) --
Cumulative preferred stock dividend................... (30,000) -- (60,000) --
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK............ $ (7,511) $ 833,815 (10,889) $ 1,534,743
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Basic net income per common share....................... $ -- $ 0.12 $ -- $ 0.22
Diluted net income per common share..................... $ -- $ 0.12 $ -- $ 0.22
Basic weighted average common shares outstanding........ 4,228,302 6,977,985 4,131,510 6,977,843
Diluted weighted average common shares outstanding...... 4,315,771 7,104,329 4,218,979 7,076,495
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
DENTAL CARE ALLIANCE, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1997 1998
------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 59,611 $ 1,534,743
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 41,578 389,751
Stock issued for services....................................................... -- 4,377
Deferred income taxes........................................................... -- 35,000
(Increase) decrease in:
Consulting and license fees receivable.......................................... (47,427) 34,547
Management fee receivable from PAs.............................................. (179,015) (2,190,001)
Other assets.................................................................... 17,367 (195,062)
Increase in:
Accounts payable................................................................ 82,774 192,827
Other accrued liabilities....................................................... 20,237 293,795
Accrued payroll & payroll related costs......................................... 88,336 103,156
------------ --------------
Net cash provided by operating activities..................................... 83,461 203,133
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............................................... (211,040) (1,811,857)
Advances made on notes receivable from PAs........................................ -- (450,000)
Payments received on notes receivable from PAs.................................... 24,639 54,019
Acquisition and affiliations obligations payable.................................. -- (920,000)
Investment in servicing agreements and other assets............................... -- (8,667,063)
------------ --------------
Net cash used in investing activities......................................... (186,401) (11,794,901)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............................................ 20,020 --
Payments of long-term debt........................................................ (23,449) (80,922)
Proceeds from issuance of long-term debt.......................................... -- 1,216,062
Advances to PAs................................................................... (270,673) (878,096)
------------ --------------
Net cash (used in) provided by financing activities . (274,102) 257,044
Net decrease in cash and cash equivalents..................................... (377,042) (11,334,724)
Cash and cash equivalents at beginning of period.................................... 1,253,259 20,367,722
Cash and cash equivalents at end of period.......................................... $ 876,217 $ 9,032,998
------------ --------------
------------ --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes...................................... $ -- $ 838,074
Cash paid during the period for interest.......................................... $ 6,809 $ 62,072
Increase to redemption value of preferred stock................................... $ 10,500 $ --
Increase in cumulative preferred stock dividend................................... $ 60,000 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
DENTAL CARE ALLIANCE, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
JUNE, 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 June 30, 1998, the Company provided
management and licensing services to 49 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-69
<PAGE>
DENTAL CARE ALLIANCE, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
JUNE, 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.
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. The Company was assigned
management fee receivables owed Dental One by its Managed Dental Centers of
approximately $1.2 million. These receivables which equal $600,000 as of June
30, 1998 have been recorded as acquisition accounts receivable.
F-70
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board 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
F-71
<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......................................................................... -- 966
Deferred income taxes........................................................................ 24 81
Current maturities of obligations under capital leases (note 4).............................. 77 35
--------- ---------
Total current liabilities.................................................................. 597 1,827
--------- ---------
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 3,866
--------- ---------
Total shareholders' equity................................................................. 5,457 4,076
--------- ---------
Commitments and contingencies (note 4)
Total liabilities and shareholders' equity................................................. $ 6,119 $ 5,938
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-72
<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..................................... 1,272 961
Depreciation and amortization............................................................. 101 74
--------- ---------
16,458 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)................................................................. 256 1,677
--------- ---------
Net income.............................................................................. $ 1,831 $ 2,567
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-73
<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..................................... -- -- -- -- -- 2,567
----- ----- ----- --- --------- -----
Balances at December 31, 1996.................. 1,000 1 1,000 30 179 3,866
Dividends paids to shareholders................ -- -- -- -- -- (450)
Net income..................................... -- -- -- -- -- 1,831
----- ----- ----- --- --------- -----
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..................................... 2,567
------
Balances at December 31, 1996.................. 4,076
Dividends paids to shareholders................ (450)
Net income..................................... 1,858
------
Balances at Decemer 31, 1997................... 5,484
------
------
</TABLE>
See accompanying notes to combined financial statements.
F-74
<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.................................................................................. $ 1,831 $ 2,567
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................. 57 74
Deferred income taxes..................................................................... (184) 36
Changes in assets and liabilities:
Accounts receivable..................................................................... (67) 52
Prepaid income taxes.................................................................... (420) --
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.................................................................... (966) 941
--------- ---------
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-75
<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.
(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.
(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 contractual allowances.
(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 straight-line method over the shorter of the lease
term or the estimated useful life of the improvements.
F-76
<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)
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.
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 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.
F-77
<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)
(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,
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) 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 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.
F-78
<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)
(4) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
(5) INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
1997
-----------------------------------
CURRENT DEFERRED TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
U.S. Federal.......................................... $ 245 $ (42) $ 203
State and local....................................... 68 (15) 53
----- ----- ---------
$ 313 $ (57) $ 256
----- ----- ---------
----- ----- ---------
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------
CURRENT DEFERRED TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
U.S. Federal.......................................... $ 1,445 $ (66) $ 1,379
State and local....................................... 280 18 298
----------- ----- ---------
$ 1,725 $ (48) $ 1,677
----------- ----- ---------
----------- ----- ---------
</TABLE>
F-79
<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 (CONTINUED)
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>
The reconciliation between the effective income tax rate and the U.S.
federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
U.S. Federal taxes at statutory..................................... 710 1,443
State taxes, net.................................................... (102) 126
Timing differences.................................................. (352) 108
--- ---------
256 1,677
--- ---------
--- ---------
</TABLE>
(6) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ---------------
<S> <C> <C>
Cash paid during the period for:
Interest............................................. $ 32 38
Income taxes......................................... 1,035 635
</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.
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)
(7) SUBSEQUENT EVENTS
On October 30, 1998, the Company entered into agreements with Gentle Dental
Service Corporation (GDSC) to sell 100% of the stock in 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 has agreed
to pay the shareholders of the Company $6,100 in cash, $2,180 in promissory
notes and assumed $175 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-81
<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
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TABLE OF CONTENTS
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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>
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TABLE OF CONTENTS (CONTINUED)
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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>
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TABLE OF CONTENTS (CONTINUED)
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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
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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
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<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
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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:
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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.
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(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.
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(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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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):
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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 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.
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>
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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.
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.
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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.
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.
24.1 Power of Attorney (set forth on Page II-9)
</TABLE>
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* To be filed by amendment.
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),
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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.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused 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 October 29, 1998.
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WISDOM HOLDINGS, INC.
By: /s/ MICHAEL T. FIORE
-----------------------------------------
Michael T. Fiore
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
We, the undersigned officers and directors of Wisdom do hereby constitute
and appoint Michael T. Fiore and Steven R. Matzkin, and each of them, our true
and lawful attorneys-in-fact and agents, each with full power of substitution
and resubstitution, for each of them and in each of their names, place and
stead, in any and all capacities, to sign any and all amendments to this
Registration Statement, and to file same, with exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby, ratifying and confirming all that said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
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.
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SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Co-Chairman and Chief
/s/ MICHAEL T. FIORE Executive Officer
- ------------------------------ (principal executive October 29, 1998
Michael T. Fiore officer)
/s/ STEVEN R. MATZKIN,
D.D.S.
- ------------------------------ Co-Chairman and President October 29, 1998
Dr. Steven R. Matzkin
/s/ NORMAN R. HUFFAKER Chief Financial Officer
- ------------------------------ and Treasurer (principal October 29, 1998
Norman R. Huffaker financial officer)
/s/ ROBERT FINZI
- ------------------------------ Director October 29, 1998
Robert Finzi
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SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ ERIC GREEN
- ------------------------------ Director October 29, 1998
Eric Green
/s/ PAUL H. KECKLEY
- ------------------------------ Director October 29, 1998
Paul H. Keckley
/s/ WAYNE POSEY
- ------------------------------ Director October 29, 1998
H.Wayne Posey
/s/ ROBERT F. RAUCCI
- ------------------------------ Director October 29, 1998
Robert F. Raucci
/s/ CURTIS LEE SMITH
- ------------------------------ Director October 29, 1998
Curtis Lee Smith
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EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
WISDOM HOLDINGS, INC.
ARTICLE I
The name of this Corporation shall be: Wisdom Holdings, Inc.
ARTICLE II
The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street,
Wilmington, Delaware 19801 and the name of the registered agent at that
address is The Corporation Trust Company located in New Castle County.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation Law of Delaware.
ARTICLE IV
The total number of shares which this Corporation is authorized to
issue is Eighty Million (80,000,000) shares. The Corporation is authorized
to issue two classes of stock to be designated, respectively, "Common Stock"
and "Preferred Stock." Fifty Million (50,000,000) shares shall be designated
Common Stock, with a par value of $.001 per share, and Thirty Million
(30,000,000) shares shall be designated Preferred Stock, with a par value of
$.001 per share.
ARTICLE V
The management of the business and the conduct of the affairs of
the Corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed
by, or in the manner provided in, the Bylaws of the Corporation.
ARTICLE VI
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal,
alter, amend and rescind the Bylaws of the Corporation.
ARTICLE VII
Election of directors at an annual or special meeting of
stockholders need not be by written ballot unless the Bylaws of the
Corporation shall so provide.
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ARTICLE VIII
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation 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 Delaware General
Corporation Law, or (iv) for any transaction from which the director derived
any improper personal benefit. If the Delaware General Corporation Law is
amended after approval by the stockholders of this Article to authorize
corporation action further eliminating or limiting the personal liability of
directors then the liability of a director of the corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law as so amended.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the corporation may be
kept (subject to any provision contained in the statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the Bylaws of the corporation.
ARTICLE X
Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the Board of Directors or by
a committee of the Board of Directors which has been duly designated by the
Board of Directors and whose powers and authority, as provided in a
resolution of the Board of Directors or in the Bylaws of the Corporation,
include the power to call such meetings, but such special meetings may not be
called by any other person or persons; provided, however, that if and to the
extent that any special meeting of stockholders may be called by any other
person or persons specified in any provisions of the Certificate of
Incorporation or any amendment thereto or any certificate filed under Section
151(g) of the General Corporation Law of Delaware (or its successor statute
as in effect from time to time hereunder), then such special meeting may also
be called by the person or persons in the manner, at the times and for the
purposes so specified.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation.
ARTICLE XII
Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a
summary way of this corporation or of any creditor or stockholder thereof or
on the application of any receiver or receivers appointed for this
corporation under the provisions of Section 291 of Title 8 of the Delaware
Code or on the application of trustees in dissolution or of any receiver or
receivers appointed for this corporation under the
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<PAGE>
provisions of Section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may
be, agree to any compromise or arrangement and to any reorganization of this
corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.
ARTICLE XIII
The name and mailing address of the incorporator of the Corporation
is:
Kate Lane
2030 Main Street, Suite 1040
Irvine, California 92614
THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation to do business both within and without the
State of Delaware and in pursuance of the General Corporation Law of
Delaware, does make and file this Certificate, hereby declaring and
certifying that the facts herein stated are true, and accordingly has
hereunto set her hand this 12th day of October, 1998.
---------------------------------------
KATE LANE, Incorporator
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<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT OF CERTIFICATE
OF INCORPORATION BEFORE PAYMENT OF
ANY PART OF THE CAPITAL
OF
WISDOM HOLDINGS, INC.
WISDOM HOLDINGS, INC. (hereinafter called the "Corporation"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, does hereby certify:
1. The name of the corporation is WISDOM HOLDINGS, INC.
2. The corporation has not received any payment for any of its stock.
3. The Certificate of Incorporation of the Corporation is hereby
amended by adding the following new Article XIV:
A. The Corporation shall, to the broadest and maximum extent
permitted by Delaware law, as the same exists from time to time indemnify
each person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative by reason of the fact that
he or she is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amount paid in settlement actually and reasonably incurred by him or
her in connection with such action or proceeding.
B. In addition, the Corporation shall, to the broadest and maximum
extent permitted by Delaware law, as the same may exist from time to time
pay to such person any and all expenses (including attorneys' fees)
incurred in defending or settling any such action, suit or proceeding in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of the director or officer to
repay such amount if it shall ultimately be determined by a final judgment
or other final adjudication that he or she is not entitled to be
indemnified by the Corporation as authorized in this Article XIV.
C. Subsections (A) and (B) of this Article XIV to the contrary
notwithstanding, the Corporation shall not indemnify any such person with
respect to any of the following matters: (i) remuneration paid to such
person if it shall be determined by a final judgment or other final
adjudication that such remuneration was in violation of law; or (ii) any
accounting of profits made from the purchase or sale by such person of the
Corporation's securities within the meaning of Section 16(b) of the
Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law, or (iii) actions
brought about or contributed to by the dishonesty of such person, if a
final judgment or other final adjudication adverse to such person
establishes that acts of active and deliberate dishonesty were committed or
attempted by such person with actual dishonest purpose and intent and were
material to the adjudication; or (iv) actions based on or attributable to
such person having gained any personal profit or advantage to which he or
she was not entitled, in the event that a final judgment or other final
adjudication
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<PAGE>
adverse to such person establishes that such person in fact gained such
personal profit or other advantage to which he or she was not entitled; or
(v) any matter in respect of which a final decision by a court with
competent jurisdiction shall determine that indemnification is unlawful.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article XIV shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the
Certificate of Incorporation, this amendment of the Certificate of
Incorporation, the Bylaws of the Corporation, by agreement, vote of
stockholders, or disinterested directors or otherwise.
4. The amendment of the Certificate of Incorporation of the Corporation
herein certified was duly adopted, pursuant to the provisions of Section 241 of
the General Corporation Law of the State of Delaware, by the sole incorporator,
no directors having been named in the Certificate of Incorporation and no
directors having been elected.
Executed on this 14th day of October, 1998.
-------------------------------------------
KATE LANE, Sole Incorporator
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<PAGE>
EXHIBIT 3.3
---------------------------------------
BYLAWS
OF
WISDOM HOLDINGS, INC.,
a Delaware corporation
---------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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----
<S> <C>
ARTICLE I OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1. Registered Office. . . . . . . . . . . . . . . . . . . . 1
Section 2. Other Offices. . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . 1
Section 1. Annual Meeting . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Notice of Annual Meeting . . . . . . . . . . . . . . . . 1
Section 3. Voting List. . . . . . . . . . . . . . . . . . . . . . . 1
Section 4. Special Meetings . . . . . . . . . . . . . . . . . . . . 1
Section 5. Notice of Special Meetings . . . . . . . . . . . . . . . 2
Section 6. Scope of Business at Special Meeting . . . . . . . . . . 2
Section 7. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 8. Qualifications to Vote . . . . . . . . . . . . . . . . . 2
Section 9. Record Date 2
Section 10. Action at Meetings . . . . . . . . . . . . . . . . . . . 2
Section 11. Voting and Proxies . . . . . . . . . . . . . . . . . . . 2
Section 12. Nominations for Board of Directors . . . . . . . . . . . 3
Section 13. Stockholder Proposals for Meetings . . . . . . . . . . . 3
ARTICLE III DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1. Powers . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2. Number; Election; Tenure and Qualification . . . . . . . 4
Section 3. Vacancies and Newly Created Directorships. . . . . . . . 4
Section 4. Location of Meetings . . . . . . . . . . . . . . . . . . 4
Section 5. Meeting of Newly Elected Board of Directors. . . . . . . 4
Section 6. Regular Meetings . . . . . . . . . . . . . . . . . . . . 4
Section 7. Special Meetings . . . . . . . . . . . . . . . . . . . . 5
Section 8. Quorum and Action at Meetings. . . . . . . . . . . . . . 5
Section 9. Action Without a Meeting . . . . . . . . . . . . . . . . 5
Section 10. Telephonic Meeting . . . . . . . . . . . . . . . . . . . 5
Section 11. Committees . . . . . . . . . . . . . . . . . . . . . . . 5
Section 12. Committee Authority. . . . . . . . . . . . . . . . . . . 5
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
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<S> <C>
Section 13. Committee Minutes. . . . . . . . . . . . . . . . . . . . 6
Section 14. Directors Compensation . . . . . . . . . . . . . . . . . 6
Section 15. Resignation. . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE IV NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 1. Notice to Directors and Stockholders . . . . . . . . . . 6
Section 2. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE V OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 1. Enumeration. . . . . . . . . . . . . . . . . . . . . . . 7
Section 2. Election . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3. Appointment of Other Agents. . . . . . . . . . . . . . . 7
Section 4. Compensation . . . . . . . . . . . . . . . . . . . . . . 7
Section 5. Tenure . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 6. Chairman of the Board and Vice-Chairman of the Board . . 7
Section 7. Chief Executive Officer. . . . . . . . . . . . . . . . . 7
Section 8. President. . . . . . . . . . . . . . . . . . . . . . . . 7
Section 9. Secretary. . . . . . . . . . . . . . . . . . . . . . . . 8
Section 10. Assistant Secretary. . . . . . . . . . . . . . . . . . . 8
Section 11. Treasurer. . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE VI CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 1. Certificates . . . . . . . . . . . . . . . . . . . . . . 8
Section 2. Class or Series. . . . . . . . . . . . . . . . . . . . . 8
Section 3. Signature. . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4. Lost Certificates. . . . . . . . . . . . . . . . . . . . 9
Section 5. Transfer of Stock. . . . . . . . . . . . . . . . . . . . 9
Section 6. Record Date. . . . . . . . . . . . . . . . . . . . . . . 9
Section 7. Registered Stockholders. . . . . . . . . . . . . . . . . 9
ARTICLE VII GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . 10
Section 1. Dividends. . . . . . . . . . . . . . . . . . . . . . . . 10
Section 2. Checks . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
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Section 4. Seal . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 5. Loans. . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VIII INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . 10
Section 1. Scope. . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 2. Advancing Expenses . . . . . . . . . . . . . . . . . . . 11
Section 3. Liability Offset . . . . . . . . . . . . . . . . . . . . 11
Section 4. Continuing Obligation. . . . . . . . . . . . . . . . . . 11
Section 5. Nonexclusive . . . . . . . . . . . . . . . . . . . . . . 11
Section 6. Other Persons. . . . . . . . . . . . . . . . . . . . . . 11
Section 7. Definitions. . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE IX AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
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<PAGE>
---------------------------------------
BYLAWS
OF
WISDOM HOLDINGS, INC.,
a Delaware corporation
---------------------------------------
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE. The registered office shall be at the
office of The Corporation Trust Company, Corporation Trust Center, 1209
Orange Street, County of New Castle, Delaware 19801
Section 2. OTHER OFFICES. The corporation may also have offices at
such other places both within and without the State of Delaware as the Board
of Directors may on an annual basis determine or the business of the
corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. ANNUAL MEETING. An annual meeting of the stockholders
for the election of directors shall be held at such place either within or
without the State of Delaware as shall be designated on an annual basis by
the Board of Directors and stated in the notice of the meeting. Meetings of
stockholders for any other purpose may be held at such time and place, within
or without the State of Delaware, as shall be stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. NOTICE OF ANNUAL MEETING. Written notice of the annual
meeting stating the place, date and hour of the meeting shall be given to
each stockholder entitled to vote at such meeting not less than ten (10) nor
more than sixty (60) days before the date of the meeting.
Section 3. VOTING LIST. The officer who has charge of the stock
ledger of the corporation shall prepare and make, or cause a third party to
prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Section 4. SPECIAL MEETINGS. Special meetings of the stockholders
of this corporation, for any purpose or purposes, unless otherwise prescribed
by statute or by the Certificate of Incorporation, shall be called by the
President or Secretary at the request in writing of the President, a majority
of the members of the Board of Directors or holders of at least 20% of the
total voting power of all outstanding shares of stock of this corporation
then entitled to vote, and may not be called absent such a request. Such
request shall state the purpose or purposes of the proposed meeting.
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<PAGE>
Section 5. NOTICE OF SPECIAL MEETINGS. As soon as reasonably
practicable after receipt of a request as provided in Section 4 of this
Article II, written notice of a special meeting, stating the place, date
(which shall be not less than ten (10) nor more than sixty (60) days from the
date of the notice) and hour of the special meeting and the purpose or
purposes for which the special meeting is called, shall be given to each
stockholder entitled to vote at such special meeting.
Section 6. SCOPE OF BUSINESS AT SPECIAL MEETING. Business
transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice.
Section 7. QUORUM. The holders of a majority of the stock issued
and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business, except as otherwise provided by
statute or by the Certificate of Incorporation. If, however, such quorum
shall not be present or represented at any meeting of the stockholders, the
chairman of the meeting or the stockholders entitled to vote thereat, present
in person or represented by proxy, shall have power to adjourn the meeting
from time to time, without notice other than announcement at the meeting,
until a quorum shall be present or represented. At such adjourned meeting at
which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty (30) days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting as provided in Section 5 of this Article II.
Section 8. QUALIFICATIONS TO VOTE. The stockholders of record on
the books of the corporation at the close of business on the record date as
determined by the Board of Directors and only such stockholders shall be
entitled to vote at any meeting of stockholders or any adjournment thereof.
Section 9. RECORD DATE. The Board of Directors may fix a record
date for the determination of the stockholders entitled to notice of or to
vote at any stockholders' meeting and at any adjournment thereof, and to fix
a record date for any other purpose. The record date shall not be more than
sixty (60) nor less than ten (10) days before the date of such meeting. If
no record date is fixed by the Board of Directors, the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or if notice is waived, at the close of
business on the day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting.
Section 10. ACTION AT MEETINGS. When a quorum is present at any
meeting, the vote of the holders of a majority of the stock having voting
power present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which by express
provision of applicable law or of the Certificate of Incorporation, a
different vote is required, in which case such express provision shall govern
and control the decision of such question.
Section 11. VOTING AND PROXIES. Unless otherwise provided in the
Certificate of Incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one (1) vote in person or by proxy for each share
of the capital stock having voting power held by such stockholder, but no
proxy shall be voted on after three (3) years from its date, unless the proxy
provides for a longer period. Each proxy shall be revocable unless expressly
provided therein to be irrevocable and unless it is coupled with an interest
sufficient in law to support an irrevocable power
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<PAGE>
Section 12. NOMINATIONS FOR BOARD OF DIRECTORS. Nominations for
election to the Board of Directors must be made by the Board of Directors or
by any stockholder of any outstanding class of capital stock of the
corporation entitled to vote for the election of directors. Nominations,
other than those made by the Board of Directors of the corporation, must be
preceded by notification in writing in fact received by the Secretary of the
corporation not less than sixty (60) days prior to any meeting of
stockholders called for the election of directors. Such notification shall
contain the written consent of each proposed nominee to serve as a director
if so elected and the following information as to each proposed nominee and
as to each person, acting alone or in conjunction with one or more other
persons as a partnership, limited partnership, syndicate or other group, who
participates or is expected to participate in making such nomination or in
organizing, directing or financing such nomination or solicitation of proxies
to vote for the nominee:
(a) the name, age, residence, address, and business address of
each proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of
business and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially,
either directly or indirectly, by each proposed nominee and each such
person; and
(d) a description of any arrangement or understanding of each
proposed nominee and of each such person with each other or any other
person regarding future employment or any future transaction to which the
corporation will or may be a party.
The presiding officer of the meeting shall have the authority to determine
and declare to the meeting that a nomination not preceded by notification made
in accordance with the foregoing procedure shall be disregarded.
Section 13. STOCKHOLDER PROPOSALS FOR MEETINGS. At any meeting of
the stockholders, only such business shall be conducted as shall be properly
before the meeting. To be properly before a meeting, business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (b) otherwise properly brought
before the meeting by or at the direction of the Board of Directors, or (c)
otherwise properly brought before the meeting by a stockholder. For business
to be properly brought before a meeting by a stockholder, the stockholder
must have given timely notice thereof in writing to the Secretary. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal place of business of the corporation not less than thirty (30)
days nor more than sixty (60) days prior to the meeting; provided, however,
that in the event that less than forty (40) days notice or prior public
disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be received not later than the
close of business on the tenth day following the day on which such notice of
the date of the meeting was mailed or such public disclosure was made. A
stockholder's written notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the meeting (a) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (b) the name and address
as they appear on the corporation's books of the stockholder proposing such
business, (c) the class and number of shares of the corporation which are
beneficially owned by such stockholder, and (d) any material interest of such
stockholder in such business. Notwithstanding anything in these Bylaws to
the contrary, no business shall be conducted at a meeting unless properly
brought before such meeting in accordance with the procedures set forth in
this Section 13 of Article II. The chairman of the
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<PAGE>
meeting shall, if he facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this Section 13 of Article II and if it shall be so determined,
the chairman of the meeting shall so declare this to the meeting and such
business not properly brought before the meeting shall not be transacted.
ARTICLE III
DIRECTORS
Section 1. POWERS. The business of the corporation shall be managed by
or under the direction of its Board of Directors, which may exercise all such
powers of the corporation and do all such lawful acts and things as are not by
applicable law or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
Section 2. NUMBER; ELECTION; TENURE AND QUALIFICATION. The number of
directors which shall constitute the whole Board of Directors shall be fixed
from time to time by resolution of the Board of Directors or by the Stockholders
at an annual meeting of the Stockholders provided that the number of directors
shall be not less than ________ (__) nor more than _______ (__). With the
exception of the first Board of Directors, which shall be elected by the
incorporator, and except as provided in the corporation's Certificate of
Incorporation or in Section 3 of this Article III, the directors shall be
elected at the annual meeting of the stockholders by a plurality vote of the
shares represented in person or by proxy and each director elected shall hold
office until his successor is elected and qualified unless he shall resign,
become disqualified, disabled, or otherwise removed. Directors need not be
stockholders.
Section 3. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Unless otherwise
provided in the Certificate of Incorporation, vacancies and newly-created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director. The directors so chosen shall serve
for the remainder of the term of the vacated directorships being filled and
until their successors are duly elected and shall qualify, unless sooner
displaced. If there are no directors in office, then an election of directors
may be held in the manner provided by statute.
Section 4. LOCATION OF MEETINGS. The Board of Directors of the
corporation may hold meetings, both regular and special, either within or
without the State of Delaware.
Section 5. MEETING OF NEWLY ELECTED BOARD OF DIRECTORS. The first
meeting of each newly elected Board of Directors shall be held immediately
following the annual meeting of stockholders and no notice of such meeting shall
be necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event such meeting is not
held at such time, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
Board of Directors, or as shall be specified in a written waiver signed by all
of the directors.
Section 6. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held upon at least seven (7) days prior written notice at such
time and at such place as shall from time to time be determined by the Board of
Directors; provided that any director who is absent when such a determination is
made shall be given notice of such location. Notice may be waived in accordance
with Section 229 of the Delaware General Corporation Law.
Section 7. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the President on seven (7) days' notice to each
director by mail or two (2) days' notice to each director by
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<PAGE>
overnight courier service or facsimile; special meetings shall be called by
the President or Secretary in a like manner and on like notice on the written
request of two (2) directors unless the Board of Directors consists of only
one (1) director, in which case special meetings shall be called by the
President or Secretary in a like manner and on like notice on the written
request of the sole director. Notice may be waived in accordance with Section
229 of the Delaware General Corporation Law.
Section 8. QUORUM AND ACTION AT MEETINGS. At all meetings of the Board
of Directors, a majority of the directors then in office shall constitute a
quorum for the transaction of business, and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by
statute or by the Certificate of Incorporation. If a quorum shall not be
present at any meeting of the Board of Directors, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 9. ACTION WITHOUT A MEETING. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 10. TELEPHONIC MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, upon proper notice duly
given, by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other, and
such participation in a meeting shall constitute presence in person at the
meeting.
Section 11. COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole board, designate one or more committees, each
committee to consist of one (1) or more of the directors of the corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence of disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
Section 12. COMMITTEE AUTHORITY. Any such committee, to the extent
provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders a dissolution of the corporation or a revocation of a dissolution,
amending the Bylaws of the corporation, or any action requiring unanimous
consent of the Board of Directors pursuant to the terms of the Certificate of
Incorporation; and, unless the resolution or the Certificate of Incorporation
expressly so provide, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of stock. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the Board of Directors.
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Section 13. COMMITTEE MINUTES. Each committee shall keep regular
minutes of its meetings and report the same to the Board of Directors when
required.
Section 14. DIRECTORS COMPENSATION. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
Section 15. RESIGNATION. Any director or officer of the corporation may
resign at any time. Each such resignation shall be made in writing and shall
take effect at the time specified therein, or, if no time is specified, at the
time of its receipt by either the Board of Directors, the President or the
Secretary. The acceptance of a resignation shall not be necessary to make it
effective unless expressly so provided in the resignation.
ARTICLE IV
NOTICES
Section 1. NOTICE TO DIRECTORS AND STOCKHOLDERS. Whenever, under
the provisions of the statutes or of the Certificate of Incorporation or of
these Bylaws, notice is required to be given to any director or stockholder,
it shall not be construed to mean personal notice, but such notice may be
given in writing, by mail, addressed to such director or stockholder, at his
address as it appears on the records of the corporation, with postage thereon
prepaid, and such notice shall be deemed to be given at the time when the
same shall be deposited in the United States mail. An affidavit of the
Secretary or an Assistant Secretary or of the transfer agent of the
corporation that the notice has been given shall in the absence of fraud, be
prima facie evidence of the facts stated therein. Notice to directors may
also be given by telephone, facsimile or telegram.
Section 2. WAIVER. Whenever any notice is required to be given
under the provisions of the statutes or of the Certificate of Incorporation
or of these Bylaws, a waiver thereof in writing, signed by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. The written waiver need not
specify the business to be transacted at, nor the purpose of, any regular or
special meeting of the stockholders, directors, or members of a committee of
directors. Attendance of a person at a meeting shall constitute a waiver of
notice of such meeting, except when the person attends a meeting for the
express purpose of objecting at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
ARTICLE V
OFFICERS
Section 1. ENUMERATION. The officers of the corporation shall be
chosen by the Board of Directors and shall be a Chief Executive Officer,
President, Secretary, Treasurer or Chief Financial Officer and such other
officers with such other titles as the Board of Directors shall determine.
The Board of Directors may elect from among its members a Chairman or
Chairmen of the Board and a Vice Chairman of the Board. The Board of
Directors may also choose one (1) or more Vice-Presidents and Assistant
Secretaries. Any number of offices may be held by the same person, unless
the Certificate of Incorporation or these Bylaws otherwise provide.
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Section 2. ELECTION. The Board of Directors at its first meeting
after each annual meeting of stockholders shall elect a President, a
Secretary, a Treasurer and such other officers with such other titles as the
Board of Directors shall determine.
Section 3. APPOINTMENT OF OTHER AGENTS. The Board of Directors may
appoint such other officers and agents as it shall deem necessary, who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the Board of
Directors.
Section 4. COMPENSATION. The salaries of all officers of the
corporation shall be fixed by the Board of Directors or a committee thereof.
The salaries of agents of the corporation shall, unless fixed by the Board of
Directors, be fixed by the President or any Vice-President of the corporation.
Section 5. TENURE. The officers of the corporation shall hold
office until their successors are chosen and qualify. Any officer elected or
appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the directors of the Board of Directors.
Any vacancy occurring in any office of the corporation shall be filled by the
Board of Directors.
Section 6. CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD.
The Chairman or Chairmen of the Board, if any, shall preside at all meetings
of the Board of Directors and of the stockholders at which he or they shall
be present. He or they shall have and may exercise such powers as are, from
time to time, assigned to him or them by the Board and as may be provided by
law. In the absence of the Chairman of the Board, the Vice Chairman of the
Board, if any, shall preside at all meetings of the Board of Directors and of
the stockholders at which he shall be present. He shall have and may
exercise such powers as are, from time to time, assigned to him by the Board
of Directors and as may be provided by law.
Section 7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer
shall be the Chief Executive Officer of the corporation unless such titles
are assigned to a Chairman of the Board; and in the absence of a Chairman and
Vice Chairman of the Board he shall preside as the chairman of meetings of
the stockholders and the Board of Directors; he shall have general and active
management of the business of the corporation and shall see that all orders
and resolutions of the Board of Directors are carried into effect. The Chief
Executive Officer, President or any Vice-President shall execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent
of the corporation.
Section 8. PRESIDENT. In the absence of the Chief Executive Officer
or in the event of his inability or refusal to act, the President, or in his
absence or inability to act, a Vice-President, if any (or in the event there
be more than one Vice-President, the Vice-Presidents in the order designated
by the Board of Directors, or in the absence of any designation, then in the
order of their election) shall perform the duties of the Chief Executive
Officer, and when so acting shall have all the powers of and be subject to
all the restrictions upon the Chief Executive Officer. The President and any
Vice-Presidents shall perform such other duties and have such other powers as
the Board of Directors may from time to time prescribe.
Section 9. SECRETARY. The Secretary shall attend all meetings of
the Board of Directors and all meetings of the stockholders and record all
the proceedings of the meetings of the corporation and of the Board of
Directors in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. She shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
Board of Directors, and shall perform such other duties as may be prescribed
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by the Board of Directors or Chief Executive Officer, under whose supervision
she shall be subject. She shall have custody of the corporate seal of the
corporation and she, or an Assistant Secretary, shall have authority to affix
the same to any instrument requiring it and when so affixed, it may be
attested by his signature or by the signature of such Assistant Secretary.
The Board of Directors may give general authority to any other officer to
affix the seal of the corporation and to attest the affixing by her signature.
Section 10. ASSISTANT SECRETARY. The Assistant Secretary, or if
there be more than one (1), the Assistant Secretaries in the order determined
by the Board of Directors (or if there be no such determination, then in the
order of their election) shall, in the absence of the Secretary or in the
event of his inability or refusal to act, perform the duties and exercise the
powers of the Secretary and shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
Section 11. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the corporation as may be
ordered by the Board of Directors, Chief Executive Officer, taking proper
vouchers for such disbursements, and shall render to the Chief Executive Officer
and the Board of Directors, at its regular meetings, or when the Board of
Directors so requires, an account of all his transactions as Treasurer and of
the financial condition of the corporation. If required by the Board of
Directors, the Treasurer shall give the corporation a bond (which shall be
renewed every six (6) years) in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance of
the duties of his office and for the restoration to the corporation, in case of
his death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the corporation.
ARTICLE VI
CAPITAL STOCK
Section 1. CERTIFICATES. Every holder of stock in the corporation
shall be entitled to have a certificate, signed by, or in the name of the
corporation by, the Chairman or Vice-Chairman of the Board of Directors, or the
Chief Executive Officer, President or a Vice-President and the Treasurer or the
Secretary or an Assistant Secretary of the corporation, certifying the number of
shares owned by him in the corporation. Certificates may be issued for partly
paid shares and in such case upon the face or back of the certificates issued to
represent any such partly paid shares, the total amount of the consideration to
be paid therefor and the amount paid thereon shall be specified.
Section 2. CLASS OR SERIES. If the corporation shall be authorized to
issue more than one class of stock or more than one series of any class, the
powers, designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in Section 202 of the General Corporation Law
of Delaware, in lieu of the foregoing requirements, there may be set forth on
the face or back of the certificate which the corporation shall issue to
represent such class or series of stock, a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
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Section 3. SIGNATURE. Any of or all of the signatures on the
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 4. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 5. TRANSFER OF STOCK. Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 6. RECORD DATE. In order that the corporation may determine
the stockholders entitled to notice of or to vote at any meeting of stockholder
or any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 7. REGISTERED STOCKHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
ARTICLE VII
GENERAL PROVISIONS
Section 1. DIVIDENDS. Dividends upon the capital stock of the
corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property or in
shares of capital stock, subject to the provisions of the Certificate of
Incorporation. Before payment of any
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dividend, there may be set aside out of any funds of the corporation
available for dividends such sum or sums as the Board of Directors from time
to time, in their absolute discretion, think proper as a reserve or reserves
to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purposes as
the Board of Directors shall think conducive to the interest of the
corporation, and the Board of Directors may modify or abolish any such
reserve in the manner in which it was created.
Section 2. CHECKS. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 3. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
Section 4. SEAL. The Board of Directors may adopt a corporate seal
having inscribed thereon the name of the corporation, the year of its
organization and the words "Corporate Seal, Delaware". The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
Section 5. LOANS. The Board of Directors of this corporation may,
without stockholder approval, authorize loans to, or guaranty obligations of, or
otherwise assist, including, without limitation, the adoption of employee
benefit plans under which loans and guarantees may be made, any officer or other
employee of the corporation or of its subsidiary, including any officer or
employee who is a director of the corporation or its subsidiary, whenever, in
the judgment of the Board of Directors, such loan, guaranty or assistance may
reasonably be expected to benefit the corporation. The loan, guaranty or other
assistance may be with or without interest, and may be unsecured, or secured in
such manner as the Board of Directors shall approve, including, without
limitation, a pledge of shares of stock of the corporation.
ARTICLE VIII
INDEMNIFICATION
Section 1. SCOPE. The corporation shall, to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, as that
Section may be amended and supplemented from time to time, indemnify any
director, officer, employee or agent of the corporation, against expenses
(including attorneys' fees), judgments, fines, amounts paid in settlement and/or
other matters referred to in or covered by that Section, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
Section 2. ADVANCING EXPENSES. Expenses incurred by a director of
the corporation in defending a civil or criminal action, suit or proceeding
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation (or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise) shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized by relevant
provisions of the Delaware General Corporation Law; provided, however, the
corporation shall not be required to advance such expenses to a director (i)
who commences any action, suit or proceeding as a plaintiff unless such
advance is specifically approved by a majority of the Board of Directors, or
(ii) who is a party to an action, suit or proceeding brought by the
corporation and approved by a majority of
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the Board of Directors which alleges willful misappropriation of corporate
assets by such director, disclosure of confidential information in violation
of such director's fiduciary or contractual obligations to the corporation,
or any other willful and deliberate breach in bad faith of such director's
duty to the corporation or its stockholders.
Section 3. LIABILITY OFFSET. The corporation's obligation to provide
indemnification under this Article VIII shall be offset to the extent the
indemnified party is indemnified by any other source including, but not limited
to, any applicable insurance coverage under a policy maintained by the
corporation, the indemnified party or any other person.
Section 4. CONTINUING OBLIGATION. The provisions of this Article VIII
shall be deemed to be a contract between the corporation and each director of
the corporation who serves in such capacity at any time while this bylaw is in
effect, and any repeal or modification thereof shall not affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought
based in whole or in part upon any such state of facts.
Section 5. NONEXCLUSIVE. The indemnification and advancement of
expenses provided for in this Article VIII shall (i) not be deemed exclusive of
any other rights to which those indemnified may be entitled under any by-law,
agreement or vote of stockholders or disinterested directors or otherwise, both
as to action in their official capacities and as to action in another capacity
while holding such office, (ii) continue as to a person who has ceased to be a
director and (iii) inure to the benefit of the heirs, executors and
administrators of such a person.
