<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
<TABLE>
<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
</TABLE>
_________________________________INTERDENT, INC.________________________________
(Name of Registrant as Specified In Its Charter)
_________________________________INTERDENT, INC.________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
<TABLE>
<S> <C> <C>
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
InterDent Common Stock, par value $0.001 per share, and
InterDent Preferred Stock, par value $0.001.
(2) Aggregate number of securities to which transaction
applies:
17,881,030 shares of Common Stock and Series D Preferred
Stock, 100 shares of Series A Preferred Stock, and
2,047,443 shares of Common Stock underlying options and
712,372 shares of Common Stock underlying warrants.
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: $9.50 per
share in cash for each share of Common Stock and Series D
Preferred Stock, $1.00 per share in cash for each share of
Series A Preferred Stock, $2.87 per share of Common Stock
underlying the options, representing the difference in
cash between $9.50 and the average exercise price per
share of the options, and $2.70 per share of Common Stock
underlying the warrants, representing the difference in
cash between $9.50 and the average exercise price per
share of the warrants.
(4) Proposed maximum aggregate value of transaction:
$170,069,351.
(5) Total fee paid: $34,014.
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------
</TABLE>
<PAGE>
[INTERDENT LETTERHEAD]
, 2000
222 North Sepulveda Blvd., Suite 740
El Segundo, California 90245
Dear InterDent Stockholder:
You are cordially invited to attend a special meeting of stockholders of
InterDent, Inc., which will be held at 222 North Sepulveda Boulevard, Suite 740,
El Segundo, California 90245, on , 2000 at 9:00 a.m., local time.
At the special meeting, we will ask you to approve and adopt the merger of
ID Recap, Inc., a Delaware corporation, with and into InterDent pursuant to an
Agreement and Plan of Merger, dated as of October 22, 1999 and the transactions
contemplated by the merger agreement. As a result of the merger, InterDent will
become 100% owned by Green Equity Investors III, L.P., an affiliate of Leonard
Green & Partners, L.P., and the other stockholders of ID Recap, Inc., consisting
of seven stockholders of InterDent and members of InterDent's management.
If the merger and related transactions are approved, adopted and
consummated, holders of InterDent Common Stock or Series D Preferred Stock,
other than shares held by ID Recap, shares held in InterDent's treasury and
shares held by any stockholder who properly perfects appraisal rights under
Delaware law, will receive $9.50 in cash for each share of Common Stock or
Series D Preferred Stock owned. This amount represents a premium of
approximately 18.8% over the $8.00 per share closing market price of the Common
Stock on October 22, 1999, the last full trading day before InterDent announced
it had entered into the merger agreement.
The Board of Directors, taking into account the recommendation of a Special
Committee of independent directors formed to consider the merger and the merger
agreement, has unanimously approved and declared advisable the merger agreement
and the transactions contemplated thereby. The Special Committee and the Board
of Directors believe that the merger is in the best interests of InterDent's
stockholders, and unanimously recommend that you vote FOR the approval of the
merger agreement and the transactions contemplated thereby.
This transaction has not been approved or disapproved by the Securities and
Exchange Commission, nor has the Commission passed upon the fairness or merits
of such transaction, nor upon the accuracy or adequacy of the information
contained in this document. Any representation to the contrary is unlawful.
This letter, the notice of special meeting, the proxy statement and the
accompanying form of proxy are first being mailed to InterDent stockholders on
or about , 2000.
The attached notice of special meeting of stockholders and proxy statement
explain the proposed merger and provide specific information concerning the
special meeting. Please read these materials, including the appendices thereto,
carefully. In addition, you may obtain information about InterDent from
documents that InterDent has filed with the Securities and Exchange Commission,
including the Schedule 13E-3 transaction statement filed in connection with the
proposed merger.
Whether or not you plan to attend the special meeting, we urge you to
complete, sign and promptly return the enclosed proxy card to ensure that your
shares of Common Stock or Series D Preferred Stock will be voted at the special
meeting. If you sign, date and return your proxy card without indicating how you
want to vote, your proxy will be counted as a vote FOR the merger agreement and
the transactions contemplated thereby. Not returning your proxy card or not
instructing your broker how to vote any shares
<PAGE>
held for you in "street name" will have the same effect as a vote against the
merger agreement and the transactions contemplated thereby.
If you have any questions concerning the merger or the other matters to be
voted on at the special meeting, or if you will need special assistance at the
meeting, please call , our proxy solicitors, toll-free at
1-800- or collect at .
On behalf of the Board of Directors, we thank you for your support and urge
you to vote FOR the approval and adoption of the merger agreement and the
transactions contemplated thereby.
Sincerely,
<TABLE>
<S> <C> <C>
MICHAEL T. FIORE DR. STEVEN R. MATZKIN
CO-CHAIRMAN AND CO-CHAIRMAN, PRESIDENT
CHIEF EXECUTIVE OFFICER AND CHIEF DENTAL OFFICER
</TABLE>
<PAGE>
[LOGO]
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
El Segundo, California
, 2000
TO OUR STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of
InterDent, Inc. will be held on , 2000, 9:00 a.m., local time, at
222 North Sepulveda Boulevard, Suite 740, El Segundo, California 90245, for the
purpose of considering and voting upon the following matters:
- To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of October 22, 1999, by and between
InterDent, Inc., a Delaware corporation, and ID Recap, Inc., a Delaware
corporation, and the transactions contemplated by the merger agreement.
Pursuant to the merger agreement, ID Recap will be merged with and into
InterDent and each share of InterDent Common Stock and Series D Preferred
Stock, other than shares held by ID Recap, shares held in InterDent's
treasury and shares held by any stockholder who properly perfects
appraisal rights under Delaware law, will be converted into the right to
receive $9.50 in cash, upon the terms and subject to the conditions set
forth in the merger agreement.
- 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 January 26, 2000
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. Holders of Interdent Common Stock or Series D Preferred Stock are
entitled to notice of and to vote together as a single class on all matters at
the special meeting. If you do not vote FOR the approval and adoption of the
merger agreement and the transactions contemplated thereby, you have the right
to dissent and to seek appraisal of the fair value of your shares if the merger
is consummated. In order to do so, you must properly perfect your appraisal
rights under Delaware law in accordance with the procedures described on pages
28-30 of the accompanying proxy statement.
BY ORDER OF THE BOARD OF DIRECTORS
<TABLE>
<S> <C>
MICHAEL T. FIORE DR. STEVEN R. MATZKIN
CO-CHAIRMAN AND CO-CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER CHIEF DENTAL OFFICER
</TABLE>
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. IF YOU LATER DESIRE TO REVOKE OR CHANGE
YOUR PROXY FOR ANY REASON, YOU MAY DO SO AT ANY TIME BEFORE THE VOTING BY
DELIVERING TO INTERDENT A WRITTEN NOTICE OF REVOCATION OR A DULY EXECUTED PROXY
BEARING A LATER DATE OR BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
WHO CAN HELP ANSWER YOUR QUESTIONS?......................... 3
INFORMATION CONCERNING THE SPECIAL MEETING.................. 4
Date, Time and Place of the Special Meeting............... 4
Purposes of the Special Meeting........................... 4
Record Date; Quorum; Outstanding Common Stock and
Preferred Stock Entitled to Vote........................ 4
Vote Required to Approve the Merger; Certain Holders of
Common Stock and Preferred Stock Voting in Favor of the
Merger.................................................. 4
Solicitation and Revocation of Proxies.................... 4
SPECIAL FACTORS............................................. 6
Background of the Merger.................................. 6
The Special Committee..................................... 10
ID Recap, Inc., Leonard Green & Partners, L.P. and Green
Equity Investors III, L.P............................... 11
Members of the Affiliate Group............................ 11
Purposes and Reasons of the Merger; Certain Effects of the
Merger.................................................. 11
Recommendations of the Special Committee and the Board Of
Directors; Fairness of the Merger....................... 12
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD
OF DIRECTORS........................................... 12
FAIRNESS OF THE MERGER.................................. 13
Opinion of Deutsche Banc Alex. Brown...................... 14
ANALYSIS OF SELECTED PUBLIC COMPANIES................... 16
ANALYSIS OF SELECTED PRECEDENT COMPANIES................ 18
DISCOUNTED CASH FLOW ANALYSIS........................... 18
PREMIUMS ANALYSIS....................................... 19
OTHER FACTORS........................................... 19
Position of the Affiliate Group As To Fairness............ 21
Conflicts of Interest and Other Interests of the Affiliate
Group................................................... 21
EXCHANGE AND SUBSCRIPTION AGREEMENTS.................... 21
PAYMENT AND CANCELLATION OF 7% CONVERTIBLE SUBORDINATED
NOTES.................................................. 22
EMPLOYMENT AGREEMENTS................................... 23
MANAGEMENT SERVICES AGREEMENT........................... 23
VOTING AGREEMENT........................................ 24
STOCKHOLDERS AGREEMENT.................................. 25
TREATMENT OF STOCK OPTIONS.............................. 25
ROLLOVER OF OPTIONS AND WARRANTS IN THE MERGER.......... 25
Plans for InterDent after the Merger...................... 26
Conduct of the Business of InterDent if the Merger is not
Consummated............................................. 26
Financing and Expenses of the Merger...................... 26
Rights of Dissenting Stockholders......................... 28
PROPOSALS AT THE SPECIAL MEETING............................ 31
The Merger................................................ 31
Terms of the Merger....................................... 31
Effective Time Of The Merger.............................. 32
Exchange and Payment Procedures........................... 32
Transfer of Stock......................................... 32
Representations and Warranties............................ 32
Covenants................................................. 33
Conditions Precedent...................................... 35
Termination; Amendments; Waiver........................... 36
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Certain Tax Considerations................................ 38
Accounting Treatment...................................... 39
Regulatory Requirements................................... 40
Certain Litigation........................................ 40
BUSINESS OF THE COMPANY..................................... 41
Overview.................................................. 41
Dental Services Industry.................................. 42
Operating Strategy........................................ 42
PROVIDE CONVENIENT, COMPREHENSIVE DENTAL CARE........... 43
FOCUS ON QUALITY OF PATIENT CARE........................ 43
ESTABLISH A COMPREHENSIVE DENTAL CARE NETWORK........... 43
ACHIEVE OPERATIONAL EFFICIENCIES AND ENHANCE REVENUE.... 43
INTEGRATE AND LEVERAGE MANAGEMENT INFORMATION SYSTEMS... 44
EXPAND PATIENT VOLUME THROUGH PROACTIVE MARKETING....... 44
CAPITALIZE ON MANAGED CARE EXPERTISE.................... 44
Dental Practice Network................................... 45
Expansion Strategy........................................ 45
Services and Operations................................... 46
ADMINISTRATIVE AND FINANCIAL SERVICES................... 46
PERSONNEL SERVICES...................................... 47
OPERATIONAL SERVICES.................................... 48
Management, Licensing and Collaboration Agreements........ 49
GENTLE DENTAL MANAGEMENT AGREEMENTS..................... 49
DENTAL CARE ALLIANCE MANAGEMENT AGREEMENTS.............. 50
DENTAL CARE ALLIANCE LICENSE AGREEMENTS................. 52
DENTAL X CHANGE, INC. COLLABORATION AGREEMENT........... 52
Government Regulation..................................... 53
GENERAL................................................. 53
CORPORATE PRACTICE OF DENTISTRY; FEE SPLITTING.......... 54
ANTI-KICKBACK AND ANTI-REFERRAL LEGISLATION............. 54
STATE INSURANCE LAWS AND REGULATIONS.................... 55
HEALTH CARE REFORM PROPOSALS............................ 55
REGULATORY COMPLIANCE................................... 56
Competition............................................... 56
Insurance................................................. 56
Service Mark.............................................. 57
Employees................................................. 57
Properties................................................ 58
Legal Proceedings......................................... 58
MARKET PRICE INFORMATION; DIVIDENDS; AND RELATED STOCKHOLDER
MATTERS................................................... 59
Effect of Merger on Principal Stockholders of InterDent... 59
Effect of Merger on Interests in Net Book Value and Net
Earnings of InterDent................................... 61
Commitments to Issue Common Stock to Directors and
Executive Officers...................................... 61
Affiliate Group Capital Stock Purchase Information........ 61
Dividends................................................. 62
SELECTED FINANCIAL DATA..................................... 63
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ 64
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.................................. 65
Overview.................................................. 65
Results of Operations..................................... 66
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Nine Months Ended September 30, 1999 Compared to Nine
Months Ended September 30, 1998......................... 66
Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997....................................... 69
Year Ended December 31, 1997 Compared to Year Ended
December 31, 1996....................................... 71
Liquidity and Capital Resources........................... 72
APPENDICES
A--AGREEMENT AND PLAN OF MERGER
B--OPINION OF DEUTSCHE BANK SECURITIES INC.
C--FORM OF EXCHANGE AND SUBSCRIPTION AGREEMENT
D--FORM OF VOTING AGREEMENT
E--SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
F--CHANGES TO CERTIFICATE OF INCORPORATION AND BY-LAWS OF
INTERDENT
G--MEMBERS OF THE AFFILIATE GROUP
</TABLE>
iii
<PAGE>
INTERDENT, INC.
222 NORTH SEPULVEDA BOULEVARD, SUITE 740
EL SEGUNDO, CALIFORNIA 90245
------------------------
SPECIAL MEETING OF STOCKHOLDERS
, 2000
------------------------
QUESTIONS AND ANSWERS ABOUT THE MERGER
The following questions and answers are for your convenience only, and
briefly address some commonly asked questions about the merger. You should still
carefully read this proxy statement in its entirety, including the attached
appendices.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: You are being asked to approve and adopt a merger agreement that provides
that ID Recap, Inc., a newly formed Delaware corporation formed by Leonard
Green & Partners, will be merged with and into InterDent. If the merger
agreement is approved and adopted, InterDent will no longer be a
publicly-held corporation.
Q: WHAT IS THE PROPOSED TRANSACTION?
A: In the proposed transaction, ID Recap will merge with and into InterDent,
with InterDent being the surviving corporation. As a result of the merger,
Green Equity Investors III, L.P., an affiliate of Leonard Green & Partners,
and a group of InterDent affiliates will become the owners of 100% of
InterDent, and holders of InterDent Common Stock or Series D Preferred
Stock, other than shares held by ID Recap, shares held in InterDent's
treasury and shares held by stockholders who properly perfect appraisal
rights under Delaware law, will receive $9.50 in cash for each of their
shares.
Q: WHO ARE THE MEMBERS OF THE AFFILIATE GROUP?
A: The members of the affiliate group consist of Michael T. Fiore, SRM 1993
Children's Trust, CB Capital Investors, L.P., DLJ Capital Corp., DLJ First
ESC L.L.C., Sprout Capital VII, L.P., Sprout Growth II, L.P. and The Sprout
CEO Fund, L.P. and related persons. See Appendix G attached to this proxy
statement for a more detailed description of the members of the affiliate
group.
Q: WHAT WILL THE MEMBERS OF THE AFFILIATE GROUP RECEIVE AS A RESULT OF THE
MERGER?
A: Each member of the affiliate group has agreed to subscribe for shares of
ID Recap in exchange for notes or shares of InterDent prior to the closing
of the merger. As a result of the merger, shares of ID Recap will be
converted into shares of InterDent. Consequently, as a result of the merger,
members of the affiliate group will acquire capital stock of InterDent that
collectively provides the affiliate group with beneficial ownership of
approximately 49% of the outstanding shares of InterDent Common Stock
following the merger. Please refer to the table on page 60 of this proxy
statement that sets forth the amount and percentage of InterDent Common
Stock that will be beneficially owned by each member of the affiliate group
following the merger.
Q: WHAT WILL I RECEIVE AS A RESULT OF THE MERGER?
A: As a result of the merger, each holder of InterDent Common Stock or Series D
Preferred Stock, other than shares held by ID Recap, shares held in
InterDent's treasury or any shares held by a stockholder who properly
perfects appraisal rights under Delaware law, will receive $9.50 per share
in cash. The
1
<PAGE>
$9.50 per share represents a premium of approximately 18.8% over the $8.00
closing market price of our Common Stock on October 22, 1999, the last full
trading day before we announced that we had entered into the merger
agreement.
Q: WHAT ARE THE ASSETS, LIABILITIES AND BUSINESS OF ID RECAP?
A: ID Recap is a new Delaware corporation formed by Leonard Green & Partners
solely for the purpose of effectuating the merger and related transactions
and does not conduct any other business. ID Recap has nominal assets and
liabilities.
Q: WHY IS THE BOARD OF DIRECTORS RECOMMENDING THAT I VOTE FOR THE MERGER AND THE
MERGER AGREEMENT?
A: The Board of Directors has determined that the merger is advisable, fair to,
and in the best interests of InterDent and its stockholders. In order to
evaluate the fairness of the merger to the stockholders, InterDent's Board
of Directors formed a Special Committee consisting of independent directors.
The Special Committee concluded that the terms of the merger agreement and
the merger are fair to InterDent's stockholders. The Board of Directors took
into account the conclusion of the Special Committee that the merger is fair
to the stockholders of InterDent in recommending the merger.
Q: IS THE MERGER SUBJECT TO THE FULFILLMENT OF CERTAIN CONDITIONS?
A: Yes. Prior to consummation of the transactions contemplated by the merger
agreement, we and ID Recap must fulfill or waive, if permissible, certain
conditions. These conditions include that ID Recap shall have obtained all
financing necessary to consummate the transactions contemplated by the
merger agreement and which is reasonably necessary to continue the business
of InterDent as it is currently being conducted.
Q: WHAT APPROVALS DOES THE MERGER REQUIRE?
A: The merger agreement and the transactions contemplated thereby must be
approved and adopted by the affirmative vote of the holders of at least a
majority of the outstanding shares of our Common Stock and Series D
Preferred Stock, voting together as a single class. Members of the affiliate
group and Dr. Steven Matzkin, who own collectively as of the record date
approximately % of the outstanding shares of Common Stock and Series D
Preferred Stock have agreed to vote in favor of the merger. The merger is
also subject to clearance by antitrust regulatory bodies under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Q: WHAT DO I NEED TO DO NOW?
A: Please read this proxy statement and then sign and mail your proxy card in
the enclosed return envelope as soon as possible so that your shares can be
represented at the special meeting, even if you plan to attend the special
meeting in person.
Q: WHAT RIGHTS DO I HAVE TO DISSENT FROM THE MERGER?
A: If you wish, you may dissent from the merger and seek an appraisal of the
fair value of your shares, but only if you comply with all requirements of
Delaware law summarized on pages 28 through 30 of this proxy statement. The
appraised fair value of your shares may be more or less than the $9.50 per
share of Common Stock and Series D Preferred Stock to be paid in the merger.
Q: WHO GETS TO VOTE ON THE MERGER?
A: All holders of InterDent Common Stock and Series D Preferred Stock of record
as of January 26, 2000 will be entitled to notice of and to vote, either in
person or by proxy, at the special meeting.
Q: WHAT WILL HAPPEN TO PRESENT MEMBERS OF INTERDENT'S MANAGEMENT?
A: We expect that members of InterDent's current management will continue to
serve as officers and employees of InterDent. Some of them will continue to
be stockholders of InterDent after the merger and may also sell some of
their shares of Common Stock in the merger for $9.50 per share in cash.
2
<PAGE>
Those members of management who will not continue as stockholders after the
merger will sell all of their shares of Common Stock in the merger for $9.50
per share in cash.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is completed, we will promptly send you written
instructions for delivering your stock certificates in exchange for $9.50
per share.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide written instructions on
how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares. If you do not
provide instructions to your broker, your shares will be counted to
determine if a quorum for the special meeting exists, but will effectively
count as votes against the merger.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. Just send in a later-dated, signed proxy card or a written revocation
before the special meeting or attend the special meeting and vote in person.
However, your attendance at the special meeting after you have executed and
delivered a proxy to us will not in and of itself constitute a revocation of
your proxy.
Q: WHEN WILL THE MERGER BE COMPLETED?
A: We are working toward completing the merger as quickly as possible and expect
to complete the merger after the special meeting and after completion of all
regulatory requirements and conditions have been met. We expect to
consummate the merger by April 30, 2000.
Q: WHAT ARE THE FEDERAL TAX CONSEQUENCES OF THE MERGER?
A: The merger will be a taxable transaction to you for federal income tax
purposes. A summary of the possible tax consequences to stockholders is set
forth on pages 38 and 39 of this proxy statement. You should also consult
your tax advisor as to the tax effect in your particular circumstances.
WHO CAN HELP ANSWER YOUR QUESTIONS?
The information provided above in "question and answer" format is for your
convenience only and is merely a summary of the information contained in this
proxy statement. You should carefully read this proxy statement, including the
attached appendices, in its entirety.
If you have any questions concerning the merger, if you would like
additional copies of the proxy statement or if you will need special assistance
at the meeting, please call , our proxy solicitors, toll-free at
1-800- - or collect at ( ) - .
3
<PAGE>
INFORMATION CONCERNING THE SPECIAL MEETING
DATE, TIME AND PLACE OF THE SPECIAL MEETING
This proxy statement is furnished to the holders of the outstanding
InterDent Common Stock and Series D Preferred Stock as of January 26, 2000, the
record date in connection with the solicitation of proxies by the Board of
Directors of InterDent to be voted at the special meeting of stockholders to be
held at 222 North Sepulveda Boulevard, Suite 740, El Segundo, California 90245,
on , 2000, at 9:00 a.m. local time, or any postponement or
adjournment thereof. This proxy statement, the notice of special meeting and the
accompanying form of proxy are first being mailed to stockholders on or about
, 2000.
PURPOSES OF THE SPECIAL MEETING
At the special meeting, you will be asked:
- to consider and vote upon a proposal to approve and adopt the merger
agreement and the transactions contemplated thereby; and
- to transact such other business as may properly come before the special
meeting or any adjournment or postponement thereof.
Additional information concerning the special meeting, the merger and the
merger agreement is set forth below, and a copy of the merger agreement is
attached hereto as Appendix A.
RECORD DATE; QUORUM; OUTSTANDING COMMON STOCK AND PREFERRED STOCK ENTITLED TO
VOTE
All holders of our Common Stock or Series D Preferred Stock of record at the
close of business on January 26, 2000 are entitled to notice of, and to vote at,
the special meeting. The presence in person or by proxy of holders of at least a
majority of the shares of our Common Stock and Series D Preferred Stock is
required to constitute a quorum for the special meeting. Pursuant to our
certificate of incorporation, you are entitled to one vote for each share of our
Common Stock or Series D Preferred Stock held on the record date on all matters
properly presented at the special meeting. A list of stockholders of record will
be open for examination by you for any purpose related to the special meeting,
at our offices at 222 North Sepulveda Boulevard, Suite 740, El Segundo,
California 90245, for a period of 10 days prior to the special meeting.
VOTE REQUIRED TO APPROVE THE MERGER; CERTAIN HOLDERS OF COMMON STOCK AND
PREFERRED STOCK VOTING IN FAVOR OF THE MERGER
The merger agreement and the transactions contemplated thereby must be
approved and adopted by the affirmative vote of at least a majority of our
outstanding Common Stock and Series D Preferred Stock, voting together as a
single class. The merger agreement and the transactions contemplated thereby do
not require and are not conditioned upon the separate approval and adoption
thereof by a majority of the Common Stock and Series D Preferred Stock held by
stockholders who are not members of the affiliate group. As of the record date,
there were 21,106,184 shares of Common Stock, 100 shares of Series A Preferred
Stock and 1,628,663 shares of Series D Preferred Stock outstanding, which were
held of record by 183 holders of Common Stock, one holder of Series A Preferred
Stock and 13 holders of Series D Preferred Stock. The Series A Preferred Stock
is non-voting stock. Members of the affiliate group and Dr. Steven Matzkin, who
own collectively as of the record date an aggregate of % of our outstanding
shares of Common Stock and Series D Preferred Stock, have agreed to vote for the
approval and adoption of the merger agreement and the transactions contemplated
thereby.