Section 6. OTHER PERSONS. In addition to the indemnification rights of
directors, officers, employees, or agents of the corporation, the Board of
Directors in its discretion shall have the power on behalf of the corporation to
indemnify any other person made a party to any action, suit or proceeding who
the corporation may indemnify under Section 145 of the Delaware General
Corporation Law.
Section 7. DEFINITIONS. The phrases and terms set forth in this
Article VIII shall be given the same meaning as the identical terms and phrases
are given in Section 145 of the Delaware General Corporation Law, as that
Section may be amended and supplemented from time to time.
ARTICLE IX
AMENDMENTS
Except as otherwise provided in the Certificate of Incorporation, these
Bylaws may be altered, amended or repealed, or new Bylaws may be adopted, by the
holders of a majority of the outstanding voting shares or by the Board of
Directors, when such power is conferred upon the Board of Directors by the
Certificate of Incorporation, at any regular meeting of the stockholders or of
the Board of Directors or at any special meeting of the stockholders or of the
Board of Directors if notice of such alteration, amendment, repeal or adoption
of new Bylaws be contained in the notice of such special meeting. If the power
to adopt, amend or repeal Bylaws is conferred upon the Board of Directors by the
Certificate of Incorporation, it shall not divest or limit the power of the
stockholders to adopt, amend or repeal Bylaws.
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CERTIFICATE OF SECRETARY
The undersigned certifies:
(1) That the undersigned is the duly elected and acting
Secretary of Wisdom Holdings, Inc., a Delaware corporation (the
"Corporation"); and
(2) That the foregoing Bylaws constitute the Bylaws of the
Corporation as duly adopted by the Board of Directors of the Corporation.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the Corporation as of this _____ day of October, 1998.
-----------------------------------
, Secretary
---------------------
<PAGE>
EXHIBIT 10.41
TRADEMARK ASSIGNMENT
WHEREAS, Tse, Saiget, Watanabe & McClure, Inc., P.S., a Washington
Professional Service Corporation, whose address is 7725 N.E. Highway 99,
Suite B, Vancouver, Washington 98685, hereinafter referred to as "Tse", has
adopted and used the mark GENTLE DENTAL as a trademark for dental services,
and is the owner of U.S. Trademark Registration No. 1,214,416 granted October
26, 1982; and
WHEREAS, Mutual Health Systems, Inc., a Washington Corporation, whose
address is 7725 N.E. Highway 99, Suite C, Vancouver, Washington 98685,
hereinafter referred to as "Mutual", is desirous of acquiring said mark and
said registration, together with the goodwill of the business with which said
mark is used and which is symbolized by said mark;
NOW, THEREFORE, to all whom it may concern, be it known that for and
in consideration of the sum of One Dollar ($1.00) and other good and valuable
consideration, the receipt of which is hereby acknowledged, Tse by these
presence does hereby sell, transfer, convey and assign unto Mutual the entire
right, title and interest in and to the mark GENTLE DENTAL and said
Registration No. 1,214,461, together with the goodwill of the business in
connection with which the mark is used and which is symbolized by said mark,
said assignment being subject to a license to Daniel L. Maloof set forth in
an agreement dated April 19, 1989 which was recorded in the U.S. Patent and
Trademark Office at Reel 0652, France 664 on May 11, 1989.
Tse, Saiget, Watanabe &
McClure, Inc., P.S.
Dated: December 30, 1992 By: /s/ Yui S. Tse
------------------------------
Yui S. Tse
Chairman of the Board
ACKNOWLEDGMENT
STATE OF WASHINGTON )
) ss:
County of )
Before me, a Notary Public for said county, personally appeared said
Yui S. Tse, known to me to be the person who executed the foregoing
instrument and acknowledged it to be his free act and deed.
Witness my hand and seal this 30th day of December 1992.
/s/ [illegible]
----------------------------------
[Seal] Notary Public for Washington
My Commission Expires: 7-1-93
<PAGE>
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
Dated as of September 30, 1998
Among
GENTLE DENTAL SERVICE CORPORATION,
and
GENTLE DENTAL MANAGEMENT, INC.,
AS BORROWERS,
THE GUARANTORS NAMED HEREIN,
THE LENDERS NAMED HEREIN,
UNION BANK OF CALIFORNIA, N.A., AS ADMINISTRATIVE AGENT
and
THE CHASE MANHATTAN BANK, AS SYNDICATION AGENT
- --------------------------------------------------------------------------------
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TABLE OF CONTENTS
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I. DEFINITIONS..............................................................................................1
SECTION 1.01. Certain Defined Terms..................................................................1
SECTION 1.02. Accounting Terms......................................................................27
II. THE LOANS...............................................................................................27
SECTION 2.01. Revolving Credit Commitments and Term Loan............................................27
SECTION 2.02. Loans.................................................................................28
SECTION 2.03. Notice of Loans.......................................................................30
SECTION 2.04. Notes; Repayment of Loans.............................................................31
SECTION 2.05. Interest on Loans.....................................................................33
SECTION 2.06. Fees..................................................................................33
SECTION 2.07. Termination and Reduction of Revolving Credit
Commitments..................................................................34
SECTION 2.08. Interest on Overdue Amounts; Alternate Rate of
Interest.....................................................................34
SECTION 2.09. Prepayment of Loans...................................................................35
SECTION 2.10. Reserve Requirements; Change in Circumstances.........................................39
SECTION 2.11. Change in Legality....................................................................41
SECTION 2.12. Indemnity.............................................................................42
SECTION 2.13. Pro Rata Treatment; Assumption by and Delegation
of Authority to the Administrative Agent.....................................43
SECTION 2.14. Sharing of Setoffs....................................................................45
SECTION 2.15. Payments and Computations.............................................................46
SECTION 2.16. Taxes.................................................................................47
SECTION 2.17. Issuance of Letters of Credit.........................................................49
SECTION 2.18. Payment of Letters of Credit; Reimbursement...........................................50
SECTION 2.19. Administrative Agent's Actions with respect to Letters
of Credit....................................................................52
SECTION 2.20. Letter of Credit Fees.................................................................52
III. COLLATERAL SECURITY.....................................................................................53
SECTION 3.01. Security Documents....................................................................53
SECTION 3.02. Filing and Recording..................................................................53
IV. REPRESENTATIONS AND WARRANTIES..........................................................................54
SECTION 4.01. Organization, Legal Existence.........................................................54
SECTION 4.02. Authorization.........................................................................54
SECTION 4.03. Governmental Approvals................................................................54
SECTION 4.04. Binding Effect........................................................................55
SECTION 4.05. Material Adverse Change...............................................................55
SECTION 4.06. Litigation; Compliance with Laws; etc.................................................55
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SECTION 4.07. Financial Statements..................................................................55
SECTION 4.08. Federal Reserve Regulations...........................................................56
SECTION 4.09. Taxes.................................................................................56
SECTION 4.10. Employee Benefit Plans................................................................57
SECTION 4.11. No Material Misstatements.............................................................58
SECTION 4.12. Investment Company Act; Public Utility Holding
Company Act..................................................................58
SECTION 4.13. Security Interest.....................................................................58
SECTION 4.14. Use of Proceeds.......................................................................59
SECTION 4.15. Subsidiaries..........................................................................59
SECTION 4.16. Title to Properties; Possession Under Leases;
Trademarks...................................................................59
SECTION 4.17. Solvency..............................................................................60
SECTION 4.18. Permits, etc..........................................................................60
SECTION 4.19. Compliance with Environmental Laws. .................................................61
SECTION 4.20. No Change in Credit Criteria or Collection Policies...................................61
SECTION 4.21. Employee Matters......................................................................62
SECTION 4.22. Year 2000.............................................................................62
V. CONDITIONS OF CREDIT EVENTS.............................................................................62
SECTION 5.01. All Credit Events.....................................................................62
SECTION 5.02. First Borrowing.......................................................................63
VI. AFFIRMATIVE COVENANTS...................................................................................67
SECTION 6.01. Legal Existence.......................................................................67
SECTION 6.02. Businesses and Properties.............................................................67
SECTION 6.03. Insurance.............................................................................68
SECTION 6.04. Taxes.................................................................................68
SECTION 6.05. Financial Statements, Reports, etc....................................................68
SECTION 6.06. Litigation and Other Notices..........................................................71
SECTION 6.07. ERISA.................................................................................72
SECTION 6.08. Maintaining Records; Access to Properties and
Inspections; Right to Audit..................................................73
SECTION 6.09. Use of Proceeds.......................................................................73
SECTION 6.10. Fiscal Year-End.......................................................................73
SECTION 6.11. Further Assurances....................................................................73
SECTION 6.12. Additional Grantors and Guarantors....................................................74
SECTION 6.13. Environmental Laws....................................................................74
SECTION 6.14. Pay Obligations to Lenders and Perform Other
Covenants....................................................................76
SECTION 6.15. Maintain Operating Accounts...........................................................76
SECTION 6.16. Life Insurance........................................................................76
SECTION 6.17. Year 2000.............................................................................76
SECTION 6.18. Assignment of Contracts...............................................................76
SECTION 6.19. Holding Company Structure.............................................................77
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 6.20. Dedicated Dental......................................................................77
SECTION 6.21. Landlord Waivers......................................................................77
SECTION 6.22. Purchase Agreements...................................................................77
SECTION 6.23. Trademark.............................................................................77
SECTION 6.24. Cash Management Arrangements..........................................................77
VII. NEGATIVE COVENANTS......................................................................................77
SECTION 7.01. Liens.................................................................................78
SECTION 7.02. Sale and Lease-Back Transactions......................................................79
SECTION 7.03. Indebtedness..........................................................................79
SECTION 7.04. Dividends, Distributions and Payments.................................................79
SECTION 7.05. Consolidations, Mergers and Sales of Assets...........................................80
SECTION 7.06. Investments...........................................................................80
SECTION 7.07. Capital Expenditures..................................................................81
SECTION 7.08. Net Worth.............................................................................81
SECTION 7.09. Leverage Ratio; Interest Leverage Ratio...............................................82
SECTION 7.10. Interest Coverage Ratios..............................................................83
SECTION 7.11. Fixed Charge Ratio....................................................................84
SECTION 7.12. Business..............................................................................84
SECTION 7.13. Sales of Accounts Receivables.........................................................84
SECTION 7.14. Use of Proceeds.......................................................................84
SECTION 7.15. ERISA.................................................................................84
SECTION 7.16. Accounting Changes....................................................................85
SECTION 7.17. Prepayment or Modification of Indebtedness;
Modification of Charter Documents, etc.......................................85
SECTION 7.18. Transactions with Affiliates..........................................................85
SECTION 7.19. Consulting Fees.......................................................................85
SECTION 7.20. Negative Pledges, Etc.................................................................85
VIII. EVENTS OF DEFAULT.......................................................................................86
IX. AGENTS..................................................................................................89
X. COLLECTION OF RECEIVABLES...............................................................................94
XI. MISCELLANEOUS...........................................................................................95
SECTION 11.01. Notices...............................................................................95
SECTION 11.02. Survival of Agreement.................................................................96
SECTION 11.03. Successors and Assigns; Participations................................................96
SECTION 11.04. Expenses; Indemnity...................................................................99
SECTION 11.05. Applicable Law.......................................................................101
SECTION 11.06. Right of Setoff......................................................................101
SECTION 11.07. Payments on Business Days............................................................101
SECTION 11.08. Waivers; Amendments..................................................................101
SECTION 11.09. Severability.........................................................................103
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 11.10. Entire Agreement; Waiver of Jury Trial, etc..........................................103
SECTION 11.11. Confidentiality......................................................................104
SECTION 11.12. Submission to Jurisdiction...........................................................104
SECTION 11.13. Counterparts; Facsimile Signature....................................................105
SECTION 11.14. Headings.............................................................................105
XII. GUARANTEES.............................................................................................105
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
EXHIBIT A Form of Term Note
EXHIBIT B Form of Revolving Credit Note
EXHIBIT C Form of Opinion of Counsel
EXHIBIT D Form of Pledge Agreement
EXHIBIT E Form of Security Agreement
EXHIBIT F Form of Assignment and Acceptance
EXHIBIT G Form of Security Agreement-Patents and Trademarks
EXHIBIT H Form of Assignment of Contract
EXHIBIT I Form of Assignment of Life Insurance
EXHIBIT J Form of Management Agreement
EXHIBIT K Form of Shares Acquisition Agreement
EXHIBIT L Form of Covenant Compliance Certificates
</TABLE>
<TABLE>
<CAPTION>
SCHEDULES
- ---------
<S> <C>
SCHEDULE 2.01(a) Revolving Credit Commitments
SCHEDULE 2.02 Domestic Lending Offices
SCHEDULE 2.03 Eurodollar Lending Offices
SCHEDULE 2.20 Letter of Credit Fees
SCHEDULE 4.01 Qualified Jurisdictions
SCHEDULE 4.05 Material Adverse Change
SCHEDULE 4.06(a) Litigation
SCHEDULE 4.06(b) Compliance with Laws
SCHEDULE 4.10 ERISA Matters
SCHEDULE 4.15 Subsidiaries
SCHEDULE 4.19 Environmental Law Compliance
SCHEDULE 4.21 Employee Matters
SCHEDULE 6.13 Hazardous Materials
SCHEDULE 6.25 Dental Practices
SCHEDULE 7.01 Existing Liens
SCHEDULE 7.03 Existing Indebtedness
SCHEDULE 7.19 Consulting Fees
</TABLE>
v
<PAGE>
CREDIT AGREEMENT dated as of September 30, 1998, among GENTLE
DENTAL SERVICE CORPORATION, a Washington corporation ("Dental
Service") and GENTLE DENTAL MANAGEMENT, INC., a Delaware
corporation ("Dental Management"); Dental Service and Dental
Management, each a "Borrower" and collectively, the "Borrowers"),
the Guarantors named herein and signatories hereto, the financial
institutions from time to time party hereto, initially consisting
of those financial institutions listed on Schedule 2.01(a)
annexed hereto (collectively, the "Lenders"), UNION BANK OF
CALIFORNIA, N.A., as administrative agent for the Lenders (in
such capacity, the "Administrative Agent") and THE CHASE
MANHATTAN BANK, as syndication agent for the Lenders (in such
capacity, the "Syndication Agent").
The Borrowers have applied to the Lenders for Revolving Credit Loans (such
term and all other capitalized terms used in this paragraph having the
respective meanings ascribed to such terms above or hereinafter) at any time and
from time to time prior to the earlier to occur of (i) the Revolving Credit
Termination Date and (ii) the Conversion Date, in an aggregate principal amount
not in excess of $45,000,000 at any time outstanding. The proceeds of the
Revolving Credit Loans shall be used to refinance existing Indebtedness of the
Borrowers, for Permitted Acquisitions and for Permitted De Novo Capital
Expenditures, as well as for other capital improvements. The proceeds of the
Revolving Credit Loans shall also be used for general working capital purposes.
The Grantors will provide Collateral in accordance with the provisions of this
Agreement and the Security Documents. The Lenders are severally, and not
jointly, willing to extend such Loans to the Borrowers subject to the terms and
conditions hereinafter set forth. Accordingly, the Borrowers, the Guarantors,
the Lenders and the Agents hereby agree as follows:
I. DEFINITIONS
SECTION I.1. Certain Defined Terms. For purposes hereof, the following
terms shall have the meanings specified below (the following meanings to be
equally applicable to both the singular and plural forms of the terms defined):
"Acquisition Capital Expenditures" shall mean, with respect to any person,
all capital expenditures (other than De Novo Capital Expenditures) incurred (or
expected to be incurred) by such person within the first six months of any
dental practice becoming an Affiliated Dental Practice, including, without
limitation, expenditures related to management information system requirements
and expenditures to upgrade the image of such Affiliated Dental Practice to the
Borrowers' standards.
<PAGE>
"Adjusted EBITDA" shall mean, with respect to any person as of the last day
of any fiscal quarter, the sum of (i) with respect to De Novo Dental Practices
which have been operating for more than six months prior to such date of
determination, the product of (x) EBITDA of such De Novo Dental Practice for
such fiscal quarter (or, if shorter than a full fiscal quarter, the period
commencing with the six-month anniversary of such De Novo Dental Practice and
ending on the last day of such fiscal quarter) and (y) 4 plus (ii) with respect
to dental practices (other than De Novo Dental Practices) that have been
Affiliated Dental Practices for at least one full fiscal quarter (inclusive of
the fiscal quarter then ended), the product of (x) EBITDA of such Affiliated
Dental Practice for the fiscal quarter then ended and (y) 4 plus (iii) with
respect to dental practices (other than De Novo Dental Practices ) that have
been Affiliated Dental Practices for less than one full fiscal quarter prior to
such date of determination, Pro Forma EBITDA for such Affiliated Dental Practice
for the four fiscal quarter period ending on the last day of fiscal quarter
immediately preceding the date such dental practice became an Affiliated Dental
Practice plus (iv) with respect to the fiscal quarter ended September 30, 1998,
the product of (x) the aggregate amount of dividends paid by Dedicated Dental to
Dental Service during September 1998 and (y) 12, or, in the case of each fiscal
quarter thereafter, the product of (x) the aggregate amount of dividends paid by
Dedicated Dental to Dental Service during such fiscal quarter and (y) 4 plus (v)
with respect to any subsidiary that is in the Dental Insurance Business and is
not a Guarantor, the product of (x) the aggregate amount of dividends paid by
such person to a Borrower or Guarantor during the fiscal quarter then ended and
(y) 4; provided, however, that for the purposes of calculating the foregoing,
the aggregate amount of such dividends shall not exceed the applicable person's
EBITDA for the applicable period plus (vi) without duplication of amounts
determined above, the product of (x) EBITDA of the Borrowers and the Guarantors
(on a Consolidated basis) for the fiscal quarter then ended and (y) 4 minus
(vii) the product of (x) the aggregate corporate "selling, general and
administrative" expenses of the Borrowers and the Guarantors (on a Consolidated
basis) for the fiscal quarter then ended and other expenses not included in the
calculation of EBITDA of the Borrowers and the Guarantors and (y) 4 plus (viii)
the product of (x) negative EBITDA (if any) of any subsidiary that is in the
Dental Insurance Business and is not a Guarantor for the fiscal quarter then
ended and (y) 4.
"Adjusted LIBO Rate" shall mean, with respect to any Eurodollar Loan for
any Interest Period, an interest rate per annum (rounded upwards, if necessary,
to the next 1/16 of 1%) equal to the product of (i) the LIBO Rate in effect for
such Interest Period and (ii) Statutory Reserves. For purposes hereof,
"Statutory Reserves" shall mean a fraction (expressed as a decimal), the
numerator of which is the number one and the denominator of which is the number
one minus the aggregate of the maximum reserve percentages (including, without
limitation, any marginal, special, emergency, or supplemental reserves)
expressed as a decimal established by the Board with respect to Eurocurrency
Liabilities (as defined in Regulation D). Such reserve percentages shall
include, without limitation, those imposed under Regulation D. Eurodollar Loans
2
<PAGE>
shall be deemed to constitute Eurocurrency Liabilities and as such shall be
deemed to be subject to such reserve requirements without benefit of or credit
for proration, exemptions or offsets which may be available from time to time to
any Lender under Regulation D. Statutory Reserves shall be adjusted
automatically on and as of the effective date of any change in any reserve
percentage.
"Adjusted Senior Debt" shall mean, with respect to any person as of any
date of determination, the total Funded Debt of such person as of such date
minus the Subordinated Indebtedness of such person, and shall include earn-outs
which would be payable in cash based upon such person's operating performance as
at such date of determination. Earn-out liabilities with respect to the current
12-month period being measured shall be calculated by annualizing year-to-date
EBITDA (or, if not determined by reference to EBITDA, a similar performance
methodology) performance assuming EBITDA ( or similar performance methodology)
performance for the remaining months of the twelve month period being measured
will be identical to the EBITDA (or similar performance methodology) performance
of the most recently ended fiscal quarter (e.g., if there are four months
remaining in the 12-month period and the EBITDA performance was $300,000 in the
most recently ended quarter, the estimated EBITDA for the remaining four months
would be $400,000). Earn-out liabilities with respect to subsequent 12-month
periods shall be calculated by multiplying the EBITDA (or similar performance
methodology) performance of the most recently ended fiscal quarter by 4, and
discounting such payments by a factor of 8% in order to determine the present
value thereof.
"Adjusted Total Funded Debt" shall mean, with respect to any person as of
any date of determination, the total Funded Debt of such person as of such date
and shall include earn-outs which would be payable in cash in connection with
completed Permitted Acquisitions based upon such person's operating performance
as at such date of determination; provided, however, that for purposes of
determining the Leverage Ratio, the Interest Leverage Ratio and Pro Forma
Adjusted Total Funded Debt, "Adjusted Total Funded Debt" shall not include the
Convertible Subordinated Notes. Earn-out liabilities with respect to the current
12-month period being measured shall be calculated by annualizing year-to-date
EBITDA (or, if not determined by reference to EBITDA, a similar performance
methodology) performance assuming EBITDA (or similar performance methodology)
performance for the remaining months of the twelve month period being measured
will be identical to the EBITDA (or similar performance methodology) performance
of the most recently ended fiscal quarter (e.g., if there are four months
remaining in the 12-month period and the EBITDA performance was $300,000 in the
most recently ended quarter, the estimated EBITDA for the remaining four months
would be $400,000). Earn-out liabilities with respect to subsequent 12-month
periods shall be calculated by multiplying the EBITDA (or similar performance
methodology) performance of the most recently ended fiscal quarter by 4,
3
<PAGE>
and discounting such payments by a factor of 8% in order to determine the
present value thereof.
"Administrative Agent" shall have the meaning assigned to such term in the
preamble to this Agreement.
"Affiliate" of any person shall mean any other person which, directly or
indirectly, controls or is controlled by or is under common control with such
person and, without limiting the generality of the foregoing, includes (i) any
person which beneficially owns or holds 5% or more of any class of voting
securities of such person or 5% or more of the equity interest in such person,
(ii) any person of which such person beneficially owns or holds 5% or more of
any class of voting securities or in which such person beneficially owns or
holds 5% or more of the equity interest in such person and (iii) any director,
officer or employee of such person. For the purposes of this definition, the
term "control" (including, with correlative meanings, the terms "controlled by"
and "under common control with"), as used with respect to any person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, whether through the
ownership of voting securities or by contract or otherwise.
"Affiliated Dental Practice" shall mean a dental practice which has entered
into a Management Agreement and Shares Acquisition Agreement with any of the
Borrowers.
"Agents" shall have the meaning assigned to such term in Article IX to this
Agreement.
"Alternate Base Loan" shall mean a Loan based on the Alternate Base Rate in
accordance with Article II hereof.
"Alternate Base Rate" shall mean, for any day, a rate per annum (rounded
upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the
Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day
plus 1%, and (c) the Federal Funds Effective Rate in effect on such day plus 1/2
of 1%. "Prime Rate" shall mean the rate of interest per annum publicly announced
from time to time by The Chase Manhattan Bank at its principal office in New
York City as its prime rate in effect at such time. "Base CD Rate" shall mean
the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii)
Statutory Reserves and (b) the Assessment Rate. "Three-Month Secondary CD Rate"
shall mean, for any day, the secondary market rate for three-month certificates
of deposit reported as being in effect on such day (or, if such day shall not be
a Business Day, the next preceding Business Day) by the Board through the public
information telephone line of the Federal Reserve Bank of New York (which rate
will, under the current practices of the Board, be published in Federal Reserve
Statistical Release H.15(519) during the week following such day), or, if such
4
<PAGE>
rate shall not be so reported on such day or such next preceding Business Day,
the average of the secondary market quotations for three-month certificates of
deposit of major money center banks in New York City received at approximately
10:00 A.M., New York City time, on such day (or, if such day shall not be a
Business Day, on the next preceding Business Day) by the Administrative Agent
from three New York City negotiable certificate of deposit dealers of recognized
standing selected by it. "Statutory Reserves" shall mean a fraction (expressed
as a decimal), the numerator of which is the number one and the denominator of
which is the number one minus the maximum reserve percentage (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal,
established by the Board and any other banking authority to which the
Administrative Agent is subject for new negotiable nonpersonal time deposits in
dollars of over $100,000 with maturities approximately equal to three months.
Statutory Reserves shall be adjusted automatically on and as of the effective
date of any change in any reserve percentage. "Assessment Rate" shall mean, for
any day, the annual assessment rate (net of refunds and rounded upwards, if
necessary, to the next 1/16 of 1%) estimated by the Administrative Agent (in
good faith, but in no event in excess of statutory or regulatory maximums) to be
payable by the Administrative Agent to the Federal Deposit Insurance Corporation
(or any successor) for insurance by such Corporation (or such successor) of time
deposits made in dollars at the Administrative Agent's domestic offices during
the current calendar year. "Federal Funds Effective Rate" shall mean, for any
day, the weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds brokers, as
published on the next succeeding Business Day by the Federal Reserve Bank of New
York, or, if such rate is not so published for any day which is a Business Day,
the average of the quotations for the day of such transactions received by the
Administrative Agent from three Federal funds brokers of recognized standing
selected by it. If for any reason the Administrative Agent shall have determined
(which determination shall be conclusive absent manifest error) that it is
unable to ascertain the Base CD Rate or the Federal Funds Effective Rate, or
both, for any reason, including, the inability or failure of the Administrative
Agent to obtain sufficient quotations in accordance with the terms hereof, the
Alternate Base Rate shall be determined without regard to clause (b) or (c), or
both, of the first sentence of this definition, as appropriate, until the
circumstances giving rise to such inability no longer exist. Any change in the
Alternate Base Rate due to a change in the Prime Rate, the Base CD Rate or the
Federal Funds Effective Rate shall be effective on the effective date of such
change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate,
respectively.
"Applicable Lending Office" shall mean, with respect to each Lender, such
Lender's Domestic Lending Office in the case of an Alternate Base Loan and such
Lender's Eurodollar Lending Office in the case of a Eurodollar Loan.
5
<PAGE>
"Assignment and Acceptance" shall mean an assignment and acceptance entered
into by a Lender and an assignee and accepted by the Agents, in substantially
the form of Exhibit F annexed hereto.
"Assignment of Contract" shall mean, collectively, each Assignment of
Contract delivered by a Borrower pursuant to the provisions of Section 6.18
hereof, each substantially in the form of Exhibit H annexed hereto, each as
amended, modified or supplemented from time to time.
"Assignment of Life Insurance" shall mean the Assignment of Life Insurance
dated as of the date hereof, between Dental Service and the Administrative
Agent, for its own benefit and for the benefit of the Lenders, substantially in
the form of Exhibit I annexed hereto, as amended, modified or supplemented from
time to time.
"Board" shall mean the Board of Governors of the Federal Reserve System of
the United States.
"Borrowers" shall have the meaning assigned to such term in the preamble to
this Agreement.
"Business Day" shall mean any day, other than a Saturday, Sunday or legal
holiday in the State of New York, on which banks are open for substantially all
their banking business in New York City except that, if any determination of a
"Business Day" shall relate to a Eurodollar Loan, the term "Business Day" shall
in addition exclude any day on which banks are not open for dealings in dollar
deposits in the London interbank market.
"Capital Expenditures" shall mean, with respect to any person, all
Acquisition Capital Expenditures incurred by such person and all other
expenditures incurred by such person with respect to any fixed assets or
improvements or replacements, substitutions or additions thereto, which have a
useful life of more than one year, including the direct or indirect acquisition
of such assets by way of increased product or service charges, offset items or
otherwise; provided, however, that "Capital Expenditures" shall not include
expenditures to the extent that such expenditures constitute De Novo Capital
Expenditures.
"Capitalized Lease Obligation" shall mean an obligation to pay rent or
other amounts under any lease of (or other arrangement conveying the right to
use) real and/or personal property which obligation is required to be classified
and accounted for as a capital lease on a balance sheet prepared in accordance
with GAAP, and for purposes hereof the amount of such obligation shall be the
capitalized amount thereof determined in accordance with GAAP.
6
<PAGE>
"Cash Interest Expense" shall mean, with respect to any person for any
period, the Interest Expense of such person for such period less all non-cash
items constituting Interest Expense during such period (including, without
limitation, amortization of debt discounts and payments of interest on
Indebtedness by issuance of Indebtedness).
"Celebration" shall mean Celebration Dental Services, L.C., a Florida
limited liability company.
"Change of Control" shall mean the occurrence of any of the following
events: (i) all or substantially all of the Dental Service's assets, on a
consolidated basis, are sold as an entirety to any person or related group of
persons or there shall be consummated any consolidation or merger of Dental
Service (A) in which Dental Service is not the continuing or surviving company
(other than consolidation or merger with a wholly-owned subsidiary of Dental
Service in which all shares of common stock outstanding immediately prior to the
effectiveness thereof are changed into or exchanged for the same consideration),
(B) pursuant to which the common stock would be converted into cash, securities
or other property, in any case, other than a consolidation or merger of Dental
Service in which the holders of the common stock immediately prior to the sale
of assets or consolidation or merger have, directly or indirectly, at least a
majority of the common stock of the transferee or continuing or surviving
company immediately after such sale of assets or consolidation or merger or (C)
as a result of which Dental Service, as the continuing or surviving company,
would not be permitted by applicable law or regulation to (x) be jointly and
severally liable for the obligations of others or (y) grant a security interest
in its assets to the Administrative Agent pursuant to the Security Documents,
(ii) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), is or becomes the beneficial owner
(as defined in Rules 13d-3 and 13d-5 of the Securities Exchange Act of 1934, as
amended, provided that such person shall be deemed to have "beneficial
ownership" of all shares that such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time), directly or
indirectly, of more than 35% of the total voting power of the outstanding
capital stock of Dental Service; provided however that for purposes of computing
the total voting power of the outstanding capital stock of Dental Service such
computation shall not include shares of Common Stock issuable upon conversion of
the Convertible Subordinated Notes, Series B Preferred Stock of Dental Service
or Series D Preferred Stock of Dental Service; (iii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the board of directors of Dental Service cease for any reason to constitute a
majority of the board of directors of Dental Service, then in office; or (iv)
Dental Service or the Holding Company (if any) shall cease to own 100% of all
classes of stock of Dental Management.
"Closing Date" shall mean the date of the first borrowing under this
Agreement, but in no event later than September 30, 1998.
7
<PAGE>
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"Collateral" shall mean all collateral and security as described in the
Security Documents.
"Commitment Fee Percentage" shall mean, with respect to any quarter, the
percentage per annum set forth below as corresponds to the average daily
outstanding principal balance of the Revolving Loan during such fiscal quarter:
<TABLE>
<CAPTION>
Average Daily Outstanding
Principal Balance of Commitment
Revolving Loan Fee Percentage
--------------------------- ---------------
<S> <C>
Greater than or equal to $30,000,000 0.375%
Greater than or equal to $15,000,000
but less than $30,000,000 0.500%
Less than $15,000,000 0.750%
</TABLE>
On the Closing Date, the Commitment Fee Percentage shall be 0.500%; which
shall thereafter be adjusted in accordance with the provisions hereof commencing
one year after the Closing Date.
"Commitment Letter" shall mean the letter dated July 22, 1998 and all
attachments thereto addressed to Dental Service by The Chase Manhattan Bank.
"Consolidated" shall mean, in respect of any person, as applied to any
financial or accounting term, such term determined on a consolidated basis in
accordance with GAAP (except as otherwise required herein) for the person and
all consolidated subsidiaries thereof.
"Contaminant" shall mean all Hazardous Materials and all those substances
which are regulated by or form the basis of liability under Federal, state or
local environmental, health and safety statutes or regulations or any other
material or substance which constitutes a material health, safety or
environmental hazard to any person or property.
"Conversion Date" shall have the meaning assigned to such term in Section
2.01(b) hereof.
"Convertible Preferred Stock" shall mean the convertible preferred stock of
Dental Service.
8
<PAGE>
"Convertible Subordinated Notes" shall mean Dental Service's 7% Convertible
Subordinated Notes due May 15, 2006 in the original principal amount of
$30,000,000, and all instruments or other documents related thereto, in each
case as amended, modified or supplemented from time to time in accordance with
their respective terms and the limitations set forth in Section 7.17 hereof.
"Credit Event" shall mean each borrowing and each issuance of a Letter of
Credit hereunder.
"Credits" shall mean the Loans and the Letters of Credit.
"Cure Loans" shall have the meaning assigned to such term in Section
2.13(d) hereof.
"Customer" shall mean and include the account debtor or obligor with
respect to any Receivable.
"Debt Service Expense" shall mean, with respect to any person for any
period, the aggregate of regularly scheduled principal payments of all long-term
Indebtedness (including, without limitation, Subordinated Indebtedness) made or
to be made by such person during such period on a Consolidated basis in
accordance with GAAP.
"Dedicated Dental" shall mean Dedicated Dental Systems, Inc., a California
corporation.
"Default" shall mean any condition, act or event which, with notice or
lapse of time or both, would constitute an Event of Default.
"De Novo Capital Expenditures" shall mean, with respect to any person, the
sum of (i) capital expenditures incurred by such person to establish De Novo
Dental Practices in markets in which the Borrowers operate plus (ii) net losses
incurred by a De Novo Dental Practice within its first six months of operation.
"De Novo Dental Practice" shall mean a dental practice not in existence
prior to its affiliation with any of the Borrowers.
"Dental Insurance Business" shall mean (a) the provision, administration or
arrangement of (pursuant to state licensor, certification or other
authorization, if necessary), (i) dental care services, related ancillary
products or both, directly or through a DMO, a provider, a regulated service
contractor or any other business which in the ordinary course provides,
administers or arranges for such services, products or both, or (ii) dental and
related insurance, (b) the provision or management of dental care services
(including dental management claims services and management through dental
information services), pursuant to state licensor, certification or other
9
<PAGE>
authorization, if necessary, and (c) any business activities related and
incidental to any of the foregoing.
"Dental Management" shall have the meaning assigned to such term in the
preamble to this Agreement.
"Dental Oregon" shall mean Managed Dental Care of Oregon, Inc., an Oregon
corporation.
"DMO" means any person which operates as a dental maintenance organization
or a similar organization which provides, manages or arranges dental care
services, pursuant to state licensor, certification or other authorization, if
necessary, in the jurisdictions in which any Borrower or any subsidiary of a
Borrower conducts business.
"Dental Service" shall have the meaning assigned to such term in the
preamble of this Agreement.
"dollars" or the symbol "$" shall mean lawful currency of the United States
of America.
"Domestic Lending Office" shall mean, with respect to any Lender, the
office of such Lender specified as its "Domestic Lending Office" opposite its
name in Schedule 2.02 annexed hereto, or such other office of such Lender as
such Lender may from time to time specify to the Borrowers and the
Administrative Agent.
"EBITDA" shall mean, with respect to any person for any period, the sum of
(i) Net Income, (ii) Interest Expense, (iii) depreciation and amortization and
other non-cash items properly deducted in determining Net Income and (iv)
federal, state and local income taxes, in each case of such person for such
period, computed and calculated in accordance with GAAP; provided, however, that
in determining EBITDA for the Borrowers and their Consolidated subsidiaries, (w)
income related to Celebration shall not be included in such determination, (x)
the aggregate amount of dividends paid by Celebration to Dental Service shall be
included in such determination, (y) positive EBITDA of subsidiaries which are in
the Dental Insurance Business and which are not Guarantors shall not be included
in such determination and (z) the aggregate amount of dividends paid by
subsidiaries which are in the Dental Insurance Business and which are not
Guarantors to a Borrower or Guarantor during the applicable period shall be
included in such determination; provided, further, that the aggregate amount of
such dividends so included shall not exceed the applicable person's EBITDA for
such period.
"Environmental Claim" shall mean any written notice of violation, claim,
demand, abatement or other order by any governmental authority or any person for
personal injury (including sickness, disease or death), tangible or intangible
property
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<PAGE>
damage, damage to the environment, nuisance, pollution, contamination
or other adverse effects on the environment, or for fines, penalties or deed or
use restrictions, resulting from or based upon (i) the existence, or the
continuation of the existence, of a Release (including, without limitation,
sudden or non-sudden, accidental or nonaccidental Releases), of, or exposure to,
any Contaminant at, in, by or from any of the properties of the Borrowers or
their subsidiaries, (ii) the environmental aspects of the transportation,
storage, treatment or disposal of Contaminants in connection with the operation
of any of the properties of the Borrowers or their subsidiaries or (iii) the
violation, or alleged violation by the Borrowers or any of their subsidiaries,
of any statutes, ordinances, orders, rules, regulations, Permits or licenses of
or from any governmental authority, agency or court relating to environmental
matters connected with any of the properties of the Borrowers or their
subsidiaries, under any applicable Environmental Law.
"Environmental Laws" shall mean the Comprehensive Environmental
Response, Compensation, and Liability Act (42 U.S.C. Section 9601 et seq.),
the Hazardous Material Transportation Act (49 U.S.C. Section 1801 et seq.),
the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.),
the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), the
Oil Pollution Act of 1990 (33 U.S.C. Section 2701 et. seq.), the Safe
Drinking Water Act (42 U.S.C. Section 300f, et seq.), the Clear Air Act (42
U.S.C. Section 7401 et seq.), the Toxic Substances Control Act, as amended
(15 U.S.C. Section 2601 et seq.), the Federal Insecticide, Fungicide, and
Rodenticide Act (7 U.S.C. Section 136 et seq.), and the Occupational Safety
and Health Act (29 U.S.C. Section 651 et seq.), as such laws have been and
hereafter may be amended or supplemented, and any related or analogous
present or future Federal, state or local, statutes, rules, regulations,
ordinances, licenses, permits and interpretations and orders of regulatory
and administrative bodies.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder, as in effect from
time to time.
"ERISA Affiliate" shall mean any trade or business (whether or not
incorporated) which together with any of the Borrowers or any subsidiary of any
thereof would be treated as a single employer under the provisions of Title I or
Title IV of ERISA.
"Eurodollar Lending Office" shall mean, with respect to any Lender, the
office of such Lender specified as its "Eurodollar Lending Office" opposite its
name in Schedule 2.03 annexed hereto (or, if no such office is specified, its
Domestic Lending Office), or such other office of such Lender as such Lender may
from time to time specify to the Borrowers and the Administrative Agent.
"Eurodollar Loan" shall mean a Loan based on the Adjusted LIBO Rate in
accordance with Article II hereof.
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<PAGE>
"Event of Default" shall have the meaning assigned to such term in Article
VIII hereof.
"Excess Cash Flow" shall mean, with respect to any person for any period,
the amount, if any, by which Net Cash Flow of such person and its subsidiaries
on a Consolidated basis for such period exceeds the Debt Service Expense of such
person and its subsidiaries on a Consolidated basis for such period.
"Final Maturity Date" shall mean September 30, 2005.
"Financial Officer" shall mean, with respect to any person, the chief
financial officer of such person.