SOLICITATION AND REVOCATION OF PROXIES
All proxies that are properly executed and received on or before the special
meeting, and subsequently not revoked, will be voted at the special meeting or
any adjournment or postponement thereof in accordance with any instructions
thereon, or, if no instructions are provided, will be voted FOR the
4
<PAGE>
approval and adoption of the merger agreement and the transactions contemplated
thereby, and in accordance with the proxyholder's best judgment as to any other
business as may properly come before the special meeting. Shares represented by
proxies which are marked "ABSTAIN" or deny discretionary authority on other
matters will not be counted in determining the number of votes cast for such
matters and will have the same effect as votes against the merger or such other
matters.
Similarly, in the case of shares held in "street name," your broker is
prohibited from exercising discretionary voting authority for you as to the
merger if you have not returned your proxy. Those shares (sometimes referred to
as "broker non-votes") will be counted for the purpose of determining if a
quorum is present but will not be included in the vote totals for matters being
voted upon and, therefore, will have the same effect as votes against approval
and adoption of the merger agreement and the transactions contemplated thereby.
If you have given a proxy pursuant to this solicitation, you may revoke it
by attending the special meeting and voting in person. In addition, you may
revoke your proxy at any time prior to the special meeting by delivering to the
Secretary of InterDent a written statement revoking it or by delivering a duly
executed proxy bearing a later date. Your attendance at the special meeting will
not, in and of itself, constitute a revocation of a previously delivered proxy.
A vote in favor of the merger agreement and the transactions contemplated
thereby means that you will not have the right to dissent and seek appraisal of
the fair value of your shares.
We do not know of any matters other than those set forth herein which may
come before the special meeting. If any other matters are properly presented at
the special meeting for action, it is intended that the persons named in the
enclosed form of proxy and acting thereunder will vote in accordance with their
best judgment on such matters. Such matters may include an adjournment or
postponement of the special meeting from time to time in the event the Board of
Directors determines to adjourn or postpone. If any such adjournment or
postponement is made, additional proxies may be solicited during such
adjournment period.
We will bear the cost of soliciting proxies. Proxies will be solicited
initially by mail. Our directors, officers and employees may solicit proxies by
telephone or otherwise, but will not receive any compensation for such services.
Upon request, we will reimburse brokers, dealers, banks or similar entities
acting as nominees for reasonable expenses incurred in forwarding copies of the
proxy materials relating to the special meeting to the beneficial owners of
shares of our Common Stock or Series D Preferred Stock which such persons hold
of record. We have retained to coordinate the solicitation of
proxies for a fee of approximately $ , plus reasonable out-of-pocket
expenses.
Your vote is important. Please return your completed proxy card promptly so
your shares can be represented, even if you plan to attend the special meeting
in person.
You should not send any certificates representing our Common Stock or
Series D Preferred Stock with your proxy card. If the merger is consummated, we
will promptly send you written instructions for exchanging your stock
certificates for $9.50 per share.
5
<PAGE>
SPECIAL FACTORS
BACKGROUND OF THE MERGER
Since April of 1999, after the merger of Dental Care Alliance, Inc. and
Gentle Dental Service Corporation to form InterDent, we have pursued a growth
strategy in an effort to increase the public trading price of our Common Stock.
Regardless of the Company's continued growth since April of 1999, our Common
Stock has experienced light trading volume and traded as low as $4 per share.
The Board of Directors was aware that InterDent needed to raise additional
capital if it were to continue its planned growth. Failure to raise additional
capital would limit our ability to continue to pursue aggressive strategic
acquisitions, creating a further impediment to improving stockholder value. The
Board of Directors considered raising additional capital through either a public
or private equity offering, but were concerned with the valuation the public
market had assigned to us. The Board of Directors concluded that the perceived
nature of our business, combined with diminished attentiveness of the market,
was likely to preclude achieving a reasonable trading value for our Common Stock
in the short or medium term. The Board of Directors also concluded that the
inability to achieve a reasonable stock price would have a negative impact on
our ability to raise additional public or private equity capital during the next
year at a reasonable price that would not be significantly dilutive to our
stockholders. We also considered raising additional capital through issuance of
private or public debt. After considering this alternative, the Board of
Directors concluded that the increased leverage placed on InterDent by issuance
of additional debt beyond current levels would increase the risk to our
stockholders and negatively impact the price of our Common Stock. We also
contemplated a slowdown in growth to a rate that could be internally financed
through InterDent's operations; however, the Board of Directors concluded that a
slowdown in growth would be negatively received by investors and our employees,
with a corresponding negative impact upon our operations and stock price.
The Board of Directors did consider the possibility of a sale of InterDent
to potential third party buyers that included our competitors as well as dental
insurance companies, dental product distributors and companies with dental
related technology. However, the Board of Directors concluded that there were no
logical and viable buyers that could provide the same cash return to our
stockholders as the merger. Further, the Board of Directors believed that the
process involved in identifying potential buyers would be so disruptive to
InterDent's operations that it could negatively impact the trading price of our
Common Stock without any reasonable assurance of identifying an appropriate
buyer. For example, identifying an appropriate buyer would require our
affiliated dental professionals to be comfortable with any new management team
that would be put into place following the sale. It would also have jeopardized
the proposed transaction with Leonard Green & Partners, which the Board of
Directors believed was more likely to be successfully concluded and that
contemplated retaining existing management and its operational philosophy.
The Board of Directors' conclusion that there were no logical and viable
third party buyers was based upon its knowledge of InterDent's industry. We
regularly participate in and attend industry meetings and investor conferences.
Attendees at these meetings and conferences include our competitors in the
dental practice management business as well as suppliers and distributors of
dental products, dental insurance companies and information technology companies
that have dental related businesses. Attendees use these conferences and
meetings to keep current in the industry as well as to gain information on other
businesses. Generally, attendees are provided an opportunity to present
information about their company (including financial information) to other
attendees. Through our attendance and participation at these meetings and
conferences, our Board of Directors and senior management team have gained
significant knowledge about the companies in and related to our industry,
including knowledge about their management teams, operations and financial
capabilities of possible buyers of our company.
Since the Board of Directors determined that there were no logical buyers
that could provide the same cash return to our stockholders as the merger, the
Board of Directors focused on ensuring that the merger agreement with Leonard
Green & Partners would not require the payment of large break-up fees,
6
<PAGE>
nor would it preclude an interested and qualified buyer from obtaining
information about InterDent or making an offer to buy InterDent at a higher
price after the proposed merger transaction was publicly announced. Following is
a discussion of the sequence of events that lead to the Board of Director's
unanimous approval and recommendation of the merger agreement and the
transactions contemplated thereby.
On June 28, 1999, Morgan Stanley Dean Witter introduced Leonard Green &
Partners to InterDent. An informal meeting was held at our corporate offices in
El Segundo, California, between representatives of Leonard Green & Partners,
Michael Fiore and Dr. Steven Matzkin, at which Leonard Green & Partners
indicated an interest in the dental practice management industry and discussed
the possibility of an acquisition, recapitalization or other form of transaction
with us.
On July 13, 1999, representatives of Leonard Green & Partners met with
Mr. Fiore and Dr. Matzkin and indicated its interest in an investment in us.
Representatives of Leonard Green & Partners explained to Mr. Fiore and
Dr. Matzkin the process involved in a "going private" transaction and began
preliminary discussions about a possible structure and time frame for such a
transaction.
On July 28, 1999, representatives of Leonard Green & Partners met with
Mr. Fiore and Dr. Matzkin at our offices and discussed the compelling reasons
for a "going private" transaction. At this meeting, Mr. Fiore and Dr. Matzkin
described our overall business to the representatives of Leonard Green &
Partners.
On August 4, 1999, the Board of Directors met in a private session to
discuss the merits of a "going private" transaction, and the alternatives
available to enhance stockholder value while providing for additional financing
to fund our growth. These alternatives included a public equity offering, a
private equity/convertible securities offering, and other possible public and
private debt financing. Following this discussion, the Board of Directors
authorized our management to pursue the possibility of a transaction with
Leonard Green & Partners. The Board of Directors also discussed the formation of
a Special Committee of the Board of Directors composed solely of members who
were non-management and would not hold a continuing interest in InterDent if a
transaction similar to the one discussed by Leonard Green & Partners was to be
presented for consideration to the Board of Directors.
On August 10, 1999, representatives of Leonard Green & Partners met with
Mr. Fiore and Dr. Matzkin and signed a confidentiality agreement with us. During
this meeting, representatives of Leonard Green & Partners discussed the
possibility of taking InterDent private at a price of $9.00 per share. At this
meeting, representatives of Leonard Green & Partners commenced their business
due diligence review of InterDent. Mr. Fiore and Dr. Matzkin provided a
description of InterDent and delivered financial and other confidential
information to Leonard Green & Partners. Mr. Fiore and Dr. Matzkin indicated
that they believed that the Board of Directors would consider a price of $9.00
per share as inadequate.
At a meeting held in the morning on September 2, 1999 with Mr. Fiore and
Dr. Matzkin, a representative of Leonard Green & Partners communicated its
preliminary interest in exploring an acquisition of InterDent for $9.50 per
share and indicated that it would be interested in retaining our senior
management and having our senior management retain an equity interest in
InterDent following the merger. The representative also stated that Leonard
Green & Partners was prepared to commence a comprehensive due diligence review
of InterDent with the objective of setting forth a formal proposal.
Following the discussion by representatives of Leonard Green & Partners,
Mr. Fiore and Dr. Matzkin discussed the $9.50 per share price and indicated to
Leonard Green & Partners that the Board of Directors would likely expect a
higher price. Representatives of Leonard Green & Partners indicated that Leonard
Green & Partners would consider raising the price to $10.50 per share, subject
to completion of its due diligence review of InterDent, including its review and
confirmation of our current and pending debt levels.
7
<PAGE>
On the afternoon of September 2, 1999, the Board of Directors held a
teleconference to discuss the earlier meeting between Mr. Fiore, Dr. Matzkin and
representatives of Leonard Green & Partners. The Board of Directors formed a
Special Committee of three non-interested directors to:
- evaluate the current and any future proposals of Leonard Green & Partners
or other third parties;
- participate in the negotiation of the proposed transaction; and
- advise the Board of Directors of its opinion as to the fairness of the
proposed transaction.
The members of the Special Committee were Paul H. Keckley, H. Wayne Posey
and Curtis Lee Smith, Jr. The Board of Directors also authorized the Special
Committee to hire independent counsel to advise it in its analysis and
negotiation and an investment bank to review the consideration payable by
Leonard Green & Partners in the proposed transaction. Management was directed to
cooperate in the completion of the due diligence review process with Leonard
Green & Partners and to assist the Special Committee as requested. The Special
Committee subsequently engaged Dyer Ellis & Joseph PC, located in Washington,
D.C., to serve as its legal counsel to advise it on its analysis and
negotiation.
On September 15 and 16, 1999, attorneys representing Leonard Green &
Partners traveled to Irvine, California, as part of their due diligence review
of InterDent to meet with our attorneys.
On September 15, 1999, representatives of Leonard Green & Partners, Morgan
Stanley Dean Witter, Mr. Fiore, Dr. Matzkin and Norman Huffaker, our chief
financial officer, met with potential financing sources for the proposed
transaction, Donaldson Lufkin & Jenrette, Inc., Deutsche Bank Securities Inc.
and Chase Securities. At the meeting we discussed, among other topics, our
business, the dental industry, competitive position, financial performance and
future prospects. Mr. Fiore and Dr. Matzkin described our business to the
potential financing sources and held a question and answer session. Later that
day, Leonard Green & Partners met with Robert Raucci, a member of the Board of
Directors, to discuss the proposed transaction.
On September 16, 1999, members of the Special Committee and the Special
Committee's legal counsel met with representatives of Leonard Green & Partners
and discussed the proposed transaction in general terms. During this meeting,
the representatives of Leonard Green & Partners:
- described their firm's background and current activities;
- explained the analysis that led them to propose a transaction involving
InterDent;
- briefly summarized the discussions they had had with management concerning
the proposed transaction at a possible per share purchase price between
$9.50 and $10.50; and
- described the proposed timing of the transaction, possible structures and
the manner in which it was proposed the transaction would be financed.
Later that same day, representatives of Leonard Green & Partners, Mr. Fiore
and Dr. Matzkin met with Mr. Green, a member of our Board of Directors to
discuss the proposed transaction and the possibility of CB Capital Investors,
L.P. participating as part of an affiliate group of InterDent security holders
and management who would continue to own InterDent securities after the merger.
On September 21, 1999, representatives of Leonard Green & Partners met with
Mr. Fiore and held a conference call with Robert Finzi, a member of the Board of
Directors, to discuss the proposed transaction and the possibility of Sprout
Capital VII, L.P. and related entities participating as part of the affiliate
group.
On September 23, 1999, the Special Committee engaged Deutsche Bank
Securities Inc. (referred to herein as "Deutsche Banc Alex. Brown" in
discussions pertaining to the opinion rendered to the Special Committee and the
Board of Directors) to provide an opinion as to the fairness, from a financial
point of view, to the holders of Common Stock, other than members of the
affiliate group, of the consideration to be received by such holders in the
proposed transaction.
8
<PAGE>
On September 24, 1999, representatives of Deutsche Banc Alex. Brown met with
Mr. Fiore and Mr. Huffaker at our offices in El Segundo, California, in order to
conduct their due diligence review.
On September 29, 1999, representatives of Donaldson, Lufkin & Jenrette, Inc.
traveled to our offices in Sarasota, Florida, to meet with Dr. Matzkin and other
members of management as part of their due diligence review in consideration of
their participation as a financing source for the transaction.
Representatives of Leonard Green & Partners met with Mr. Fiore and
Dr. Matzkin on October 1, 1999 to discuss the proposed transaction. During their
meeting, representatives of Leonard Green & Partners indicated that Leonard
Green & Partners had completed its due diligence review of our actual and
projected levels of debt. Representatives of Leonard Green & Partners informed
Mr. Fiore and Dr. Matzkin that Leonard Green & Partners determined that it could
not increase its offer for InterDent beyond $9.50 per share. InterDent's total
debt was now projected to be approximately $16 million higher at December 31,
1999 than earlier estimates due to an increased level of acquisitions and an
increase in working capital. Representatives of Leonard Green & Partners also
cited softness in the high yield debt market which they believed would require
more conservative leverage ratios to successfully sell the debt required to
finance the transaction.
On the afternoon of October 1, 1999, Mr. Fiore and Dr. Matzkin informed the
Special Committee of their meeting with representatives of Leonard Green &
Partners and of the discussions regarding the proposed pricing of $9.50 per
share.
On October 4 and 5, 1999, attorneys representing Leonard Green & Partners
traveled to our offices in Sarasota, Florida, as part of their due diligence
review and met with Dr. Matzkin and members of management.
A draft of the merger agreement prepared by counsel for Leonard Green &
Partners was thereafter distributed to the Special Committee and its counsel,
who discussed the draft during a telephonic meeting on October 7, 1999. At the
conclusion of the meeting, the Special Committee instructed its legal counsel to
propose several changes to the merger agreement to legal counsel for InterDent,
who were negotiating the terms of the merger agreement with legal counsel for
Leonard Green & Partners. The Special Committee's proposed changes were focused
upon those provisions of the merger agreement relating to the ability of third
parties to make a competing bid for InterDent, primarily:
- those prescribing the circumstances under which we could provide
information to, hold discussions with and ultimately enter into a
transaction with a third party; and
- the amount of the termination fee and the circumstances under which it
would become payable.
On October 7, 1999, the Board of Directors held a teleconference to discuss
the draft merger agreement. The members of the Board of Directors agreed that
although some progress had been made, they were dissatisfied as to the amount
and conditions of the termination fee and as to the extent of the disclosure
requirements under the representations and warranties requested of InterDent by
Leonard Green & Partners. The proposed changes were focused primarily on:
- reducing the amount of the termination fee; and
- qualifying our representations and warranties to reduce the risk that our
inadvertent failure to disclose a non-material exception to a particular
representation or warranty would result in our breach of the merger
agreement.
During the succeeding week, legal counsel for the Special Committee:
- reviewed revised drafts of the merger agreement,
- discussed the drafts with Deutsche Banc Alex. Brown and its legal counsel;
- proposed additional language to legal counsel for Leonard Green &
Partners;
- participated in negotiations with legal counsel for InterDent and legal
counsel for Leonard Green & Partners; and
9
<PAGE>
- periodically discussed the progress of the negotiations with members of
the Special Committee.
The Board of Directors met again in a teleconference related to the merger
agreement on October 12, 1999 to review the progress of the Special Committee in
relation to the outstanding issues. The Special Committee informed the Board of
Directors that it believed it would be prepared to consider the proposed merger
on October 14, 1999, and that the Board of Directors should have a
teleconference on October 15, 1999 to review the transaction.
On October 14, 1999, the Special Committee held a telephonic meeting, along
with its counsel and representatives of Deutsche Banc Alex. Brown. During this
meeting, counsel updated the Special Committee as to the status of negotiations
concerning the terms of the merger agreement. Also at the meeting, Deutsche Banc
Alex. Brown reviewed with the Special Committee in detail its financial analysis
with respect to the proposed merger consideration. After full discussion and
based upon this analysis and other relevant factors and subject to receipt of a
written opinion of Deutsche Banc Alex. Brown as to the fairness, from a
financial point of view, of the merger consideration to the holders of Common
Stock, other than members of the affiliate group, the Special Committee
unanimously concluded that the proposed transaction was fair to our
stockholders, other than the affiliate group.
On October 15, 1999, the Board of Directors held a meeting, at which counsel
reviewed the material terms of the proposed merger agreement and Deutsche Banc
Alex. Brown reviewed its financial analysis as reviewed on October 14, 1999 with
the Special Committee.
On October 18, 1999, the Board of Directors held a telephonic meeting at
which the Special Committee advised the Board of Directors that it believed the
merger agreement and merger with Leonard Green & Partners was fair to our
stockholders. The revised merger agreement was also presented, which included a
number of changes earlier requested by the Board of Directors such as reducing
the termination fee and limiting circumstances under which such fees should be
paid, expanding our ability to provide information to other potential acquirors
and further limiting our representations and warranties. The Special Committee
recommended that the Board of Directors should have a final opportunity to
review the merger agreement and the financial analysis of Deutsche Banc Alex.
Brown.
On October 20, 1999, the Board of Directors held a teleconference at which
the Board of Directors reviewed the final proposed terms of the merger agreement
and considered and adopted the financial analysis of Deutsche Banc Alex. Brown.
As part of the discussion, the Special Committee reaffirmed its opinion that the
merger was fair to our stockholders other than the affiliate group. After
further discussions, the Board of Directors unanimously approved and deemed
advisable the merger agreement and the transactions contemplated thereby and
authorized and directed management to finalize and sign the merger agreement
containing the material terms and conditions as renegotiated and presented to
the Board of Directors at this meeting. The Board of Directors and the Special
Committee also unanimously concluded that they should recommend the approval and
adoption of the merger agreement and the transactions contemplated thereby to
our stockholders.
The merger agreement was signed and the proposed merger was announced on
October 22, 1999. Deutsche Banc Alex. Brown also delivered on October 22, 1999
its written opinion as to the fairness, from a financial point of view, of the
merger consideration to the holders of Common Stock, other than members of the
affiliate group.
THE SPECIAL COMMITTEE
On September 2, 1999, the Board of Directors formed a Special Committee
consisting of three non-interested directors to evaluate and negotiate the
proposal submitted by Leonard Green & Partners and to advise the Board of
Directors of its opinion as to the fairness of the proposed transaction. The
members of the Special Committee were Paul H. Keckley, H. Wayne Posey and Curtis
Lee Smith, Jr. The Special Committee engaged independent legal counsel, Dyer
Ellis & Joseph PC, located in Washington, D.C., and an independent investment
bank, Deutsche Banc Alex. Brown, to assist the Special Committee in this
evaluation.
10
<PAGE>
ID RECAP, INC., LEONARD GREEN & PARTNERS, L.P. AND GREEN EQUITY INVESTORS III,
L.P.
ID Recap, Inc. is a Delaware corporation created by Leonard Green & Partners
to facilitate the merger. Green Equity Investors III, L.P. is an affiliate of
Leonard Green & Partners, a private Los Angeles-based merchant banking firm
specializing in organizing, structuring and sponsoring management buy-outs,
going private transactions and recapitalizations of established public and
private companies. Morgan Stanley Dean Witter advised Leonard Green & Partners
in the merger transaction.
MEMBERS OF THE AFFILIATE GROUP
Members of the affiliate group include Michael T. Fiore, SRM 1993 Children's
Trust, CB Capital Investors, L.P., DLJ Capital Corp., DLJ First ESC, L.L.C.,
Sprout Capital VII, L.P., Sprout Growth II, L.P., The Sprout CEO Fund, L.P. and
related persons. See Appendix G attached to this proxy statement for a more
detailed description of the members of the affiliate group.
PURPOSES AND REASONS OF THE MERGER; CERTAIN EFFECTS OF THE MERGER
The principal purpose of the merger is to enable Green Equity Investors III
and the affiliate group to own collectively all of our equity interest after the
merger, and afford our stockholders the opportunity to receive a cash price for
their shares of our Common Stock and Series D Preferred Stock that is fair and
represents a premium over the market prices at which the Common Stock traded
prior to the announcement of the proposed merger. This will be accomplished by a
merger of an acquisition entity, ID Recap, with and into InterDent, pursuant to
which all of the shares of InterDent's Common Stock and Series D Preferred Stock
outstanding on the date of the merger, other than shares held by ID Recap, in
our treasury or by stockholders who perfect their dissenter's rights, will be
converted into the right to receive the merger consideration of $9.50 per share.
When the merger is completed, members of the affiliate group will continue to
hold a portion of their investment in InterDent through ownership of both
InterDent Common Stock and Preferred Stock. Members of the affiliate group will
be able to receive the $9.50 per share from the merger for the remaining portion
of their investments in InterDent on the same terms as our other stockholders.
As a result of the merger, Green Equity Investors III, an affiliate of
Leonard Green & Partners, will acquire approximately 57.9% of our outstanding
Common Stock and 72.1% of our outstanding Preferred Stock, for an investment of
$120.7 million. Upon completion of the merger, the affiliate group will, for an
investment valued at $53.7 million, own approximately 42.1% of our outstanding
Common Stock and approximately 27.9% of our outstanding Preferred Stock, with CB
Capital Investors owning approximately 6.5% of such Common Stock and
approximately 7.3% of such Preferred Stock and Sprout Capital VII and its
related entities owning approximately 13.5% of such Common Stock and
approximately 15.3% of such Preferred Stock. The members of management will
collectively own approximately 2.7% of such Common Stock and approximately 0.5%
of such Preferred Stock. These percentages reflect the planned exchange by the
affiliate group of a part of their Common Stock, Series D Preferred Stock and 7%
Convertible Subordinated Notes immediately prior to the merger for shares of ID
Recap.