"FIRREA" shall mean the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, as amended from time to time.
"Fiscal Year" shall mean the fiscal year of each of the Borrowers for
accounting purposes which in each case ends on December 31 of each year.
"Fixed Charge Coverage Ratio" shall mean, with respect to any person for
any period, the ratio of (i) the sum of (x) Funds Flow from Operations of such
person for such period less (y) the sum of (x) Capital Expenditures of such
person for such period plus (y) De Novo Capital Expenditures of such person for
such period to (ii) the sum of (x) the Debt Service Expense of such person for
such period plus (y) all earn-out payments paid in cash by such person during
such period plus (z) the aggregate amount of Preferred Dividends paid in cash by
such person during such period.
"Funded Debt" shall mean with respect to any person as of the date of
determination thereof, all Indebtedness of such person and its subsidiaries on a
Consolidated basis outstanding at such time which matures more than one year
after the date of calculation, and any such Indebtedness maturing within one
year from such date of calculation which is renewable or extendable at the
option of the obligor to a date more than one year from such date and including
in any event the Revolving Credit Loans.
"Funds Flow from Operations" shall mean, with respect to any person for any
period, without duplication of addition or subtraction of any items, the sum for
such person for such period of (i) Net Income plus (ii) depreciation and
amortization plus (iii) other non-cash items properly deducted in arriving at
Net Income plus (iv) decreases in deferred tax assets plus (v) increases in
deferred tax liabilities minus (vi) increases in deferred tax assets minus (vii)
decreases in deferred tax liabilities minus (viii) other non-cash items property
added in arriving at Net Income minus (ix) the positive Net Income for the
applicable period of subsidiaries which are in the Dental Insurance Business and
which are not Guarantors plus (x) the aggregate amount of
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<PAGE>
dividends paid by such person to a Borrower or a Guarantor during the
applicable period; provided, however, that the aggregate amount of such
dividends so added shall not exceed the applicable person's positive Net
Income for such period.
"GAAP" shall have the meaning assigned to such term in Section 1.02 hereof.
"Grantor" shall mean any Grantor, Pledgor or Debtor, as such terms are
defined in any of the Security Documents.
"Guarantee" shall mean any obligation, contingent or otherwise, of any
person guaranteeing or having the economic effect of guaranteeing any
Indebtedness or obligation of any other person in any manner, whether directly
or indirectly, and shall include, without limitation, any obligation of such
person, direct or indirect, to (i) purchase or pay (or advance or supply funds
for the purchase or payment of) such Indebtedness or obligation or to purchase
(or to advance or supply funds for the purchase of) any security for the payment
of such Indebtedness or obligation, (ii) purchase property, securities or
services for the purpose of assuring the owner of such Indebtedness or
obligation of the payment of such Indebtedness or obligation, or (iii) maintain
working capital, equity capital, available cash or other financial condition of
the primary obligor so as to enable the primary obligor to pay such Indebtedness
or obligation; provided, however, that the term Guarantee shall not include
endorsements for collection or collections for deposit, in either case in the
ordinary course of business.
"Guarantor" shall mean, collectively, each subsidiary of any of the
Borrowers (other than Dedicated Dental and Dental Oregon) in existence on the
Closing Date and the Holding Company (if any) or any subsidiary of any of the
Borrowers which becomes a guarantor of the Obligations after the date hereof.
"Hazardous Material" shall mean any pollutant, contaminant, chemical, or
industrial or hazardous, toxic or dangerous waste, substance or material,
defined or regulated as such in (or for purposes of) any Environmental Law and
any other toxic, reactive, or flammable chemicals, including (without
limitation) any asbestos, any petroleum (including crude oil or any fraction),
any radioactive substance and any polychlorinated biphenyls; provided, in the
event that any Environmental Law is amended so as to broaden the meaning of any
term defined thereby, such broader meaning shall apply subsequent to the
effective date of such amendment; and provided, further, to the extent that the
applicable laws of any state establish a meaning for "hazardous material,"
"hazardous substance," "hazardous waste," "solid waste" or "toxic substance"
which is broader than that specified in any Federal Environmental Law, such
broader meaning shall apply.
"Holding Company" shall mean the corporation formed as a holding company in
connection with the implementation of a holding company structure in accordance
with the provisions of Section 6.19 hereof.
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<PAGE>
"Indebtedness" shall mean, with respect to any person, (a) all obligations
of such person for borrowed money or with respect to deposits or advances of any
kind, (b) all obligations of such person evidenced by bonds, debentures, notes
or other similar instruments or upon which interest charges are customarily
paid, (c) all obligations of such person for the deferred purchase price of
property or services, except current accounts payable arising in the ordinary
course of business and not overdue beyond such period as is commercially
reasonable for such person's business, (d) all obligations of such person under
conditional sale or other title retention agreements relating to property
purchased by such person and all Capitalized Lease Obligations, (e) all payment
obligations of such person with respect to interest rate or currency protection
agreements, (f) all obligations of such person as an account party under any
letter of credit or in respect of bankers' acceptances, (g) all obligations of
any third party secured by property or assets of such person (regardless of
whether or not such person is liable for repayment of such obligations), (h) all
Guarantees of such person and (i) the redemption price of all redeemable
preferred stock of such person, but only to the extent that such stock is
redeemable at the option of the holder or requires sinking fund or similar
payments at any time prior to the Final Maturity Date.
"Indemnitees" shall have the meaning assigned to such term in Section
11.04(c) hereof.
"Information" shall have the meaning assigned to such term in Section 11.11
hereof.
"Interest Expense" shall mean, with respect to any person for any period,
the interest expense of such person during such period determined on a
Consolidated basis in accordance with GAAP, and shall in any event include,
without limitation, (i) the amortization of debt discounts, (ii) the
amortization of all fees payable in connection with the incurrence of
Indebtedness to the extent included in interest expense, (iii) the portion of
any Capitalized Lease Obligation allocable to interest expense, (iv) all fixed
and all calculable dividend payments on preferred stock, and (v) payments of
interest expense in kind.
"Interest Leverage Ratio" shall mean, with respect to any person for any
period, the ratio of (i) Adjusted Total Funded Debt as of the date of
determination to (ii) Adjusted EBITDA of such person for such period.
"Interest Margin" shall mean, with respect to any Loan, the amount as set
forth below as corresponds to the Interest Leverage Ratio set forth below,
determined on the Closing Date and adjusted thereafter, ten (10) Business Days
after the delivery of the financial statements to the Administrative Agent
required pursuant to Section 6.05(a) or (b) hereof, as applicable, together with
the corresponding compliance certificates required pursuant to Section 6.05(e)
hereof, commencing with the financial statements and certificates for the period
ending September 30, 1998 or if
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<PAGE>
the Borrowers shall fail to timely deliver such statements and certificates for
any such period or during the continuance of an Event of Default, then at the
highest Interest Margin provided for herein:
<TABLE>
<CAPTION>
Alternate Base
Interest Leverage Ratio Eurodollar Loan Interest Margin Loan Interest Margin
- ----------------------- ------------------------------- ---------------------
<S> <C> <C>
Equal to or greater than 3.75:1.00 3.00% 1.25%
Equal to or greater than 3.25:1.00 but 2.75% 1.00%
less than 3.75:1.00
Equal to or greater than 2.50:1.00 but 2.50% 0.75%
less than 3.25:1.00
Less than 2.50:1.00 2.25% 0.50%
</TABLE>
On the Closing Date (i) the Eurodollar Loan Interest Margin shall be 2.25% and
(ii) the Alternate Base Loan Interest Margin shall be 0.50%; each shall
thereafter be adjusted in accordance with the provisions hereof.
"Interest Payment Date" shall mean (i) in the case of an Alternate Base
Loan, the first Business Day of each October, January, April and July,
commencing October 1, 1998, and (ii) with respect to any Eurodollar Loan, the
last day of the Interest Period applicable thereto, and, in addition, in respect
of any Eurodollar Loan of more than three (3) months' duration, each earlier day
which is three (3) months after the first day of such Interest Period.
"Interest Period" shall mean, as to any Eurodollar Loan, the period
commencing on the date of such Eurodollar Loan and ending on the numerically
corresponding day (or, if there is no numerically corresponding day, on the last
day) in the calendar month that is one (1), three (3) or six (6) months
thereafter, as the Borrowers may elect with respect to its Eurodollar Loans;
provided, however, that (x) if an Interest Period would end on a day that is not
a Business Day, such Interest Period shall be extended to the next succeeding
Business Day unless, with respect to Eurodollar Loans, such next succeeding
Business Day would fall in the next calendar month, in which case such Interest
Period shall end on the next preceding Business Day, (y) no Interest Period
shall end later than the Final Maturity Date and (z) interest shall accrue from
and including the first day of an Interest Period to but excluding the last day
of such Interest Period.
"Investor Group" shall mean, collectively, Chase Capital Partners, The
Sprout Group, Bessemer Venture Partners, Accel Partners and St. Paul Venture
Capital.
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<PAGE>
"Lenders" shall have the meaning assigned to such term in the preamble to
this Agreement.
"Letter of Credit" shall have the meaning assigned to such term in Section
2.17 hereof.
"Letter of Credit Usage" shall mean at any time, (i) the aggregate undrawn
amount of all outstanding Letters of Credit at such time plus (ii) the
unreimbursed drawings at such time under all such Letters of Credit.
"Leverage Ratio" shall mean, with respect to any person for any period, the
ratio of (i) Adjusted Senior Debt as at the date of determination to (ii)
Adjusted EBITDA of such person for such period.
"LIBO Rate" shall mean, with respect to any Eurodollar Loan for any
Interest Period, an interest rate per annum (rounded upwards, if necessary, to
the next 1/16 of 1%) equal to the rate at which dollar deposits approximately
equal in principal amount to the Administrative Agent's portion of such
Eurodollar Loan and for a maturity equal to the applicable Interest Period are
offered in immediately available funds to the Administrative Agent in the London
interbank market at approximately 11:00 A.M., London time, two (2) Business Days
prior to the first day of such Interest Period.
"Lien" shall mean, with respect to any asset, (i) any mortgage, lien,
pledge, encumbrance, charge or security interest in or on such asset, (ii) the
interest of a vendor or a lessor under any conditional sale agreement, capital
lease or other title retention agreement relating to such asset, (iii) in the
case of securities, any purchase option, call or similar right of a third party
with respect to such securities or (iv) any other right of or arrangement with
any creditor to have such creditor's claim satisfied out of such assets, or the
proceeds therefrom, prior to the general creditors of the owner thereof.
"Loan" shall mean any Revolving Credit Loan or the Term Loan.
"Loan Documents" shall mean this Agreement, each Security Document, each
Guarantee executed and delivered at any time with respect to the Obligations,
the Notes and each other document, instrument or agreement now or hereafter
delivered to the Administrative Agent or any Lender in connection herewith or
therewith.
"Loan Party" shall mean each Borrower, each Grantor, each Guarantor, and
each subsidiary thereof.
"Maintenance Capital Expenditures" shall mean, with respect to any person,
all Capital Expenditures incurred by such person with respect to any Affiliated
Dental Practice after the six-month anniversary of such dental practice becoming
an Affiliated Dental Practice.
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<PAGE>
"Management Agreement" shall mean the Management Agreements (having terms
of no less than 25 years) entered into by a Borrower or a Guarantor and a dental
practice, pursuant to which the Borrowers provide comprehensive management and
administrative services to such dental practice, and, in the case of Management
Agreements entered into after the Closing Date, each of which shall be in
substantially the form attached hereto as Exhibit J.
"Mandatory Prepayment" shall mean an amount equal to fifty percent (50%) of
Excess Cash Flow, if any, of the Borrowers and their subsidiaries for the Fiscal
Year then ended.
"Margin Stock" shall have the meaning assigned to such term in Regulation
U.
"Material Adverse Effect" shall mean a material adverse effect on (i) the
business, assets, prospects, operations or financial or other condition of the
Borrowers and their subsidiaries taken as a whole, (ii) the ability of the Loan
Parties to perform or pay the Obligations in accordance with the terms hereof or
of any other Loan Document, (iii) the rights of, or benefits available to, the
Lenders or the Administrative Agent under any Loan Document or (iv) the
Administrative Agent's Lien on any material portion of the Collateral or the
priority of such Lien.
"Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA.
"Net Cash Flow" shall mean, with respect to any person for any period,
without duplication of addition or subtraction of items, (A) the sum for such
period of (i) Net Income, (ii) depreciation and amortization, (iii) the change
(expressed as a positive number in the event of an increase or a negative number
in the event of a decrease) in deferred tax liabilities, (iv) other noncash
items properly deducted in arriving at Net Income and (v) the change (expressed
as a negative number in the event of an increase or a positive number in the
event of a decrease), if any, in deferred tax assets minus (B) the sum of (i)
all Capital Expenditures paid in cash during such period (including, without
limitation, the principal component of Capitalized Lease Obligations) and (ii)
all distributions and dividends permitted to be paid pursuant to the terms of
this Agreement (and which are actually paid) during such period.
"Net Income" shall mean, with respect to any person for any period, the
aggregate income (or loss) of such person for such period which shall be an
amount equal to net revenues and other proper items of income for such person
less the aggregate for such person of any and all items that are treated as
expenses under GAAP, and less Federal, state and local income taxes, but
excluding any extraordinary gains or losses or any gains or losses from the sale
or disposition of assets other than
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<PAGE>
in the ordinary course of business, all computed and calculated in accordance
with GAAP.
"Net Worth" shall mean, with respect to any person at any time, (i) the sum
of such person's capital stock, capital in excess of par or stated value of
shares of its capital stock, retained earnings and any other account which, in
accordance with GAAP, constitutes stockholders' equity, less (ii) treasury stock
and any minority interest in subsidiaries, and less (iii) the amount of any
write-up subsequent to the Closing Date in the value of any asset above the cost
or depreciated cost thereof to such person.
"Non Pro Rata Loan" shall have the meaning assigned to such term in Section
2.13(d) hereof.
"Notes" shall mean the Term Notes and the Revolving Credit Notes.
"Obligations" shall mean all obligations, liabilities and Indebtedness of
the Borrowers to the Lenders and the Administrative Agent, arising under one or
more of the Loan Documents, whether now existing or hereafter created, direct or
indirect, due or not, whether created directly or acquired by assignment,
participation or otherwise, including without limitation all obligations,
liabilities and Indebtedness of the Borrowers with respect to the Security
Documents and other Loan Documents, the principal of and interest on the
Revolving Credit Loans, the Term Loans and the payment or performance of all
other obligations, liabilities, and Indebtedness of the Borrowers to the Lenders
and the Administrative Agent hereunder, under the Letters of Credit or under any
one or more of the other Loan Documents (including the payment of amounts that
would become due but for the operation of the automatic stay under Section
362(a) of the Bankruptcy Code, and interest that, but for the filing of a
petition in bankruptcy with respect to any Borrower, would accrue on such
obligations, whether or not a claim is allowed against such Borrower for such
interest in the related bankruptcy proceeding), including without limitation all
fees, costs, expenses and indemnity obligations hereunder and thereunder.
"Other Taxes" shall have the meaning assigned to such term in Section
2.16(b) hereof.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Pension Plan" shall mean any Plan which is subject to the provisions of
Title IV of ERISA.
"Permits" shall have the meaning assigned to such term in Section 4.18
hereof.
18
<PAGE>
"Permitted Acquisition" shall mean the acquisition and/or affiliations with
dental practices, dental practice management companies or persons in the Dental
Insurance Business in which:
(i) the purchase price, including the maximum earn-out
consideration and expected Acquisition Capital Expenditures is less
than or equal to $12,000,000;
(ii) the cash consideration, including the maximum earn-out
payments (including, without limitation, earn-outs based upon current
EBITDA), and including expected Acquisition Capital Expenditures is
less than or equal to $7,500,000, but excluding the value of any
capital stock issued by the acquiror as consideration for such
acquisition;
(iii) the business of the acquired or affiliated dental practice
is substantially related to that of the other Affiliated Dental
Practices as of the effective date of the proposed acquisition and
such dental practice is located in the United States;
(iv) no Default or Event of Default shall have occurred and be
continuing at the time of the proposed acquisition or would occur as a
result thereof;
(v) (A) both before and after giving effect to such acquisition
or affiliation and the financing therefor, the Borrowers shall be in
compliance with Sections 7.09(a), 7.09(b) and 7.10(a) hereof on a pro
forma basis for the fiscal quarter immediately preceding the proposed
effective date of such acquisition or affiliation and (B) after giving
effect to such acquisition or affiliation and the financing therefor,
the Pro Forma Interest Coverage Ratio for the fiscal quarter
immediately preceding the proposed effective date of such acquisition
or affiliation shall not be less than 3.00:1.00, the Pro Forma
Leverage Ratio for the fiscal quarter immediately preceding the
proposed effective date of such acquisition or affiliation shall not
be greater than the ratios set forth in Section 7.09(a) for such
fiscal quarter and the Pro Forma Interest Leverage Ratio for the
fiscal quarter immediately preceding the proposed effective date of
such acquisition or affiliation shall not be greater than the ratios
set forth in Section 7.09(b) for such fiscal quarter;
(vi) both before and after giving effect to such acquisition or
affiliation and the financing therefor, the Borrowers shall have
adequate availability under the Total Revolving Credit Commitment for
the Borrowers' and their subsidiaries working capital needs (as
determined by
19
<PAGE>
the Administrative Agent in its reasonable discretion at the time of
the proposed acquisition);
(vii) the acquiree has positive EBITDA;
(viii) the proposed acquisition or affiliation is not hostile;
(ix) the acquiror is Dental Management or a subsidiary of any of
the Borrowers (other than Dedicated Dental) which is permitted (under
applicable laws or regulations) to have its shares pledged to the
Administrative Agent (for the benefit of the Lenders) pursuant to the
terms of the Pledge Agreement and the acquiree, in the case of an
acquisition, is permitted by applicable law and regulation to satisfy
the provisions of Section 6.12 hereof;
(x) if the proposed acquisition or affiliation is of a dental
practice, the target dental practice enters into a Management
Agreement and a Shares Acquisition Agreement with a Borrower or, if
the proposed acquisition is of a dental practice management company or
persons in the Dental Insurance Business, the Management Agreement and
Shares Acquisition Agreements of such target are assumed by the
acquiror (and assigned pursuant to an Assignment of Contract in
accordance with the provisions of Section 6.18 hereof); and
(xi) the Borrowers have delivered to the Administrative Agent as
soon as the information is available, but at least 14 days prior to
the closing of any such acquisition, (A) a compliance certificate in
form and substance satisfactory to the Administrative Agent certifying
the Borrowers' compliance with the provisions of this Agreement after
giving effect on a pro forma basis to such acquisition, (B) a report
of the chief financial officer of the Borrowers, in a form
satisfactory to the Administrative Agent and providing sufficient
detail and justification for the information provided therein,
including assumptions, as shall be found to be reasonable by the
Administrative Agent in its good faith discretion after completion of
reasonable due diligence, establishing the basis for the conclusions
contained therein and establishing compliance with clauses (iv)
through (vi) above and (C) a compliance certificate in form and
substance satisfactory to the Administrative Agent certifying the
Borrowers' compliance with clause (iii) and clauses (vii) through (x)
above and, to the extent not consented to by the Required Lenders as
provided below, certifying compliance with clauses (i) and (ii) above;
provided, however, that, upon the written consent of the Required
Lenders, in the exercise of their reasonable discretion after their
review
20
<PAGE>
and satisfaction with all documentation, financial and other
information with respect to any proposed acquisition or affiliation,
the limitations set forth in clauses (i) and (ii) above shall not
apply.
"Permitted De Novo Capital Expenditures" shall mean De Novo Capital
Expenditures up to a maximum of $500,000 per De Novo Dental Practice and
$2,500,000 in the aggregate for any Fiscal Year ($625,000 for the period
commencing on the Closing Date through the end of the 1998 Fiscal Year);
provided, however, that upon the written consent of the Required Lenders, the
foregoing amounts may be increased by up to $100,000 and $500,000, respectively;
provided, further, that
(i) no Default or Event of Default shall have occurred and be
continuing at the time of the proposed De Novo Capital Expenditure or
would occur as a result thereof;
(ii) (A) both before and after giving effect to such De Novo
Capital Expenditure and the financing therefor, the Borrowers shall be
in compliance with Sections 7.09(a), 7.09(b) and 7.10(a) hereof on a
pro forma basis for the fiscal quarter immediately preceding the
proposed date of such De Novo Capital Expenditure and (B) after giving
effect to such proposed De Novo Capital Expenditure and the financing
therefor, the Pro Forma Interest Coverage Ratio for the period ending
on the last day of the fiscal quarter immediately preceding the
proposed date of such De Novo Capital Expenditure shall not be less
than 3.00:1.00, the Pro Forma Leverage Ratio for the fiscal quarter
immediately preceding the proposed date of such De Novo Capital
Expenditure shall not be greater than the ratios set forth in Section
7.09(a) for such fiscal quarter and the Pro Forma Interest Leverage
Ratio for the fiscal quarter immediately preceding the proposed date
of such De Novo Capital Expenditure shall not be greater than the
ratios set forth in Section 7.09(b) for such fiscal quarter;
(iii) both before and after giving effect to such De Novo Capital
Expenditure and the financing therefor, the Borrowers shall have
adequate availability under the Total Revolving Credit Commitment for
the Borrowers' and their subsidiaries working capital needs (as
determined by the Administrative Agent in its reasonable discretion at
the time of the proposed De Novo Capital Expenditure); and
(iv) the Borrowers shall have delivered to the Administrative
Agent at least 30 days prior to the incurrence of any such De Novo
Capital Expenditure, (A) a compliance certificate in form and
substance satisfactory to the Administrative Agent certifying the
Borrowers' compliance with the provisions of this Agreement and (B) a
report of the
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<PAGE>
chief financial officer of the Borrowers, in a form satisfactory to
the Administrative Agent and providing sufficient detail and
justification for the information provided therein, including
assumptions, as shall be found to be reasonable by the Administrative
Agent in its good faith discretion after completion of reasonable due
diligence, establishing the basis for the conclusions contained
therein and establishing compliance with clauses (i) through (iii)
above.
"person" shall mean any natural person, corporation, business trust,
limited liability company, association, company, joint venture, professional
corporation, limited liability partnership, partnership or government or any
agency or political subdivision thereof.
"Plan" shall mean any employee benefit plan within the meaning of Section
3(3) of ERISA and which is maintained (in whole or in part) for employees of the
Borrowers, any subsidiary or any ERISA Affiliate.
"Pledge Agreement" shall mean the Pledge Agreement dated as of the date
hereof, between the Grantor(s) and the Administrative Agent, for its own benefit
and for the benefit of the Lenders, in substantially the form of Exhibit D
annexed hereto, as amended, modified or supplemented from time to time.
"Pledged Stock" shall have the meaning assigned to such term in the Pledge
Agreement.
"Preferred Dividends" shall mean, after the conversion of the Convertible
Subordinated Notes to preferred stock, dividends paid with respect thereto.
"Pro Forma Adjusted EBITDA" shall mean with respect to any person for any
period, the sum of (i) Adjusted EBITDA of such person for such period plus, in
the case of a Permitted Acquisition, (ii) Pro Forma EBITDA of the proposed
acquiree for such period.
"Pro Forma Adjusted Senior Funded Debt" shall mean, with respect to any
person as of the date of any proposed Permitted Acquisition or Permitted De Novo
Capital Expenditure, the sum of (i) the Adjusted Senior Funded Debt of such
person as of such date plus (ii) senior Funded Debt incurred (or to be incurred)
by such person in connection with such proposed Permitted Acquisition or
Permitted De Novo Capital Expenditure.
"Pro Forma Adjusted Total Funded Debt" shall mean, with respect to any
person as of the date of any proposed Permitted Acquisition or Permitted De Novo
Capital Expenditure, the sum of (i) the Adjusted Total Funded Debt of such
person as of such date plus (ii) Funded Debt incurred (or to be incurred) by
such person in
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connection with such proposed Permitted Acquisition or Permitted De Novo Capital
Expenditure.
"Pro Forma Cash Interest Expense" shall mean, with respect to any person
for any period, the sum of (i) the Interest Expense attributable to any
Indebtedness incurred (or to be incurred) during such period in connection with
any Permitted Acquisition or Permitted De Novo Capital Expenditure, treating any
such Indebtedness as having been outstanding as of the first day of such period
and computing the interest rate on such Indebtedness on a pro forma basis as if
the rate in effect on the date of determination had been the applicable rate for
the entire period plus (ii) the Cash Interest Expense of such person for such
period (without duplication of amounts included in clause (i) hereof).
"Pro Forma EBITDA" shall mean, with respect to any person, EBITDA of such
person adjusted for non-recurring verifiable expense deductions, including,
without limitation, excess owner compensation; provided, however, that the
calculation of Pro Forma EBITDA shall be reasonably acceptable to the
Administrative Agent.
"Pro Forma Interest Coverage Ratio" shall mean, with respect to any person,
after giving effect to any potential Permitted Acquisition or Permitted De Novo
Capital Expenditure, the ratio for the one fiscal quarter period (in the case of
proposed acquisitions or capital expenditures to occur prior to December 31,
1998), two fiscal quarter period (in the case of proposed acquisitions or
capital expenditures to occur on or after December 31, 1998 but prior to March
31, 1999), three fiscal quarter period (in the case of proposed acquisitions or
capital expenditures to occur on or after March 31, 1999 but prior to June 30,
1999) or four fiscal quarter period (in the case of proposed acquisitions or
capital expenditures to occur on or after June 30, 1999) of (a) the sum of (x)
EBITDA of such person for such period plus, in the case of a Permitted
Acquisition, (y) Pro Forma EBITDA of such person for such period to (b) the sum
of (x) Pro Forma Cash Interest Expense of such person for such period plus (y)
Preferred Dividends paid in cash during such period.
"Pro Forma Interest Leverage Ratio" shall mean, with respect to any person
for any period, after giving effect to any potential Permitted Acquisition or
Permitted De Novo Capital Expenditure, the ratio of (i) Pro Forma Adjusted Total
Funded Debt of such person for such period to (ii) Pro Forma Adjusted EBITDA for
such person for such period.
"Pro Forma Leverage Ratio" shall mean, with respect to any person for any
period, after giving effect to any potential Permitted Acquisition or Permitted
De Novo Capital Expenditure, the ratio of (i) Pro Forma Adjusted Senior Debt of
such person for such period to (ii) Pro Forma Adjusted EBITDA for such person
for such period.
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"Purchase Agreement" shall mean the agreement entered into by a Borrower or
a Guarantor and a dental practice or a manager of dental practices whereby such
Borrower or Guarantor will acquire all or substantially all of the assets or
stock of such dental practice or such manager of dental practices.
"Receivables" shall mean and include all of the Borrowers', Guarantors' and
Affiliated Dental Practices' accounts, instruments, documents, chattel paper and
general intangibles and all management fees due and owing to the Borrowers in
connection with Management Agreements, whether secured or unsecured, whether now
existing or hereafter created or arising, and whether or not specifically
assigned to the Administrative Agent for its own benefit and/or the ratable
benefit of the Lenders.
"Register" shall have the meaning assigned to such term in Section 11.03(e)
hereof.
"Regulation D" shall mean Regulation D of the Board, as the same is from
time to time in effect, and all official rulings and interpretations thereunder
or thereof.
"Regulation T" shall mean Regulation T of the Board, as the same is from
time to time in effect, and all official rulings and interpretations thereunder
or thereof.
"Regulation U" shall mean Regulation U of the Board, as the same is from
time to time in effect, and all official rulings and interpretations thereunder
or thereof.
"Regulation X" shall mean Regulation X of the Board, as the same is from
time to time in effect, and all official rulings and interpretations thereunder
or thereof.
"Release" shall mean any releasing, spilling, leaking, seepage, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
disposing or dumping, in each case as defined in Environmental Law, and shall
include any "Threatened Release," as defined in Environmental Law.
"Remedial Work" shall mean any investigation, site monitoring, containment,
cleanup, removal, restoration or other remedial work of any kind or nature with
respect to any property of any Loan Party or its subsidiaries (whether such
property is owned, leased, subleased or used), including, without limitation,
with respect to Contaminants and the Release thereof.
"Repayment Date" shall have the meaning assigned to such term in Section
2.04(c) hereof.
"Reportable Event" shall mean a Reportable Event as defined in Section
4043(c) of ERISA.
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"Required Lenders" shall mean Lenders having 66 - 2/3% of the Total
Revolving Credit Commitment.
"Responsible Officer" shall mean, with respect to any person, any vice
president or president, chief executive officer, chief operating officer or the
chief financial officer or controller, of such person. "Revolving Credit
Alternate Base Loan" shall mean a Revolving Credit Loan that is an Alternate
Base Loan.
"Revolving Credit Commitment" shall mean, with respect to any Lender, the
Revolving Credit Commitment of such Lender as set forth in Schedule 2.01(a)
annexed hereto, as the same may be reduced from time to time pursuant to this
Agreement including, without limitation, Section 2.07 hereof.
"Revolving Credit Commitment Fee" shall have the meaning set forth in
Section 2.06(a) hereof.
"Revolving Credit Eurodollar Loan" shall mean a Revolving Credit Loan that
is a Eurodollar Loan.
"Revolving Credit Loan" shall mean a Revolving Credit Loan made pursuant to
Sections 2.01 and 2.02 hereof.
"Revolving Credit Notes" shall mean the Revolving Credit Notes of the
Borrowers, executed and delivered as provided in Section 2.04 hereof, in
substantially the form of Exhibit B annexed hereto, as amended, modified or
supplemented from time to time.
"Revolving Credit Termination Date" shall mean such date as the Revolving
Credit Loans shall otherwise be payable in full and the Revolving Credit
Commitment shall terminate, expire or be canceled in accordance with the terms
of this Agreement.
"Security Agreement" shall mean the Security Agreement dated as of the date
hereof, between the Grantor(s) and the Administrative Agent, for its own benefit
and for the benefit of the Lenders, substantially in the form of Exhibit E
annexed hereto, as amended, modified or supplemented from time to time.
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"Security Documents" shall mean the Pledge Agreement, the Security
Agreement, each Assignment of Contract, the Security Agreement-Patents and
Trademarks, the Assignment of Life Insurance and each other agreement now
existing or hereafter created providing collateral security for the payment or
performance of any Obligations.
"Shares Acquisition Agreement" shall mean the Shares Acquisition
Agreement entered into by a Borrower or a Guarantor and the owner(s) of a dental
practice, and, in the case of Shares Acquisition Agreements entered into after
the Closing Date, each of which shall (i) contain a provision substantially
similar to Section 3 of the form attached hereto as Exhibit K and (ii) permit
the assignment of the rights granted to the Borrower or Guarantor party thereto
pursuant to said provision to the Administrative Agent (for the ratable benefit
of the Lenders).
"Subordinated Indebtedness" shall mean, with respect to any of the
Borrowers, Indebtedness subordinated in right of payment to such person's
monetary obligations under this Agreement upon terms satisfactory to and
approved in writing by the Administrative Agent, to the extent it does not by
its terms mature or become subject to any mandatory prepayment or amortization
of principal prior to the Final Maturity Date, and shall include the Convertible
Subordinated Notes.
"subsidiary" shall mean, with respect to any person, any corporation,
association or other business entity of which securities or other ownership
interests representing more than 50% of the ordinary voting power are, at the
time as of which any determination is being made, owned or controlled, directly
or indirectly, by the parent of such person or one or more subsidiaries of the
parent of such person.
"Syndication Agent" shall have the meaning assigned to such term in
the preamble to this Agreement.
"Taxes" shall have the meaning assigned to such term in Section
2.16(a) hereof.
"Term Alternate Base Loan" shall mean a Term Loan that is an Alternate
Base Loan.
"Term Eurodollar Loan" shall mean a Term Loan that is a Eurodollar
Loan.
"Term Loan" shall mean the Term Loan made on the Conversion Date
pursuant to Sections 2.01(b) and 2.02 hereof.
"Term Notes" shall mean the Term Notes of the Borrowers when
subsequently executed and delivered as provided in Section 2.04 hereof, in
substantially the form of Exhibit A hereto, as amended, modified or supplemented
from time to time.
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"Total Revolving Credit Commitment" shall mean the sum of the Lenders'
Revolving Credit Commitments, as the same may be reduced from time to time
pursuant to this Agreement including, without limitation, Section 2.07 hereof.
"Transactions" shall have the meaning assigned to such term in Section
4.02 hereof.
SECTION I.2. Accounting Terms. Unless otherwise expressly provided
herein, each accounting term used herein shall have the meaning given it under
generally accepted accounting principles in effect from time to time in the
United States applied on a basis consistent with those used in preparing the
financial statements referred to in Section 6.05 hereof ("GAAP"); provided,
however, that each reference in Article VII hereof, or in the definition of any
term used in Article VII hereof, to GAAP shall mean GAAP as in effect on the
date hereof.
II. THE LOANS
SECTION II.1. Revolving Credit Commitments and Term Loan. (a) Subject
to the terms and conditions and relying upon the representations and warranties
herein set forth, each Lender, severally and not jointly, agrees to make
Revolving Credit Loans to the Borrowers, at any time and from time to time from
the date hereof to the earlier of (i) the Revolving Credit Termination Date and
(ii) the Conversion Date, in an aggregate principal amount at any time
outstanding not to exceed the amount of such Lender's Revolving Credit
Commitment set forth opposite its name in Schedule 2.01(a) annexed hereto, as
such Revolving Credit Commitment may be reduced from time to time in accordance
with the provisions of this Agreement. Notwithstanding the foregoing, the
aggregate principal amount of Revolving Credit Loans outstanding at any time to
the Borrowers shall not exceed the Total Revolving Credit Commitment (as such
amount may be reduced pursuant to this Agreement including, without limitation,
Section 2.07 hereof) minus the Letter of Credit Usage at such time (such Letter
of Credit Usage not to exceed $1,000,000 at any time).
Subject to the foregoing and within the foregoing limits, the
Borrowers may borrow, repay (or, subject to the provisions of Section 2.09
hereof, prepay) and reborrow Revolving Credit Loans, on and after the date
hereof and prior to the earlier of (i) the Revolving Credit Termination Date and
(ii) the Conversion Date, subject to the terms, provisions and limitations set
forth herein, including, without limitation, the requirement that no Revolving
Credit Loan shall be made hereunder after giving effect thereto the sum of the
aggregate principal amount of the Revolving Credit Loans outstanding hereunder
plus the Letter of Credit Usage would exceed the Total Revolving Credit
Commitment (as such amount may be reduced pursuant to the provisions of this
Agreement).
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(b Subject to the terms and conditions of this Agreement, including,
without limitation, that no Default or Event of Default shall then exist, on
September 30, 2001 (the "Conversion Date"), then the unpaid principal amount of
Revolving Credit Loans shall be converted into a Term Loan (the "Term Loan")
from the Lenders.
SECTION II.2. Loans. (a) The Revolving Credit Loans made by the
Lenders on any date shall be in integral multiples of $100,000 (except that the
foregoing limitation shall not be applicable to the extent that the proceeds of
such Loans are requested to be disbursed to the Borrowers' controlled
disbursement account maintained with the Administrative Agent); provided,
however, that the Eurodollar Loans made on any date shall be in a minimum
aggregate principal amount equal to the product of $500,000 times the number of
Lenders on such date.
(b Loans shall be made ratably by the Lenders in accordance with
their respective Revolving Credit Commitments; provided, however, that the
failure of any Lender to make any Loan shall not in itself relieve any other
Lender of its obligation to lend hereunder. The initial Revolving Credit Loans
shall be made by the Lenders against delivery of Revolving Credit Notes, payable
to the order of the Lenders, as referred to in Section 2.04 hereof. On the
Conversion Date, the Term Loans to be made by the Lenders shall be made against
delivery of Term Notes payable to the order of the Lenders, as referred to in
Section 2.04 hereof.
(c Each Loan shall be either an Alternate Base Loan or a Eurodollar
Loan as the Borrowers may request pursuant to Section 2.03 hereof. Each Lender
may fulfill its obligations under this Agreement by causing its Applicable
Lending Office to make such Loan; provided, however, that the exercise of such
option shall not affect the obligation of the Borrowers to repay such Loan in
accordance with the terms of the applicable Note. Not more than five (5)
Eurodollar Loans may be outstanding at any one time.
(d Subject to the provisions of paragraph (e) below, each Lender
shall make its Revolving Credit Loans on the proposed dates thereof by paying
the amount required to the Administrative Agent in Walnut Creek, California in
immediately available funds not later than 12:00 noon, Los Angeles, California
time, and the Administrative Agent shall as soon as practicable, but in no event
later than 3:00 P.M., Los Angeles, California time, credit the amounts so
received to the general deposit account of the Borrowers with the Administrative
Agent in immediately available funds or, if Loans are not to be made on such
date because any condition precedent to a borrowing herein specified is not met,
return the amounts so received to the respective Lenders.
(e The Borrowers shall have the right at any time upon prior
irrevocable written, telex or facsimile notice (promptly confirmed in writing)
to the Administrative Agent given in the manner and at the times specified in
Section 2.03 with
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respect to the Loans into which conversion or continuation is to be made, to
convert all or any portion of Eurodollar Loans into Alternate Base Loans, to
convert all or any portion of Alternate Base Loans into Eurodollar Loans
(specifying the Interest Period to be applicable thereto), to convert the
Interest Period with respect to all or any portion of any Eurodollar Loans to
another permissible Interest Period, and to continue all or any portion of any
Eurodollar Loans into a subsequent Interest Period, subject to the terms and
conditions of this Agreement (including the last sentence of Section 2.02(c)
hereof) and to the following:
(i each conversion or continuation shall be made pro rata among
the Lenders in accordance with the respective principal amounts of the
Loans comprising the conversion or continuation, and in the case of a
conversion or continuation of fewer than all the Loans, the aggregate
principal amount of Loans converted or continued shall not be less
than $100,000 in the case of Alternate Base Loans (except that the
foregoing limitation shall not be applicable to the extent that the
proceeds of such Loans are requested to the disbursed to the
Borrowers' controlled disbursement account maintained with the
Administrative Agent) or $500,000 times the number of Lenders on such
date in the case of Eurodollar Loans, and, in any event shall be an
integral multiple of $100,000;
(ii accrued interest on a Eurodollar Loan (or portion thereof)
being converted shall be paid by the Borrowers at the time of
conversion;
(iii if any Eurodollar Loan is converted at any time other than
the end of an Interest Period applicable thereto, the Borrowers shall
make such payments associated therewith as are required pursuant to
Section 2.12;
(iv any portion of a Revolving Credit Eurodollar Loan which is
subject to an Interest Period ending on a date that is less than one
(1) month prior to the Revolving Credit Termination Date may not be
converted into, or continued as, a Eurodollar Loan and shall be
automatically converted at the end of such Interest Period into an
Alternate Base Loan;
(v any portion of a Term Eurodollar Loan required to be paid on
any Repayment Date occurring less than one (1) month after the end of
the then current Interest Period applicable to such Loan, may not be
converted into, or continued as, a Term Eurodollar Loan and shall be
automatically converted at the end of such Interest Period into a Term
Alternate Base Loan; and
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(vi no Default or Event of Default shall have occurred and be
continuing.