The merger will terminate all existing equity interests in InterDent, and
Green Equity Investors III and the affiliate group will be the sole
beneficiaries of any earnings and growth of InterDent following the completion
of the merger. Accordingly, you will no longer own any shares of InterDent and
therefore will neither benefit from any increase in the value of InterDent or
payment of dividends, nor will you bear the risk of any decrease in the value of
InterDent following the merger. In the merger, the outstanding shares of common
stock and preferred stock of ID Recap will be converted into an equivalent
number of shares of Common Stock and Preferred Stock of InterDent. Immediately
prior to the effective time of the merger, Green Equity Investors III and the
affiliate group will be the only stockholders of ID Recap. The $9.50 per share
you will receive is the result of arm's-length negotiations between
representatives of Leonard Green & Partners and the Board of Directors, and
their respective counsel, following the receipt of the initial merger proposal
from Leonard Green & Partners. As a result of the merger, our capital stock will
be privately held and will cease to be publicly traded.
11
<PAGE>
As a private company, we will have greater flexibility to undergo
fluctuations in short-term earnings and to focus on our long-term value by
pursuing our growth strategy, including making capital expenditure and
acquisition decisions, without the constraint of the public market's emphasis on
quarterly results. In addition, the proposed merger transaction will provide
InterDent with access to additional capital through the existence of a new
senior credit facility. The access to this additional capital will enable
InterDent to continue pursuing its growth strategy; however, use of this new
senior facility, combined with the issuance of an expected $160.0 million of
subordinated debt securities to accomplish the merger, will significantly
increase InterDent's levels of outstanding debt and present additional risk to
Green Equity Investors III and the members of the affiliate group. Other than as
set forth herein, the affiliate group has no reason for proposing the merger at
this particular time, as opposed to any other time, and is not aware of any
material development expected to affect the future value of our Common Stock or
Preferred Stock that is not described in this proxy statement.
Our Common Stock is currently registered under the Exchange Act and is
listed for trading on the Nasdaq National Market under the symbol "DENT." Upon
consummation of the merger, our Common Stock will be delisted from Nasdaq and
registration of our Common Stock under the Exchange Act will be terminated.
Because our Common Stock will be privately held, we will enjoy certain
efficiencies, such as the elimination of the time devoted by our management and
certain other employees to complying with certain reporting requirements of the
Exchange Act, including the obligation to comply with the proxy rules
thereunder, and its directors, officers and beneficial owners of more than 10%
of our Common Stock will be relieved of the reporting requirements and
restrictions on insider trading under Section 16 of the Exchange Act. In
addition, we will be relieved of certain Nasdaq listing and reporting
requirements. Accordingly, less information will be required to be made publicly
available than is required at this time. We will be able to reduce certain
costs, which we estimate to be approximately $750,000 per year, including the
costs of preparing, printing and mailing certain corporate reports and proxy
statements, the expenses of a transfer agent and registrar and the costs of
investor relations activities.
Leonard Green & Partners and InterDent structured the transaction as a
one-step merger without a first-step cash tender offer because they believed
that a first-step cash tender offer would make it less likely that the
transaction would qualify as a leveraged recapitalization under generally
accepted accounting principles. Moreover, we did not believe that a first-step
tender offer would result in our stockholders receiving the cash from the merger
significantly sooner than under a one-step merger structure. See "PROPOSALS AT
THE SPECIAL MEETING--Accounting Treatment."
The merger agreement and the transactions contemplated thereby require the
approval and adoption of the holders of a majority of the outstanding shares of
our Common Stock and Series D Preferred Stock, voting together as a single
class. The merger agreement and the transactions contemplated thereby do not
require the approval and adoption of a majority of the Common Stock and
Series D Preferred Stock held by stockholders who are not members of the
affiliate group because such approval is not required under the Delaware merger
statute and because the Special Committee and the Board of the Directors believe
that the fairness of the transaction was established by other factors. These
factors include the arm's-length bargaining between Leonard Green & Partners,
the Special Committee and the Board of Directors as to the terms of the
transaction, and the other factors referred to below as having been taken into
account by the Special Committee and the Board of Directors.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS; FAIRNESS OF
THE MERGER
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS.
On October 14, 1999, the Special Committee unanimously determined that the
merger is fair to our stockholders. At a telephonic meeting of the Board of
Directors held on October 18, 1999, the Special Committee so advised the Board
of Directors. On October 20, 1999, the Board of Directors unanimously approved
and deemed advisable the merger agreement and the transactions contemplated
thereby.
12
<PAGE>
FAIRNESS OF THE MERGER.
SPECIAL COMMITTEE. In reaching its determinations referred to above, the
Special Committee considered the following factors:
- the relationship between the price per share to be paid in the merger and
the recent market prices of our Common Stock;
- the recent market prices of the stocks of other companies in the
dental/orthodontic and physician practice management industries;
- the fact that the merger consideration is payable in cash, eliminating any
uncertainties in valuing the consideration to be received by our
stockholders;
- the likelihood that the merger would be consummated, including the
experience and reputation of Leonard Green & Partners;
- the possibilty that the required financing would not be obtained on
acceptable terms and the potential disruption to our business during the
pendency of the proposed merger;
- the Special Committee's belief that the price per share to be paid in the
merger was fair relative to its own assessment of the business, condition
and prospects of InterDent;
- the financial analysis of Deutsche Banc Alex. Brown and its opinion as to
the fairness, from a financial point of view, of the merger consideration
to the holders of Common Stock, other than members of the affiliate group;
and
- certain benefits and detriments to be received or incurred by members of
the affiliate group as described in this proxy statement under the heading
"Conflicts of Interest and other Interests of the Affiliate Group;"
- the terms of the merger and the merger agreement, including those
provisions of the merger agreement relating to the ability of third
parties to make a bid for InterDent and our ability to consider and accept
a bid superior to the terms of the merger; and
- the fact that the terms of the merger agreement would permit InterDent to
provide information to potential third-party acquirors only during a
limited period.
The above discussion of the factors considered by the Special Committee is
not intended to be exhaustive but summarizes all material factors considered.
The Special Committee did not assign any relative or specific weights to the
above factors, nor did it specifically characterize any factor as positive or
negative, and individual members of the Special Committee may have given
differing weights to differing factors and may have viewed certain factors more
positively or negatively than others. Throughout its deliberations, the Special
Committee received the advice of its advisors.
BOARD OF DIRECTORS. In reaching its determinations referred to above, the
Board of Directors considered the following factors:
- the determinations and opinion of the Special Committee;
- the fact that the price and the terms and conditions of the merger
agreement were the result of arm's-length negotiations between the Special
Committee, the Board of Directors and Leonard Green & Partners;
- certain benefits and detriments to be received or incurred by members of
the affiliate group as described in this proxy statement under the heading
"Conflicts of Interest and other Interests of the Affiliate Group;"
13
<PAGE>
- the financial analysis of Deutsche Banc Alex. Brown, which analysis was
considered and adopted by the Board of Directors;
- utilization of management time and effort to complete the transaction;
- possible lost opportunity to pursue other potential financing sources;
- the other factors referred to above as having been taken into account by
the Special Committee;
- the fact that the merger is subject to a financing condition, which is
highly dependent upon the financial markets;
- the potential disruption to our business operations following public
announcement of the merger transaction; and
- the costs and fees that we will incur in connection with the merger
transaction, including any fees that would be due and payable to ID Recap
if the merger agreement is terminated.
In considering the arm's-length nature of the negotiations and the
procedural fairness of the merger, the Board of Directors noted that:
- the Special Committee consisted of independent directors of the Board of
Directors, who represented the interests of our stockholders who are not
members of the affiliate group;
- the Special Committee retained and was advised by independent legal
counsel; and
- the Special Committee retained Deutsche Banc Alex. Brown to assist it in
evaluating the fairness, from a financial point of view, of the merger
consideration to the holders of Common Stock, other than members of the
affiliate group.
In considering the fairness of the merger, the Special Committee and the
Board of Directors did not consider our going concern value, net book value or
liquidation value materially relevant because they believed those values were
not material indicators of our value. Our book value per share as of
September 30, 1999 was $2.95, substantially below the $9.50 per share price to
be paid in the merger.
The description set forth above of the factors considered by the Board of
Directors is not intended to be exhaustive, but summarizes all material factors
considered. The Board of Directors did not assign any relative or specific
weights to the factors nor did it specifically characterize any factor as
positive or negative, and individual members of the Board of Directors may have
given differing weights to different factors and may have viewed certain factors
more positively or negatively than others.
OPINION OF DEUTSCHE BANC ALEX. BROWN
The Special Committee engaged Deutsche Banc Alex. Brown to render an opinion
as to the fairness, from a financial point of view, of the consideration to be
received in the merger by the holders of our Common Stock, other than members of
the affiliate group. On October 14, 1999, at a meeting of the Special Committee
held to evaluate the merger, Deutsche Banc Alex. Brown reviewed with the Special
Committee its financial analysis of the merger consideration. On October 22,
1999, the date of execution of the merger agreement, Deutsche Banc Alex. Brown
delivered to the Board of Directors and Special Committee a written opinion
dated October 22, 1999, to the effect that, as of that date and based on and
subject to the matters described in its opinion, the merger consideration of
$9.50 per share in cash was fair, from a financial point of view, to the holders
of our Common Stock, other than members of the affiliate group.
The full text of Deutsche Banc Alex. Brown's written opinion dated
October 22, 1999, which describes the assumptions made, matters considered and
limitations of the review undertaken, is attached as Appendix B and is
incorporated into this document by reference. DEUTSCHE BANC ALEX. BROWN'S
OPINION IS DIRECTED TO THE BOARD OF DIRECTORS AND THE SPECIAL COMMITTEE, AND
ADDRESSES ONLY THE FAIRNESS OF THE MERGER
14
<PAGE>
CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO THE HOLDERS OF OUR COMMON STOCK,
OTHER THAN MEMBERS OF THE AFFILIATE GROUP. THE OPINION DOES NOT ADDRESS THE
MERITS OF OUR UNDERLYING DECISION TO ENGAGE IN THE MERGER AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW TO VOTE WITH RESPECT TO
MATTERS RELATING TO THE MERGER. The summary of Deutsche Banc Alex. Brown's
opinion described below is qualified in its entirety by reference to the full
text of its opinion.
In arriving at its opinion, Deutsche Banc Alex. Brown:
- reviewed publicly available financial and other information concerning
InterDent and internal analyses and other information furnished to or
discussed with Deutsche Banc Alex. Brown by InterDent and its advisors;
- held discussions with members of the senior management of InterDent
regarding the business and prospects of InterDent;
- reviewed the reported prices and trading activity for InterDent Common
Stock;
- compared financial and stock market information for InterDent with similar
information for other companies whose securities are publicly traded;
- reviewed the financial terms of recent business combinations which
Deutsche Banc Alex. Brown deemed comparable in whole or in part;
- reviewed the terms of the merger agreement; and
- performed other studies and analyses and considered other factors as
Deutsche Banc Alex. Brown deemed appropriate.
Deutsche Banc Alex. Brown did not assume responsibility for independent
verification of, and did not independently verify, any information, whether
publicly available or furnished to Deutsche Banc Alex. Brown, concerning
InterDent, including any financial information, forecasts or projections
considered in connection with the rendering of its opinion. For purposes of its
opinion, Deutsche Banc Alex. Brown assumed and relied on the accuracy and
completeness of all information that it reviewed and did not conduct a physical
inspection of any of the properties or assets, or prepare or obtain any
independent evaluation or appraisal of any of the assets or liabilities, of
InterDent.
With respect to the financial forecasts and projections made available to
Deutsche Banc Alex. Brown and used in its analyses, Deutsche Banc Alex. Brown
assumed that they were reasonably prepared on bases reflecting the best
currently available estimates and judgments of InterDent as to the matters
covered by the forecasts and projections. In rendering its opinion, Deutsche
Banc Alex. Brown expressed no view as to the reasonableness of the forecasts and
projections used by it or the assumptions on which the forecasts and projections
were based.
Deutsche Banc Alex. Brown was not requested to, and it did not, participate
in the negotiation or structuring of the merger, and Deutsche Banc Alex. Brown
was not authorized to, and it did not, solicit indications of interest from any
party with respect to the acquisition of all or a part of InterDent. Deutsche
Banc Alex. Brown's opinion was necessarily based on economic, market and other
conditions as in effect on, and the information made available to Deutsche Banc
Alex. Brown as of, the date of its opinion.
For purposes of rendering its opinion, Deutsche Banc Alex. Brown assumed
that, in all respects material to its analysis:
- the representations and warranties of InterDent and ID Recap contained in
the merger agreement were true and correct;
- InterDent and ID Recap would each perform all of the covenants and
agreements to be performed by it under the merger agreement; and
15
<PAGE>
- all conditions to the obligations of each of InterDent and ID Recap to
consummate the merger would be satisfied without any waiver.
Deutsche Banc Alex. Brown also assumed that all material governmental,
regulatory or other approvals and consents required in connection with the
consummation of the merger would be obtained and that in connection with
obtaining any necessary governmental, regulatory or other approvals and
consents, or any amendments, modifications or waivers to any agreements,
instruments or orders to which either InterDent or ID Recap is a party or is
subject or by which it is bound, no limitations, restrictions or conditions
would be imposed or amendments, modifications or waivers made that would have a
material adverse effect on InterDent or materially reduce the contemplated
benefits of the merger to InterDent.
Except as otherwise described above, no other instructions or limitations
were imposed by InterDent on Deutsche Banc Alex. Brown with respect to the
investigations made or procedures followed by Deutsche Banc Alex. Brown in
rendering its opinion.
In connection with rendering its opinion to the Board of Directors and
Special Committee, Deutsche Banc Alex. Brown performed a variety of financial
analyses which are summarized below. The following summary does not purport to
be a complete description of all of the analyses performed and factors
considered by Deutsche Banc Alex. Brown in connection with its opinion. A copy
of Deutsche Banc Alex. Brown's written presentation to the Board of Directors
and the Special Committee in connection with its opinion has been filed as an
exhibit to the Rule 13e-3 Transaction Statement on Schedule 13E-3 filed by
InterDent with the Securities and Exchange Commission and will be available for
inspection and copying at the principal executive offices of InterDent during
regular business hours by any interested stockholder of InterDent or
representatives of such stockholder who have been so designated in writing and
may be inspected and copied, and obtained by mail, from the Securities and
Exchange Commission.
The following is a summary of the material financial analyses performed by
Deutsche Banc Alex. Brown in connection with its opinion to the Board of
Directors and the Special Committee dated October 22, 1999. THE FINANCIAL
ANALYSES SUMMARIZED BELOW INCLUDE INFORMATION PRESENTED IN TABULAR FORMAT. IN
ORDER TO FULLY UNDERSTAND DEUTSCHE BANC ALEX. BROWN'S FINANCIAL ANALYSES, THE
TABLES MUST BE READ TOGETHER WITH THE TEXT OF EACH SUMMARY. THE TABLES ALONE DO
NOT CONSTITUTE A COMPLETE DESCRIPTION OF THE FINANCIAL ANALYSES. CONSIDERING THE
DATA SET FORTH BELOW WITHOUT CONSIDERING THE FULL NARRATIVE DESCRIPTION OF THE
FINANCIAL ANALYSES, INCLUDING THE METHODOLOGIES AND ASSUMPTIONS UNDERLYING THE
ANALYSES, COULD CREATE A MISLEADING OR INCOMPLETE VIEW OF DEUTSCHE BANC ALEX.
BROWN'S FINANCIAL ANALYSES.
ANALYSIS OF SELECTED PUBLIC COMPANIES.
Deutsche Banc Alex. Brown compared financial and stock market information
for InterDent and the following 11 selected publicly held companies in the
dental/orthodontic practice management and physician practice management
industries:
<TABLE>
<CAPTION>
DENTAL/ORTHODONTIC PRACTICE PHYSICIAN PRACTICE
MANAGEMENT COMPANIES MANAGEMENT COMPANIES
--------------------------- --------------------
<S> <C>
- - American Dental Partners, Inc. - Radiologix, Inc. (f/k/a American
- - Apple Orthodontix, Inc. Physician Partners, Inc.)
- - Castle Dental Centers, Inc. - Pediatrix Medical Group, Inc.
- - Coast Dental Services, Inc. - PhyCor, Inc.
- - Monarch Dental Corporation - ProMedCo Management Company
- - Orthodontic Centers of America, - US Oncology, Inc.
Inc.
</TABLE>
Deutsche Banc Alex. Brown reviewed adjusted market values, calculated as
equity market value, plus debt, less cash, as multiples of latest 12 months and
second quarter annualized, or "run rate," revenues; earnings before interest,
taxes, depreciation and amortization, commonly referred to as EBITDA; and
earnings before interest and taxes, commonly referred to as EBIT. Deutsche Banc
Alex. Brown also
16
<PAGE>
reviewed equity market values as a multiple of latest 12 months and run rate net
income and stock prices as a multiple of estimated calendar years 1999 and 2000
earnings per share, commonly referred to as EPS. All multiples were based on
closing stock prices on October 13, 1999 and were calculated both for the
selected companies as an entirety and for the following subset of selected
companies: American Dental Partners, Inc., Radiologix, Inc., Orthodontic Centers
of America, Inc., PhyCor, Inc. and US Oncology, Inc. Estimated financial data
for InterDent and the selected companies were based on publicly available
research analysts' estimates. This analysis indicated the following ranges of
implied adjusted market value and equity market value multiples for the selected
companies, the overall mean multiples for the selected companies and the
selected mean multiples for the subset of selected companies, as compared to the
following multiples for InterDent implied by the merger consideration of $9.50
per share:
<TABLE>
<CAPTION>
MULTIPLES FOR
INTERDENT
IMPLIED MULTIPLES OF IMPLIED BY
SELECTED COMPANIES MERGER CONSIDERATION
---------------------------------- --------------------
SUBSET OVERALL
MEAN MEAN RANGE
-------- -------- ------------
<S> <C> <C> <C> <C>
ADJUSTED MARKET VALUES:
Latest 12 months revenues............................ 1.8x 1.3x 0.5x - 4.4x 1.6x
Latest 12 months EBITDA.............................. 6.9x 6.0x 2.9x - 11.4x 12.4x
Latest 12 months EBIT................................ 9.7x 8.8x 3.5x - 13.3x 18.1x
Run rate revenues.................................... 1.6x 1.1x 0.5x - 3.9x 1.4x
Run rate EBITDA...................................... 6.0x 5.3x 2.8x - 9.4x 10.0x
Run rate EBIT........................................ 8.7x 7.4x 3.5x - 11.3x 14.0x
EQUITY MARKET VALUES:
Latest 12 months net income.......................... 12.7x 10.9x 4.1x - 20.6x 33.3x
Run rate net income.................................. 12.3x 10.1x 4.1x - 17.8x 25.8x
Estimated calendar year 1999 earnings per share
(research analysts' estimates)..................... 11.3x 9.6x 5.2x - 17.3x 21.1x
Estimated calendar year 2000 earnings per share
(research analysts' estimates)..................... 9.1x 8.0x 4.6x - 13.3x 16.7x
</TABLE>
17
<PAGE>
ANALYSIS OF SELECTED PRECEDENT TRANSACTIONS.
Deutsche Banc Alex. Brown reviewed the purchase prices and implied
transaction multiples in the following 12 selected transactions in the health
care services industry:
<TABLE>
<CAPTION>
DATE
ACQUIROR TARGET ANNOUNCED
-------- ------ ---------
<S> <C> <C>
Alliance Imaging Inc. 9/14/99
- - Kohlberg Kravis Roberts & Co.
Physicians' Specialty Corp. 6/14/99
- - TA Associates, Inc.
Unilab Corporation 5/25/99
- - Kelso & Company
First Commonwealth, Inc. 5/19/99
- - The Guardian Life Insurance Co. of America
NovaCare, Inc. (Orthotics and
prosthetics services division) 4/2/99
- - Hanger Orthopedic Group, Inc.
Sheridan Healthcare, Inc. 3/25/99
- - Vestar Capital Partners/Investor Group
Concentra Managed Care, Inc. 3/3/99
- - Welsh, Carson, Anderson & Stowe
CompDent Corporation 1/19/99
- - TA Associates, Inc., Golder, Thoma, Cressey,
Rauner, Inc. and NMS Capital Partners
Physician Reliance Network, Inc. 12/14/98
- - American Oncology Resources, Inc.
Intensiva Healthcare Corporation 11/10/98
- - Select Medical Corporation
Dental Care Alliance, Inc. 10/16/98
- - Gentle Dental Services Corporation
MedCath Inc. 3/13/98
- - Kohlberg Kravis Roberts & Co. and Welsh,
Carson, Anderson & Stowe
</TABLE>
Deutsche Banc Alex. Brown reviewed adjusted market values in the selected
transactions as multiples of latest 12 months and run rate revenues, EBITDA and
EBIT, and equity market values as a multiple of latest 12 months, run rate and
one-year forward net income. All multiples were based on publicly available
information at the time of announcement of the relevant transaction. This
analysis indicated the following implied adjusted market value and equity market
value multiples for the selected transactions, as compared to the following
multiples for InterDent implied by the merger consideration of $9.50 per share:
<TABLE>
<CAPTION>
MULTIPLES FOR
INTERDENT
IMPLIED MULTIPLES OF IMPLIED BY
SELECTED TRANSACTIONS MERGER CONSIDERATION
------------------------ --------------------
MEAN RANGE
-------- -------------
<S> <C> <C> <C>
ADJUSTED MARKET VALUES:
Latest 12 months revenues................................... 1.8x 1.0x - 3.5x 1.6x
Latest 12 months EBITDA..................................... 9.8x 6.1x - 14.1x 12.4x
Latest 12 months EBIT....................................... 13.5x 7.9x - 20.1x 18.1x
Run rate revenues........................................... 1.7x 1.0x - 2.7x 1.4x
Run rate EBITDA............................................. 8.1x 5.6x - 9.9x 10.0x
Run rate EBIT............................................... 11.4x 7.6x - 20.4x 14.0x
EQUITY MARKET VALUES:
Latest 12 months net income................................. 23.9x 10.2x - 40.1x 33.3x
Run rate net income......................................... 21.2x 14.8x - 47.0x 25.8x
One-year forward net income (research analysts'
estimates)................................................ 15.7x 9.3x - 30.4x 21.1x
</TABLE>
DISCOUNTED CASH FLOW ANALYSIS.
Deutsche Banc Alex. Brown performed a discounted cash flow analysis to
estimate the present value of the unlevered, after-tax free cash flows that
InterDent could generate during fiscal years 1999 through 2004 based on three
scenarios reflecting the potential for different revenue growth rates and
acquisition activity for InterDent. For purposes of this analysis, Deutsche Banc
Alex. Brown utilized internal estimates
18
<PAGE>
of the management of InterDent. The first scenario, case 1, assumed a 9% revenue
growth rate without acquisitions. The second scenario, case 2, assumed a 7%
revenue growth rate with acquisitions. The third scenario, case 3, assumed a 9%
revenue growth rate with acquisitions. The range of estimated terminal values
was calculated by applying terminal value multiples ranging from 6.0x to 10.0x
to InterDent's estimated fiscal year 2004 EBITDA. The present value of the cash
flows and terminal values were calculated using discount rates ranging from
13.0% to 15.0%. This analysis yielded the following implied per share equity
reference range for InterDent, as compared to the per share equity value for
InterDent implied by the merger consideration of $9.50 per share:
<TABLE>
<CAPTION>
IMPLIED PER SHARE EQUITY
REFERENCE RANGE FOR
SCENARIO INTERDENT
- -------- ------------------------
<S> <C>
Case 1......................................... $4.32 - $10.70
Case 2......................................... $5.80 - $17.20
Case 3......................................... $6.29 - $18.49
</TABLE>
PREMIUMS ANALYSIS.