The Interest Period applicable to any Eurodollar Loan resulting from a
conversion shall be specified by the Borrowers in the irrevocable notice of
conversion delivered pursuant to this Section; provided, however, that if no
such Interest Period shall be specified, the Borrowers shall be deemed to have
selected an Interest Period of one (1) months' duration; and, provided, further,
that no such Interest Period may be for more than one (1) month for the period
commencing on the Closing Date and earlier to occur of (x) the 120th day
following the Closing Date and (y) the completion to the satisfaction of the
Syndication Agent of the syndication of the Total Revolving Credit Commitment
and the Loans and other Credits thereunder. If the Borrowers shall not have
given timely notice to continue any Eurodollar Loan into a subsequent Interest
Period (and shall not otherwise have given notice to convert such Loan), such
Loan (unless repaid or required to be repaid pursuant to the terms hereof) shall
automatically be converted into an Alternate Base Loan. The Administrative Agent
shall promptly advise the Lenders of any notice given pursuant to this Section
and of each Lender's portion of the continuation or conversion hereunder.
SECTION II.3. Notice of Loans. The Borrowers shall, through a
Responsible Officer of any of the Borrowers, give the Administrative Agent
irrevocable written, telex or facsimile notice (promptly confirmed in writing)
of each borrowing (including, without limitation, a conversion as permitted by
Section 2.02(e) hereof) not later than 11:00 A.M., Los Angeles, California time,
(i) three (3) Business Days before a proposed Eurodollar Loan borrowing or
conversion and (ii) one Business Day before an Alternate Base Loan borrowing or
conversion (except that no such confirmation will be required, unless requested
by the Administrative Agent, to the extent that the proceeds of such borrowing
are requested to be disbursed to Borrowers' controlled disbursement account
maintained with the Administrative Agent). Such notice shall specify (w) whether
the Loans then being requested are to be Alternate Base Loans or Eurodollar
Loans, it being agreed that all Loans made on the Closing Date shall be
Alternate Base Loans, (x) the date of such borrowing (which shall be a Business
Day) and amount thereof and (y) if such Loans are to be Eurodollar Loans, the
Interest Period with respect thereto. If no election as to the type of Loan is
specified in any such notice, all such Loans shall be Alternate Base Loans. If
no Interest Period with respect to any Eurodollar Loan is specified in any such
notice, then an Interest Period of one (1) month's duration shall be deemed to
have been selected; provided, however, that no such Interest Period may be for
more than one (1) month for the period commencing on the Closing Date and ending
on the earlier to occur of (x) the 120th day following the Closing Date and (y)
the completion to the satisfaction of the Syndication Agent of the syndication
of the Total Revolving Credit Commitment and the Loans and other Credits
thereunder. The Administrative Agent shall promptly advise the Lenders
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of any notice given pursuant to this Section 2.03 and of each Lender's portion
of the requested borrowing.
SECTION II.4. Notes; Repayment of Loans. (a) All Revolving Credit
Loans made by a Lender to the Borrowers shall be evidenced by a single Revolving
Credit Note, duly executed on behalf of the Borrowers, dated the Closing Date,
in substantially the form of Exhibit B annexed hereto, delivered and payable to
such Lender in a principal amount equal to its Revolving Credit Commitment on
such date. The outstanding balance of each Revolving Credit Loan, as evidenced
by any such Revolving Credit Note, shall mature and be due and payable on the
Revolving Credit Termination Date if such date occurs earlier than the
Conversion Date or, subject to the terms and conditions of this Agreement,
including, without limitation, that no Default or Event of Default shall then
exist, shall be converted to a Term Loan on the Conversion Date. The Term Loan
made by a Lender on the Conversion Date shall be evidenced by a single Term
Note, duly executed on behalf of the Borrowers, dated the Conversion Date, in
substantially the form of Exhibit A annexed hereto, delivered and payable to
such Lender in a principal amount equal to its pro rata share (based on its
Revolving Credit Commitment) of the Revolving Credit Loans being converted on
such date; provided, however, that the failure of the Borrowers to deliver Term
Notes pursuant to the provisions of this Section shall not affect the liability
of the Borrowers to repay the amount of Revolving Credit Loans being converted.
(b Each Revolving Credit Note shall bear interest from its date on
the outstanding principal balance thereof, as provided in Section 2.05 hereof.
(c The aggregate principal amount of the Term Loan, as evidenced by
the Term Notes, shall be payable in sixteen (16) consecutive quarterly
installments on the first Business Day of each October, January, April and July
of each year (the date of each such installment, a "Repayment Date"), commencing
with the first Business Day of the first full fiscal quarter succeeding the
Conversion Date, in the amount set forth in the next sentence, and such payments
shall be distributed ratably among the Lenders in accordance with their pro rata
share of such Term Loan. Payments of principal on each Repayment Date shall be
in equal amounts calculated on an amortization schedule which assumes a maturity
date ending four (4) years subsequent to the Conversion Date and which will be
confirmed in writing to the Borrowers by the Administrative Agent; provided,
however, that the final installment under such Term Note shall be in the amount
of the unpaid principal balance of such Term Note and shall be payable on the
Final Maturity Date.
To the extent not previously paid, the Term Loan shall be due and
payable on the Final Maturity Date. Each Term Note shall bear interest from its
date on the outstanding principal balance thereof, as provided in Section 2.05.
All principal payments in respect of the Term Loan shall be accompanied by
accrued interest on the principal amount being repaid to the date of payment. No
scheduled payment of
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principal in respect of the Term Loan shall be made to the extent that a lesser
principal payment would result in the payment in full of the outstanding amount
of the Term Loan, and such lesser amount is paid.
(d Each Lender, or the Administrative Agent on its behalf, shall, and
is hereby authorized by the Borrowers to, endorse on the schedule attached to
the Term Note or Revolving Credit Note, as applicable, of such Lender (or on a
continuation of such schedule attached to such Note and made a part thereof) an
appropriate notation evidencing the date and amount of each Loan to the
Borrowers from such Lender, as well as the date and amount of each payment and
prepayment with respect thereto; provided, however, that the failure of any
person to make such a notation on a Note shall not affect any obligations of the
Borrowers under such Note. Any such notation shall be conclusive and binding as
to the date and amount of such Loan or portion thereof, or payment or prepayment
of principal or interest thereon, absent manifest error.
(e Each of the Borrowers shall be jointly and severally liable with
the other Borrower(s) for the Obligations, and each of the Obligations shall be
secured by all of the Collateral. Each of the Borrowers acknowledges that it is
a co-borrower hereunder and is jointly and severally liable under this Agreement
and the other Loan Documents. All Credits extended to any of the Borrowers or
requested by any of the Borrowers shall be deemed to be Credits extended for
each of the Borrowers, and each of the Borrowers hereby authorizes each other of
the Borrowers to effectuate Credits on its behalf. Notwithstanding anything to
the contrary contained in this Agreement or any of the other Loan Documents, the
Agents and the Lenders shall be entitled to rely upon any request, notice or
other communication received by them from any of the Borrowers on behalf of all
Borrowers, and shall be entitled to treat their giving of any notice hereunder
to any of the Borrowers as notice to each and all Borrowers.
Each of the Borrowers agrees that the joint and several liability of
the Borrowers provided for in this subsection (e) shall not be impaired or
affected by any modification, supplement, extension or amendment or any contract
or agreement to which the other Borrower(s) may hereafter agree (other than an
agreement signed by the Administrative Agent and the Lenders specifically
releasing such liability), nor by any delay, extension of time, renewal,
compromise or other indulgence granted by the Administrative Agent or any Lender
with respect to any of the Obligations, nor by any other agreements or
arrangements whatsoever with the other Borrower(s) or with any other person,
each of the Borrowers hereby waiving all notice of such delay, extension,
release, substitution, renewal, compromise or other indulgence, and hereby
consenting to be bound thereby as fully and effectually as if it had expressly
agreed thereto in advance. The liability of each of the Borrowers is direct and
unconditional as to all of the Obligations, and may be enforced without
requiring the Administrative Agent or any Lender first to resort to any other
right, remedy or security. Each of the Borrowers hereby expressly waives
promptness, diligence, notice of acceptance and any other
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notice with respect to any of the Obligations, the Notes, this Agreement or any
other Loan Document and any requirement that the Administrative Agent or any
Lender protect, secure, perfect or insure any Lien or any property subject
thereto or exhaust any right or take any action against any of the Borrowers or
any other person or any collateral.
Each of the Borrowers hereby irrevocably waives and releases each
other of the Borrowers from all "claims" (as defined in Section 101(5) of the
Bankruptcy Code) to which such Borrowers are or would be entitled by virtue of
the provisions of the first paragraph of this subsection (e) or the performance
of such Borrower's obligations thereunder including, without limitation, any
right of subrogation (whether contractual, under Section 509 of the Bankruptcy
Code or otherwise), reimbursement, contribution, exoneration or similar right,
or indemnity, or any right of recourse to security for any of the Obligations.
SECTION II.5. Interest on Loans. (a) Subject to the provisions of
Section 2.05(c) and Section 2.08 hereof, each Alternate Base Loan shall bear
interest at a rate per annum equal to the Alternate Base Rate plus the
applicable Interest Margin.
(b Subject to the provisions of Section 2.05(c) and Section 2.08
hereof, each Eurodollar Loan shall bear interest at a rate per annum equal to
the Adjusted LIBO Rate plus the applicable Interest Margin.
(c Interest on each Loan shall be payable in arrears on each
applicable Interest Payment Date, the Conversion Date, the Revolving Credit
Termination Date and on the Final Maturity Date, as applicable. Interest on each
Alternate Base Loan and Eurodollar Loan shall be computed based on the number of
days elapsed in a year of 360 days. The Administrative Agent shall determine
each interest rate applicable to the Loans and shall promptly advise the
Borrowers and the Lenders of the interest rate so determined.
SECTION II.6. Fees. The Borrowers shall pay each Lender, through the
Administrative Agent, (i) on the first Business Day of each October, January,
April and July, commencing October 1, 1998, (ii) on the date of any reduction of
the Revolving Credit Commitments pursuant to this Agreement including, without
limitation, Section 2.07 hereof and (iii) on the earlier to occur of (x) the
Revolving Credit Termination Date and (y) the Conversion Date, in immediately
available funds, a commitment fee (the "Revolving Credit Commitment Fee") equal
to the Commitment Fee Percentage on the average daily unused (treating Letter of
Credit Usage as usage) amount of the Revolving Credit Commitment of such Lender,
during the quarter (or shorter period commencing with the date hereof or ending
with the Revolving Credit Termination Date) ending on such date. The Revolving
Credit Commitment Fee due to each Lender under this Section 2.06 shall commence
to accrue on the date hereof and
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cease to accrue on the earliest of (i) the Revolving Credit Termination Date,
(ii) the termination of the Revolving Credit Commitment of such Lender pursuant
to this Agreement including, without limitation, pursuant to Section 2.07 hereof
and (iii) the Conversion Date. The Revolving Credit Commitment Fee shall be
calculated on the basis of the actual number of days elapsed in a year of 360
days.
SECTION II.7. Termination and Reduction of Revolving Credit
Commitments. (a) Upon at least two (2) Business Days' prior irrevocable written
notice (or facsimile notice promptly confirmed in writing) to the Administrative
Agent, the Borrowers may at any time in whole permanently terminate, or from
time to time in part permanently reduce, the Total Revolving Credit Commitment,
ratably among the Lenders in accordance with the amounts of their Revolving
Credit Commitments; provided, however, that the Total Revolving Credit
Commitment shall not be reduced at any time to an amount less than the Revolving
Credit Loans outstanding under the Revolving Credit Commitments and the Letter
of Credit Usage at such time. Each partial reduction of the Total Revolving
Credit Commitment shall be in a minimum of $100,000 or an integral multiple of
$100,000.
(b Simultaneously with any termination or reduction of the Total
Revolving Credit Commitment pursuant to paragraph (a) of this Section 2.07, the
Borrowers shall pay to each Lender, through the Administrative Agent, the
Revolving Credit Commitment Fee due and owing through and including the date of
such termination or reduction on the amount of the Revolving Credit Commitment
of such Lender so terminated or reduced.
(c The Revolving Credit Commitment of each Lender shall automatically
and permanently terminate on the earlier of (i) the Revolving Credit Termination
Date and (ii) the Conversion Date, and all Revolving Credit Loans still
outstanding on such date shall be due and payable in full together with accrued
interest thereon on the Revolving Credit Termination Date, if such date occurs
earlier than the Conversion Date, or, subject to the terms and conditions of
this Agreement, including, without limitation, that no Default or Event of
Default shall then exist, shall be converted to a Term Loan on the Conversion
Date.
SECTION II.8. Interest on Overdue Amounts; Alternate Rate of
Interest. (a) If the Borrowers shall default in the payment of the principal of
or interest on any Loan or any other amount becoming due hereunder, by
acceleration or otherwise, the Borrowers shall on demand from time to time pay
interest, to the extent permitted by law, on all Obligations outstanding up to
the date of actual payment of such defaulted amount (after as well as before
judgment) at a rate per annum equal to two percent (2%) in excess of the rates
otherwise applicable thereto.
(b In the event, and on each occasion, that on the day two (2)
Business Days prior to the commencement of any Interest Period for a Eurodollar
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Loan the Administrative Agent shall have determined that dollar deposits in the
amount of each Eurodollar Loan are not generally available in the London
interbank market, or that the rate at which dollar deposits are being offered
will not reflect adequately and fairly the cost to any Lender of making or
maintaining such Eurodollar Loan during such Interest Period, or that reasonable
means do not exist for ascertaining the Adjusted LIBO Rate, the Administrative
Agent shall as soon as practicable thereafter give written notice (or facsimile
notice promptly confirmed in writing) of such determination to the Borrowers and
the Lenders, and any request by the Borrowers for the making of a Eurodollar
Loan pursuant to Section 2.03 hereof or conversion or continuation of any Loan
into a Eurodollar Loan pursuant to Section 2.02 hereof shall, until the
circumstances giving rise to such notice no longer exist, be deemed to be a
request for an Alternate Base Loan. Each determination by the Administrative
Agent made hereunder shall be conclusive absent manifest error.
SECTION II.9. Prepayment of Loans. (a) Subject to the terms and
conditions contained in this Section 2.09 and elsewhere in this Agreement, the
Borrowers shall have the right to prepay any Loan at any time in whole or from
time to time in part without penalty (except as otherwise provided for herein);
provided, however, that each such partial prepayment of a Loan shall be in an
integral multiple of $100,000.
(b On the date of any termination or reduction of the Total Revolving
Credit Commitment pursuant to Section 2.07(a) hereof or elsewhere in this
Agreement, the Borrowers shall pay or prepay so much of the Revolving Credit
Loans as shall be necessary in order that the aggregate principal amount of the
Revolving Credit Loans plus the Letter of Credit Usage outstanding will not
exceed the Total Revolving Credit Commitment following such termination or
reduction. Any prepayments required by this paragraph (b) shall be applied to
outstanding Revolving Credit Alternate Base Loans up to the full amount thereof
before they are applied to outstanding Revolving Credit Eurodollar Loans;
provided, however, that the Borrowers shall not be required to make any
prepayment of any Eurodollar Loan pursuant to this Section until the last day of
the Interest Period with respect thereto so long as an amount equal to such
prepayment is deposited by the Borrowers in a cash collateral account with the
Administrative Agent to be held in such account on terms satisfactory to the
Administrative Agent.
(c The Borrowers shall make prepayments of the Revolving Credit Loans
from time to time such that the outstanding principal balance of such Revolving
Credit Loans plus the Letter of Credit Usage does not exceed the Total Revolving
Credit Commitment. Any prepayments required by this paragraph (c) shall be
applied to outstanding Revolving Credit Alternate Base Loans up to the full
amount thereof before they are applied to outstanding Revolving Credit
Eurodollar Loans; provided, however, that the Borrowers shall not be required to
make any prepayment of any Eurodollar Loan pursuant to this Section until the
last day of the Interest Period with respect thereto so long as an amount equal
to such prepayment is deposited by the
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Borrowers in a cash collateral account with the Administrative Agent to be held
in such account on terms satisfactory to the Administrative Agent.
(d Within three (3) Business Days of (i) the sale or other
disposition of any assets of any Loan Party (excluding (x) sales of assets in
the ordinary course of business, and (y) subject to Section 6.02 hereof, sales
of worn-out or obsolete assets but only to the extent that the net proceeds
realized are applied within three (3) Business Days of any sale or other
disposition to purchase other assets and pending such application or prepayment
all such net proceeds shall be maintained in a cash collateral account with the
Administrative Agent on terms and conditions acceptable to the Administrative
Agent) or of the capital stock of any of the Borrowers (subject to Section 7.05
hereof), or (ii) the consummation of the issuance of any debt securities of any
of the Loan Parties, the Borrowers shall make a mandatory prepayment of the
Loans in an amount equal to 100% of the proceeds received (net of taxes due and
any reasonable expenses of sale), which proceeds shall be applied as set forth
in paragraph (g) below. Nothing contained in this paragraph (d) shall be or be
deemed to be a consent to the sale of any assets or stock or the issuance of any
stock or debt securities.
(e Within 105 days of the end of each Fiscal Year of the Borrowers,
commencing with the Fiscal Year ending December 31, 2001, the Borrowers shall
make a mandatory prepayment of the Loans in an amount equal to the Mandatory
Prepayment, if any, of the Borrowers and their subsidiaries for the Fiscal Year
then ended, such prepayment to be applied as set forth in paragraph (g) below.
(f(i Except as provided in clause (ii) below, promptly and in any
event not more than three (3) Business Days following the receipt by the
Administrative Agent or any of the Borrowers or any subsidiary of any of the
Borrowers of any net proceeds of (x) any casualty insurance required to be
maintained pursuant to Section 6.03 hereof on account of each separate loss,
damage or injury (each, a "Casualty Event") in excess of $200,000 (or, if there
shall be continuing a Default or an Event of Default, of the full amount of net
proceeds) to any asset of such Borrowers or such subsidiary (including, without
limitation, any Collateral), or (y) any business interruption insurance required
to be maintained pursuant to Section 6.03 hereof on account of any business
interruption event (each, a "BI Event") in excess of $200,000 (or, if there
shall be continuing a Default or Event of Default, of the full amount of net
proceeds), such Borrowers or subsidiary shall notify the Administrative Agent of
such receipt in writing or by telephone promptly confirmed in writing, and not
later than three (3) Business Days following receipt by the Administrative Agent
or such Borrowers or subsidiary of any such proceeds, there shall become due and
payable a prepayment of the Loans in an amount equal to 100% of such proceeds.
Prepayments from such net proceeds shall be applied as set forth in paragraph
(g) below.
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(ii In the case of the receipt of net proceeds described in clause
(i) above with respect to a Casualty Event or BI Event, the Borrowers may elect,
by written notice delivered to the Administrative Agent not later than the day
on which a prepayment would otherwise be required under clause (i), (x) in the
case of proceeds received with respect to a BI Event, to use such proceeds in
the ordinary course of such Borrower's business and (y) in the case of proceeds
received with respect to any Casualty Event, to apply all or a portion of such
net proceeds for the purpose of replacing, repairing, restoring or rebuilding
(referred to herein as a "Rebuilding") the relevant tangible property, and, in
any such event, any required prepayment under clause (i) above shall be reduced
dollar for dollar by the amount of such election under clause (x) or clause (y)
of this sentence. An election under this clause (ii) shall not be effective
unless: (x) at the time of such election there is continuing no Default or Event
of Default; (y) the Borrowers shall have certified to the Administrative Agent
that: (i) the net proceeds of the insurance adjustment with respect to a
Casualty Event, together with other funds available to the Borrowers shall be
sufficient to complete such Rebuilding in accordance with all applicable laws,
regulations and ordinances; and (ii) no Default or Event of Default has arisen
or will arise as a result of such BI Event, Casualty Event or Rebuilding; and
(z) if the amount of net proceeds in question exceeds $1,000,000, the Borrowers
shall have obtained the written consent of the Required Lenders to such
election.
(iii In the event of an election under clause (ii) above, pending
application of the net proceeds to business operations with respect to a BI
Event or to Rebuilding with respect to a Casualty Event, the Borrowers shall not
later than the time at which prepayment would have been, in the absence of such
election, required under clause (i) above, apply such net proceeds to the
prepayment of the outstanding principal balance, if any, of the Revolving Credit
Loans (not in permanent reduction of the Revolving Credit Commitment), and
deposit (the "Special Deposit") with the Administrative Agent, the balance, if
any, of such net proceeds remaining after such application, pursuant to
agreements in form, scope and substance reasonably satisfactory to the
Administrative Agent. The Special Deposit, together with all earnings on such
Special Deposit, shall be available to the Borrowers solely for the applicable
Rebuilding or ordinary course business operations, as the case may be; provided,
however, that at such time as a Default or Event of Default shall occur, the
balance of the Special Deposit and earnings thereon may be applied by the
Administrative Agent to repay the Obligations in such order as the
Administrative Agent shall elect. The Administrative Agent shall be entitled to
require proof, as a condition to the making of any withdrawal from the Special
Deposit, that the proceeds of such withdrawal are being applied for the purposes
permitted hereunder.
(iv Notwithstanding anything to the contrary contained in this
paragraph (f), on the date three (3) Business Days following the receipt by the
Administrative Agent or any Borrower of any net proceeds of any insurance
referred to
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in Section 6.16 hereof, there shall become due and payable a prepayment of
principal in respect of the Obligations in an amount equal to 100% of such net
proceeds. All prepayments made pursuant to this clause (iv) shall be applied in
the manner set forth in paragraph (g) below.
(g When making a prepayment, whether mandatory or otherwise, pursuant
to paragraph (a), (b), (c), (d), (e) or (f) above, the Borrowers shall furnish
to the Administrative Agent, not later than 11:00 A.M. (Los Angeles, California
time) (i) three (3) Business Days prior to the date of such prepayment of
Alternate Base Loans and (ii) five (5) Business Days prior to the date of such
prepayment of Eurodollar Loans, written, telex or facsimile notice (promptly
confirmed in writing) of prepayment which shall specify the prepayment date and
the principal amount of each Loan (or portion thereof) to be prepaid, which
notice shall be irrevocable and shall commit the Borrowers to prepay such Loan
by the amount stated therein on the date stated therein. All prepayments shall
be accompanied by accrued interest on the principal amount being prepaid to the
date of prepayment. Prepayments made pursuant to paragraph (d), (e) or (f) above
shall be applied as follows: (A) prior to the Conversion Date, to outstanding
Revolving Credit Alternate Base Loans up to the full amount thereof and then to
Revolving Credit Eurodollar Loans up to the full amount thereof, and (B)
following the Conversion Date, with respect to the Term Loan, to outstanding
Term Alternate Base Loans pro rata over the remaining Repayment Dates up to the
full amount thereof and then to outstanding Term Eurodollar Loans pro rata over
the remaining Repayment Dates up to the full amount thereof; provided, however,
that if at the time of the making of any prepayment in accordance with clause
(A), there are undrawn Letters of Credit outstanding, then in the discretion of
the Administrative Agent, all or any portion of any such prepayment (not to
exceed an amount equal to the aggregate undrawn amount of all such outstanding
Letters of Credit) remaining after payment in full of the Revolving Credit Loans
shall be deposited by the Borrowers in a cash collateral account to be held by
the Administrative Agent for its own benefit and for the benefit of the Lenders
for application by the Administrative Agent to the payment of any drawing made
under any such Letters of Credit; provided, however, that the Borrowers shall
not be required to make any prepayment of any Term or Revolving Credit
Eurodollar Loan required pursuant to this Section 2.09(g) until the last day of
the Interest Period with respect thereto so long as an amount equal to such
prepayment is deposited by the Borrowers into a cash collateral account with the
Administrative Agent to be held in such account pursuant to terms satisfactory
to the Administrative Agent.
(h All prepayments under this Section 2.09 shall be subject to
Section 2.12 hereof.
(i Except as otherwise expressly provided in this Section 2.09,
payments with respect to any paragraph of this Section 2.09 are in addition to
payments made or required to be made under any other paragraph of this Section
2.09.
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(j All prepayments of the Term Loan under this Section 2.09 shall be
applied pro rata over the remaining Repayment Dates. The amount of the Term Loan
prepaid may not be reborrowed.
SECTION II.10. Reserve Requirements; Change in Circumstances. (a
Notwithstanding any other provision herein, if after the date of this Agreement
(or in the case of any assignee of any Lender, the date of assignment) any
change in applicable law or regulation or in the interpretation or
administration thereof by any governmental authority charged with the
interpretation or administration thereof (whether or not having the force of
law), or any change in GAAP or regulatory accounting principles applicable to
the Administrative Agent or any Lender, shall: (i) subject the Administrative
Agent or any Lender (which shall for the purpose of this Section 2.10 include
any assignee or lending office of the Administrative Agent or any Lender) to any
charge, fee, deduction or withholding of any kind or to any tax with respect to
any amount paid or to be paid to either the Administrative Agent or any Lender
with respect to any Eurodollar Loans made by such Lender to the Borrowers or
with respect to the obligations of any Lender under Sections 2.17 through 2.20
hereof or under any Letter of Credit (other than (x) taxes imposed on the
overall net income of the Administrative Agent or such Lender and (y) franchise
taxes imposed on the Administrative Agent or such Lender, in either case by the
jurisdiction in which such Lender or the Administrative Agent has its principal
office or its lending office with respect to such Eurodollar Loan or any
political subdivision or taxing authority of either thereof); (ii) change the
basis of taxation of payments to any Lender or the Administrative Agent of the
principal of or interest on any Eurodollar Loan or any other fees or amounts
payable with respect to any Letter of Credit or otherwise hereunder (other than
taxes imposed on the overall net income of such Lender or the Administrative
Agent by the jurisdiction in which such Lender or the Administrative Agent has
its principal office or by any political subdivision or taxing authority
therein); (iii) impose, modify or deem applicable any reserve, special deposit
or similar requirement against assets of, deposits with or for the account of,
or loans or loan commitments extended by, or Letters of Credit issued and
maintained by such Lender; or (iv) impose on any Lender or, with respect to
Eurodollar Loans, the London interbank market, any other condition affecting
this Agreement, Letters of Credit issued and maintained by or Eurodollar Loans
made by such Lender; and the result of any of the foregoing shall be to increase
the cost to any such Lender of making or maintaining any Eurodollar Loan or
Letter of Credit, or to reduce the amount of any payment (whether of principal,
interest, fee, compensation or otherwise) receivable by such Lender or to
require such Lender to make any payment in respect of any Eurodollar Loan or
Letter of Credit, then the Borrowers shall pay to such Lender or the
Administrative Agent, as the case may be, upon such Lender's or the
Administrative Agent's demand, such additional amount or amounts as will
compensate such Lender or the Administrative Agent for such additional costs or
reduction. The Administrative Agent and each Lender agree to give notice to the
Borrowers of any such change in law, regulation,
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interpretation or administration with reasonable promptness after becoming
actually aware thereof and of the applicability thereof to the Transactions.
Notwithstanding anything contained herein to the contrary, nothing in clause (i)
or (ii) of this Section 2.10(a) shall be deemed to (x) permit the Administrative
Agent or any Lender to recover any amount thereunder which would not be
recoverable under Section 2.16 hereof or (y) require the Borrowers to make any
payment of any amount to the extent that such payment would duplicate any
payment made by the Borrowers pursuant to Section 2.16 hereof.
(b If at any time and from time to time after the date of this
Agreement, any Lender shall determine that the adoption of any applicable law,
rule, regulation or guideline regarding capital adequacy, or any change in any
applicable law, rule, regulation or guideline regarding capital adequacy,
including, without limitation, the July 1988 report of the Basle Committee on
Banking Regulations and Supervisory Practices entitled "International
Convergence of Capital Measurement and Capital Standards", or any change in the
interpretation or administration of any thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by such Lender (or its lending office)
with any request or directive regarding capital adequacy (whether or not having
the force of law) of any such authority, central bank or comparable agency, has
or will have the effect of reducing the rate of return on such Lender's capital
or on the capital of such Lender's holding company, if any, as a consequence of
its obligations hereunder to a level below that which such Lender could have
achieved but for such adoption, change or compliance (taking into consideration
such Lender's policies and the policies of such Lender's holding company with
respect to capital adequacy), then from time to time the Borrowers shall pay to
such Lender such additional amount or amounts as will compensate such Lender for
such reduction. Each Lender agrees to give notice to the Borrowers of any
adoption of, change in, or change in interpretation or administration of, any
such law, rule, regulation or guideline with reasonable promptness after
becoming actually aware thereof and of the applicability thereof to the
Transactions.
(c A statement of any Lender or the Administrative Agent setting
forth such amount or amounts, supported by calculations in reasonable detail, as
shall be necessary to compensate such Lender (or the Administrative Agent) as
specified in paragraphs (a) and (b) above shall be delivered to the Borrowers
and shall be conclusive absent manifest error. The Borrowers shall pay such
Lender or the Administrative Agent, as the case may be, the amount shown as due
on any such statement within ten (10) days after its receipt of the same.
(d Failure on the part of any Lender or the Administrative Agent to
demand compensation for any increased costs, reduction in amounts received or
receivable with respect to any Interest Period or any Letter of Credit or
reduction in the rate of return earned on such Lender's capital, shall not
constitute a waiver of such
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Lender's or the Administrative Agent's rights to demand compensation for any
increased costs or reduction in amounts received or receivable or reduction in
rate of return in such Interest Period or in any other Interest Period or with
respect to such Letter of Credit. The protection under this Section 2.10 shall
be available to each Lender and the Administrative Agent regardless of any
possible contention of the invalidity or inapplicability of any law, regulation
or other condition which shall give rise to any demand by such Lender or the
Administrative Agent for compensation.
(e Any Lender claiming any additional amounts payable pursuant to
this Section 2.10 agrees to use reasonable efforts (consistent with legal and
regulatory restrictions) to designate a different Applicable Lending Office if
the making of such a designation would avoid the need for, or reduce the amount
of, any such additional amounts and would not, in the reasonable judgment of
such Lender, be otherwise disadvantageous to such Lender.
SECTION II.11. Change in Legality. (a) Notwithstanding anything to the
contrary herein contained, if any change in any law or regulation or in the
interpretation thereof by any governmental authority charged with the
administration or interpretation thereof shall make it unlawful for any Lender
to make or maintain any Eurodollar Loan or to give effect to its obligations to
make Eurodollar Loans as contemplated hereby, then, by written notice to
Borrowers and to the Administrative Agent, such Lender may:
(i declare that Eurodollar Loans will not thereafter be made by
such Lender hereunder, whereupon the Borrowers shall be prohibited
from requesting Eurodollar Loans from such Lender hereunder unless
such declaration is subsequently withdrawn; and
(ii require that all outstanding Eurodollar Loans, made by such
Lender be converted to Alternate Base Loans, in which event (A) all
such Eurodollar Loans shall be automatically converted to Alternate
Base Loans as of the effective date of such notice as provided in
paragraph (b) below and (B) all payments of principal which would
otherwise have been applied to repay the converted Eurodollar Loans
shall instead be applied to repay the Alternate Base Loans resulting
from the conversion of such Eurodollar Loans.
(b For purposes of Section 2.11(a) hereof, a notice to the Borrowers
by any Lender shall be effective, if lawful, on the last day of the then current
Interest Period or, if there are then two or more current Interest Periods, on
the last day of each such Interest Period, respectively; otherwise, such notice
shall be effective with respect to the Borrowers on the date of receipt by the
Borrowers.
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SECTION II.12. Indemnity. The Borrowers shall indemnify the
Administrative Agent and each Lender against any loss or reasonable expense
(including, but not limited to, any loss or reasonable expense sustained or
incurred or to be sustained or incurred by reason of or in connection with the
execution and delivery or assignment of, or payment under, any Letter of Credit,
or in liquidating or employing deposits from third parties acquired to affect or
maintain any Loan or part thereof as a Eurodollar Loan) which the Administrative
Agent or such Lender may sustain or incur as a consequence of the following
events (regardless of whether such events occur as a result of the occurrence of
a Default or an Event of Default or the exercise of any right or remedy of the
Administrative Agent or the Lenders under this Agreement or any other agreement,
or at law): any failure of the Borrowers to fulfill on the date of any Credit
Event the applicable conditions set forth in Article V hereof applicable to it;
any failure of the Borrowers to borrow hereunder after irrevocable notice of
borrowing pursuant to Section 2.03 hereof has been given; any payment,
prepayment or conversion of a Eurodollar Loan on a date other than the last day
of the relevant Interest Period; any default in payment or prepayment of the
principal amount of any Loan or any part thereof or interest accrued thereon, or
with respect to any Letter of Credit, in each case, as and when due and payable
(at the due date thereof, by irrevocable notice of prepayment or otherwise); or
the occurrence of an Event of Default. Without limiting the foregoing, the
Borrowers further agree to indemnify and hold harmless the Administrative Agent,
each Lender as well as their respective officers and directors, each person who
controls the Administrative Agent or Lender within the meaning of Section 15 of
the Securities Act of 1933 or any applicable state securities law and their
respective successors, from and against any and all claims, damages, losses,
liabilities, costs or expenses, joint or several, to which they or any of them
may become subject under any Federal or state securities law, rule or
regulation, at common law or otherwise, insofar as such claims, damages, losses,
liabilities, costs or expenses arise out of or are based upon the execution and
delivery by the Administrative Agent or any Lender of any Letter of Credit or
the execution and delivery of any other document in connection therewith. Such
loss or reasonable expense shall include, without limitation, an amount equal to
the excess, if any, of (i) the amount of interest which would have accrued on
the principal or other amount so paid, prepaid or converted or not borrowed for
the period from the date of such payment, prepayment or conversion or failure to
borrow to, in the case of a Loan, the last day of the Interest Period for such
Loan (or, in the case of a failure to borrow, the Interest Period for such Loan
which would have commenced on the date of such failure to borrow), at the
applicable rate of interest for such Loan provided for herein over (ii) the
amount of interest (as reasonably determined by such Lender) that would be
realized by such Lender in reemploying the funds so paid, prepaid or converted
or not borrowed for such period or Interest Period, as the case may be. Any such
Lender shall provide to the Borrowers a statement, signed by an officer of such
Lender, explaining any loss or expense and setting forth, if applicable, the
computation pursuant to the preceding sentence, and such statement shall be
conclusive absent manifest error. The
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Borrowers shall pay such Lender the amount shown as due on any such statement
within ten (10) days after the receipt of the same. The indemnities contained
herein shall survive the expiration or termination of this Agreement and of the
Letters of Credit.
SECTION II.13. Pro Rata Treatment; Assumption by and Delegation of
Authority to the Administrative Agent. (a) Except as permitted under Sections
2.10, 2.11 and 2.16 hereof or as described in subsection (d) below, each
borrowing, each payment or prepayment of principal of the Notes, each payment of
interest on the Notes, each payment of any fee or other amount payable hereunder
and each reduction of the Total Revolving Credit Commitment shall be made pro
rata among the Lenders in the proportions that their Revolving Credit
Commitments bear to the Total Revolving Credit Commitment or that the aggregate
principal amount of such Lender's Term Loan bears to the aggregate principal
amount of the Term Loans made by all of the Lenders, as the case may be.
(b) Notwithstanding the occurrence or continuance of a Default or
Event of Default or other failure of any condition to the making of Loans or
occurrence of other Credit Events hereunder subsequent to the Credit Events on
the Closing Date, unless the Administrative Agent shall have been notified in
writing by any Lender in accordance with the provisions of paragraph (c) below
prior to the date of a proposed Credit Event that such Lender will not make the
amount that would constitute its pro rata share of the applicable Credits on
such date available to the Administrative Agent, the Administrative Agent may
assume that such Lender has made such amount available to the Administrative
Agent on such date, and the Administrative Agent may, in reliance upon such
assumption, make available to the Borrowers a corresponding amount. If such
amount is made available to the Administrative Agent on a date after such Credit
Event date, such Lender shall pay to the Administrative Agent on demand an
amount equal to the product of (i) the daily average Federal funds rate during
such period as quoted by the Administrative Agent, times (ii) the amount of such
Lender's pro rata share of such Credits, times (iii) a fraction the numerator of
which is the number of days that elapse from and including such Credit Event
date to the date on which such Lender's pro rata share of such Credits shall
have become immediately available to the Administrative Agent and the
denominator of which is 360. A certificate of the Administrative Agent submitted
to any Lender with respect to any amounts owing under this subsection shall be
conclusive in the absence of manifest error. If such Lender's pro rata share of
such Credits is not in fact made available to the Administrative Agent by such
Lender within three Business Days of such Credit Event date, the Administrative
Agent shall be entitled to recover such amount with interest thereon at the rate
per annum applicable to the Loans hereunder, on demand, from the Borrowers.
(c) Unless and until the Administrative Agent shall have received
notice from the Required Lenders as to the existence of a Default, an Event of
Default or some other circumstance which would relieve the Lenders of their
respective obligations to extend Credits hereunder, which notice shall be in
writing and shall be
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signed by the Required Lenders and shall expressly state that the Required
Lenders do not intend to make available to the Administrative Agent such
Lenders' ratable share of Credits extended after the effective date of such
notice, the Administrative Agent shall be entitled to continue to make the
assumptions described in Section 2.13(b) above. After receipt of the notice
described in the preceding sentence, which shall become effective on the third
Business Day after receipt of such notice by the Administrative Agent (unless
otherwise agreed by the Administrative Agent), the Administrative Agent shall be
entitled to make the assumptions described in Section 2.13(b) above as to any
Credits as to which it has not received a written notice to the contrary prior
to 11:00 A.M. (Los Angeles, California time) on the Business Day next preceding
the day on which such Credits are to be extended. The Administrative Agent shall
not be required to extend any Credits as to which it shall have received notice
by a Lender of such Lender's intention not to make its ratable portion of such
Credits available to the Administrative Agent. Any withdrawal of authorization
as described under this Section 2.13(c) shall not affect the validity of any
Credits extended prior to the effectiveness thereof.