Deutsche Banc Alex. Brown reviewed the premiums paid in eight selected
merger and acquisition transactions in the health care services industry
completed since January 1, 1995 having transaction values of between
$100 million and $350 million. Deutsche Banc Alex. Brown analyzed the premiums
in these transactions based on, among other things, the target company's stock
price one day and one month prior to public announcement of the transaction.
This analysis indicated the following premiums for the target companies in the
selected transactions, as compared to the premiums implied for InterDent in the
merger based on closing prices of InterDent Common Stock one day and one month
prior to October 14, 1999, which is the last trading day prior to the Board of
Directors meeting of October 15, 1999, at which it reviewed Deutsche Banc Alex.
Brown's financial analyses:
<TABLE>
<CAPTION>
PREMIUMS PAID IN
SELECTED HEALTH CARE
SERVICES MERGERS AND PREMIUM FOR
ACQUISITIONS INTERDENT IMPLIED BY
MEASUREMENT DATE TRANSACTIONS MERGER CONSIDERATION
- ---------------- ------------------------ --------------------
MEAN RANGE
-------- -------------
<S> <C> <C> <C>
One Day Prior.............................................. 26.0% 6.3% - 54.0% 28.8%
One Month Prior............................................ 43.8% 11.1% - 92.5% 25.6%
</TABLE>
OTHER FACTORS.
In rendering its opinion, Deutsche Banc Alex. Brown also reviewed and
considered, among other things:
- historical and projected financial data for InterDent;
- historical market prices and trading volumes for our Common Stock and the
relationship between movements in our Common Stock, movements in the
common stock of the selected companies and movements in the S&P 500 Index;
- a financial model of the leveraged recapitalization of InterDent proposed
by Leonard Green & Partners based on financing assumptions of Leonard
Green & Partners;
- the earnings performance of InterDent and selected companies as well as
price-to-earnings multiples of InterDent relative to the selected
companies; and
- selected published analysts' reports, including analysts' estimates as to
the earnings per share of InterDent.
19
<PAGE>
The above summary is not a complete description of Deutsche Banc Alex.
Brown's opinion to the Board of Directors and the Special Committee or the
financial analyses performed and factors considered by Deutsche Banc Alex. Brown
in connection with its opinion. The preparation of a fairness opinion is a
complex analytical process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances and, therefore, a fairness opinion
is not readily susceptible to summary description. Deutsche Banc Alex. Brown
believes that its analyses and the summary above must be considered as a whole
and that selecting portions of its analyses and factors or focusing on
information presented in tabular format, without considering all analyses and
factors or the narrative description of the analyses, could create a misleading
or incomplete view of the processes underlying Deutsche Banc Alex. Brown's
analyses and opinion.
In performing its analyses, Deutsche Banc Alex. Brown considered industry
performance, general business, economic, market and financial conditions and
other matters existing as of the date of its opinion, many of which are beyond
the control of InterDent. No company, transaction or business used in the
analyses as a comparison is identical to InterDent, ID Recap or the merger, and
an evaluation of the results of those analyses is not entirely mathematical.
Rather, the analyses involve complex considerations and judgments concerning
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, business segments
or transactions analyzed.
The estimates contained in Deutsche Banc Alex. Brown's analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than those suggested by its analyses. In addition, analyses
relating to the value of businesses or securities do not necessarily purport to
be appraisals or to reflect the prices at which businesses or securities
actually may be sold. Accordingly, Deutsche Banc Alex. Brown's analyses and
estimates are inherently subject to substantial uncertainty.
The type and amount of consideration payable in the merger were determined
through negotiation between InterDent and Leonard Green & Partners, and the
decision to enter into the merger was solely that of the Board of Directors.
Deutsche Banc Alex. Brown's opinion and financial analyses were only one of many
factors considered by the Board of Directors and the Special Committee in their
evaluation of the merger and should not be viewed as determinative of the views
of the Board of Directors, the Special Committee or InterDent management with
respect to the merger consideration or the merger.
Deutsche Banc Alex. Brown is an internationally recognized investment
banking firm and, as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements and
valuations for estate, corporate and other purposes. The Special Committee
selected Deutsche Banc Alex. Brown based on Deutsche Banc Alex. Brown's
reputation and expertise.
Deutsche Banc Alex. Brown and its affiliates have in the past provided
financial services to Leonard Green & Partners and its affiliates unrelated to
the merger, including having acted as lead managing underwriter in connection
with various financings relating to the securities of Leonard Green & Partners
and certain affiliates of Leonard Green & Partners, for which services Deutsche
Banc Alex. Brown and its affiliates have received compensation. Deutsche Bank
Securities Inc. may be participating in the financing for the merger, for which
services it may receive compensation. Affiliates of Deutsche Bank Securities
Inc. are limited partners in Green Equity Investors III, L.P.
Deutsche Banc Alex. Brown maintains a market in InterDent Common Stock and
regularly publishes research reports regarding the businesses and securities of
InterDent and other publicly traded companies in the health care services
industry. In the ordinary course of business, Deutsche Banc Alex. Brown and its
affiliates may actively trade or hold the securities and other instruments and
obligations of InterDent for their own account and for the accounts of customers
and, accordingly, may at any time hold a long or short position in those
securities, instruments or obligations.
20
<PAGE>
Under the terms of Deutsche Banc Alex. Brown's engagement, InterDent has
agreed to pay Deutsche Banc Alex. Brown upon delivery of its opinion an
aggregate fee of $700,000. In addition, InterDent has agreed to reimburse
Deutsche Banc Alex. Brown for its reasonable travel and other out-of-pocket
expenses, including reasonable fees and disbursements of legal counsel, and to
indemnify Deutsche Banc Alex. Brown and related parties against liabilities,
including liabilities under the federal securities laws, relating to, or arising
out of, Deutsche Banc Alex. Brown's engagement.
POSITION OF THE AFFILIATE GROUP AS TO FAIRNESS
The members of the affiliate group have considered the analyses of and the
factors examined by the Special Committee and the Board of Directors. The
members of the affiliate group believe that these analyses and factors, when
considered together with the determination of the Special Committee and the
opinion of Deutsche Banc Alex. Brown, provide a reasonable basis for them to
believe that the merger is fair to InterDent stockholders from a financial point
of view. Certain members of the affiliate group are directors, executive
officers and significant stockholders of InterDent and have an interest in the
contemplated merger that may conflict with the interests of the stockholders of
InterDent. No member of the affiliate group has assigned specific relative
weights to the factors considered in reaching such member's belief as to
fairness.
The members of the affiliate group have concluded that the merger and the
terms of the merger agreement, including the merger consideration of $9.50 per
share, are fair to InterDent's holders of Common Stock, other than members of
the affiliate group, based on the following factors:
- the determinations and recommendations of the Special Committee and the
Board of Directors;
- the unanimous opinion of the Special Committee, which consisted solely of
directors who were independent of Green Equity Investors III, Leonard
Green & Partners and the affiliate group, that the merger is fair and
reasonable to Interdent stockholders, other than members of the affiliate
group;
- the fact that the price and the terms and conditions of the merger
agreement were the result of arm's-length negotiations between the Special
Committee or the Board of Directors and Leonard Green & Partners; and
- the independent factors referred to above as having been taken into
account by the Special Committee and the Board of Directors, including the
fact that the Board of Directors and the Special Committee had received
the opinion of Deutsche Banc Alex. Brown as to the fairness, from a
financial point of view, of the merger consideration to the holders of
Common Stock, other than members of the affiliate group.
CONFLICTS OF INTEREST AND OTHER INTERESTS OF THE AFFILIATE GROUP
In considering the recommendation of the Special Committee and the Board of
Directors with respect to the merger, our stockholders should be aware of
certain inherent conflicts of interest, and other interests of members of the
affiliate group, including those referred to below, that give rise to divided
interests in considering the merger. The Special Committee and the Board of
Directors were aware of these actual and potential conflicts of interest.
EXCHANGE AND SUBSCRIPTION AGREEMENTS.
In connection with the merger agreement, each member of the affiliate group
has entered into or will enter into an exchange and subscription agreement with
ID Recap. The following summary of the exchange and subscription agreement
highlights important selected information. For a more complete description, you
should refer to the exchange and subscription agreement attached as Appendix C
to this proxy statement.
21
<PAGE>
Pursuant to the exchange and subscription agreement, each member of the
affiliate group agrees, or expects to agree, to subscribe for shares of ID Recap
in exchange for convertible notes or shares of InterDent prior to the closing of
the merger as follows:
- Michael Fiore has agreed to exchange 39,579 shares of InterDent Common
Stock for 39,579 shares of ID Recap common stock;
- SRM 1993 Children's Trust has agreed to exchange 1,422,789 shares of
InterDent Common Stock for 724,105 shares of common stock and 265,500
shares of junior preferred stock of ID Recap;
- certain members of management are expected to agree to exchange an
aggregate of 138,817 shares of InterDent Common Stock for an aggregate of
59,870 shares of common stock and 30,000 shares of junior preferred stock
of ID Recap;
- Sprout Capital VII, L.P. and related entities have agreed to exchange an
aggregate of $26.0 million of InterDent's 7% Convertible Subordinated
Notes, Common Stock and Series D Preferred Stock for 503,370 shares of
common stock, 470,463 shares of senior preferred stock, and 378,256 shares
of junior preferred stock of ID Recap; and
- CB Capital Investors, L.P. has agreed to exchange an aggregate of
$12.5 million of InterDent's 7% Convertible Subordinated Notes and
Series D Preferred Stock for 242,005 shares of common stock, 226,184
shares of senior preferred stock, and 181,854 shares of junior preferred
stock of ID Recap.
As a result of the merger, each share of ID Recap common stock, junior
preferred stock and senior preferred stock will be converted into one share of
Interdent Common Stock, Junior Preferred Stock and Senior Preferred Stock,
respectively. Please refer to the table on page 60 of this proxy statement which
reflects the amount and percentage of InterDent Common Stock held by each member
of the affiliate group immediately prior to and following the merger.
The opportunity to obtain an equity interest in InterDent following the
consummation of the merger may have presented members of the affiliate group
with actual or potential conflicts of interest in connection with the merger.
Such conflicts of interest arise because the members of the affiliate group will
be offered the opportunity to obtain an equity interest in InterDent following
consummation of the merger, and other shareholders will not have that same
opportunity. In light of these inherent conflicts of interest, the Board of
Directors appointed the Special Committee, comprised solely of directors who are
not members of the affiliate group, who are not employees or affiliates of any
members of the affiliate group and who are not InterDent employees, to evaluate
the fairness of the merger to InterDent's stockholders.
PAYMENT AND CANCELLATION OF 7% CONVERTIBLE SUBORDINATED NOTES.
At two related closings occurring on May 18, 1998 and June 3, 1998, Gentle
Dental Service Corporation, a predecessor and wholly-owned subsidiary of
InterDent, issued $30.0 million of 7% Convertible Subordinated Notes and $15.0
million of Series D Preferred Stock. The 7% Convertible Subordinated Notes and
Series D Preferred Stock were privately placed to raise additional capital to
support the ongoing business operations and planned growth of Gentle Dental
Service Corporation. The Gentle Dental Series D Preferred Stock was issued at a
per share price of $9.21 and, subject to certain conditions, the 7% Convertible
Subordinated Notes were convertible into shares of Gentle Dental capital stock
at a conversion price of $9.21.