(d) In the event that any Lender fails to fund its ratable portion
(based on its Revolving Credit Commitment) of any Revolving Credit Loan which
such Lender is obligated to fund under the terms of this Agreement (the funded
portion of such borrowing being hereinafter referred to as a "Non Pro Rata
Loan"), until the earlier of such Lender's cure of such failure or the
termination of the Total Revolving Credit Commitment, in the Administrative
Agent's sole discretion, the proceeds of all amounts thereafter repaid to the
Administrative Agent for the benefit of the Lenders by the Borrowers and
otherwise required to be applied to such Lender's share of any other Obligation
pursuant to the terms of this Agreement, may be advanced to the Borrowers by the
Administrative Agent on behalf of such Lender to cure, in full or in part, such
failure by such Lender, but shall nevertheless be deemed to have been paid to
such Lender in satisfaction of such other Obligation. Notwithstanding anything
in this Agreement to the contrary:
(i) the foregoing provisions to this subsection (d) shall apply
only with respect to the proceeds of payments of Obligations and shall
not affect the conversion or continuation of Loans pursuant to Section
2.02;
(ii) any such Lender shall be deemed to have cured its failure to
fund at such time as an amount equal to such Lender's ratable portion
(based on its Revolving Credit Commitment) of the requested principal
portion of such Revolving Credit Loan is fully funded to the Borrowers
whether made by such Lender itself or by operation of the terms of
this subsection (d) and whether or not the Non Pro Rata Loan with
respect thereto has been converted or continued;
(iii) amounts advanced to the Borrowers to cure, in full or in
part, any such Lender's failure to fund its Revolving Credit Loans
("Cure
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Loans") shall bear interest at the rate applicable to Alternate Base
Loans under Section 2.05 in effect from time to time, and for all
other purposes of this Agreement shall be treated as if they were
Alternate Base Loans;
(iv) regardless of whether or not an Event of Default has
occurred and is continuing, and notwithstanding the instructions of
the Borrowers as to their desired application, all repayments of
principal which would be applied to the outstanding Revolving Credit
Alternate Base Loans shall be applied first, ratably to Revolving
Credit Alternate Base Loans constituting Non Pro Rata Loans, second,
ratably to Revolving Credit Alternate Base Loans other than those
constituting Non Pro Rata Loans or Cure Loans and, third, ratably to
Revolving Credit Alternate Base Loans constituting Cure Loans;
(v) for so long as, and until the earlier of any such Lender's
cure of the failure to fund its ratable portion (based on its
Revolving Credit Commitment) of any Revolving Credit Loan and the
termination of the Total Revolving Credit Commitment, the term
"Required Lenders" for all purposes of this Agreement shall exclude
all Lenders whose failure to fund their ratable portion (based on
their respective Revolving Credit Commitments) of any Revolving Credit
Loan have not been cured; and
(vi) for so long as and until any such Lender's failure to fund
its ratable portion (based on its Revolving Credit Commitment) of any
Revolving Credit Loan is cured in accordance with this subsection (d),
such Lender shall not be entitled to any Revolving Credit Commitment
Fee with respect to its Revolving Credit Commitment.
SECTION II.14. Sharing of Setoffs. Each Lender agrees that if it
shall, through the exercise of a right of banker's lien, setoff or counterclaim
against the Borrowers, including, but not limited to, a secured claim under
Section 506 of Title 11 of the United States Code or other security or interest
arising from, or in lieu of, such secured claim, received by such Lender under
any applicable bankruptcy, insolvency or other similar law or otherwise, obtain
payment (voluntary or involuntary) in respect of a Note or exposure under the
Letter of Credit Usage held by it as a result of which the unpaid principal
portion of the Notes or exposure under the Letter of Credit Usage held by it
shall be proportionately less than the unpaid principal portion of the Notes or
exposure under the Letter of Credit Usage held by any other Lender, it shall be
deemed to have simultaneously purchased from such other Lender a participation
in the Notes and exposure under the Letter of Credit Usage held by such other
Lender, so that the aggregate unpaid principal
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amount of the Notes and exposure under the Letter of Credit Usage and
participations in Notes and exposure under the Letter of Credit Usage held by it
shall be in the same proportion to the aggregate unpaid principal amount of all
Notes and exposure under the Letter of Credit Usage then outstanding as the
principal amount of the Notes and exposure under the Letter of Credit Usage held
by it prior to such exercise of banker's lien, setoff or counterclaim was to the
principal amount of all Notes and exposure under the Letter of Credit Usage
outstanding prior to such exercise of banker's lien, setoff or counterclaim;
provided, however, that if any such purchase or purchases or adjustments shall
be made pursuant to this Section 2.14 and the payment giving rise thereto shall
thereafter be recovered, such purchase or purchases or adjustments shall be
rescinded to the extent of such recovery and the purchase price or prices or
adjustments restored without interest. The Borrowers expressly consent to the
foregoing arrangements and agree that any Lender holding a participation in a
Note and exposure under the Letter of Credit Usage deemed to have been so
purchased may exercise any and all rights of banker's lien, setoff or
counterclaim with respect to any and all moneys owing by the Borrowers to such
Lender as fully as if such Lender held a Note and exposure under the Letter of
Credit Usage in the amount of such participation.
SECTION II.15. Payments and Computations. (a) The Borrowers shall make
each payment hereunder and under any instrument delivered hereunder not later
than 12:00 noon (Los Angeles, California time) on the day when due in lawful
money of the United States (in freely transferable dollars) to the
Administrative Agent at its offices at 100 Pringle Avenue, Suite 650, Walnut
Creek, California 94596 for the account of the Lenders, in immediately available
funds, without set-off or counterclaim. Any amounts received after such time on
any date may, in the discretion of the Administrative Agent, be deemed to have
been received on the next succeeding Business Day for purposes of calculating
interest thereon. The Administrative Agent shall distribute any such payments
received by it for the account of any other person to the appropriate recipient
promptly following receipt thereof. The Administrative Agent may charge, when
due and payable, the Borrowers' account with the Administrative Agent for all
interest, principal and Revolving Credit Commitment Fees or other fees owing to
the Administrative Agent or the Lenders on or with respect to this Agreement
and/or the Loans and other Loan Documents. If at any time there is not
sufficient availability to cover any of the payments referred to in the prior
sentence, and in any event upon the occurrence of any Default, the Borrowers
shall make any such payments upon demand.
(b) If the Administrative Agent pays an amount to a Lender under this
Agreement in the belief or expectation that a related payment has been or will
be received by the Administrative Agent from Borrower and such related payment
is not received by the Administrative Agent, then the Administrative Agent will
be entitled to recover such amount from such Lender without setoff, counterclaim
or deduction of any kind. If the Administrative Agent determines at any time
that any amount received by the Administrative Agent under this Agreement must
be returned to Borrowers or paid to any other person pursuant to any solvency
law or otherwise, then, notwithstanding any other term or condition of this
Agreement, the Administrative Agent will not be
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required to distribute any portion thereof to any Lender. In addition, each
Lender will repay to the Administrative Agent on demand any portion of such
amount that Agent has distributed to such Lender, together with interest at such
rate, if any, as the Administrative Agent is required to pay to Borrowers or
such other person, without setoff, counterclaim or deduction of any kind.
SECTION II.16. Taxes. (a) Any and all payments by the Borrowers
hereunder shall be made, in accordance with Section 2.15 hereof, free and clear
of and without deduction for any and all present or future taxes, levies,
imposts, deductions, charges or withholdings in any such case imposed by the
United States or any political subdivision thereof, excluding:
(i) in the case of the Administrative Agent and each Lender,
taxes imposed or based on its net income, and franchise or capital
taxes imposed on it, (A) if the Administrative Agent or such Lender is
organized under the laws of the United States or any political
subdivision thereof and (B) if the Administrative Agent or such Lender
is not organized under the laws of the United States or any political
subdivision thereof, and its principal office or Applicable Lending
Office is located in the United States, and in the case of both (A)
and (B), withholding taxes payable with respect to payments to the
Administrative Agent or such Lender at its principal office or
Applicable Lending Office under laws (including, without limitation,
any treaty, ruling, determination or regulation) in effect on the date
hereof, but not any increase in withholding tax resulting from any
subsequent change in such laws (other than withholding with respect to
taxes imposed or based on its net income or with respect to franchise
or capital taxes), and
(ii) taxes (including withholding taxes) imposed by reason of the
failure of the Administrative Agent or any Lender, in either case that
is organized outside the United States, to comply with Section 2.16(f)
hereof (or the inaccuracy at any time of the certificates, documents
and other evidence delivered thereunder)
(all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings
and liabilities being hereinafter referred to as "Taxes"). If the Borrowers
shall be required by law to deduct any Taxes from or in respect of any sum
payable hereunder to the Lenders or the Administrative Agent, (x) the sum
payable shall be increased by the amount necessary so that after making all
required deductions (including without limitation deductions applicable to
additional sums payable under this Section 2.16) such Lender or the
Administrative Agent (as the case may be) receives an amount equal to the sum it
would have received had no such deductions been made, (y) the Borrowers shall
make such deductions and (z) the Borrowers shall pay the full amount
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deducted to the relevant tax authority or other authority in accordance with
applicable law.
(b) In addition, the Borrowers agree to pay any present or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies which arise from any payment made hereunder or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement (hereinafter referred to as "Other Taxes").
(c) The Borrowers will indemnify each Lender and the Administrative
Agent for the full amount of Taxes or Other Taxes (including, without
limitation, any Taxes or Other Taxes imposed by any jurisdiction (except as
specified in clauses (a)(i) and (ii)) on amounts payable under this Section
2.16) paid by such Lender or the Administrative Agent (as the case may be) and
any liability (including penalties, interest and expenses) arising therefrom or
with respect thereto. This indemnification shall be made within 30 days from the
date such Lender or the Administrative Agent (as the case may be) makes written
demand therefor. If any Lender receives a refund in respect of any Taxes or
Other Taxes for which such Lender has received payment from the Borrowers
hereunder, such Lender shall promptly notify the Borrowers of such refund and
such Lender shall, within 30 days of receipt of a request by the Borrowers,
repay such refund to the Borrowers, provided that the Borrowers, upon the
request of such Lender, agrees to return such refund (plus any penalties,
interest or other charges) to such Lender in the event such Lender is required
to repay such refund.
(d) Within 30 days after the date of any payment of Taxes or Other
Taxes withheld by the Borrowers in respect of any payment to any Lender, the
Borrowers will furnish to the Administrative Agent, at its address referred to
in Section 11.01 hereof, such certificates, receipts and other documents as may
be reasonably required to evidence payment thereof.
(e) Without prejudice to the survival of any other agreement
hereunder, the agreements and obligations contained in this Section 2.16 shall
survive the payment in full of principal and interest hereunder.
(f) Each Lender that is organized outside of the United States shall
deliver to the Borrowers on the date hereof (or, in the case of an assignee, on
the date of the assignment) and from time to time as required for renewal under
applicable law duly completed copies of United States Internal Revenue Service
Form 1001 or 4224 (or any successor or additional forms), as appropriate,
indicating in each case that such Lender is entitled to receive payments under
this Agreement without any deduction or withholding of any United States federal
income taxes. The Administrative Agent (if the Administrative Agent is an entity
organized outside the United States) and each Lender that is organized outside
the United States shall promptly notify the Borrowers and the Administrative
Agent of any change in its Applicable Lending Office and upon written
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request of the Borrowers such Lender shall, prior to the immediately following
due date of any payment by the Borrowers or any Guarantor hereunder or under any
other Loan Document, deliver to the Borrowers or such Guarantor, as the case may
be (with copies to the Administrative Agent), such certificates, documents or
other evidence, as required by the Code or Treasury Regulations issued pursuant
thereto, including without limitation Internal Revenue Service Form 4224, Form
1001 and any other certificate or statement of exemption required by Treasury
Regulation Section 1.1441-4(a) or Section 1.1441-6(c) or any subsequent version
thereof, properly completed and duly executed by such Lender establishing that
such payment is (i) not subject to withholding under the Code because such
payment is effectively connected with the conduct by such Lender of a trade or
business in the United States or (ii) totally exempt from United States tax
under a provision of an applicable tax treaty. The Borrowers shall be entitled
to rely on such forms in their possession until receipt of any revised or
successor form pursuant to this Section 2.16(f). If the Administrative Agent or
a Lender fails to provide a certificate, document or other evidence required
pursuant to this Section 2.16(f), then (i) the Borrowers shall be entitled to
deduct or withhold on payments to the Administrative Agent or such Lender as a
result of such failure, as required by law, and (ii) the Borrowers shall not be
required to make payments of additional amounts with respect to such withheld
Taxes pursuant to clause (x) of Section 2.16(a) to the extent such withholding
is required solely by reason of the failure of the Administrative Agent or such
Lender to provide the necessary certificate, document or other evidence.
(g) Each Lender and the Administrative Agent shall use reasonable
efforts to avoid or minimize any amounts which might otherwise be payable
pursuant to this subsection 2.16 (including seeking refunds of any amounts that
are reasonably believed not to have been correctly or legally asserted);
provided, however, that such efforts shall not include the taking of any actions
by such Lender or the Administrative Agent that would result in any tax, costs
or other expense to such Lender or the Administrative Agent (other than a tax,
cost or other expense for which such Lender or the Administrative Agent shall
have been reimbursed or indemnified by the Borrowers pursuant to this Agreement
or otherwise) or any action which would or might in the reasonable opinion of
such Lender or the Administrative Agent have an adverse effect upon its
business, operations or financial condition or otherwise be disadvantageous to
such Lender or the Administrative Agent.
SECTION II.17. Issuance of Letters of Credit. Upon the request of the
Borrowers, and subject to the conditions set forth in Article V hereof and such
other conditions to the opening of Letters of Credit as the Administrative Agent
requires of its customers generally, the Administrative Agent shall from time to
time open standby letters of credit (each, a "Letter of Credit") for the account
of the Borrowers, the aggregate undrawn amount of all outstanding Letters of
Credit not at any time to exceed $1,000,000; provided, however, that the
Borrowers may not request the Administrative Agent to open a Letter of Credit if
after giving effect thereto (measured
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by the face amount of such Letter of Credit) the sum of the aggregate principal
amount of the Revolving Credit Loans outstanding hereunder plus the Letter of
Credit Usage would exceed the Total Revolving Credit Commitment. The issuance of
each Letter of Credit shall be made on at least three (3) Business Days' prior
written notice from the Borrowers to the Administrative Agent, at its Domestic
Lending Office, which written notice shall be an application for a Letter of
Credit on the Administrative Agent's customary form completed to the
satisfaction of the Administrative Agent, together with the proposed form of the
Letter of Credit (which shall be satisfactory to the Administrative Agent) and
such other certificates, documents and other papers and information as the
Administrative Agent may reasonably request. The Administrative Agent shall not
at any time be obligated to issue any Letter of Credit if such issuance would
conflict with, or cause the Administrative Agent or any Lender to exceed any
limits imposed by, any applicable requirements of law. The expiration date of
any standby Letter of Credit shall not be later than 365 days from the date of
issuance thereof, and, in any event, no Letter of Credit shall have an
expiration date later than the Conversion Date. The Letters of Credit shall be
issued with respect of transactions occurring in the ordinary course of business
of the Borrowers.
SECTION II.18. Payment of Letters of Credit; Reimbursement. Upon the
issuance of any Letter of Credit, the Administrative Agent shall notify each
Lender of the principal amount, the number, and the expiration date thereof and
the amount of such Lender's participation therein. By the issuance of a Letter
of Credit hereunder and without further action on the part of the Administrative
Agent or the Lenders, each Lender hereby accepts from the Administrative Agent a
participation (which participation shall be nonrecourse to the Administrative
Agent) in such Letter of Credit equal to such Lender's pro rata (based on its
Revolving Credit Commitment) share of such Letter of Credit, effective upon the
issuance of such Letter of Credit. Each Lender hereby absolutely and
unconditionally assumes, as primary obligor and not as a surety, and agrees to
pay and discharge, and to indemnify and hold the Administrative Agent harmless
from liability in respect of, such Lender's pro rata share of the amount of any
drawing under a Letter of Credit. Each Lender acknowledges and agrees that its
obligation to acquire participations in each Letter of Credit issued by the
Administrative Agent and its obligation to make the payments specified herein,
and the right of the Administrative Agent to receive the same, in the manner
specified herein, are absolute and unconditional and shall not be affected by
any circumstance whatsoever, including, without limitation, the occurrence and
continuance of a Default or an Event of Default hereunder, and that each such
payment shall be made without any offset, abatement, withholding or reduction
whatsoever. The Administrative Agent shall review, on behalf of the Lenders,
each draft and any accompanying documents presented under a Letter of Credit and
shall notify each Lender of any such presentment. Promptly after it shall have
ascertained that any draft and any accompanying documents presented under such
Letter of Credit appear on their face to be in substantial conformity with the
terms and conditions of the Letter of Credit, the Administrative Agent shall
give telephonic or
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facsimile notice to the Lenders and the Borrowers of the receipt and amount of
such draft and the date on which payment thereon will be made, and the Lenders
shall, by 11:00 A.M., Los Angeles, California time on the date such payment is
to be made, pay the amounts required to the Administrative Agent in Walnut
Creek, California in immediately available funds, and the Administrative Agent,
not later than 3:00 P.M. Los Angeles, California time on such day, shall make
the appropriate payment to the beneficiary of such Letter of Credit. If in
accordance with the prior sentence the Lenders shall pay any draft presented
under a Letter of Credit, then the Administrative Agent, on behalf of the
Lenders, shall charge the general deposit account of the Borrowers with the
Administrative Agent for the amount thereof, together with the Administrative
Agent's customary overdraft fee in the event the funds available in such account
shall not be sufficient to reimburse the Lenders for such payment and the
Borrowers shall not otherwise have discharged such reimbursement obligation by
11:00 A.M., Los Angeles, California time, on the date of such payment. If the
Lenders have not been reimbursed with respect to such drawing as provided above,
the Borrowers shall pay to the Administrative Agent, for the account of the
Lenders, the amount of the drawing together with interest on such amount at a
rate per annum (computed on the basis of the actual number of days elapsed over
a year of 360 days) equal to the rate applicable to Alternate Base Loans
hereunder plus two percent (2%), payable on demand. The obligations of the
Borrowers under this Section 2.18 to reimburse the Lenders and the
Administrative Agent for all drawings under Letters of Credit shall be joint and
several, absolute, unconditional and irrevocable and shall be satisfied strictly
in accordance with their terms, irrespective of:
(a) any lack of validity or enforceability of any Letter of Credit;
(b) the existence of any claim, setoff, defense or other right which
the Borrowers or any other person may at any time have against the
beneficiary under any Letter of Credit, the Administrative Agent or any
Lender (other than the defense of payment in accordance with the terms of
this Agreement or a defense based on the gross negligence or willful
misconduct of the Administrative Agent or any Lender) or any other person
in connection with this Agreement or any other transaction;
(c) any draft or other document presented under any Letter of Credit
proving to be forged, fraudulent, invalid or insufficient in any respect or
any statement therein being untrue or inaccurate in any respect;
(d) payment by the Administrative Agent or any Lender under any Letter
of Credit against presentation of a draft or other document which does not
comply with the terms of such Letter of Credit; and
(e) any other circumstance or event whatsoever, whether or not similar
to any of the foregoing.
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It is understood that in making any payment under any Letter of Credit
(x) the Administrative Agent's and any Lender's exclusive reliance on the
documents presented to it under such Letter of Credit as to any and all matters
set forth therein, including, without limitation, reliance on the amount of any
draft presented under such Letter of Credit, whether or not the amount due to
the beneficiary equals the amount of such draft and whether or not any document
presented pursuant to such Letter of Credit proves to be insufficient in any
respect, if such document on its face appears to be in order, and whether or not
any other statement or any other document presented pursuant to such Letter of
Credit proves to be forged or invalid or any statement therein proves to be
inaccurate or untrue in any respect whatsoever and (y) any noncompliance in any
immaterial respect of the documents presented under such Letter of Credit with
the terms thereof shall, in each case, not be deemed willful misconduct or gross
negligence of the Administrative Agent or any Lender.
SECTION II.19. Administrative Agent's Actions with respect to Letters
of Credit. Any Letter of Credit may, in the discretion of the Administrative
Agent or its correspondents, be interpreted by them (to the extent not
inconsistent with such Letter of Credit) in accordance with the Uniform Customs
and Practice for Documentary Credits of the International Chamber of Commerce,
as adopted or amended from time to time, or any other rules, regulations and
customs prevailing at the place where any Letter of Credit is available or the
drafts are drawn or negotiated. The Administrative Agent and its correspondents
may accept and act upon the name, signature, or act of any party purporting to
be the executor, administrator, receiver, trustee in bankruptcy, or other legal
representative of any party designated in any Letter of Credit in the place of
the name, signature, or act of such party.
SECTION II.20. Letter of Credit Fees. The Borrowers agree to pay (i)
to the Administrative Agent for the account of each Lender a participation fee
with respect to its participations in Letters of Credit, which shall accrue at a
rate per annum equal to the margin over the Adjusted LIBO Rate applicable to
interest on Eurodollar Loans on the average daily amount of such Lender's pro
rata share of the Letter of Credit Usage (excluding any portion attributable to
unreimbursed drawings) during the period from and including the Closing Date to
but excluding the later of the date on which such Lender's Revolving Credit
Commitment terminates and the date on which such Lender ceases to have any share
of the Letter of Credit Usage, and (ii) an issuance fee and other related fees
charged by the Administrative Agent for transactions of this nature as set forth
on Schedule 2.20 hereto (as such Schedule may be amended from time to time)
payable to the Administrative Agent for its own account at its Domestic Lending
Office in immediately available funds. Participation fees and other fees accrued
through and including the last day of September, December, March and June of
each year shall be payable on the first Business Day following each such period,
commencing October 1, 1998; provided that all such fees shall be payable on the
date on which the Revolving Credit Commitment terminates and any such fees
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accruing after the date on which the Revolving Credit Commitment terminates
shall be payable on demand. Any other fees payable to the Administrative Agent
pursuant to this paragraph shall be payable within 10 days after demand. All
participation fees and fronting fees shall be computed on the basis of a year of
360 days and shall be payable for the actual number of days elapsed (including
the first day but excluding the last day).
III. COLLATERAL SECURITY
SECTION III.1. Security Documents. The Obligations shall be secured by
the Collateral described in the Security Documents and are entitled to the
benefits thereof. The Borrowers shall duly execute and deliver the Security
Documents, all consents of third parties necessary to permit the effective
granting of the Liens created in such agreements, financing statements pursuant
to the Uniform Commercial Code and other documents, all in form and substance
satisfactory to the Administrative Agent, as may be reasonably required by the
Administrative Agent to grant to the Lenders a valid, perfected and enforceable
first priority Lien on and security interest in (subject only to the Liens
permitted under Section 7.01 hereof) the Collateral.
SECTION III.2. Filing and Recording. The Borrowers shall, at their
sole cost and expense, cause all instruments and documents given as evidence of
security pursuant to this Agreement to be duly recorded and/or filed or
otherwise perfected in all places necessary, in the opinion of the
Administrative Agent, and take such other actions as the Administrative Agent
may reasonably request, in order to perfect and protect the Liens of the
Administrative Agent and Lenders in the Collateral. The Borrowers, to the extent
permitted by law, hereby authorize the Administrative Agent to file any
financing statement in respect of any Lien created pursuant to the Security
Documents which may at any time be required or which, in the opinion of the
Administrative Agent, may at any time be desirable although the same may have
been executed only by the Administrative Agent or, at the option of the
Administrative Agent, to sign such financing statement on behalf of the
Borrowers and file the same, and the Borrowers hereby irrevocably designate the
Administrative Agent, its agents, representatives and designees as its agent and
attorney-in-fact for this purpose. In the event that any re-recording or
refiling thereof (or the filing of any statements of continuation or assignment
of any financing statement) is required to protect and preserve such Lien, the
Borrowers shall, at the Borrowers' cost and expense, cause the same to be
recorded and/or refiled at the time and in the manner requested by the
Administrative Agent.
IV. REPRESENTATIONS AND WARRANTIES
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Each of the Borrowers and each of the Guarantors jointly and severally
represents and warrants to each of the Lenders and each of the Agents that both
before and after giving effect to the consummation of the Transactions:
SECTION IV.1. Organization, Legal Existence. Each Loan Party is a
legal entity duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization, has the requisite power and
authority to own its property and assets and to carry on its business as now
conducted and as currently proposed to be conducted and is qualified to do
business in every jurisdiction where such qualification is required, except
where the failure to so qualify would not have a Material Adverse Effect (all
such jurisdictions being listed in Schedule 4.01 annexed hereto). Each Loan
Party has the corporate power to execute, deliver and perform its obligations
under this Agreement and the other Loan Documents to which it is a party, and to
borrow hereunder and to execute and deliver the Notes.
SECTION IV.2. Authorization. The execution, delivery and performance
by each of the Loan Parties of this Agreement and each of the other Loan
Documents to which it is a party, the borrowings hereunder by the Borrowers, the
execution and delivery by the Borrowers of the Notes and the grant of security
interests in the Collateral created by the Security Documents (collectively, the
"Transactions") (a) have been duly authorized by all requisite corporate and, if
required, stockholder action and (b) will not (i) violate (A) any provision of
law, statute, rule or regulation or the certificate or articles of incorporation
or other applicable constitutive documents or the by-laws of any Loan Party, or
their respective subsidiaries, as the case may be, (B) any order of any court,
or any rule, regulation or order of any other agency of government binding upon
any Loan Party, or (C) any provisions of any material indenture, agreement or
other instrument to which any Loan Party, or their respective subsidiaries, or
any of their respective properties or assets are or may be bound, (ii) be in
conflict with, result in a breach of or constitute (alone or with notice or
lapse of time or both) a default under any material indenture, agreement or
other instrument referred to in (b)(i)(C) above or (iii) result in the creation
or imposition of any Lien of any nature whatsoever (other than in favor of the
Administrative Agent, for its own benefit and for the benefit of the Lenders, as
contemplated by this Agreement and the Security Documents) upon any property or
assets of any Loan Party.
SECTION IV.3. Governmental Approvals. No registration or filing (other
than the filings necessary to perfect the Liens created by the Security
Documents) with consent or approval of, or other action by, any Federal, state
or other governmental agency, authority or regulatory body is or will be
required in connection with the Transactions, other than any which have been
made or obtained.
SECTION IV.4. Binding Effect. This Agreement and each of the other
Loan Documents executed and delivered by any of the Loan Parties constitutes a
legal, valid and binding obligation of such person, and is enforceable in
accordance with its
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terms. Each of the Notes, when duly executed and delivered by the Borrowers,
will constitute a legal, valid and binding obligation of the Borrowers
enforceable in accordance with its terms.
SECTION IV.5. Material Adverse Change. Except as set forth in Schedule
4.05 annexed hereto, there has been no material adverse change in the business,
assets, operations or financial condition of any of the Borrowers or any of
their subsidiaries since December 31, 1997.
SECTION IV.6. Litigation; Compliance with Laws; etc. (a) Except as set
forth in Schedule 4.06(a) annexed hereto, there are not any actions, suits or
proceedings at law or in equity or by or before any governmental instrumentality
or other agency or regulatory authority now pending or, to the knowledge of any
Responsible Officer of any Loan Party, threatened against or affecting any of
the Loan Parties or the businesses, assets or rights of any of the Loan Parties
(i) which involve any of the Transactions or (ii) as to which it is probable
(within the meaning of Statement of Financial Accounting Standards No. 5) that
there will be an adverse determination and which, if adversely determined,
would, individually or in the aggregate, materially impair the ability of any of
the Loan Parties to conduct business substantially as now conducted, or have a
Material Adverse Effect.
(b) Except as set forth in Schedule 4.06(b) annexed hereto, no Loan
Party is in violation of any law, or in default with respect to any judgment,
writ, injunction, decree, rule or regulation of any court or governmental agency
or instrumentality, except where such violation or default would not have a
Material Adverse Effect.
SECTION IV.7. Financial Statements. (a) The Borrowers have
heretofore furnished to the Administrative Agent the financial statements of
the Borrowers for the six month period ended June 30, 1998. Such financial
statements present fairly the Consolidated financial condition and results of
operations of the Borrowers and their subsidiaries as of the dates and for
the periods indicated, and such balance sheets and the notes thereto disclose
all material liabilities, direct or contingent, of the Borrowers and their
subsidiaries, as of the dates thereof.
(b) The Borrowers have heretofore furnished to the Administrative
Agent updated quarterly, through December 31, 1998, and annual, thereafter
through the December 31, 2000, projected income statements, balance sheets and
cash flows of the Borrowers on a Consolidated basis together with a schedule
confirming the ability of the Borrowers to consummate the Transactions and
demonstrating prospective compliance with all financial covenants contained in
this Agreement, such projections disclosing all assumptions made by Borrowers in
formulating such projections and giving effect to the Transactions. The
projections are based upon reasonable estimates and assumptions, all of which
are reasonable in light of the conditions which existed at the time the
projections were made, have been prepared on the basis of the
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assumptions stated therein, and reflect as of the Closing Date the reasonable
estimate of the Borrowers of the results of operations and other information
projected therein.
(c) The Borrowers have heretofore furnished to the Administrative
Agent a Consolidated pro forma balance sheet of the Borrowers and which sets
forth information before and after giving effect to the Transactions.
(d) The financial statements referred to in this Section 4.07 have
been prepared in accordance with GAAP, in each case subject to normal year-end
audit adjustments and, in the case of the financial statements delivered
pursuant to clauses (b) and (c) above, subject to the absence of footnotes.
SECTION IV.8. Federal Reserve Regulations. (a) No Loan Party is
engaged principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying Margin Stock.
(b) No part of the proceeds of the Loans will be used, whether
directly or indirectly, and whether immediately, incidentally or ultimately, (i)
to purchase or carry Margin Stock or to extend credit to others for the purpose
of purchasing or carrying Margin Stock or to refund indebtedness originally
incurred for such purpose, or (ii) for any purpose which entails a violation of,
or which is inconsistent with, the provisions of the Regulations of the Board,
including, without limitation, Regulation T, U or X thereof. If requested by any
Lender, the Borrowers or any subsidiary thereof shall furnish to such Lender a
statement on Federal Reserve Form U-1 referred to in said Regulation U.
SECTION IV.9. Taxes. Each Loan Party has filed or caused to be filed
all Federal, state, local and foreign tax returns which are required to be filed
by it, on or prior to the date hereof, other than tax returns in respect of
taxes that (x) are not franchise, capital or income taxes, (y) in the aggregate
are not material and (z) would not, if unpaid, result in the imposition of any
material Lien on any property or assets of any Loan Party. Each Loan Party has
paid or caused to be paid all taxes shown to be due and payable on such filed
returns or on any assessments received by it, other than (i) any taxes or
assessments the validity of which such Loan Party is contesting in good faith by
appropriate proceedings, and with respect to which such Loan Party shall, to the
extent required by GAAP have set aside on its books adequate reserves and (ii)
taxes other than income, capital or franchise taxes that in the aggregate are
not material and which would not, if unpaid, result in the imposition of any
material Lien on any property or assets of any Loan Party. No Federal income tax
returns of any Loan Party have been audited by the United States Internal
Revenue Service and no Loan Party has as of the date hereof requested or been
granted any extension of time to file any Federal, state, local or foreign tax
return. No Loan Party is party to or has any obligation under any tax sharing
agreement.
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SECTION IV.10. Employee Benefit Plans. With respect to the provisions
of ERISA, except as set forth on Schedule 4.10 hereto:
(i) No Reportable Event has occurred or is continuing with respect to
any Pension Plan.
(ii) No prohibited transaction (within the meaning of Section 406 of
ERISA or Section 4975 of the Code) has occurred with respect to any Plan subject
to Part 4 of Subtitle B of Title I of ERISA.
(iii) None of the Borrowers or any ERISA Affiliate is now, or has been
during the preceding five years, obligated to contribute to a Pension Plan or a
Multiemployer Plan. None of the Borrowers or any ERISA Affiliate has (A) ceased
operations at a facility so as to become subject to the provisions of Section
4062(e) of ERISA, (B) withdrawn as a substantial employer so as to become
subject to the provisions of Section 4063 of ERISA, (C) ceased making
contributions to any Pension Plan subject to the provisions of Section 4064(a)
of ERISA to which the Borrowers, any subsidiary or any ERISA Affiliate made
contributions, (D) incurred or caused to occur a "complete withdrawal" (within
the meaning of Section 4203 of ERISA) or a "partial withdrawal" (within the
meaning of Section 4205 of ERISA) from a Multiemployer Plan that is a Pension
Plan so as to incur withdrawal liability under Section 4201 of ERISA (without
regard to subsequent reduction or waiver of such liability under Section 4207 or
4208 of ERISA), or (E) been a party to any transaction or agreement under which
the provisions of Section 4204 of ERISA were applicable.
(iv) No notice of intent to terminate a Pension Plan has been filed,
nor has any Plan been terminated pursuant to the provisions of Section 4041(e)
of ERISA.
(v) The PBGC has not instituted proceedings to terminate (or appoint a
trustee to administer) a Pension Plan and no event has occurred or condition
exists which might constitute grounds under the provisions of Section 4042 of
ERISA for the termination of (or the appointment of a trustee to administer) any
such Plan.
(vi) With respect to each Pension Plan that is subject to the
provisions of Title I, Subtitle B, Part 3 of ERISA, the funding method used in
connection with such Plan is acceptable under ERISA, and the actuarial
assumptions and methods used in connection with funding such Pension Plan
satisfy the requirements of Section 302 of ERISA. The assets of each such
Pension Plan (other than the Multiemployer Plans) are at least equal to the
present value of the greater of (i) accrued benefits (both vested and
non-vested) under such Plan, or (ii) "benefit liabilities" (within the meaning
of Section 4001(a)(16) of ERISA) under such Plan, in each case as of the latest
actuarial valuation date for such Plan (determined in accordance with the same
actuarial assumptions and methods as those used by the Plan's actuary in its
valuation of such
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Plan as of such valuation date). No such Pension Plan has incurred any
"accumulated funding deficiency" (as defined in Section 412 of the Code),
whether or not waived.
(vii) There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the knowledge of the Responsible Officers of
any Loan Party, which could reasonably be expected to be asserted, against any
Plan or the assets of any such Plan. No civil or criminal action brought
pursuant to the provisions of Title I, Subtitle B, Part 5 of ERISA is pending
or, to the knowledge of the Responsible Officers of any Loan Party threatened
against any fiduciary or any Plan. None of the Plans or any fiduciary thereof
(in its capacity as such) has been the direct or indirect subject of any audit,
investigation or examination by any governmental or quasi-governmental agency.
(viii) All of the Plans comply currently, and have complied in the
past, both as to form and operation, with their terms and with the provisions of
ERISA and the Code, and all other applicable laws, rules and regulations; all
necessary governmental approvals for the Plans have been obtained and a
favorable determination as to the qualification under Section 401(a) of the Code
of each of the Plans which is an employee pension benefit plan (within the
meaning of Section 3(2) of ERISA) has been made by the Internal Revenue Service
and a recognition of exemption from federal income taxation under Section 501(c)
of the Code of each of the funded employee welfare benefit plans (within the
meaning of Section 3(1) of ERISA) has been made by the Internal Revenue Service,
and nothing has occurred since the date of each such determination or
recognition letter that would adversely affect such qualification.
SECTION IV.11. No Material Misstatements. No information, report,
financial statement, exhibit or schedule prepared or furnished by or on behalf
of any Loan Party to the Administrative Agent or any Lender in connection with
any of the Transactions or this Agreement, the Security Documents, the Notes or
any other Loan Documents or included therein contained or contains any material
misstatement of fact or omitted or omits to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
SECTION IV.12. Investment Company Act; Public Utility Holding Company
Act. No Loan Party is an "investment company" as defined in, or is otherwise
subject to regulation under, the Investment Company Act of 1940. No Loan Party
is a "holding company" as that term is defined in or is otherwise subject to
regulation under, the Public Utility Holding Company Act of 1935.
SECTION IV.13. Security Interest. Each of the Security Documents
creates and grants to the Administrative Agent, for its own benefit and for the
benefit of the Lenders, a legal, valid and perfected first (except as permitted
pursuant to Section 7.01 hereof) priority security interest in the collateral
identified therein. Such
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collateral or property is not subject to any other Liens whatsoever, except
Liens permitted by Section 7.01 hereof.
SECTION IV.14. Use of Proceeds. All proceeds of each borrowing under
the Revolving Credit Commitment on the Closing Date, if any, shall be used to
partially refinance existing Indebtedness of the Borrowers. All proceeds of each
subsequent borrowing under the Total Revolving Credit Commitment after the
Closing Date shall be used to finance the consideration required for Permitted
Acquisitions and to finance Permitted De Novo Capital Expenditures as well as
other capital improvements and to provide for working capital requirements and
for general corporate purposes of the Borrowers.
SECTION IV.15. Subsidiaries. As of the Closing Date, Schedule 4.15
annexed hereto sets forth each subsidiary of each Borrower, its jurisdiction of
incorporation, its capitalization and ownership of capital stock of each
subsidiary.
SECTION IV.16. Title to Properties; Possession Under Leases;
Trademarks. (a) Each Borrower and each of their subsidiaries has good and
marketable title to, or valid leasehold interest in, all of its respective
properties and assets shown on the most recent balance sheet referred to in
Section 4.07(a) hereof and all assets and properties acquired since the date of
such balance sheet, except for such properties as are no longer used or useful
in the conduct of its business or as have been disposed of in the ordinary
course of business, and except for minor defects in title that do not materially
interfere with the ability of any of the Borrowers or any subsidiary thereof to
conduct its business as now conducted. All such assets and properties are free
and clear of all Liens other than those permitted by Section 7.01 hereof.
(b) Each Borrower and each of their subsidiaries has complied with all
obligations under all leases to which it is a party and under which it is in
occupancy, except where the failure to so comply would not have a Material
Adverse Effect, and all such leases are in full force and effect and each
Borrower and each of their subsidiaries enjoys peaceful and undisturbed
possession under all such leases.
(c) Each Borrower and each of their subsidiaries owns or controls all
material trademarks, trademark rights, trade names, trade name rights,
copyrights, patents, patent rights and licenses which are necessary for the
conduct of the business of such Borrowers and such subsidiary. No Borrower or
subsidiary thereof is infringing upon or otherwise acting adversely to any of
such trademarks, trademark rights, trade names, trade name rights, copyrights,
patent rights or licenses owned by any other person or persons. There is no
claim or action by any such other person pending, or to the knowledge of any
Responsible Officer of any Borrower or any subsidiary thereof, threatened,
against any Borrowers or any subsidiary thereof with respect to any of the
rights or property referred to in this Section 4.16(c).
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SECTION IV.17. Solvency. (a) The fair salable value of the assets of
each Borrower and its Consolidated subsidiaries is not less than the amount that
will be required to be paid on or in respect of the probable liability on the
existing debts and other liabilities (including contingent liabilities) of such
Borrower and its Consolidated subsidiaries, as they become absolute and mature.
For the purposes hereof, the "fair saleable value" of assets shall mean the
price a buyer is willing to pay for such assets in an arm's-length transaction.
(b) The assets of each Borrower and its Consolidated subsidiaries do
not constitute unreasonably small capital for such Borrowers and their
Consolidated subsidiaries to carry out their business as now conducted and as
proposed to be conducted including the capital needs of such Borrower and its
Consolidated subsidiaries, taking into account the particular capital
requirements of the business conducted by such Borrower and its Consolidated
subsidiaries and projected capital requirements and capital availability
thereof.
(c) No Borrower or any subsidiary thereof intends to incur debts
beyond its ability to pay such debts as they mature (taking into account the
timing and amounts of cash to be received by such Borrower and such subsidiary,
and of amounts to be payable on or in respect of debt of such Borrowers and such
subsidiary). The cash flow of each Borrower and its Consolidated subsidiaries,
after taking into account all anticipated uses of the cash of such Borrower and
its Consolidated subsidiaries, will at all times be sufficient to pay all such
amounts on or in respect of debt of such Borrower and its Consolidated
subsidiaries when such amounts are required to be paid.
(d) No Borrower or any subsidiary thereof believes that final
judgments against it in actions for money damages presently pending will be
rendered at a time when, or in an amount such that, it will be unable to satisfy
any such judgments promptly in accordance with their terms (taking into account
the maximum reasonable amount of such judgments in any such actions and the
earliest reasonable time at which such judgments might be rendered). The cash
flow of such Borrower and its Consolidated subsidiaries, after taking into
account all other anticipated uses of the cash of such Borrower and its
Consolidated subsidiaries (including the payments on or in respect of debt
referred to in paragraph (c) of this Section), will at all times be sufficient
to pay all such judgments promptly in accordance with their terms.
SECTION IV.18. Permits, etc. Each Loan Party possesses all licenses,
permits, approvals and consents, including, without limitation, all
environmental, health and safety licenses, permits, approvals and consents
(collectively, "Permits") of all Federal, state and local governmental
authorities as required to conduct properly its business, each such Permit is
and will be in full force and effect, each Loan Party is in compliance in all
material respects with all such Permits, and no event (including, without
limitation, any violation of any law, rule or
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regulation) has occurred which allows the revocation or termination of any such
Permit or any restriction thereon.
SECTION IV.19. Compliance with Environmental Laws. Except as disclosed
in Schedule 4.19 hereto: (i) the operations of the Loan Parties comply in all
material respects with all applicable Environmental Laws; (ii) the Loan Parties
and all of their present facilities or operations, as well as to the knowledge
of the Responsible Officers of the Borrowers and their subsidiaries their past
facilities or operations, are not subject to any judicial proceeding or
administrative proceeding or any outstanding written order or agreement with any
governmental authority or private party respecting (a) any Environmental Law,
(b) any Remedial Work, or (c) any Environmental Claims arising from the Release
of a Contaminant into the environment; (iii) to the best of the knowledge of the
Responsible Officers of the Loan Parties, none of their operations is the
subject of any Federal or state investigation evaluating whether any Remedial
Work is needed to respond to a Release of any Contaminant into the environment;
(iv) no Loan Party nor, to the knowledge of the Responsible Officers of the Loan
Parties, any predecessor of any Loan Party has filed any notice under any
Environmental Law indicating past or present treatment, storage, or disposal of
a Hazardous Material or reporting a spill or Release of a Contaminant into the
environment; (v) to the best of the knowledge of the Responsible Officers of the
Loan Parties, no Loan Party has any contingent liability in connection with any
Release of any Contaminant into the environment; (vi) none of the operations of
the Loan Parties involve the generation, transportation, treatment or disposal
of Hazardous Materials, except for Hazardous Materials used in the ordinary
course of business of the Loan Parties in accordance in all material respects
with Environmental Laws; (vii) no Loan Party has disposed of any Contaminant by
placing it in or on the ground or waters of any premises owned, leased or used
by any of them and to the knowledge of the Loan Parties neither has any lessee,
prior owner, or other person; (viii) no underground storage tanks or surface
impoundments are on any property of the Loan Parties; and (ix) no Lien in favor
of any governmental authority for (A) any liability under any Environmental Law
or regulations, or (B) damages arising from or costs incurred by such
governmental authority in response to a Release of a Contaminant into the
environment, has been filed or attached to the property of the Loan Parties.
SECTION IV.20. No Change in Credit Criteria or Collection Policies.
There has been no material change in credit criteria or collection policies
concerning account receivables of any of the Borrowers since December 31, 1997.
All account receivables are valid, binding and enforceable obligations of
account debtors, except to the extent reserves are taken in accordance with GAAP
with respect to contractual adjustments for account receivables.
SECTION IV.21. Employee Matters. Except as disclosed in Schedule 4.21
hereto, (a) no Loan Party nor any of such person's employees are subject to any
collective bargaining agreement, (b) to the knowledge on the date hereof
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of a Responsible Officer the Loan Parties, no petition for certification or
union election is pending with respect to the employees of any Loan Party and no
union or collective bargaining unit has sought such certification or recognition
with respect to the employees of any Loan Party and (c) there are no strikes,
slowdowns, work stoppages or controversies pending or, to the knowledge of a
Responsible Officer of the Loan Parties, threatened between any Loan Party and
their respective employees, other than employee grievances arising in the
ordinary course of business none of which could have, either individually or in
the aggregate, a Material Adverse Effect.
SECTION IV.22. Year 2000. To the knowledge of the Responsible Officers
of the Borrowers, the cost to the Borrowers of reprogramming and testing of the
Borrowers' and their subsidiaries' computer systems and related equipment to
permit proper functioning in and following the year 2000 (including, without
limitation, reprogramming errors) will not reasonably be expected to result in a
Material Adverse Effect.
V. CONDITIONS OF CREDIT EVENTS
The obligation of each Lender to make Loans and extend other Credits
hereunder shall be subject to the following conditions precedent:
SECTION V.1. All Credit Events. On each date on which a Credit Event
is to occur:
(a) The Administrative Agent shall have received a notice of borrowing
as required by Section 2.03 hereof or a request for the issuance of a
Letter of Credit pursuant to Section 2.17 hereof.
(b) The representations and warranties set forth in Article IV hereof
and in any documents delivered herewith, including, without limitation, the
Loan Documents, shall be true and correct in all material respects with the
same effect as though made on and as of such date (except insofar as such
representations and warranties relate expressly to an earlier date).
(c) Each of the Borrowers shall be in compliance with all the terms
and provisions contained herein on its part to be observed or performed and
at the time of and immediately after such Credit Event no Default or Event
of Default shall have occurred and be continuing.
(d) The Agent shall have received a certificate signed by the
Financial Officer of each of the Borrowers (i) as to the compliance with
(b) and (c) above and (ii) with respect to each Revolving Credit Loan and
each Letter of Credit, demonstrating that after giving effect thereto the
sum of the aggregate principal amount of Revolving Credit Loans outstanding
at such time plus the Letter of
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Credit Usage outstanding at such time shall not exceed the Total Revolving
Credit Commitment.
SECTION V.2. First Borrowing. The obligations of the Lenders in
respect of the first Credit Event hereunder is subject to the following
additional conditions precedent:
(a) The Lenders shall have received the favorable written opinion of
counsel for the Borrowers and each of the Guarantors and Grantors,
substantially in the form of Exhibit C hereto, dated the Closing Date,
addressed to the Lenders and satisfactory to the Administrative Agent.
(b) The Lenders shall have received (i) a copy of the certificate or
articles of incorporation or constitutive documents, in each case as
amended to date, of each of the Borrowers, the Grantors and the Guarantors,
certified as of a recent date by the Secretary of State or other
appropriate official of the state of its organization, and a certificate as
to the good standing of each from such Secretary of State or other official
and from the Secretary of State or other official of each state in which it
is qualified to do business, in each case dated as of a recent date; (ii) a
certificate of the Secretary of each Borrower, Grantor and Guarantor, dated
the Closing Date and certifying (A) that attached thereto is a true and
complete copy of such person's By-laws as in effect on the date of such
certificate and at all times since a date prior to the date of the
resolution described in item (B) below, (B) that attached thereto is a true
and complete copy of a resolution adopted by such person's Board of
Directors authorizing the execution, delivery and performance of this
Agreement, the Security Documents, the Notes, the other Loan Documents and
the Credit Events hereunder, as applicable, and that such resolution has
not been modified, rescinded or amended and is in full force and effect,
(C) that such person's certificate or articles of incorporation or
constitutive documents has not been amended since the date of the last
amendment thereto shown on the certificate of good standing furnished
pursuant to (i) above, and (D) as to the incumbency and specimen signature
of each of such person's officers executing this Agreement, the Notes, each
Security Document or any other Loan Document delivered in connection
herewith or therewith, as applicable; (iii) a certificate of another of
such person's officers as to incumbency and signature of its Secretary; and
(iv) such other documents as the Administrative Agent or any Lender may
reasonably request.
(c) The Administrative Agent shall have received a certificate, dated
the Closing Date and signed by the Financial Officer of each Borrower,
confirming compliance with the conditions precedent set forth in paragraphs
(b) and (c) of Section 5.01 hereof and the conditions set forth in this
Section 5.02.
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(d) Each Lender shall have received its Revolving Credit Note, each
duly executed by the Borrowers, payable to its order and otherwise
complying with the provisions of Section 2.04 hereof.
(e) The Administrative Agent shall have received the Security
Documents (including, without limitation, an Assignment of Contract with
respect to each Management Agreement and Shares Acquisition Agreement in
effect on the Closing Date), and certificates evidencing the Pledged Stock,
together with undated stock powers executed in blank, each duly executed by
the applicable Grantors.
(f) The Syndication Agent shall have received certified copies of
requests for copies or information on Form UCC-11 or certificates
satisfactory to the Syndication Agent of a UCC Reporter Service, listing
all effective financing statements which name as debtor any Borrower, any
Guarantor or any Grantor and which are filed in the appropriate offices in
the States in which are located the chief executive office and other
operating offices of such person, together with copies of such financing
statements. With respect to any Liens not permitted pursuant to Section
7.01 hereof, the Syndication Agent shall have received termination
statements in form and substance satisfactory to it.
(g) Each document (including, without limitation, each Uniform
Commercial Code financing statement) required by law or requested by the
Syndication Agent to be filed, registered or recorded in order to create in
favor of the Administrative Agent for its own benefit and for the benefit
of the Lenders a first priority perfected security interest in the
Collateral shall have been properly filed, registered or recorded in each
jurisdiction in which the filing, registration or recordatio thereof is so
required or requested. The Syndication Agent shall have received an
acknowledgment copy, or other evidence satisfactory to it, of each such
filing, registration or recordation.
(h) The Syndication Agent shall have received the results of a search
of tax and other Liens, and judgments and of the Uniform Commercial Code
filings made with respect to each of the Borrowers and each Grantor in the
jurisdictions in which the Borrower and the Grantors are doing business
and/or in which any Collateral is located, and in which Uniform Commercial
Code filings have been made against each Borrower, each Guarantor and each
Grantor pursuant to paragraph (g) above.
(i) The Lenders and the Agents shall have received and determined to
be in form and substance satisfactory to them:
(i) a copy of a field examination of the Borrowers' books and
records;
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(ii) evidence of the compliance by the Borrowers with Section
6.03 hereof;
(iii) the financial statements described in Section 4.07 hereof;
(iv) evidence that the Transactions are in compliance with all
applicable laws and regulations;
(v) evidence of payment of all fees owed to the Administrative
Agent and Syndication Agent and the Lenders by the Borrowers under
this Agreement, the Commitment Letter or otherwise;
(vi) evidence that all requisite third party consents (including,
without limitation, consents with respect to each of the Borrowers and
each of the Grantors and Guarantors) to the Transactions have been
received;
(vii) evidence that there has been no material adverse change in
the business, assets, operations or financial condition of the
Borrowers and subsidiaries since December 31, 1997;
(viii) evidence of the repayment in full of exiting credit
arrangements and the termination of all commitments to lend
thereunder, and the termination of all security interests securing
such indebtedness as required under paragraph (f) above;
(ix) evidence that all dental practices affiliated with any of
the Borrowers have entered into a Management Agreement and a Shares
Acquisition Agreement (and an Assignment of Contract has been executed
and delivered in connection thereto); and
(x) evidence that there are no actions, suits or proceedings at
law or in equity or by or before any governmental instrumentality or
other agency or regulatory authority now pending or threatened against
or affecting any Borrowers or any subsidiary thereof or any of their
respective businesses, assets or rights which involve any of the
Transactions.
(j) Each Agent and the Lenders shall have had the opportunity, if they
so choose, to examine the books of account and other records and files of
the Borrowers, subsidiaries of the Borrowers, the Grantors and the
Guarantors and to make copies thereof, and to conduct customer checkings
and checkings with suppliers, insurance companies and dentists affiliated
with the Borrowers, and the results of such examination and checkings shall
have been satisfactory to the Agents and Lenders in all respects.
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(k) Each Agent shall have received and had the opportunity to review
and determine to be in form and substance satisfactory to it:
(i) copies of all real property lease agreements entered into by
any of the Borrowers and their subsidiaries;
(ii) copies of all loan agreements, notes and other documentation
evidencing Indebtedness for borrowed money of any of the Borrowers,
their subsidiaries which are not to be repaid on the Closing Date;
(iii) copies of all Management Agreements, Share Acquisition
Agreements, Purchase Agreements and earn-out agreements to which any
Loan Party is a party as of the Closing Date; and
(iv) copies of an amendment to the terms and provisions of the
Convertible Subordinated Note in form and substance satisfactory to
the Agents.
(l) Messrs. Kaye, Scholer, Fierman, Hays & Handler, LLP, counsel to
the Syndication Agent and Buchalter, Nemer, Fields & Younger, counsel to
the Administrative Agent, shall have each received payment in full for all
legal fees charged, and all costs and expenses incurred, by such counsel
through the Closing Date in connection with the transactions contemplated
under this Agreement, the Security Documents and the other Loan Documents
and instruments in connection herewith and therewith.
(m) The corporate structure and capitalization of the Borrowers shall
be satisfactory to the Lenders in all respects.
(n) All legal matters in connection with the Transactions shall be
satisfactory to the Administrative Agent, the Lenders and their respective
counsel in their sole discretion.
(o) The Borrowers shall have executed and delivered to the
Administrative Agent a disbursement authorization letter with respect to
the disbursement of the proceeds of the Credit Events made on the Closing
Date, in form and substance satisfactory to the Administrative Agent.
(p) The Borrowers and the Administrative Agent (or another financial
institution acceptable to the Administrative Agent and the Syndication
Agent) shall have entered into lockbox and other cash management
arrangements pursuant to documentation satisfactory in form and substance
to the Administrative Agent and the Syndication Agent.
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(q) Each Agent shall have received such other documents as the Lenders
or such Agent or such Agent's counsel shall reasonably deem necessary.
VI. AFFIRMATIVE COVENANTS
Each of the Borrowers covenant and agree with each Lender and each
Agent that, so long as this Agreement shall remain in effect or the principal of
or interest on any Note, any amount under any Letter of Credit or any fee,
expense or other Obligation payable hereunder or in connection with any of the
Transactions shall be unpaid, it will, and will cause each of its subsidiaries
and, with respect to Section 6.07 hereof, each ERISA Affiliate, to:
SECTION VI.1. Legal Existence. Do or cause to be done all things
necessary to preserve, renew and keep in full force and effect its legal
existence.
SECTION VI.2. Businesses and Properties. At all times do or cause to
be done all things necessary to preserve, renew and keep in full force and
effect the rights, licenses, Permits, franchises, patents, copyrights,
trademarks and trade names material to the conduct of its businesses; maintain
and operate such businesses in the same general manner in which they are
presently conducted and operated; comply with all laws, rules, regulations and
governmental orders (whether Federal, state or local) applicable to the
operation of such businesses whether now in effect or hereafter enacted
(including, without limitation, all applicable laws, rules, regulations and
governmental orders relating to public and employee health and safety and all
Environmental Laws) and with any and all other applicable laws, rules,
regulations and governmental orders, the lack of compliance with which would
have a Material Adverse Effect; take all actions which may be required to
obtain, preserve, renew and extend all Permits and other authorizations which
are material to the operation of such businesses; and at all times maintain,
preserve and protect all property material to the conduct of such businesses and
keep such property in good repair, working order and condition and from time to
time make, or cause to be made, all needful and proper repairs, renewals,
additions, improvements and replacements thereto necessary in order that the
business carried on in connection therewith may be properly conducted at all
times.
SECTION VI.3. Insurance. (a) Keep its insurable properties adequately
insured at all times by financially sound and reputable insurers, (b) maintain
such other insurance, to such extent and against such risks, including fire and
other risks insured against by extended coverage, as is customary with companies
similarly situated and in the same or similar businesses, provided, however,
that such insurance shall insure the property of the Borrowers against all risk
of physical damage, including, without limitation, loss by fire, explosion,
theft, fraud and such other casualties as may be
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reasonably satisfactory to the Administrative Agent, but in no event at any time
in an amount less than the replacement value of the Collateral, (c) maintain in
full force and effect public liability insurance against claims for personal
injury or death or property damage occurring upon, in, about or in connection
with the use of any properties owned, occupied or controlled by any Borrowers or
any of their subsidiaries, in such amount as the Administrative Agent shall
reasonably deem necessary, (d) maintain business interruption insurance to such
extent as is customary with companies similarly situated and in the same or
similar businesses, (e) cause each Affiliated Dental Practice to maintain such
medical malpractice insurance as is customary for similar dental practices and
(f) maintain such other insurance as may be required by law or as may be
reasonably requested by the Administrative Agent for purposes of assuring
compliance with this Section 6.03. All insurance covering tangible personal
property subject to a Lien in favor of the Administrative Agent for its own
benefit and for the benefit of the Lenders granted pursuant to the Security
Documents shall provide that, in the case of each separate loss the full amount
of insurance proceeds shall be payable to the Administrative Agent and shall
further provide for at least 30 days' prior written notice to the Administrative
Agent of the cancellation or substantial modification thereof.
SECTION VI.4. Taxes. Pay and discharge promptly when due all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or profits or in respect of its property before the same shall become
delinquent or in default, as well as all lawful claims for labor, materials and
supplies or otherwise, which, if unpaid, might give rise to Liens upon such
properties or any part thereof.
SECTION VI.5. Financial Statements, Reports, etc. Furnish to the
Administrative Agent, with copies for each of the Lenders:
(a) within 105 days after the end of each Fiscal Year, (i)
Consolidated balance sheets and Consolidated income statements showing the
financial condition of the Borrowers and their subsidiaries as of the close
of such Fiscal Year and the results of their operations during such year,
(ii) a Consolidated statement of shareholders' equity and a Consolidated
statement of cash flow, as of the close of such Fiscal Year, comparing such
financial condition and results of operations to such financial condition
and results of operations for the comparable period during the immediately
preceding Fiscal Year, all the foregoing financial statements to be audited
by independent public accountants acceptable to the Administrative Agent
(which report shall not contain any qualification except with respect to
new accounting principles mandated by the Financial Accounting Standards
Board) and to be in form and substance acceptable to the Administrative
Agent, (iii) consolidating income statements by market place as of the
close of such Fiscal Year, such consolidating income statements to be in
form and substance acceptable to the Agents, (iv) balance sheets and income
statements showing the financial condition of Dedicated Dental as of the
close of such Fiscal Year and the results of Dedicated Dental's
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operations during such year and (v) Dedicated Dental's statement of cash
flow, as of the close of such Fiscal Year, comparing such financial
condition and results of operations to such financial condition and results
of operations for the comparable period during the immediately preceding
Fiscal Year, in the case of clauses (iii), (iv) and (v), prepared and
certified by the Financial Officer of the Borrowers as having been prepared
in accordance with GAAP and, with respect to clause (iv), as presenting
fairly the financial condition and results of operations of Dedicated
Dental;
(b) within 45 days after the end of each of the first three (3) fiscal
quarters of the Borrowers, (i) unaudited Consolidated balance sheets and
Consolidated income statements showing the financial condition and results
of operations of the Borrowers and their subsidiaries as of the end of each
such quarter, (ii) a Consolidated statement of shareholders' equity, (iii)
a Consolidated statement of cash flow, in each case for the fiscal quarter
just ended and for the period commencing at the end of the immediately
preceding Fiscal Year and ending with the last day of such quarter, and
comparing such financial condition and results of operations to the
projections for the applicable period provided under paragraph (g) below
and to the results for the comparable period during the immediately
preceding Fiscal Year, (iv) consolidating income statements by market place
as of the end of each such fiscal quarter, such consolidating income
statements to be in form and substance acceptable to the Agents, (v)
balance sheets and income statements showing the financial condition and
the results of operations of Dedicated Dental as of the end of each such
quarter and (vi) Dedicated Dental's statement of cash flow for the fiscal
quarter just ended and for the period commencing at the end of the
immediately preceding Fiscal Year and ending with the last day of such
quarter, in each case prepared and certified by the Financial Officer of
each of the Borrowers as presenting fairly the financial condition and
results of operations of the Borrowers and their subsidiaries, or of
Dedicated Dental, as the case may be, and as having been prepared in
accordance with GAAP, in each case subject to normal year-end audit
adjustments;
(c) within 30 days after the end of each month (i) unaudited
Consolidated balance sheets and income statements showing the financial
condition and results of operations of the Borrowers and their subsidiaries
as of the end of each such month, (ii) a Consolidated statement of
shareholders' equity, (iii) a Consolidated statement of cash flow, in each
case for the month just ended and for the period commencing at the end of
the immediately preceding Fiscal Year and ending with the last day of such
month, and comparing such financial condition and results of operations to
the projections for the applicable period provided under paragraph (g)
below and to the results for the comparable period during the immediately
preceding Fiscal Year, (iv) income
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statements by market place as of the end of each such month, such financial
statements to be in form and substance satisfactory to the Agents, (v)
balance sheets and income statements showing the financial condition and
the results of operations of Dedicated Dental as of the end of each such
month and (vi) Dedicated Dental's statement of cash flow for the month just
ended and for the period commencing at the end of the immediately preceding
Fiscal Year and ending with the last day of such month, in each case
prepared and certified by the Financial Officer of the Borrowers as
presenting fairly the financial condition and results of operations of the
Borrowers and their subsidiaries, or of Dedicated Dental, as the case may
be, and as having been prepared in accordance with GAAP, in each case
subject to the absence of footnotes and normal year-end audit adjustments;
(d) promptly after the same become publicly available, copies of such
registration statements, annual, periodic and other reports, and such proxy
statements and other information, if any, as shall be filed by the
Borrowers or any of their subsidiaries with the Securities and Exchange
Commission pursuant to the requirements of the Securities Act of 1933 or
the Securities Exchange Act of 1934;
(e) (i) concurrently with any delivery under (a) or (b) above, a
certificate of the Financial Officer of each of the Borrowers, which
certificate shall certify that to the best of his or her knowledge no
Default or Event of Default has occurred (including (i) calculations
demonstrating compliance, as of the dates of the financial statements being
furnished, with the covenants set forth in Sections 7.07, 7.08, 7.09, 7.10
and 7.11 hereof and (ii) appropriate schedules as may be requested by the
Administrative Agent in support of such calculations, such schedules to be
in substantially the form of Exhibit L annexed hereto) and, if such a
Default or Event of Default has occurred, specifying the nature and extent
thereof and any corrective action taken or proposed to be taken with
respect thereto and, if such a Default or Event of Default has occurred,
specifying the nature and extent thereof and any corrective action taken or
proposed to be taken with respect thereto, and shall in addition certify
that in the course of preparing the audit and the certificate referred to
herein, such accountants have not become aware of the occurrence of any
other Default or Event of Default and, if such a Default or Event of
Default has occurred, specifying the nature thereof; provided, however,
that any certificate delivered concurrently with (a) above shall be signed
by the Financial Officer of a Borrower;
(f) concurrently with any delivery under (a) above, any related
management letter prepared by the independent public accountants who
reported on the financial statements delivered under (a) above, with
respect to
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the internal audit and financial controls of any of the Borrowers and
their subsidiaries;
(g) within 30 days after the beginning of each Fiscal Year, a summary
of business plans and financial operation projections (including, without
limitation, with respect to Capital Expenditures) for the Borrowers and
their respective subsidiaries for such Fiscal Year (including monthly
balance sheets, statements of income and of cash flow) and annual
projections through the Final Maturity Date prepared by management and in
form, substance and detail (including, without limitation, principal
assumptions) satisfactory to the Administrative Agent;
(h) as soon as practicable, copies of all reports, forms, filings,
loan documents and financial information submitted to governmental agencies
and/or its shareholders.
(i) immediately upon becoming aware thereof, notice to the
Administrative Agent of the breach by any party of any material agreement
with any of the Borrowers; and
(j) such other information as the Administrative Agent or any Lender
may reasonably request.
SECTION VI.6. Litigation and Other Notices. Give the Administrative
Agent prompt written notice of the following:
(a) the issuance by any court or governmental agency or authority of
any injunction, order, decision or other restraint prohibiting, or having
the effect of prohibiting, the making of the Loans or occurrence of other
Credit Events, or invalidating, or having the effect of invalidating, any
provision of this Agreement, the Notes or the other Loan Documents, or the
initiation of any litigation or similar proceeding seeking any such
injunction, order, decision or other restraint;
(b) the filing or commencement of any action, suit or proceeding
against any Borrowers or any of their subsidiaries or, to the extent known
by a Responsible Officer of a Borrower, against any Affiliated Dental
Practice, whether at law or in equity or by or before any court or any
Federal, state, municipal or other governmental agency or authority, (i)
which is material and is brought by or on behalf of any governmental agency
or authority, or in which injunctive or other equitable relief is sought or
(ii) as to which it is probable (within the meaning of Statement of
Financial Accounting Standards No. 5) that there will be an adverse
determination and which, if adversely determined, would (A) reasonably be
expected to result in liability of one or more Borrowers or a subsidiary
thereof or an Affiliated Dental Practice in an aggregate amount of
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$200,000 or more, not reimbursable by insurance or (B) materially impair
the right of any Borrowers or a subsidiary thereof to perform its
obligations under this Agreement, any Note or any other Loan Document to
which it is a party;
(c) any Default or Event of Default, specifying the nature and extent
thereof and the action (if any) which is proposed to be taken with respect
thereto; and
(d) any development in the business or affairs of any Borrowers or any
of their subsidiaries which has had or which is likely to have, in the
reasonable judgment of any Responsible Officer of such Borrower, a Material
Adverse Effect.
SECTION VI.7. ERISA. (a) Pay and discharge promptly any liability
imposed upon it pursuant to the provisions of Title IV of ERISA; provided,
however, that neither the Borrowers nor any ERISA Affiliate shall be required to
pay any such liability if (1) the amount, applicability or validity thereof
shall be diligently contested in good faith by appropriate proceedings, and (2)
such person shall have set aside on its books reserves which, in the opinion of
the independent certified public accountants of such person, are adequate with
respect thereto.
(b) Deliver to the Administrative Agent, promptly, and in any event
within 5 days, after (i) the occurrence of any Reportable Event, a copy of the
materials that are filed with the PBGC, or the materials that would have been
required to be filed if the 30-day notice requirement to the PBGC was not
waived, (ii) any Borrowers or any ERISA Affiliate or an administrator of any
Pension Plan files with participants, beneficiaries or the PBGC a notice of
intent to terminate any such Plan, a copy of any such notice, (iii) the receipt
of notice by any Borrowers or any ERISA Affiliate or an administrator of any
Pension Plan from the PBGC of the PBGC's intention to terminate any Pension Plan
or to appoint a trustee to administer any such Plan, a copy of such notice, (iv)
the filing thereof with the Internal Revenue Service, copies of each annual
report that is filed on Treasury Form 5500 with respect to any Plan, together
with certified financial statements (if any) for the Plan and any actuarial
statements on Schedule B to such Form 5500, (v) any Borrowers or any ERISA
Affiliate knows or has reason to know of any event or condition which might
constitute grounds under the provisions of Section 4042 of ERISA for the
termination of (or the appointment of a trustee to administer) any Pension Plan,
an explanation of such event or condition, (vi) the receipt by any Borrowers or
any ERISA Affiliate of an assessment of withdrawal liability under Section 4201
of ERISA from a Multiemployer Plan, a copy of such assessment, (vii) any
Borrowers or any ERISA Affiliate knows or has reason to know of any event or
condition which might cause any one of them to incur a liability under Section
4062, 4063, 4064 or 4069 of ERISA or Section 412(n) or 4971 of the Code, an
explanation of such event or condition, and (viii) any Borrowers or any ERISA
Affiliate knows or has reason to know that an application is to be, or has been,
made to the
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Secretary of the Treasury for a waiver of the minimum funding standard under the
provisions of Section 412 of the Code, a copy of such application, and in each
case described in clauses (i) through (iii) and (v) through (vii) together with
a statement signed by the Financial Officer setting forth details as to such
Reportable Event, notice, event or condition and the action which such Borrowers
or such ERISA Affiliate proposes to take with respect thereto.
SECTION VI.8. Maintaining Records; Access to Properties and
Inspections; Right to Audit. Maintain financial records in accordance with
accepted financial practices and, upon reasonable notice (which may be
telephonic), at all reasonable times and as often as any Lender may request,
permit any authorized representative designated by such Lender to visit and
inspect the properties and financial records of the Borrowers and their
subsidiaries and to make extracts from such fina cial records at the Borrowers'
expense, and permit any authorized representative designated by such Lender to
discuss the affairs, finances and condition of the Borrowers and their
subsidiaries with the appropriate Financial Officer and such other officers as
the Borrowers shall deem appropriate and the Borrowers' independent public
accountants, as applicable. The Administrative Agent agrees that it shall
schedule any meeting with any such independent public accountant through the
Borrowers and a Responsible Officer of one or more Borrowers shall have the
right to be present at any such meeting. At the Borrowers' expense, the
Administrative Agent shall have the right to audit, as often as it may request,
the existence and condition of the accounts receivables, inventory, books and
records of the Borrowers and their subsidiaries and to review their compliance
with the terms and conditions of this Agreement and the other Loan Documents.
SECTION VI.9. Use of Proceeds. Use the proceeds of the Credit Events
only for the purposes set forth in Section 4.14 hereof.
SECTION VI.10. Fiscal Year-End. Cause its Fiscal Year to end on
December 31 in each year.
SECTION VI.11. Further Assurances. Execute any and all further
documents and take all further actions which may be required under applicable
law, or which the Administrative Agent may reasonably request, to grant,
preserve, protect and perfect the first priority security interest created by
the Security Documents in the Collateral.
SECTION VI.12. Additional Grantors and Guarantors. Promptly inform the
Administrative Agent of the creation or acquisition of any direct or indirect
subsidiary (subject to the provisions of Section 7.06 hereof) and cause each
direct or indirect subsidiary not in existence on the date hereof to enter into
a Guarantee in form and substance satisfactory to the Administrative Agent, and
to execute the Security Documents, as applicable, as a Grantor, and cause the
direct parent of each such
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subsidiary to pledge all of the capital stock of such subsidiary pursuant to the
Pledge Agreement and cause each such subsidiary to pledge its accounts
receivable and all other assets pursuant to the Security Agreement.
SECTION VI.13. Environmental Laws. (a) Comply, and cause each of their
subsidiaries to comply, in all material respects with the provisions of all
Environmental Laws, and shall keep their properties and the properties of their
subsidiaries free of any Lien imposed pursuant to any Environmental Law. The
Borrowers shall not cause or suffer or permit, and shall not suffer or permit
any of their subsidiaries to cause or suffer or permit, the property of the
Borrowers or their subsidiaries to be used for the generation, production,
processing, handling, storage, transporting or disposal of any Hazardous
Material, except for Hazardous Materials used in the ordinary course of business
of the Borrowers and disclosed in Schedule 6.13 hereto, in which case such
Hazardous Materials shall be used, stored, generated, treated and disposed of
only in compliance, in all material respects, with Environmental Law.
(b) Supply to the Administrative Agent copies of all submissions by
the Borrowers or any of their subsidiaries to any governmental body and of the
reports of all environmental audits and of all other environmental tests,
studies or assessments (including the data derived from any sampling or survey
of asbestos, soil, or subsurface or other materials or conditions) that may be
conducted or performed (by or on behalf of the Borrowers or any of their
subsidiaries) on or regarding the properties owned, operated, leased or occupied
by the Borrowers or any of their subsidiaries or regarding any conditions that
might have been affected by Hazardous Materials on or Released or removed from
such properties. The Borrowers shall also permit and authorize, and shall cause
their subsidiaries to permit and authorize, the consultants, attorneys or other
persons that prepare such submissions or reports or perform such audits, tests,
studies or assessments to discuss such submissions, reports or audits with the
Administrative Agent and the Lenders.
(c) Promptly (and in no event more than two (2) Business Days after
the Borrowers become aware or are otherwise informed of such event) provide oral
and written notice to the Administrative Agent upon the happening of any of the
following:
(i) any Borrower, any subsidiary of any Borrower, or any tenant
or other occupant of any property of such Borrowers or such subsidiary
receives written notice of any claim, complaint, charge or notice of a
violation or potential violation of any Environmental Law;
(ii) there has been a spill or other Release of Hazardous
Materials upon, under or about or affecting any of the properties
owned, operated, leased or occupied by any Borrowers or any subsidiary
of any Borrowers in amounts that may have to be reported under
Environmental Law, or
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Hazardous Materials at levels or in amounts that may have to be
reported, remedied or responded to under Environmental Law are
detected on or in the soil or groundwater;
(iii) any Borrowers or any subsidiary of any Borrowers are or may
be liable any costs of cleaning up or otherwise responding to a
Release of Hazardous Materials;
(iv) any part of the properties owned, operated, leased or
occupied by any Borrowers or any subsidiary of any Borrowers are or
may be subject to a Lien under any Environmental Law; or
(v) any Borrowers or any subsidiary of any Borrowers undertakes
any Remedial Work with respect to any Hazardous Materials.
(d) Without in any way limiting the scope of Section 11.04(c) and in
addition to any obligations thereunder, each of the Borrowers hereby indemnifies
and agrees to hold the Administrative Agent and the Lenders harmless from and
against any liability, loss, damage, suit, action or proceeding arising out of
its business or the business of its subsidiaries pertaining to Hazardous
Materials, including, but not limited to, claims of any governmental body or any
third person arising under any Environmental Law or under tort, contract or
common law. To the extent laws of the United States or any applicable state or
local law in which property owned, operated, leased or occupied by any Borrowers
or any subsidiary of any Borrowers are located provide that a Lien upon such
property of such Borrowers or such subsidiary may be obtained for the removal of
Hazardous Materials which have been or may be Released, no later than sixty days
after notice that a Release has occurred is given by the Administrative Agent to
such Borrowers or such subsidiary, such Borrowers or such subsidiary shall
deliver to the Administrative Agent a report issued by a qualified third party
engineer assessing the existence and extent of any Hazardous Materials located
upon or beneath the specified property. To the extent any Hazardous Materials
located therein or thereunder either subject the property to Lien or require
removal to safeguard the health of any persons, the removal thereof shall be an
affirmative covenant of the Borrowers hereunder.
(e) In the event that any Remedial Work is required to be performed by
any Borrowers or any subsidiary of any Borrowers under any applicable
Environmental Law, any judicial order, or by any governmental entity, such
Borrowers or such subsidiary shall commence all such Remedial Work at or prior
to the time required therefor under such Environmental Law or applicable
judicial orders and thereafter diligently prosecute to completion all such
Remedial Work in accordance with and within the time allowed under such
applicable Environmental Laws or judicial orders.
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SECTION VI.14. Pay Obligations to Lenders and Perform Other Covenants. (a)
Make full and timely payment of the Obligations, whether now existing or
hereafter arising, (b) duly comply with all the terms and covenants contained in
this Agreement (including, without limitation, the borrowing limitations and
mandatory prepayments in accordance with Article II hereof) and in each of the
other Loan Documents, all at the times and places and in the manner set forth
therein, and (c) except for the filing of continuation statements and the making
of other filings by the Administrative Agent as secured party or assignee, at
all times take all actions necessary to maintain the Liens and security
interests provided for under or pursuant to this Agreement and the Security
Documents as valid and perfected first Liens on the property intended to be
covered thereby (subject only to Liens expressly permitted hereunder) and supply
all information to the Administrative Agent necessary for such maintenance.
SECTION VI.15. Maintain Operating Accounts. Maintain all of its operating
accounts and cash management arrangements with the Administrative Agent.
SECTION VI.16. Life Insurance. Obtain within 90 days of the Closing Date,
and at all times thereafter maintain in full force and effect, key man life
insurance on Michael Fiore in an amount of not less than Five Million Dollars
($5,000,000), with the Borrowers as beneficiary under such policy. Dental
Service shall assign to the Administrative Agent for its own benefit and for the
benefit of the Lenders as security for the Obligations all monies payable under
or in respect of such insurance policy pursuant to the Assignment of Life
Insurance.
SECTION VI.17. Year 2000. Take all actions necessary to permit the proper
functioning, in and following the year 2000 of (i) the Borrowers' computer
systems and (ii) equipment containing embedded microchips (including systems and
equipment sup-plied by others or with which Borrowers' systems interface and
which are within the control of the Borrowers) and the testing of all such
systems and equipment, as so programmed, unless the failure to take such actions
would not reasonably be expected to have a Material Adverse Effect.
SECTION VI.18. Assignment of Contracts. In connection with each Permitted
Acquisition, cause the applicable Loan Party to execute and deliver to the
Administrative Agent an Assignment of Contract with respect to the related
Management Agreement, Purchase Agreement and Shares Acquisition Agreement.
SECTION VI.19. Holding Company Structure. Seek shareholder approval for the
implementation of a holding company structure at or before the Borrowers' 1999
shareholder meeting and effect the implementation of such holding company
structure acceptable to the Required Lenders by July 31, 1999. Immediately upon
the implementation of such holding company structure, the Holding Company shall
enter
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into a pledge agreement in form and substance satisfactory to the Administrative
Agent, pledging the shares of Dental Service.
SECTION VI.20. Dedicated Dental. By no later than 14 days after the Closing
Date, file a Notice of Material Modification with the California Department of
Corporations seeking an Order of Approval in order to effectuate a pledge by
Dental Service of all of the capital shares of Dedicated Dental pursuant to the
terms of the Pledge Agreement and, immediately upon receiving such Order of
Approval, Dental Service shall pledge all of the capital stock of Dedicated
Dental in accordance with the provisions of the Pledge Agreement.
SECTION VI.21. Landlord Waivers. Within 60 days of the Closing Date, obtain
a landlord waiver in form and substance reasonably acceptable to the
Administrative Agent with respect to the 222 North Sepulveda, El Segundo,
California location.
SECTION VI.22. Purchase Agreements. Upon the request of the Administrative
Agent, enforce any indemnification rights which might arise under any Purchase
Agreement to the extent the related loss, if not indemnified, would be material.
SECTION VI.23. Trademark. By no later than 5 days after the Closing Date,
file an assignment of the "Gentle Dental" trademark in the United States Patent
and Trademark Office evidencing Dental Service's ownership of such trademark.
SECTION VI.24. Cash Management Arrangements. Within 30 days of the Closing
Date, direct (pursuant to documentation acceptable to the Administrative Agent)
each of the banks holding accounts into which the Affiliated Dental Practices'
Receivables are deposited to sweep the amounts on deposit in such accounts to an
account maintained at bank reasonably acceptable to the Administrative Agent;
provided, however, that to the extent that such bank is a bank other than the
Administrative Agent, such bank enter into a blocked account letter with the
Administrative Agent (such blocked account letter to be in form and substance
satisfactory to the Administrative Agent).
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SECTION VI.25. UCC-1 Financing Statements. Within 10 Business Days of the
Closing Date, file UCC-1 Financing Statements against the dental practices
listed on Schedule 6.25 hereto, such financing statements to name a Borrower or
a Guarantor as secured party, the Administrative Agent as assignee and the
dental practice as debtor and containing a collateral description reflecting the
collateral described in the related security agreement.
VII. NEGATIVE COVENANTS
Each of the Borrowers covenant and agree with each Lender and each Agent
that, so long as this Agreement shall remain in effect or the principal of or
interest on any Note, any amount under any Letter of Credit, or any fee, expense
or other Obligation payable hereunder or in connection with any of the
Transactions shall be unpaid, it will not and will not cause or permit any of
their subsidiaries and, in the case of Section 7.15 hereof, any ERISA Affiliate
to, either directly or indirectly:
SECTION VII.1. Liens. Incur, create, assume or permit to exist any Lien on
any of its property or assets (including the stock of any direct or indirect
subsidiary), whether owned at the date hereof or hereafter acquired, or assign
or convey any rights to or security interests in any future revenues, except:
(a) Liens incurred and pledges and deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance, old-age pensions and other social security benefits (not
including any lien described in Section 412(m) of the Code);
(b) Liens imposed by law, such as carriers', warehousemen's,
mechanics', materialmen's and vendors' liens and other similar liens,
incurred in good faith in the ordinary course of business and securing
obligations which are not overdue for a period of more than 15 days or
which are being contested in good faith by appropriate proceedings as to
which any Borrowers or any of their subsidiaries, as the case may be,
shall, to the extent required by GAAP, have set aside on its books adequate
reserves;
(c) Liens securing the payment of taxes, assessments and governmental
charges or levies, that are not delinquent or are being diligently
contested in good faith by appropriate proceedings and as to which adequate
reserves have been established in accordance with GAAP; provided, however,
that in no event shall the aggregate amount of such reserves be less than
the aggregate amount secured by such Liens;
(d) zoning restrictions, easements, licenses, reservations,
provisions, covenants, conditions, waivers, restrictions on the use of
property or minor
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irregularities of title (and with respect to leasehold interests,
mortgages, obligations, liens and other encumbrances incurred, created,
assumed or permitted to exist and arising by, through or under a landlord
or owner of the leased property, with or without consent of the lessee)
which do not in the aggregate materially detract from the value of its
property or assets or materially impair the use thereof in the operation of
its business;
(e) Liens upon any equipment acquired through the purchase or lease by
any Borrowers or any of their subsidiaries which are created or incurred
contemporaneously with such acquisition to secure or provide for the
payment of any part of the purchase price of, or lease payments on, such
equipment (but no other amounts and not in excess of the purchase price or
lease payments); provided, however, that any such Lien shall not apply to
any other property of the Borrowers or any of their subsidiaries; and
provided, further, that after giving effect to such purchase or lease,
compliance is maintained with Section 7.07 hereof; provided, further, that
the aggregate outstanding amount of any such Liens shall not exceed
$3,500,000 at any time outstanding;
(f) Liens existing on the date of this Agreement and set forth in
Schedule 7.01 annexed hereto but not the extension, renewal or refunding of
the Indebtedness secured thereby;
(g) Liens created in favor of the Administrative Agent for its own
benefit and the benefit of the Lenders; or
(h) Liens securing the performance of bids, tenders, leases, contracts
(other than for the repayment of borrowed money), statutory obligations,
surety, customs and appeal bonds and other obligations of like nature,
incurred as an incident to and in the ordinary course of business.
SECTION VII.2. Sale and Lease-Back Transactions. Enter into any
arrangement, directly or indirectly, with any person whereby any Borrowers or
any of their subsidiaries shall sell or transfer any property, real or personal,
and used or useful in its business, whether now owned or hereafter acquired, and
thereafter rent or lease such property or other property which such Borrowers or
such subsidiary intends to use for substantially the same purpose or purposes as
the property being sold or transferred.
SECTION VII.3. Indebtedness. Incur, create, assume or permit to exist any
Indebtedness other than (i) Indebtedness secured by Liens permitted under
Sections 7.01(f), (ii) Indebtedness (including, without limitation, Guarantees)
existing on the date hereof and listed in Schedule 7.03 annexed hereto, but not
the extension, renewal or refunding thereof, (iii) Indebtedness incurred
hereunder, (iv) Indebtedness to trade creditors incurred in the ordinary course
of business, (v) Guarantees constituting
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the endorsement of negotiable instruments for deposit or collection in the
ordinary course of business, (vi) Guarantees of the Obligations, (vii) purchase
money Indebtedness to the extent permitted by Sections 7.01(e) and 7.07 hereof,
(viii) Subordinated Indebtedness and (ix) earn-out liabilities incurred in
connection with Permitted Acquisitions.
SECTION VII.4. Dividends, Distributions and Payments. Declare or pay,
directly and indirectly, any cash dividends or make any other distribution,
whether in cash, property, securities or a combination thereof, with respect to
(whether by reduction of capital or otherwise) any shares of its capital stock
or directly or indirectly redeem, purchase, retire or otherwise acquire for
value (or permit any subsidiary to purchase or acquire) any shares of any class
of its capital stock or set aside any amount for any such purpose; provided,
however, that the Borrowers may pay Preferred Dividends so long as no Default or
Event of Default shall have occurred and be continuing at such time or shall
occur as a result of such payment; provided, further, that a Guarantor may pay
dividends to its immediate parent so long as such parent is a Guarantor or a
Borrower and so long as no Default or Event of Default shall have occurred and
be continuing at such time or shall occur as a result of such payment.
SECTION VII.5. Consolidations, Mergers and Sales of Assets. Consolidate
with or merge into any other person, or sell, lease, transfer or assign to any
persons or otherwise dispose of (whether in one transaction or a series of
transactions) any portion of its assets (whether now owned or hereafter
acquired), or sell any of its inventory, other than in the normal course of
business, or permit another person to merge into it, or acquire all or
substantially all the capital stock or assets of any other person, other than
Permitted Acquisitions, Permitted De Novo Capital Expenditures or in connection
with the implementation of a holding company structure to the extent permitted
pursuant to Section 6.19 hereof.
SECTION VII.6. Investments. Own, purchase or acquire any stock,
obligations, assets (not in the ordinary course of business) or securities of,
or any interest in, or make any capital contribution or loan or advance to, any
other person, or make any other investments, except:
(a) certificates of deposit in dollars of any commercial banks
registered to do business in any state of the United States (i) having
capital and surplus in excess of $1,000,000,000 and (ii) whose long-term
debt rating is at least investment grade as determined by either Standard &
Poor's Ratings Group or Moody's Investors Service, Inc.;
(b) readily marketable direct obligations of the United States
government or any agency thereof which are backed by the full faith and
credit of the United States;
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(c) investments in money market mutual funds having assets in excess
of $2,500,000,000;
(d) commercial paper at the time of acquisition having the highest
rating obtainable from either Standard & Poor's Ratings Group or Moody's
Investors Service, Inc.;
(e) federally tax exempt securities rated A or better by either
Standard & Poor's Ratings Group or Moody's Investors Service, Inc.;
(f) investments in the stock of any subsidiary existing on the Closing
Date, but not any additional investments therein;
(g) Permitted De Novo Capital Expenditures;
(h) Permitted Acquisitions;
(i) loans or advances by a Borrower to a Guarantor; and
(j) loans or advances by a Borrower to an Affiliated Dental Practice,
made in the ordinary course of business to fund operating expenses in
accordance with the terms of the related Management Agreement;
(k) loans or advances by a Borrower to Dedicated Dental, made in the
ordinary course of business to fund operating expenses; and
(l) loans or advances by a Borrower to a subsidiary which is in the
Dental Insurance Business, made in the ordinary course of business to fund
operating expenses; provided that the stock of such subsidiary is pledged
to the Administrative Agent pursuant to the terms of the Pledge Agreement;
provided that, in each case mentioned in (a), (b), (d) and (e) above, such
obligations shall mature not more than one year from the date of acquisition
thereof.
SECTION VII.7. Capital Expenditures. Permit the aggregate amount of
payments made for Capital Expenditures and De Novo Capital Expenditures,
including Capitalized Lease Obligations and Indebtedness secured by Liens
permitted under Section 7.01(e) hereof, for the one fiscal quarter period (in
the case of the fiscal quarter ending September 30, 1998), two fiscal quarter
period (in the case of the fiscal quarter ending December 31, 1998), three
fiscal quarter period (in the case of the fiscal quarter ending March 31, 1999)
or four fiscal quarter period (in the case of the fiscal quarter ending June 30,
1999) and for each four fiscal quarter period thereafter, commencing with the
fiscal quarter ending September 30, 1998, to exceed 6% of the Borrowers' and
their subsidiaries' net revenues (as determined in accordance with GAAP) for
such period. Upon the written consent of the Required Lenders, the foregoing
limitation may
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be increased to an amount not in excess of 8% of the Borrowers' and their
subsidiaries' net revenues (as determined in accordance with GAAP) for any such
period.
SECTION VII.8. Net Worth. Permit the Net Worth of the Borrowers and their
subsidiaries (on a Consolidated basis) at any time to be less than the sum of
(i) (x) the Net Worth of the Borrowers and their subsidiaries (on a Consolidated
basis) on the Closing Date minus (y) $750,000, plus (ii) 100% of extraordinary
gains arising after the Closing Date through the date of determination, plus
(iii) 100% of the net proceeds received by the Borrowers after the Closing Date
through the date of determination from any sale of common stock of any of the
Borrowers, plus (iv) 100% of the value of any capital stock issued by any of the
Borrowers as consideration in connection with any Permitted Acquisitions
occurring after the Closing Date through the date of determination plus (v) 70%
of the positive Net Income of the Borrowers and their subsidiaries (on a
Consolidated basis) for the period commencing with the Closing Date through and
including the date of determination.
SECTION VII.9. Leverage Ratio; Interest Leverage Ratio. (a) Leverage Ratio.
Permit the Leverage Ratio of the Borrowers and their subsidiaries on a
Consolidated basis at the end of any fiscal quarter to be greater than the
respective amounts set forth below opposite such dates:
<TABLE>
<CAPTION>
Quarter Ending Ratio
- -------------- -----
<S> <C>
September 30, 1998, 3.75:1.00
December 31, 1998,
March 31, 1999, June 30,
1999, September 30,
1999, December 31, 1999,
March 31, 2000, June 30,
2000, September 30,
2000, December 31, 2000,
March 31, 2001, June 30,
2001 and September 30,
2001
December 31, 2001 and 3.50:1.00
March 31, 2002
June 30, 2002 and 3.00:1.00
September 30, 2002
December 31, 2002 and 2.50:1.00
March 31, 2003
Each June 30, September
</TABLE>
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<TABLE>
<S> <C>
30, December 31 and 2.00:1.00;
March 31 thereafter
</TABLE>
provided, however, that if the Borrowers' complete an equity offering prior
to the Conversion Date, each of the following ratios shall be reduced by 0.25
commencing with the last day of the fiscal quarter in which such equity offering
was completed.
(b) Interest Leverage Ratio. Permit the Interest Leverage Ratio of the
Borrowers and their subsidiaries on a Consolidated basis at the end of any
fiscal quarter to be greater than the respective amounts set forth below
opposite such dates:
<TABLE>
<CAPTION>
Quarter Ending Ratio
- -------------- -----
<S> <C>
September 30, 1998, 4.75:1.00
December 31, 1998,
March 31, 1999, June 30,
1999, September 30,
1999, December 31, 1999,
March 31, 2000, June 30,
2000, September 30,
2000, December 31, 2000,
March 31, 2001, June 30,
2001 and September 30,
2001
December 31, 2001 and 4.50:1.00
March 31, 2002
June 30, 2002 and 4.00:1.00
September 30, 2002
December 31, 2002 and 3.50:1.00
March 31, 2003
Each June 30, September 3.00:1.00;
30, December 31 and
March 31 thereafter
</TABLE>
provided, however, that if the Borrowers' complete an equity offering prior
to the Conversion Date, each of the following ratios shall be reduced by 0.25
commencing with the last day of the fiscal quarter in which such equity offering
was completed.
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SECTION VII.10. Interest Coverage Ratios. (a) Permit the ratio for each one
fiscal quarter period (in the case of the fiscal quarter ending September 30,
1998), two fiscal quarter period (in the case of the fiscal quarter ending
December 31, 1998), three fiscal quarter period (in the case of the fiscal
quarter ending March 31, 1999) or four fiscal quarter period (in the case of the
fiscal quarter ending June 30, 1999) and for each four fiscal quarter period
thereafter, commencing with the fiscal quarter ending September 30, 1998, of (i)
EBITDA of the Borrowers and their subsidiaries on a Consolidated basis for such
period to (ii) the sum of (x) Cash Interest Expense of the Borrowers and their
subsidiaries on a Consolidated basis for such period plus (y) the aggregate
amount of all Preferred Dividends paid in cash during such period to be less
than 3.00:1.00.
(b) Permit the ratio for each one fiscal quarter period (in the case of the
fiscal quarter ending September 30, 1998), two fiscal quarter period (in the
case of the fiscal quarter ending December 31, 1998), three fiscal quarter
period (in the case of the fiscal quarter ending March 31, 1999) or four fiscal
quarter period (in the case of the fiscal quarter ending June 30, 1999) and for
each four fiscal quarter period thereafter, commencing with the fiscal quarter
ending September 30, 1998, of (i) the sum of (x) EBITDA of the Borrowers and
their subsidiaries on a Consolidated basis for such period minus (y) the
aggregate amount of all Maintenance Capital Expenditures made by the Borrowers
and their subsidiaries during such period to (ii) the sum of (x) Cash Interest
Expense of the Borrowers and their subsidiaries on a Consolidated basis for such
period plus (y) the aggregate amount of all Preferred Dividends paid in cash
during such period to be less than 2.50:1.00.
SECTION VII.11. Fixed Charge Ratio. Permit the Fixed Charge Coverage Ratio
of the Borrowers and their subsidiaries on a Consolidated basis for the four
fiscal quarter period ending on the last day of each fiscal quarter commencing
with the fiscal quarter ending December 31, 2001 to be less than 1.25:1.00.
SECTION VII.12. Business. Alter the nature of its business as operated on
the date of this Agreement in any material respect.
SECTION VII.13. Sales of Accounts Receivables. Sell, assign, discount,
transfer, or otherwise dispose of any accounts receivable, promissory notes,
drafts or trade acceptances or other rights to receive payment held by it, with
or without recourse, except (i) for the purpose of collection or settlement in
the ordinary course of business or (ii) the sale of any such accounts to the
Administrative Agent.
SECTION VII.14. Use of Proceeds. Permit the proceeds of any Credit Event to
be used for any purpose which entails a violation of, or is inconsistent with,
Regulation T, U or X of the Board, or for any purpose other than those set forth
in Section 4.14 hereof.
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SECTION VII.15. ERISA. (a) Engage in any transaction in connection with
which any of the Borrowers or any ERISA Affiliate could be subject to either a
material civil penalty assessed pursuant to the provisions of Section 502 of
ERISA or a material tax imposed under the provisions of Section 4975 of the
Code.
(b) Terminate any Pension Plan in a "distress termination" under Section
4041 of ERISA, or take any other action which could result in a material
liability of any of the Borrowers or any ERISA Affiliate to the PBGC.
(c) Fail to make payment when due of all amounts which, under the
provisions of any Plan, the Borrowers or any ERISA Affiliate are required to pay
as contributions thereto, or, with respect to any Pension Plan, permit to exist
any material "accumulated funding deficiency" (within the meaning of Section 302
of ERISA and Section 412 of the Code), whether or not waived, with respect
thereto.
(d) Adopt an amendment to any Pension Plan requiring the provision of
security under Section 307 of ERISA or Section 401(a)(29) of the Code.
SECTION VII.16. Accounting Changes. Make any change in their accounting
treatment or financial reporting practices except as required or permitted by
GAAP.
SECTION VII.17. Prepayment or Modification of Indebtedness; Modification of
Charter Documents, etc. (a) Directly or indirectly prepay, redeem, purchase or
retire any Indebtedness, including, without limitation, any Subordinated
Indebtedness other than Indebtedness incurred hereunder.
(b) Modify, amend or otherwise alter the terms and provisions of any
Subordinated Indebtedness or any Management Agreement or Shares Acquisition
Agreement (unless any such amendment is required by law).
(c) Modify, amend or alter their certificates or articles of incorporation
or preferred stock/certificates of designations.
(d) Change the instructions described in Section 6.24 hereof to the banks
holding accounts into which the Affiliated Dental Practices' Receivables are
deposited.
SECTION VII.18. Transactions with Affiliates. Except as otherwise
specifically set forth in this Agreement, directly or indirectly purchase,
acquire or lease any property from, or sell, transfer or lease any property to,
or enter into any other transaction with, any stockholder, Affiliate or agent of
any Borrower, except at prices and on terms not less favorable to it than that
which would have been obtained in an arm's-length transaction with a
non-affiliated third party.
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SECTION VII.19. Consulting Fees. Pay any management, consulting or other
fees of any kind to any Borrower, or to any Affiliate of the Borrowers or any of
the Borrowers' subsidiaries, other than those fees listed on Schedule 7.19
annexed hereto.
SECTION VII.20. Negative Pledges, Etc. Enter into any agreement (other than
this Agreement or any other Loan Document) which (a) prohibits the creation or
assumption of any Lien upon any of the Collateral, including, without
limitation, any hereafter acquired property, or (b) specifically prohibits the
amendment or other modification of this Agreement or any other Loan Document.
VIII. EVENTS OF DEFAULT
In case of the happening of any of the following events (herein called
"Events of Default"):
(a) any representation or warranty made or deemed made by any Loan
Party in or in connection with this Agreement, any of the Security
Documents, the Notes or other Loan Documents or any Credit Events
hereunder, shall prove to have been incorrect in any material respect when
made or deemed to be made;
(b) default shall be made in the payment of any principal of any Note
when and as the same shall become due and payable, whether at the due date
thereof or at a date fixed for prepayment thereof or by acceleration
thereof or otherwise;
(c) default shall be made in the payment of any interest on any Note,
or any fee or any other amount payable hereunder, or under the Notes,
Letters of Credit, or any other Loan Document or in connection with any
other Credit Event or the Transactions when and as the same shall become
due and payable;
(d) default shall be made in the due observance or performance of any
covenant, condition or agreement to be observed or performed on the part of
any Loan Party pursuant to the terms of this Agreement, any of the Notes,
any of the Security Documents or any other Loan Document;
(e) any Loan Party shall (i) voluntarily commence any proceeding or
file any petition seeking relief under Title 11 of the United States Code
or any other Federal, state or foreign bankruptcy, insolvency, liquidation
or similar law, (ii) consent to the institution of, or fail to contravene
in a timely and appropriate manner, any such proceeding or the filing of
any such petition, (iii) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator or
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similar official for any Loan Party or for a substantial part of its
property or assets, (iv) file an answer admitting the material allegations
of a petition filed against it in any such proceeding, (v) make a general
assignment for the benefit of creditors, (vi) become unable, admit in
writing its inability or fail generally to pay its debts as they become due
or (vii) take corporate action for the purpose of effecting any of the
foregoing;
(f) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (i)
relief in respect of any Loan Party, or of a substantial part of the
property or assets of any Loan Party, under Title 11 of the United States
Code or any other Federal state or foreign bankruptcy, insolvency,
receivership or similar law, (ii) the appointment of a receiver, trustee,
custodian, sequestrator or similar official for any Loan Party or for a
substantial part of the property of any Loan Party, or (iii) the winding-up
or liquidation of any Loan Party; and such proceeding or petition shall
continue undismissed for 30 days or an order or decree approving or
ordering any of the foregoing shall continue unstayed and in effect for 30
days;
(g) default shall be made with respect to any Indebtedness or
obligations under a capitalized lease of any Loan Party (excluding
Indebtedness outstanding hereunder) which either individually or taken
together with other such Indebtedness as to which a default has occurred
shall exceed $150,000 if the effect of any such default shall be to
accelerate, or to permit the holder or obligee of any such Indebtedness or
obligations under a capitalized lease (or any trustee on behalf of such
holder or obligee) at its option to accelerate, the maturity of such
Indebtedness or obligations under a capitalized lease;
(h) (i) a Reportable Event shall have occurred with respect to a
Pension Plan, (ii) the filing by any Loan Party, any ERISA Affiliate, or an
administrator of any Plan of a notice of intent to terminate such a Plan in
a "distress termination" under the provisions of Section 4041 of ERISA,
(iii) the receipt of notice by any Loan Party, any ERISA Affiliate, or an
administrator of a Plan that the PBGC has instituted proceedings to
terminate (or appoint a trustee to administer) such a Pension Plan, (iv)
any other event or condition exists which might, in the opinion of the
Administrative Agent, constitute grounds under the provisions of Section
4042 of ERISA for the termination of (or the appointment of a trustee to
administer) any Pension Plan by the PBGC, (v) a Pension Plan shall fail to
maintain the minimum funding standard required by Section 412 of the Code
for any plan year or a waiver of such standard is sought or granted under
the provisions of Section 412(d) of the Code, (vi) any Loan Party or any
ERISA Affiliate has incurred, or is likely to incur, a liability under the
provisions of Section 4062, 4063, 4064 or 4201 of ERISA, (vii) any Loan
Party or any ERISA Affiliate fails to pay the full amount of an installment
required under
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Section 412(m) of the Code, (viii) the occurrence of any other event or
condition with respect to any Plan which would constitute an event of
default under any other agreement entered into by any Loan Party or any
ERISA Affiliate, and in each case in clauses (i) through (viii) of this
subsection (h), such event or condition, together with all other such
events or conditions, if any, could subject any Loan Party or any ERISA
Affiliate to any taxes, penalties or other liabilities which, in the
opinion of the Administrative Agent, could have a Material Adverse Effect
on the financial condition of any Loan Party or any ERISA Affiliate;
(i) any Loan Party or any ERISA Affiliate (i) shall have been notified
by the sponsor of a Multiemployer Plan that it has incurred any material
withdrawal liability to such Multiemployer Plan, and (ii) does not have
reasonable grounds for contesting such withdrawal liability and is not in
fact contesting such withdrawal liability in a timely and appropriate
manner;
(j) a judgment (not reimbursed by insurance policies of any Loan
Party) or decree for the payment of money, a fine or penalty which when
taken together with all other such judgments, decrees, fines and penalties
shall exceed $250,000 shall be rendered by a court or other tribunal
against any Loan Party and (i) shall remain undischarged or unbonded for a
period of 30 consecutive days during which the execution of such judgment,
decree, fine or penalty shall not have been stayed effectively or (ii) any
judgment creditor or other person shall legally commence actions to collect
on or enforce such judgment, decree, fine or penalty;
(k) this Agreement, any Note, any of the Security Documents, any
Guarantee or other Loan Documents shall for any reason cease to be, or
shall be asserted by any Loan Party not to be, a legal, valid and binding
obligation of any Loan Party, enforceable in accordance with its terms, or
the security interest or Lien purported to be created by any of the
Security Documents shall for any reason cease to be, or be asserted by any
Loan Party not to be, a valid, first priority perfected security interest
in any Collateral (except to the extent otherwise permitted under this
Agreement or any of the Security Documents);
(l) a Change of Control shall occur; or
(m) any material damage to, or loss, theft or destruction of, any
material Collateral, whether or not insured, or any strike, lockout, labor
dispute, embargo, condemnation, act of God or public enemy, or other
casualty which causes, for more than thirty (30) consecutive days beyond
the coverage period of any applicable business interruption insurance, the
cessation or substantial curtailment of revenue producing activities at any
facility of a Loan Party if any such event or circumstance could have a
Material Adverse Effect; or
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(n) change in law shall occur which results in any of the Borrowers
not enjoying rights equivalent to those in effect on the Closing Date with
respect to such Borrower's relationship with Affiliated Dental Practices;
then, and in any such event (other than an event described in paragraph (e) or
(f) above), and at any time thereafter during the continuance of such event, the
Administrative Agent may, and upon the written request of the Required Lenders
shall, by written notice (or facsimile notice promptly confirmed in writing) to
the Borrowers, take any or all of the following actions at the same or different
times: (i) terminate forthwith all or any portion of the Total Revolving Loan
Commitment and the obligations of the Lenders to issue Letters of Credit
hereunder; (ii) declare the Notes and any amounts then owing to the Lenders on
account of drawings under any Letters of Credit to be forthwith due and payable,
and (iii) require that the Borrowers remit to the Administrative Agent cash
collateral in an amount equal to the aggregate undrawn amount of all outstanding
Letters of Credit at such time, such cash collateral to be held by the
Administrative Agent for its own benefit and the benefit of the Lenders in a
cash collateral account on terms and conditions satisfactory to the
Administrative Agent, whereupon the principal of such Notes, together with
accrued interest and fees thereon and any amounts then owing to the Lenders on
account of drawings under any Letters of Credit and other liabilities of the
Borrowers accrued hereunder, shall become forthwith due and payable both as to
principal and interest, without presentment, demand, protest or any other notice
of any kind, all of which are hereby expressly waived by the Borrowers, anything
contained herein or in the Notes to the contrary notwithstanding; provided,
however, that with respect to a default described in paragraph (e) or (f) above,
the Total Revolving Credit Commitment and the obligation of the Lenders to issue
Letters of Credit shall automatically terminate and the principal of the Notes,
together with accrued interest and fees thereon and any amounts then owing to
the Lenders on account of drawings under any Letters of Credit and any other
liabilities of the Borrowers accrued hereunder shall automatically become due
and payable, both as to principal and interest, without presentment, demand,
protest or other notice of any kind, all of which are hereby expressly waived by
the Borrowers, anything contained herein or in the Notes to the contrary
notwithstanding.
IX. AGENTS
In order to expedite the transactions contemplated by this
Agreement, Union Bank of California, N.A. is hereby appointed to act as
Administrative Agent on behalf of the Lenders. Each of the Lenders and each
subsequent holder of any Note or issuer of any Letter of Credit by its
acceptance thereof, irrevocably authorizes the Administrative Agent to take such
action on its behalf and to exercise such actions and powers hereunder and under
the Security Documents and other Loan Documents as are specifically delegated to
or required of the Administrative Agent by the terms hereof and the terms
thereof together with such actions and powers as are reasonably
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incidental thereto. Neither the Administrative Agent nor any of its directors,
officers, employees or agents shall be liable as such for any action taken or
omitted to be taken by it or them hereunder or under any of the Security
Documents and other Loan Documents or in connection herewith or therewith (a) at
the request or with the approval of the Required Lenders (or, if otherwise
specifically required hereunder or thereunder, the consent of all the Lenders)
or (b) in the absence of its or their own gross negligence or willful
misconduct. Notwithstanding any provisions to the contrary elsewhere herein or
in the other Loan Documents, the Administrative Agent shall not have any duties
or responsibilities except those expressly set forth herein or in the other Loan
Documents, and no implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into the Credit Agreement or in the
other Loan Documents or otherwise exist against the Administrative Agent.
The Administrative Agent is hereby expressly authorized on behalf of the
Lenders, without hereby limiting any implied authority, (a) to receive on behalf
of each of the Lenders any payment of principal of or interest on the Notes
outstanding hereunder and all other amounts accrued hereunder which are paid to
the Administrative Agent, and promptly to distribute to each Lender its proper
share of all payments so received, (b) to distribute to each Lender copies of
all notices, agreements and other material as provided for in this Agreement or
in the Security Documents and other Loan Documents as received by the
Administrative Agent (c) to maintain, in accordance with its customary business
practices, ledgers and records reflecting the status of the Loans, the
Collateral and related matters, (d) to open and maintain bank accounts and lock
boxes as the Administrative Agent deems necessary and appropriate in accordance
with the Loan Documents with respect to the Collateral, (e) to take all actions
with respect to this Agreement and the Security Documents and other Loan
Documents as are specifically delegated to the Administrative Agent, and (f) to
incur and pay such expenses as the Administrative Agent may deem necessary or
appropriate in connection with the foregoing.
In the event that (a) any Borrowers fail to pay when due the principal of
or interest on any Note, any amount payable under any Letter of Credit, or any
fee payable hereunder or (b) the Administrative Agent receives written notice of
the occurrence of a Default or an Event of Default (the Administrative Agent
being deemed not to have knowledge of any Default or Event of Default unless and
until written notice thereof is given to the Administrative Agent by any
Borrower or a Lender), the Administrative Agent within a reasonable time shall
give written notice thereof to the Lenders, and shall take such action with
respect to such Event of Default or other condition or event as it shall be
directed to take by the Required Lenders; provided, however, that, unless and
until the Administrative Agent shall have received such directions, the
Administrative Agent may take such action or refrain from taking such action
hereunder or under the Security Documents or other Loan Documents with
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respect to a Default or Event of Default as it shall deem advisable in the best
interests of the Lenders.
Neither the Administrative Agent nor the Syndication Agent (collectively,
the "Agents") shall be responsible in any manner to any of the Lenders for the
effectiveness, enforceability, perfection, value, genuineness, validity or due
execution of this Agreement, the Notes or any of the other Loan Documents or
Collateral or any other agreements or certificates, requests, financial
statements, notices or opinions of counsel or for any recitals, statements,
warranties or representations contained herein or in any such instrument or be
under any obligation to ascertain or inquire as to the performance or observance
of any of the terms, provisions, covenants, conditions, agreements or
obligations of this Agreement or any of the other Loan Documents or any other
agreements on the part of the Borrowers and, without limiting the generality of
the foregoing, the Agents shall, in the absence of knowledge to the contrary, be
entitled to accept any certificate furnished pursuant to this Agreement or any
of the other Loan Documents as conclusive evidence of the facts stated therein
and shall be entitled to rely on any note, notice, consent, certificate,
affidavit, letter, telegram, teletype message, statement, order or other
document which it believes in good faith to be genuine and correct and to have
been signed or sent by the proper person or persons. It is understood and agreed
that each of the Agents may exercise its rights and powers under other
agreements and instruments to which it is or may be a party, and engage in other
transactions with the Borrowers, as though it were not one of the Agents
hereunder.
The Administrative Agent shall promptly give notice to the Lenders of the
receipt or sending of any material notice, schedule, report, projection,
financial statement or other document or information pursuant to this Agreement
or any of the other Loan Documents and shall promptly forward a copy thereof to
each Lender.
Neither of the Agents nor any of their respective directors, officers,
employees or agents shall have any responsibility to the Borrowers on account of
the failure or delay in performance or breach by any Lender other than such
Agents of any of its obligations hereunder or to any Lender on account of the
failure of or delay in performance or breach by any other Lender or the
Borrowers of any of their respective obligations hereunder or in connection
herewith.
Each of the Agents may consult with legal counsel selected by it in
connection with matters arising under this Agreement or any of the other Loan
Documents and any action taken or suffered in good faith by it in accordance
with the opinion of such counsel shall be full justification and protection to
it. Each of the Agents may exercise any of its powers and rights and perform any
duty under this Agreement or any of the other Loan Documents through agents or
attorneys.
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The Administrative Agent and the Borrowers may deem and treat the payee of
any Note as the holder thereof until written notice of transfer shall have been
delivered as provided herein by such payee to the Administrative Agent and the
Borrowers.
With respect to the Loans made hereunder, the Notes issued to it and any
other Credit Event applicable to it, the Administrative Agent in its individual
capacity and not as an Administrative Agent shall have the same rights, powers
and duties hereunder and under any other agreement executed in connection
herewith as any other Lender and may exercise the same as though it were not the
Administrative Agent, and the Administrative Agent and its affiliates may accept
deposits from, lend money to and generally engage in any kind of business with
the Borrowers or other affiliate thereof as if it were not the Administrative
Agent. Each of the Lenders hereby acknowledges that each of the Agents and/or
one or more Affiliates of such Agents may at any time and from time to time be a
holder of equity interests in a Loan Party.
Each Lender agrees (i) to reimburse each of the Agents in the amount of
such Lender's pro rata share (based on its Revolving Credit Commitment
hereunder) of any expenses incurred for its own benefit and/or for the benefit
of the Lenders by the Agents, including counsel fees and compensation of agents
and employees paid for services rendered on behalf of the Lenders, not
reimbursed by the Borrowers and (ii) to indemnify and hold harmless each of the
Agents and any of their respective directors, officers, employees or agents, on
demand, in the amount of its pro rata share, from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever which may be
imposed on, incurred by or asserted against it in its capacity as the
Administrative Agent or any of them in any way relating to or arising out of
this Agreement or any of the other Loan Documents or any action taken or omitted
by it or any of them under this Agreement or any of the other Loan Documents, to
the extent not reimbursed by the Borrowers; provided, however, that no Lender
shall be liable to any of the Agents for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgment, suits, costs,
expenses or disbursements resulting from the gross negligence or willful
misconduct of such Agents or any of their respective directors, officers,
employees or agents. The foregoing agreement shall survive the repayment of all
Obligations and the termination of this Agreement.
With respect to the release of Collateral, Lenders hereby irrevocably
authorize the Administrative Agent, at its option and in its discretion, to
release any Lien granted to or held by the Administrative Agent upon any
property covered by this Agreement or the other Loan Documents (i) upon
termination of the Total Revolving Credit Commitment and payment and
satisfaction of all Obligations; (ii) constituting property being sold or
disposed of in compliance with the provisions of this Agreement (and the
Administrative Agent may rely in good faith conclusively on any certificate to
such effect, without further inquiry); or (iii) constituting property leased to
any of the
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Borrowers or any of their subsidiaries under a lease which has expired or been
terminated in a transaction permitted under this Agreement or is about to expire
and which has not been, and is not intended by such Borrower or such subsidiary
to be, renewed or extended; provided, however, that (x) the Administrative Agent
shall not be required to execute any release on terms which, in the
Administrative Agent's opinion, would expose the Administrative Agent to
liability or create any obligation or entail any consequence other than the
release of such Liens without recourse or warranty, and (y) such release shall
not in any manner discharge, affect or impair the Obligations or any Liens upon
(or obligations of any Loan Party, in respect of), all interests retained by any
Loan Party, including (without limitation) the proceeds of any sale, all of
which shall continue to constitute part of the property covered by this
Agreement or the Loan Documents.
With respect to perfecting Lenders' security interest in Collateral which,
in accordance with Article 9 of the Uniform Commercial Code in any applicable
jurisdiction, can be perfected only by possession, each Lender hereby appoints
each other Lender for the purpose of perfecting such interest. Should any Lender
(other than the Administrative Agent) obtain possession of any such Collateral,
such Lender shall notify the Administrative Agent, and, promptly upon the
Administrative Agent's request, shall deliver such Collateral to the
Administrative Agent or in accordance with the Administrative Agent's
instructions. Each Lender agrees that it will not have any right individually to
enforce or seek to enforce this Agreement or any Loan Document or to realize
upon any Collateral for the Loans, it being understood and agreed that such
rights and remedies may be exercised only by the Administrative Agent.
In the event that a petition seeking relief under Title 11 of the United
States Code or any other Federal, state or foreign bankruptcy, insolvency,
liquidation or similar law is filed by or against any Loan Party, the
Administrative Agent is authorized to file a proof of claim on behalf of itself
and the Lenders in such proceeding for the total amount of Obligations owed by
such Loan Party. With respect to any such proof of claim which the
Administrative Agent may file, each Lender acknowledges that without reliance on
such proof of claim, such Lender shall make its own evaluation as to whether an
individual proof of claim must be filed in respect of such Obligations owed to
such Lender and, if so, take the steps necessary to prepare and timely file such
individual claim.
Each Lender acknowledges that it has, independently and without reliance
upon the Agents or any other Lender and based on such documents and information
as it has deemed appropriate, made its own credit analysis and decision to enter
into this Agreement and any other Loan Document to which such Lender is party.
Each Lender also acknowledges that it will, independently and without reliance
upon the Agents or any other Lender and based on such documents and information
as it shall deem appropriate at the time, continue to make its own decisions in
taking or not
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taking action under or based upon this Agreement, any other Loan Document, any
related agreement or any document furnished hereunder.
Subject to the appointment and acceptance of a successor Administrative
Agent as provided below, the Administrative Agent may resign at any time by
notifying the Lenders and the Borrowers. Upon any such resignation, the Lenders
shall have the right to appoint a successor Administrative Agent. If no
successor Administrative Agent shall have been so appointed by such Lenders and
shall have accepted such appointment within 30 days after the retiring
Administrative Agent gives notice of its resignation, then the retiring
Administrative Agent may, on behalf of the Lenders, appoint a successor
Administrative Agent which shall be a bank organized under the laws of the
United States, or any State thereof, having a combined capital and surplus of at
least $500,000,000. Upon the acceptance of any appointment as Administrative
Agent hereunder by a successor bank, such successor shall thereupon succeed to
and become vested with all the rights, powers, privileges and duties of the
retiring Administrative Agent and the retiring Administrative Agent shall be
discharged from its duties and obligations hereunder and under each of the other
Loan Documents. After any Administrative Agent's resignation hereunder, the
provisions of this Article shall continue in effect for its benefit in respect
of any actions taken or omitted to be taken by it while it was acting as
Administrative Agent.
The Lenders hereby acknowledge that the Administrative Agent shall be under
no duty to take any discretionary action permitted to be taken by the
Administrative Agent pursuant to the provisions of this Agreement or any of the
other Loan Documents unless it shall be requested in writing to do so by the
Required Lenders. The Lenders further hereby acknowledge that neither of the
Agents is acting as the fiduciary of, or the trustee for, any of the Lenders and
except as expressly set forth herein, neither of the Agents shall have any duty
to disclose, and shall not be liable for the failure to disclose, any
information communicated to such Agents by or relating to the Borrowers or any
of their respective subsidiaries.
X. COLLECTION OF RECEIVABLES
The Borrowers and the Guarantors will, at the request of the Administrative
Agent, at their own cost and expense upon the occurrence of an Event of Default,
(i) arrange for remittances on Receivables owned by the Borrowers and the
Guarantors to be made directly to lockboxes designated by the Administrative
Agent or in such other manner as the Administrative Agent may direct, and (ii)
promptly deposit all payments received by the Borrowers and the Guarantors on
account of Receivables, whether in the form of cash, checks, notes, drafts,
bills of exchange, money orders or otherwise, in one or more accounts designated
by the Administrative Agent in precisely the form received (but with any
endorsements of the Borrowers necessary for deposit or collection), subject to
withdrawal by the Administrative Agent only, as hereinafter
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provided, and until such payments are deposited, such payments shall be deemed
to be held in trust by the Borrowers or the Guarantors, as the case may be, for
and as the Lenders' property and shall not be commingled with the Borrowers' or
the Guarantors', as the case may be, other funds.
Upon the occurrence and continuance of an Event of Default, the
Administrative Agent may send a notice of assignment and/or notice of the
Administrative Agent's security interest to any and all Customers or any third
party holding or otherwise concerned with any of the Collateral, and thereafter
the Administrative Agent shall have the sole right to collect the Receivables
and/or take possession of the Collateral and the books and records relating
thereto. Neither the Borrowers nor the Guarantors shall, without the
Administrative Agent's prior written consent, grant any extension of the time of
payment of any Receivable, compromise or settle any Receivable for less than the
full amount thereof, release, in whole or in part, any person or property liable
for the payment thereof, or allow any credit or discount whatsoever thereon
except, prior to the occurrence and continuance of an Event of Default, as may
be customary in the Borrowers' or the Guarantors', as the case may be, business.
XI. MISCELLANEOUS
SECTION XI.1. Notices. Notices, consents and other communications provided
for herein shall be in writing and shall be delivered or mailed (or in the case
of telex or facsimile communication, delivered by telex, graphic scanning,
telecopier or other telecommunications equipment, with receipt confirmed)
addressed,
(a) if to all or any of the Borrowers, Guarantors, or Grantors, at 222
North Sepulveda Boulevard, Suite 740, El Segundo, California 90245,
Attention: Chief Financial Officer (Telecopy No. (310) 765-2459), with a
copy to the Chief Executive Officer (Telecopy No. (310) 765-2459), with a
copy to McDermott, Will & Emery, 1301 Dove Street, Newport Beach,
California 92660-2444, Attention: Richard J. Babcock, Esq. (Telecopy No.
(949) 851-9348);
(b) if to the Syndication Agent, at The Chase Manhattan Bank, 600
Fifth Avenue, 4th Floor, New York, New York 10020-2302, Attention: Credit
Executive (Telecopy No. (212) 332-4294), with a copy to Kaye, Scholer, et
al., LLP, at 425 Park Avenue, New York, New York 10022, Attention: Jeffrey
M. Epstein, Esq. (Telecopy No. (212) 836-7151);
(c) if to the Administrative Agent, at Union Bank of California, N.A.,
100 Pringle Avenue, Suite 650 Walnut Creek, California 94596, Attention:
Nancy A. Perkins, Vice President, Commercial Finance Division (Telecopy No.
(925)
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943-7442), with a copy to Buchalter, Nemer, Fields & Younger, 333 Market
Street, 29th Floor, San Francisco, CA 94105-2130, Attention: Gary Nemer,
Esq. (Telecopy No. (415) 224-0770); and
(d) if to any Lender, at the address set forth below its name in
Schedule 2.01 annexed hereto.
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt if hand delivered or three days after being sent by registered
or certified mail, postage prepaid, return receipt requested, if by mail, or
upon receipt if by any telex, facsimile or other telecommunications equipment,
in each case addressed to such party as provided in this Section 11.01 or in
accordance with the latest unrevoked direction from such party.
SECTION XI.2. Survival of Agreement. All covenants, agreements,
representations and warranties made by any Borrowers or any subsidiary thereof
herein and in the certificates or other instruments prepared or delivered in
connection with this Agreement, any of the Security Documents, any Guarantee or
any other Loan Document, shall be considered to have been relied upon by the
Lenders and shall survive the making by the Lenders of the Loans and the
execution and delivery to the Lenders of the Notes and the occurrence of any
other Credit Event and shall continue in full force and effect as long as the
principal of or any accrued interest on the Notes or any other fee or amount
payable under the Notes or this Agreement or any other Loan Document is
outstanding and unpaid and so long as the Total Revolving Credit Commitment has
not been terminated.
SECTION XI.3. Successors and Assigns; Participations. (a) Whenever in this
Agreement any of the parties hereto is referred to, such reference shall be
deemed to include the successors and assigns of such party; and all covenants,
promises and agreements by or on behalf of any Loan Party, any ERISA Affiliate,
any subsidiary of any thereof, the Administrative Agent or the Lenders, that are
contained in this Agreement shall bind and inure to the benefit of their
respective successors and assigns. Without limiting the generality of the
foregoing, the Borrowers specifically confirm that any Lender may at any time
and from time to time pledge or otherwise grant a security interest in any Loan
or any Note (or any part thereof) to any Federal Reserve Bank. No Borrowers may
assign or transfer any of its rights or obligations hereunder without the
written consent of all the Lenders.
(b) Each Lender, without the consent of the Borrowers or the Agents, may
sell participations to one or more banks or other entities in all or a portion
of its rights and obligations under this Agreement (including, without
limitation, all or a portion of its Revolving Credit Commitment) and the Loans
owing to it and undrawn Letters of Credit and the Notes held by it); provided,
however, that (i) such Lender's obligations
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under this Agreement (including, without limitation, its Revolving Credit
Commitment) shall remain unchanged, (ii) such Lender shall remain solely
responsible to the other parties hereto for the performance of such obligations,
(iii) the banks or other entities buying participations shall be entitled to the
cost protection provisions contained in Section 2.10, 2.12 and 2.16 hereof, but
only to the extent any of such Sections would be available to the Lender which
sold such participation, and (iv) the Borrowers, the Administrative Agent and
the other Lenders shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Agreement;
provided, further, however, that such Lender shall retain the sole right and
responsibility to enforce the obligations of the Loan Parties relating to the
Loans, including, without limitation, the right to approve any amendment,
modification or waiver of any provision of this Agreement, other than
amendments, modifications or waivers with respect to decreasing any fees payable
hereunder or the amount of principal or the rate of interest payable on the
Loans, or extending the dates fixed for any payment of principal of or interest
on, the Loans or increasing or extending the Revolving Credit Commitments or the
release of all Collateral.
(c) Each Lender may assign by novation, to any one or more banks or other
entities without the prior written consent of the Agents, all or a portion of
its interests, rights and obligations under this Agreement and the other Loan
Documents (including, without limitation, all or a portion of its Revolving
Credit Commitment and the same portion of the Loans and undrawn Letters of
Credit at the time owing to it and the Note or Notes held by it), provided,
however, that (i) each such assignment shall be of a constant, and not a
varying, percentage of all of the assigning Lender's rights and obligations
under this Agreement, which shall include the same percentage interest in the
Loans, Letters of Credit and Notes, (ii) (x) prior to the Conversion Date, the
amount of the Revolving Credit Commitment of the assigning Lender being assigned
pursuant to each such assignment (determined as of the date the Assignment and
Acceptance with respect to such assignment is delivered to the Administrative
Agent) shall be in a minimum principal amount of $4,000,000 (unless to another
Lender, in which event there shall be no minimum requirement) and the amount of
the Revolving Credit Commitment retained by such Lender shall not be less than
$4,000,000 (unless such Lender's minimum hold position shall fall below
$4,000,000 by reason of an assignment to another Lender) or shall be zero, and
(y) after the Conversion Date, the amount of the Term Loan of the assigning
Lender being assigned pursuant to each such assignment (determined as of the
date the Assignment and Acceptance with respect to such assignment is delivered
to the Administrative Agent) shall be in a minimum principal amount of
$4,000,000 (unless to another Lender, in which event there shall be no minimum
requirement) and the amount of the Term Loan retained by such Lender shall not
be less than $4,000,000 (unless such Lender's minimum hold position shall fall
below $4,000,000 by reason of an assignment to another Lender) or shall be zero,
(iii) the parties to each such assignment shall execute and deliver to the
Administrative Agent, for its acceptance and recording in the Register (as
defined below), an
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Assignment and Acceptance, together with any Note subject to such assignment and
a processing and recordation fee of $3,000) and (iv) the Assignee, if it shall
not be a Lender, shall deliver to the Administrative Agent an Administrative
Questionnaire in the form provided to such Assignee by the Administrative Agent.
Upon such execution, delivery, acceptance and recording and after receipt of the
written consent of the Administrative Agent, from and after the effective date
specified in each Assignment and Acceptance, which effective date shall be at
least five (5) Business Days after the execution thereof, (x) the assignee
thereunder shall be a party hereto and, to the extent provided in such
Assignment and Acceptance, have the rights and obligations of a Lender hereunder
and under the other Loan Documents and (y) the Lender which is assignor
thereunder shall, to the extent provided in such Assignment and Acceptance, be
released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of an assigning
Lender's rights and obligations under this Agreement, such Lender shall cease to
be a party hereto but shall continue to be entitled to the benefits of Sections
2.10, 2.12, 2.16 and 11.04, as well as any fees accrued for its account
hereunder and not yet paid).
(d) By executing and delivering an Assignment and Acceptance, the Lender
which is assignor thereunder and the assignee thereunder confirm to, and agree
with, each other and the other parties hereto as follows: (i) other than the
representation and warranty that it is the legal and beneficial owner of the
interest being assigned thereunder free and clear of any adverse claim, and that
its Commitment and the outstanding balance of its Loans and participations in
Letters of Credit, in each case without giving effect to assignments thereof
which have not become effective, are as set forth in such Assignment and
Acceptance, such Lender makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with this Agreement or the execution, legality,
validity, enforceability, perfection, genuineness, sufficiency or value of this
Agreement, the other Loan Documents or any Collateral with respect thereto or
any other instrument or document furnished pursuant hereto or thereto; (ii) such
Lender makes no representation or warranty and assumes no responsibility with
respect to the financial condition of any Loan Party or the performance or
observance by any Loan Party of any of their respective obligations under this
Agreement, any Guarantees or any of the other Loan Documents or any other
instrument or document furnished pursuant hereto or thereto; (iii) such assignee
represents and warrants that it is legally authorized to enter into such
Assignment and Acceptance and confirms that it has received a copy of this
Agreement, any Guarantees and of the other Loan Documents, together with copies
of financial statements and such other documents and information as it has
deemed appropriate to make its own credit analysis and decision to enter into
such Assignment and Acceptance; (iv) such assignee will, independently and
without reliance upon the Administrative Agent, such Lender or any other Lender
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under this Agreement; (v)
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such assignee appoints and authorizes the Administrative Agent to take such
action as the Administrative Agent on its behalf and to exercise such powers
under this Agreement as are delegated to the Administrative Agent by the terms
hereof, together with such powers as are reasonably incidental thereto; and (vi)
such assignee agrees that it will perform in accordance with their terms all of
the obligations which by the terms of this Agreement are required to be
performed by it as a Lender.
(e) The Administrative Agent shall maintain at its address referred to in
Section 11.01 hereof a copy of each Assignment and Acceptance delivered to it
and a register for the recordation of the names and addresses of the Lenders and
the Revolving Credit Commitment, as the case may be, of, and principal amount of
the Loans owing to, each Lender from time to time (the "Register"). The entries
in the Register shall be conclusive, in the absence of manifest error, and the
Borrowers, the Administrative Agent and the Lenders may treat each person whose
name is recorded in the Register as a Lender hereunder for all purposes of this
Agreement. The Register shall be available for inspection by the Borrowers or
any Lender at any reasonable time and from time to time upon reasonable prior
notice.
(f) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an assignee together with any Note or Notes subject to such
assignment, any processing and recordation fee and, if required, an
Administrative Questionnaire and the written consent to such assignment, the
Administrative Agent shall, if such Assignment and Acceptance has been completed
and is precisely in the form of Exhibit F annexed hereto, (i) accept such
Assignment and Acceptance, (ii) record the information contained therein in the
Register and (iii) give prompt notice thereof to the Lenders and the Borrowers.
Within five (5) Business Days after receipt of such notice, the Borrowers, at
their own expense, shall execute and deliver to the Administrative Agent in
exchange for each surrendered Note or Notes a new Note or Notes to the order of
such assignee in an amount equal to its portion of the Revolving Credit
Commitment or of the Term Loan, assumed by it pursuant to such Assignment and
Acceptance and, if the assigning Lender has retained any Revolving Credit
Commitment or Term Loan hereunder, a new Note or Notes to the order of the
assigning Lender in an amount equal to the Revolving Credit Commitment or Term
Loan retained by it hereunder. Such new Note or Notes shall be in an aggregate
principal amount equal to the aggregate principal amount of such surrendered
Note or Notes, or, with respect to the Term Notes, the principal amount of the
Term Notes, outstanding at such time as evidenced by the Term Note or Notes,
shall be dated the effective date of such Assignment and Acceptance and shall
otherwise be in substantially the form of Exhibit A or Exhibit B, as the case
may be. Notes surrendered to the Borrowers shall be canceled by the Borrowers.
(g) Notwithstanding any other provision herein, any Lender may, in
connection with any assignment or participation or proposed assignment or
participation pursuant to this Section 11.03, disclose to the assignee or
participant or proposed
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assignee or participant, any information, including, without limitation, any
Information, relating to the Borrowers furnished to such Lender by or on behalf
of the Borrowers in connection with this Agreement; provided, however, that
prior to any such disclosure, each such assignee or participant or proposed
assignee or participant shall agree to preserve the confidentiality of any
confidential Information relating to the Borrowers received from such Lender.
SECTION XI.4. Expenses; Indemnity. (a) Each of the Borrowers agrees to pay
all reasonable out-of-pocket expenses incurred by the Agents in connection with
the preparation of this Agreement and the other Loan Documents or with any
amendments, modifications, waivers, extensions, renewals, renegotiations or
"workouts" of the provisions hereof or thereof (whether or not the transactions
hereby contemplated shall be consummated) or incurred by the Agents or any of
the Lenders in connection with the enforcement or protection of its rights in
connection with this Agreement or any of the other Loan Documents or with the
Loans made or the Notes or Letters of Credit issued hereunder, or in connection
with any pending or threatened action, proceeding, or investigation relating to
the foregoing, including but not limited to the reasonable fees and
disbursements of counsel for the Agents and ongoing field examination expenses
and charges, and, in connection with such enforcement or protection, the
reasonable fees and disbursements of counsel for the Lenders. Each of the
Borrowers further indemnifies the Lenders from and agrees to hold them harmless
against any documentary taxes, assessments or charges made by any governmental
authority by reason of the execution and delivery of this Agreement or the
Notes.
(b) Each of the Borrowers indemnifies the Agents and each Lender and their
respective directors, officers, employees and agents against, and agrees to hold
the Agents, each Lender and each such person harmless from, any and all losses,
claims, damages, liabilities and related expenses, including reasonable counsel
fees and expenses, incurred by or asserted against the Lender or any such person
arising out of, in any way connected with, or as a result of (i) the use of any
of the proceeds of the Loans, (ii) this Agreement, the Guarantees, any of the
Security Documents, or the other documents contemplated hereby or thereby, (iii)
the performance by the parties hereto and thereto of their respective
obligations hereunder and thereunder (including but not limited to the making of
the Total Revolving Credit Commitment) and consummation of the transactions
contemplated hereby and thereby, (iv) breach of any representation or warranty,
or (v) any claim, litigation, investigation or proceedings relating to any of
the foregoing, whether or not the Agents, any Lender or any such person is a
party thereto; provided, however, that such indemnity shall not, as to the
Agents or any Lender, apply to any such losses, claims, damages, liabilities or
related expenses to the extent that they result from the gross negligence or
willful misconduct of any Agent or any Lender.
(c) Each of the Borrowers indemnifies, and agrees to defend and hold
harmless the Administrative Agent and the Lenders and their respective officers,
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directors, shareholders, agents and employees (collectively, the
"Indemnitees") from and against any loss, cost, damage, liability, lien,
deficiency, fine, penalty or expense (including, without limitation, reasonable
attorneys' fees and reasonable expenses for investigation, removal, cleanup and
remedial costs and modification costs incurred to permit, continue or resume
normal operations of any property or assets or business of the Borrowers or any
subsidiary thereof) arising from a violation of, or failure to comply with any
Environmental Law and to remove any Lien arising therefrom except to the extent
caused by the gross negligence or willful misconduct of any Indemnitee, which
any of the Indemnitees may incur or which may be claimed or recorded against any
of the Indemnitees by any person.
(d) The provisions of this Section 11.04 shall remain operative and in full
force and effect regardless of the expiration of the term of this Agreement, the
consummation of the transactions contemplated hereby, the repayment of any of
the Loans, the invalidity or unenforceability of any term or provision of this
Agreement or the Notes, or any investigation made by or on behalf of the Agents
or any Lender. All amounts due under this Section 11.04 shall be payable on
written demand therefor.
SECTION XI.5. Applicable Law. THIS AGREEMENT AND THE NOTES SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA
(OTHER THAN THE CONFLICTS OF LAWS PRINCIPLES THEREOF).
SECTION XI.6. Right of Setoff. If an Event of Default shall have occurred
and be continuing, upon the request of the Required Lenders each Lender shall
and is hereby authorized at any time and from time to time, to the fullest
extent permitted by law, to set off and apply any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by such Lender to or for the credit or the
account of any of the Borrowers against any and all of the obligations of the
Borrowers now or hereafter existing under this Agreement and the Notes held by
such Lender, irrespective of whether or not such Lender shall have made any
demand under this Agreement or the Notes and although such obligations may be
unmatured. Each Lender agrees to notify promptly the Administrative Agent and
the Borrowers after any such setoff and application made by such Lender, but the
failure to give such notice shall not affect the validity of such setoff and
application. The rights of each Lender under this Section are in addition to
other rights and remedies (including, without limitation, other rights of
setoff) which may be available to such Lender.
SECTION XI.7. Payments on Business Days. (a) Should the principal of or
interest on the Notes or any fee or other amount payable hereunder become due
and payable on other than a Business Day, payment in respect thereof may be made
on the next succeeding Business Day (except as otherwise specified in
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the definition of "Interest Period"), and such extension of time shall in such
case be included in computing interest, if any, in connection with such payment.
(b) All payments by any of the Borrowers hereunder and all Loans made by
the Lenders hereunder shall be made in lawful money of the United States of
America in immediately available funds at the office of the Administrative Agent
set forth in Section 11.01 hereof.
SECTION XI.8. Waivers; Amendments. (a) No failure or delay of any Lender in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such right or power, preclude
any other or further exercise thereof or the exercise of any other right or
power. The rights and remedies of the Lenders hereunder are cumulative and not
exclusive of any rights or remedies which they may otherwise have. No waiver of
any provision of this Agreement or the Notes nor consent to any departure by any
of the Borrowers therefrom shall in any event be effective unless the same shall
be authorized as provided in paragraph (b) below, and then such waiver or
consent shall be effective only in the specific instance and for the purpose for
which given. No notice to or demand on any of the Borrowers in any case shall
entitle it to any other or further notice or demand in similar or other
circumstances. Each holder of any of the Notes shall be bound by any amendment,
modification, waiver or consent authorized as provided herein, whether or not
such Note shall have been marked to indicate such amendment, modification,
waiver or consent.
(b) Neither this Agreement nor any provision hereof may be waived, amended
or modified except pursuant to an agreement or agreements in writing entered
into by the Borrowers and the Required Lenders; provided, however, that no such
agreement shall (i) change the principal amount of, or extend or advance the
maturity of or the dates for the payment of principal of or interest on, any
Note or reduce the rate of interest on any Note, (ii) change the Revolving
Credit Commitment of any Lender or amend or modify the provisions of this
Section, Section 2.06, Section 2.13, Section 4.14 or Section 11.04 hereof or the
definition of "Required Lenders," or (iii) release any material portion of
Collateral, in each case without the prior written consent of each Lender
affected thereby, and provided, further, however, that no such agreement shall
amend, modify or otherwise affect the rights or duties of the Agents under this
Agreement or the other Loan Documents without the written consent of the Agents.
Each Lender and holder of any Note shall be bound by any modification or
amendment authorized by this Section regardless of whether its Notes shall be
marked to make reference thereto, and any consent by any Lender or holder of a
Note pursuant to this Section shall bind any person subsequently acquiring a
Note from it, whether or not such Note shall be so marked.
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(c) In the event that the Borrowers request, with respect to this Agreement
or any other Loan Document, an amendment, modification or waiver and such
amendment, modification or waiver would require the unanimous consent of all of
the Lenders in accordance with Section 11.08(b) above, and such amendment,
modification or waiver is agreed to in writing by the Borrowers and the Required
Lenders but not by all of the Lenders, then notwithstanding anything to the
contrary in Section 11.08(b) above, with the written consent of the Borrowers
and such Required Lenders, the Borrowers and Required Lenders may, but shall not
be obligated to, amend this Agreement without the consent of the Lender or
Lenders who did not agree to the proposed amendment, modification or waiver (the
"Minority Lenders") solely to provide for (i) the termination of the Revolving
Credit Commitment of each Minority Lender, (ii) the assignment in accordance
with Section 11.03 hereof to one or more persons of each Minority Lender's
interests, rights and obligations under this Agreement (including, without
limitation, all of such Minority Lender's Revolving Credit Commitment as well as
its portion of all outstanding Loans and the Note or Notes held by such Minority
Lender) and the other Loan Documents and/or an increase in the Revolving Credit
Commitment of one or more Required Lenders, in each case so that after giving
effect thereto the Total Revolving Credit Commitment shall be in the same
amounts as prior to the events described in this paragraph, (iii) the repayment
to the Minority Lenders in full of all Loans outstanding and accrued interest
thereon at the time of the assignment and/or increase in Commitments described
in clause (ii) above with the proceeds of Loans made by such persons who are to
become Lenders by assignment or with the proceeds of Loans made by Required
Lenders who have agreed to increase their Revolving Credit Commitment, (iv) the
payment to the Minority Lenders by the Borrowers of all fees and other
compensation due and owing such Minority Lenders under the terms of this
Agreement and the other Loan Documents and (v) such other modifications as the
Required Lenders and Borrowers shall deem necessary in order to effect the
changes specified in clauses (i) through (iv) hereof.
SECTION XI.9. Severability. In the event any one or more of the provisions
contained in this Agreement or in the Notes should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein or therein shall not in any way be
affected or impaired thereby.
SECTION XI.10. Entire Agreement; Waiver of Jury Trial, etc. (a) This
Agreement, the Notes and the other Loan Documents constitute the entire contract
between the parties hereto relative to the subject matter hereof. Any previous
agreement among the parties hereto with respect to the Transactions is
superseded by this Agreement, the Notes and the other Loan Documents. Except as
expressly provided herein or in the Notes or the Loan Documents (other than this
Agreement), nothing in this Agreement, the Notes or in the other Loan Documents,
expressed or implied, is intended to confer upon any party, other than the
parties hereto, any rights,
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remedies, obligations or liabilities under or by reason of this Agreement, the
Notes or the other Loan Documents.
(b) Except as prohibited by law, each party hereto hereby waives any right
it may have to a trial by jury in respect of any litigation directly or
indirectly arising out of, under or in connection with this Agreement, the
Notes, any of the other Loan Documents or the Transactions.
(c) Except as prohibited by law, each party hereto hereby waives any right
it may have to claim or recover in any litigation referred to in paragraph (b)
of this Section 11.10 any special, exemplary, punitive or consequential damages
or any damages other than, or in addition to, actual damages.
(d) Each party hereto (i) certifies that no representative, agent or
attorney of any Lender has represented, expressly or otherwise, that such Lender
would not, in the event of litigation, seek to enforce the foregoing waivers and
(ii) acknowledges that it has been induced to enter into this Agreement, the
Notes or the other Loan Documents, as applicable, by, among other things, the
mutual waivers and certifications herein.
SECTION XI.11. Confidentiality. The Agents and the Lenders agree to keep
confidential (and to cause their respective officers, directors, employees,
agents and representatives to keep confidential) all information, materials and
documents furnished to the Agents or any Lender (the "Information").
Notwithstanding the foregoing, the Agents and each Lender shall be permitted to
disclose Information (i) to such of its officers, directors, employees, agents
and representatives as need to know such Information in connection with its
participation in any of the Transactions or the administration of this Agreement
or the other Loan Documents; (ii) to the extent required by applicable laws and
regulations or by any subpoena or similar legal process, or requested by any
governmental agency or authority; (iii) to the extent such Information (A)
becomes publicly available other than as a result of a breach of this Agreement,
(B) becomes available to the Agents or such Lender on a non-confidential basis
from a source other than any Loan Party or any of its subsidiaries or (C) was
available to the Agents or such Lender on a non-confidential basis prior to its
disclosure to the Agents or such Lender by any Loan Party or any of its
subsidiaries; (iv) to the extent any Loan Party or any of its subsidiaries shall
have consented to such disclosure in writing; (v) in connection with the sale of
any Collateral pursuant to the provisions of any of the other Loan Documents; or
(vi) pursuant to Section 11.03(g) hereof.
SECTION XI.12. Submission to Jurisdiction. (a) Any legal action or
proceeding with respect to this Agreement or the Notes or any other Loan
Document may be brought in the courts of the State of California or of the
United States of America for the Northern District of California, and, by
execution and delivery of this
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Agreement, each Loan Party hereby accepts for itself and in respect of its
property, generally and unconditionally, the jurisdiction of the aforesaid
courts.
(b) Each Loan Party hereby irrevocably waives, in connection with any such
action or proceeding, any objection, including, without limitation, any
objection to the laying of venue or based on the grounds of forum non
conveniens, which it may now or hereafter have to the bringing of any such
action or proceeding in such jurisdictions.
(c) Each Loan Party hereby irrevocably consents to the service of process
of any of the aforementioned courts in any such action or proceeding by the
mailing of copies thereof by registered or certified mail, postage prepaid, to
each such person, as the case may be, at its address set forth in Section 11.01
hereof.
(d) Nothing herein shall affect the right of the Administrative Agent or
any Lender to serve process in any other manner permitted by law or to commence
legal proceedings or otherwise proceed against any Loan Party in any other
jurisdiction.
SECTION XI.13. Counterparts; Facsimile Signature. This Agreement may be
executed in counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one contract, and shall become
effective when copies hereof which, when taken together, bear the signatures of
each of the parties hereto shall be delivered to the Administrative Agent.
Delivery of an executed counterpart of a signature page to this Agreement by
telecopier shall be effective as delivery of a manually executed signature page
hereto.
SECTION XI.14. Headings. Article and Section headings and the Table of
Contents used herein are for convenience of reference only and are not to affect
the construction of, or to be taken into consideration in interpreting, this
Agreement.
XII. GUARANTEES
Each Guarantor unconditionally guarantees, as a primary obligor and not
merely as a surety, jointly and severally with each other Guarantor, the due and
punctual payment of the principal of and interest on each of the Notes, when and
as due, whether at maturity, by acceleration, by notice of prepayment or
otherwise, and the due and punctual performance of all other Obligations. Each
Guarantor further agrees that the Obligations may be extended and renewed, in
whole or in part, without notice to or further assent from it, and that it will
remain bound upon its guarantee notwithstanding any extension or renewal of any
Obligations.
Each Guarantor waives presentment to, demand of payment from
and protest to the Borrowers of any of the Obligations, and also waives notice
of
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acceptance of its guarantee and notice of protest for nonpayment. The
obligations of a Guarantor hereunder shall not be affected by (a) the failure of
any Lender or the Administrative Agent to assert any claim or demand or to
enforce any right or remedy against the Borrowers or any other Guarantor under
the provisions of this Agreement, the Notes or any of the other Loan Documents
or otherwise; (b) any rescission, waiver, amendment or modification of any of
the terms or provisions of this Agreement, the Notes, any of the other Loan
Documents, any guarantee or any other agreement; (c) the release of any security
held by the Administrative Agent for the Obligations or any of them; or (d) the
failure of any Lender to exercise any right or remedy against any other
Guarantor of the Obligations.
Each Guarantor further agrees that its guarantee constitutes a guarantee of
payment when due and not of collection, and waives any right to require that any
resort be had by any Lender to any security (including, without limitation, any
Collateral) held for payment of the Obligations or to any balance of any deposit
account or credit on the books of any Lender in favor of any of the Borrowers or
any other person.
The obligations of each Guarantor hereunder shall not be subject to any
reduction, limitation, impairment or termination for any reason, including,
without limitation, any claim of waiver, release, surrender, alteration or
compromise, and shall not be subject to any defense or setoff, counterclaim,
recoupment or termination whatsoever by reason of the invalidity, illegality or
unenforceability of the Obligations or otherwise. Without limiting the
generality of the foregoing, the obligations of each Guarantor hereunder shall
not be discharged or impaired or otherwise affected by the failure of the
Administrative Agent or any Lender to assert any claim or demand or to enforce
any remedy under this Agreement, the Notes or under any other Loan Document, any
guarantee or any other agreement, by any waiver or modification of any provision
thereof, by any default, failure or delay, willful or otherwise, in the
performance of the Obligations, or by any other act or omission which may or
might in any manner or to any extent vary the risk of such Guarantor or
otherwise operate as a discharge of such Guarantor as a matter of law or equity.
Each Guarantor further agrees that its guarantee shall continue to be
effective or be reinstated, as the case may be, if at any time payment, or any
part thereof, of principal of or interest on any Obligation is rescinded or must
otherwise be returned by the Administrative Agent or any Lender upon the
bankruptcy or reorganization of any of the Borrowers or otherwise.
Each of the Guarantors irrevocably waives acceptance hereof,
presentment, demand, notices of nonperformance, protests, notices of protest,
notices of dishonor, and notices of acceptance of this guarantee and of the
existence, creation, or incurring of new or additional Obligations and any
notice not provided for herein, as well as any requirement that at any time any
action be taken by any person against the Borrowers or any other person or any
collateral. Each of the Guarantors waives any
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defense arising by reason of any disability or other defense of the Borrowers,
or the cessation from any cause whatsoever of the liability of the Borrowers, or
any claim that the obligations of such Guarantor exceed or are more burdensome
than those of the Borrowers. Each of the Guarantors waives any rights and
defenses that are or may become available to such Guarantor by reason of
Sections 2787 to 2855, inclusive, of the California Civil Code. Each of the
Guarantors waives all rights and defenses that such Guarantor may have because
any of the Obligations is secured by real property. This means, among other
things: (i) the Administrative Agent or any Lender may collect from any of the
Guarantors without first foreclosing on any real or personal property collateral
pledged by the Borrowers; and (ii) if the Administrative Agent forecloses on any
real property collateral pledged by the Borrowers: (1) the amount of the
Obligations may be reduced only by the price for which that collateral is sold
at the foreclosure sale, even if the collateral is worth more than the sale
price, and (2) the Administrative Agent may collect from each or any of the
Guarantors even if the Administrative Agent, by foreclosing on the real property
collateral, has destroyed any right such Guarantor may have to collect from the
Borrowers. This is an unconditional and irrevocable waiver of any rights and
defenses each of the Guarantors may have because any of the Obligations is
secured by real property. These rights and defenses include, but are not limited
to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the
California Code of Civil Procedure. Each of the Guarantors waives any right or
defense it may have at law or equity, including California Code of Civil
Procedure Section 580a, to a fair market value hearing or action to determine a
deficiency judgment after a foreclosure. No provision or waiver herein shall be
construed as limiting the generality of any other waiver contained herein.
Each of the Guarantors authorizes the Administrative Agent or any Lender,
without notice or demand and without affecting the liability of each of the
Guarantors hereunder, from time to time, either before or after revocation
hereof, to (a) receive and hold security for the payment of this guarantee or
any of the Obligations, and exchange, enforce, waive, release, fail to perfect,
sell, or otherwise dispose of any such security; (b) apply such security and
direct the order or manner of sale thereof as the Administrative Agent or any
Lender in its discretion may determine; and (c) release or substitute any one or
more of the endorsers or guarantors.
Notwithstanding any payment made by or for the account of any of the
Guarantors pursuant hereto, no Guarantor shall be subrogated to any right of the
Administrative Agent or any Lender until such time as the Administrative Agent
shall have received final payment of the full amount of all Obligations. Until
the Obligations shall have been paid in full, even though the Obligations are in
excess of the liability of any Guarantor hereunder, such Guarantor waives (a)
any right of subrogation, reimbursement, indemnification, and contribution
(contractual, statutory, or otherwise) including, without limitation, any claim
or right of subrogation under the Bankruptcy Code (Title 11, United States Code)
or any successor statute, arising from the existence or performance hereof,
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(b) any right to enforce any remedy which the Administrative Agent or any Lender
now has or may hereafter have against the Borrowers, and (c) any benefit of, and
any right to participate in, any security now or hereafter held by the
Administrative Agent or any Lender. Each of the Guarantors understands and
acknowledges that if the Administrative Agent forecloses, either by judicial
foreclosure or by exercise of power of sale, any deed of trust securing the
Obligations, that foreclosure could impair or destroy any ability that such
Guarantor may have to seek reimbursement, contribution, or indemnification from
the Borrowers or others based on any right such Guarantor may have of
subrogation, reimbursement, contribution, or indemnification for any amounts
paid by such Guarantor under this guarantee. Each of the Guarantors further
understands and acknowledges that in the absence of this paragraph, such
potential impairment or destruction of such Guarantor's rights, if any, may
entitle such Guarantor to assert a defense to this guarantee based on Section
580d of the California Code of Civil Procedure as interpreted in Union Bank v.
Gradsky, 265 Cal. App. 2d. 40 (1968). By executing this agreement, each of the
Guarantors freely, irrevocably, and unconditionally: (i) waives and relinquishes
that defense and agrees that such Guarantor will be fully liable hereunder even
though the Administrative Agent may foreclose, either by judicial foreclosure or
by exercise of power of sale, any deed of trust securing the Obligations; (ii)
agrees that such Guarantor will not assert that defense in any action or
proceeding which the Administrative Agent or any Lender may commence to enforce
this agreement; (iii) acknowledges and agrees that the rights and defenses
waived by such Guarantor herein include any right or defense that such Guarantor
may have or be entitled to assert based upon or arising out of any one or more
of Sections 580a, 580b, 580d, or 726 of the California Code of Civil Procedure
or Section 2848 of the California Civil Code; and (iv) acknowledges and agrees
that the Administrative Agent and each Lender is relying on this waiver in
creating the Obligations, and that this waiver is a material part of the
consideration which the Administrative Agent and each Lender is receiving for
creating the Obligations.
Each of the Guarantors acknowledges and agrees that it shall have the sole
responsibility for obtaining from the Borrowers such information concerning the
Borrowers's financial conditions or business operations as such Guarantor may
require, and that neither the Administrative Agent nor any Lender has any duty
at any time to disclose to such Guarantor any information relating to the
business operations or financial conditions of the Borrowers.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
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IN WITNESS WHEREOF, the Borrowers, Guarantors, the Administrative Agent,
the Syndication Agent and the Lenders have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
GENTLE DENTAL SERVICE CORPORATION,
as a Borrower
By:
----------------------------------------
Name:
Title:
GENTLE DENTAL MANAGEMENT, INC.,
as a Borrower
By:
----------------------------------------
Name:
Title:
GMS HAWAII ACQUISITION COMPANY, as a Guarantor
By:
----------------------------------------
Name:
Title:
GMS DENTAL GROUP MANAGEMENT OF HAWAII, INC.,
as a Guarantor
By:
----------------------------------------
Name:
Title:
GMS DENTAL GROUP MANAGEMENT OF SOUTHERN
CALIFORNIA, INC., as a Guarantor
By:
----------------------------------------
Name:
Title:
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<PAGE>
GMS DENTAL GROUP MANAGEMENT OF THE MOUNTAIN
STATES, INC., as a Guarantor
By:
----------------------------------------
Name:
Title:
GENTLE DENTAL MANAGEMENT - PACIFIC NORTHWEST,
INC., as a Guarantor
By:
----------------------------------------
Name:
Title:
GENTLE DENTAL OF IRVINE, INC., as a Guarantor
By:
----------------------------------------
Name:
Title:
GDSC OF PIEDMONT, INC., as a Guarantor
By:
----------------------------------------
Name:
Title:
UNION BANK OF CALIFORNIA, N.A., as
Administrative Agent and as a Lender
By:
----------------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, as Syndication
Agent and as a Lender
By:
----------------------------------------
Name:
Title:
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<PAGE>
U.S. BANK NATIONAL ASSOCIATION, as Lender
By:
----------------------------------------
Name:
Title:
111
<PAGE>
SCHEDULE 2.01
REVOLVING CREDIT COMMITMENTS
<TABLE>
<CAPTION>
Approximate
Revolving Credit Percentage of Total
Lender Commitment Revolving Credit Commitment
------ ---------- ---------------------------
<S> <C> <C>
The Chase Manhattan Bank $20,000,000 44.4444%
600 Fifth Avenue
New York, NY 10020
Attention: Credit Executive
Union Bank of California, N.A. $15,000,000 33.3333%
100 Pringle Avenue
Suite 650
Walnut Creek, CA 94596
Attention:
U.S. Bank National Association $10,000,000 22.2222%
601 Second Avenue South
5th floor
Minneapolis, MN 55402
Attention:
</TABLE>
112
<PAGE>
SCHEDULE 2.02
Domestic Lending Offices
------------------------
<TABLE>
<CAPTION>
Lender Domestic Lending Office
- ------ -----------------------
<S> <C>
The Chase Manhattan Bank The Chase Manhattan Bank
600 Fifth Avenue
New York, NY 10020
Attn: Credit Executive
Union Bank of California, N.A. 100 Pringle Avenue
Suite 650
Walnut Creek, CA 94596
Attn:
U.S. Bank National Association 601 Second Avenue South
5th floor
Minneapolis, MN 55402
Attn:
</TABLE>
113
<PAGE>
SCHEDULE 2.03
Eurodollar Lending Offices
--------------------------
<TABLE>
<CAPTION>
Lender Eurodollar Lending Office
- ------ -------------------------
<S> <C>
The Chase Manhattan Bank The Chase Manhattan Bank
600 Fifth Avenue
New York, NY 10020
Attn: Credit Executive
Union Bank of California, N.A. 100 Pringle Avenue
Suite 650
Walnut Creek, CA 94596
Attn:
U.S. Bank National Association 601 Second Avenue South
5th floor
Minneapolis, MN 55402
Attn:
</TABLE>
114
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF WISDOM HOLDINGS, INC.
1. Wisdom Holdings Acquisition Corp. I
2. Wisdom Holdings Acquisition Corp. II
<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 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
October 30, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
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-11. We also consent to the incorporation by reference in
the Prospectus constituting part of this 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 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."
PricewaterhouseCoopers LLP
Portland, Oregon
October 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.''
PricewaterhouseCoopers LLP
Tampa, Florida
October 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 the Registration Statement on Form S-4.
/s/ KPMG Peat Marwick LLP
Orange County, California
October 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 the Registration Statement on Form S-4.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
October 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" in the
Registration Statement on Form S-4.
/s/ KPMG Peat Marwick LLP
Orange County, California
October 30, 1998
<PAGE>
EXHIBIT 23.10
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (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.
ERNST & YOUNG
Los Angeles, California
October 29, 1998