InterDent was formed on March 12, 1999, in connection with the business
combination of Gentle Dental Service Corporation and Dental Care Alliance. As a
result of that business combination:
- Gentle Dental Service Corporation became a wholly-owned subsidiary of
InterDent;
22
<PAGE>
- the 7% Convertible Subordinated Notes remained outstanding, but became
convertible into InterDent capital stock; and
- the shares of Gentle Dental Series D Preferred Stock were exchanged for
shares of InterDent Series D Preferred Stock on a one-for-one basis.
As of the date of this proxy statement, all $30.0 million of the 7%
Convertible Subordinated Notes remains outstanding.
In the proposed merger, Sprout Capital VII, L.P. and related entities and CB
Capital Investors, L.P., which are members of the affiliate group, will also
have their 7% Convertible Subordinated Notes that are not exchanged for ID Recap
shares prior to the merger, as described above, cancelled and converted into the
right to receive cash. The cash to be received by such entities will equal 101%
of the outstanding principal amount of, and any accrued and unpaid interest on,
such cancelled notes plus $0.29 for each share of InterDent's Common Stock which
such entities would have been entitled to purchase under a warrant that would
have been issued to each holder upon a prepayment of the notes under the terms
of such notes.
EMPLOYMENT AGREEMENTS.
Before consummation of the merger, Michael Fiore and Dr. Steven Matzkin each
must execute and deliver a new employment agreement, the forms of which are
attached as exhibits to the merger agreement. Pursuant to Mr. Fiore's employment
agreement, Mr. Fiore shall hold the offices of Co-Chairman and Chief Executive
Officer and receive a base salary of $400,000 per year for three years. Pursuant
to Dr. Matzkin's employment agreement, Dr. Matzkin shall hold the offices of
Co-Chairman, President and Chief Dental Officer and receive a base salary of
$400,000 per year for three years. In addition, pursuant to the employment
agreements, each of Mr. Fiore and Dr. Matzkin shall:
- be entitled to participate in bonus plans, benefit plans and employee
compensation programs to the extent that other senior executive officers
of similar level and duties are eligible to participate in such programs;
- receive an automobile allowance of $1,000 per month;
- be subject to covenants prohibiting disclosure of confidential information
of InterDent and competition with, or solicitation of employees of,
InterDent; and
- be entitled to severance payments for 36 months if he is terminated
without cause or he terminates his employment for good reason.
MANAGEMENT SERVICES AGREEMENT.
InterDent and Leonard Green & Partners will enter into a management services
agreement prior to the consummation of the merger pursuant to which Leonard
Green & Partners will provide general services, consisting of management,
consulting and financial services and investment banking services for major
transactions. The management services agreement will have a 10-year term and
there will be an annual fee for general services equal to 1.6 % of any amounts
invested in InterDent by Leonard Green & Partners and its affiliates. We expect
Leonard Green & Partners and its affiliates to invest $120.7 million, which
would provide them with an annual fee equal to $1.9 million. Major transaction
service fees will be commensurate with the transaction and the services
provided. Leonard Green & Partners shall be entitled to reimbursement by
InterDent for reasonable expenses and shall be indemnified against any and all
losses related to providing services pursuant to the management services
agreement.
Each of CB Capital Investors and Sprout Capital VII and its related entities
will be entitled to an annual management fee equal to $200,000 and $416,000,
respectively, consisting of 1.6% of the value, on
23
<PAGE>
the closing date of the merger, of the expected $12.5 million and $26.0 million
of InterDent debt and equity securities to be invested by them in the merger.
VOTING AGREEMENT.
In connection with the merger agreement, Mr. Fiore, Dr. Matzkin, SRM 1993
Children's Trust, CB Capital Investors and Sprout Capital VII and related
entities each entered into a voting agreement with ID Recap. The following
summary of the voting agreement highlights important selected information. You
should refer to the text of the voting agreement attached to this proxy
statement as Appendix D for a more complete description. The voting agreement
provides that the stockholders of InterDent who sign the voting agreement will,
among other things:
- vote their shares to approve and adopt the merger agreement and the
transactions contemplated thereby, and in favor of any other matter
necessary to consummate the transactions contemplated by the merger
agreement;
- vote against any other acquisition proposal, which includes any other
merger, consolidation or similar transaction involving any purchase of all
or any significant portion of the properties and assets or any equity
securities of InterDent;
- vote against any change in a majority of the persons who constitute the
Board of Directors inconsistent with the merger agreement or the merger;
- vote against any change in the capitalization of InterDent or any
amendment of the certificate of incorporation or bylaws of InterDent
inconsistent with the merger agreement or the merger;
- not sell, transfer, pledge or otherwise dispose of any of their shares of
InterDent capital stock;
- not restrict or take any action adversely affecting their ability to
freely exercise all voting rights with respect to shares of InterDent
capital stock; and
- not directly or indirectly solicit, initiate, or otherwise facilitate any
inquiries with respect to an acquisition proposal, or have any discussions
with any person relating to an acquisition proposal regarding InterDent.
Each stockholder who executes the voting agreement also waives any rights to
dissent from the merger. The voting agreement will terminate upon termination of
the merger agreement.
24
<PAGE>
STOCKHOLDERS AGREEMENT.
Immediately prior to completion of the merger, Green Equity Investors III,
InterDent and the affiliate group will enter into a stockholders agreement, the
form of which is an exhibit to the exchange and subscription agreement. The
stockholders agreement restricts the ability to freely transfer InterDent
securities held by Green Equity Investors III and members of the affiliate
group, and establishes a right of first refusal in favor of InterDent and
certain significant stockholders, in the event members of the affiliate group
seek to transfer any of their InterDent securities to a third party pursuant to
a good faith offer. In the event any members of the affiliate group cease to be
employed by InterDent during the three years after the merger, InterDent may
purchase a portion of their securities at specified prices. In addition, Green
Equity Investors III has drag-along rights, meaning that, under some
circumstances, if Green Equity Investors III desires to sell any of its
securities to a third party, it may compel members of the affiliate group to do
the same. Also, members of the affiliate group have tag-along rights to
participate in certain sales by Green Equity Investors III, CB Capital
Investors, and Sprout Capital VII and its related entities of its InterDent
securities to a third party, meaning that, under some circumstances, Green
Equity Investors III, CB Capital Investors and Sprout Capital VII, L.P. and its
related entities may be required to include a portion of the affiliate group's
securities in such a sale. Furthermore, the stockholders agreement grants demand
and piggyback registration rights, under specific circumstances, to Green Equity
Investors III and the affiliate group. The grant of demand registration rights
generally means that both Green Equity Investors III and members of the
affiliate group may compel us to register securities owned by them under the
Securities Act of 1933. The grant of piggyback registration rights generally
means that if we propose to register any of our securities under the Securities
Act of 1933, Green Equity Investors III or the members of the affiliate group
may request that we include securities owned by them in such registration. The
stockholders agreement also grants two or more nominees of Green Equity
Investors III and four nominees of the affiliate group rights to be elected to
our Board of Directors.
TREATMENT OF STOCK OPTIONS.
Some of our directors and executive officers hold options to purchase our
Common Stock that will be terminated upon the consummation of the merger. Except
as described in the next paragraph, these individuals will receive cash for
these options according to the terms of the merger agreement. Prior to the
consummation of the merger, we have agreed to take all necessary action,
including obtaining the option holder's consent, to cancel these outstanding
options, whether or not currently exercisable. Upon the surrender and
cancellation of each of these options, each option holder will be entitled to
receive cash equal to the excess of $9.50 per share over the per share exercise
price of his options. As of December 31, 1999, there were options outstanding to
purchase an aggregate of 2,380,702 shares of our Common Stock at a weighted
average exercise price of $6.68 per share. These options were held by 263
persons.
ROLLOVER OF OPTIONS AND WARRANTS IN THE MERGER.
As of December 31, 1999, members of InterDent's senior management
collectively hold options to acquire shares of our Common Stock with an
aggregrate spread value of $3,729,111 based upon a $9.50 price per share.
Pursuant to the terms of the merger agreement, members of senior management will
be provided the opportunity to rollover outstanding options to acquire our
Common Stock with an aggregate spread value not to exceed $2,330,000, and such
options will remain outstanding options of InterDent following consumation of
the merger in accordance with the terms and provisions set forth in the
respective option plan and agreement, subject to such changes and amendment as
required by the merger agreement.
Warrants held by two members of management of InterDent that do not exceed
an aggregate spread value of $155,000 may not be cancelled in the merger and may
remain outstanding as continuing obligations of InterDent after the merger.
25
<PAGE>
PLANS FOR INTERDENT AFTER THE MERGER
Following the merger, Green Equity Investors III and the members of the
affiliate group will own, in the aggregate, 100% of our Common Stock.
InterDent's initial directors following the merger will include Michael Fiore,
Dr. Steven Matzkin, Eric Green, Robert Finzi, John Danhakl and John Baumer. Our
initial officers following the merger will be the same officers as prior to the
merger. Our directors will not receive compensation for serving as directors of
InterDent following the merger.
It is expected that, following consummation of the merger, the operations
and business of InterDent will be conducted substantially as they are currently
being conducted. Neither InterDent nor any members of the affiliate group has
any present plans or proposals that relate to or would result in an
extraordinary corporate transaction involving InterDent's corporate structure,
business or management, such as a merger, reorganization, liquidation,
relocation of any operations, or sale or transfer of a material amount of
assets. However, InterDent and the affiliate group will continue to evaluate
InterDent's business and operations after the merger from time to time, and may
propose or develop new plans and proposals which either InterDent or the
affiliate group considers to be in the best interests of InterDent and its
stockholders.
CONDUCT OF THE BUSINESS OF INTERDENT IF THE MERGER IS NOT CONSUMMATED
Consummation of the merger is subject to several conditions, in addition to
the approval of the merger by the holders of a majority of InterDent Common
Stock and Series D Preferred Stock voting together as a single class. See
"Proposals at the Special Meeting--Conditions Precedent" at page 35 for a more
complete description of these conditions. Even if the requisite stockholder
approval is obtained, because there are other conditions that are beyond
InterDent's control, there can be no assurance that the merger will be
consummated.
If the merger is not consummated for any reason, it is expected that
InterDent's business and operations will continue to be conducted by its current
management, under the direction of the Board of Directors, substantially as they
are currently being conducted. No other transaction is currently being
considered by the affiliate group or InterDent as an alternative to the merger.
FINANCING AND EXPENSES OF THE MERGER
At the closing of the merger, InterDent security holders will receive an
aggregate purchase price of approximately $250.3 million for the shares of
InterDent Common Stock, Preferred Stock, 7% Convertible Subordinated Notes and
outstanding options and warrants, assuming no stockholders dissent from the
merger and perfect their appraisal rights provided under Delaware law. In
addition, InterDent expects to incur approximately $18.75 million in costs and
expenses in connection with the merger, as set forth in the table below.
<TABLE>
<CAPTION>
COST OR FEE ESTIMATED AMOUNT
- ----------- ----------------
<S> <C>
Financial advisory fees..................................... $ 9,015,606
Bank financing fees......................................... 2,000,000
Placement agent fees and expenses........................... 4,800,000
Legal and accounting fees................................... 1,750,000
Printing and mailing fees................................... 200,000
Solicitation expenses....................................... 100,000
SEC filing fees............................................. 34,014
Miscellaneous............................................... 850,380
-----------
Total................................................... $18,750,000
===========
</TABLE>
26
<PAGE>
It is a condition to the consummation of the merger that ID Recap shall have
funds available to it at the closing sufficient to pay the aggregate merger
consideration and costs of the transactions contemplated by the merger agreement
and, as is reasonably necessary, to continue our business following the merger
in substantially the same manner as it is currently being conducted and is
planned to be conducted. ID Recap has not yet secured all of the funds necessary
to consumate the merger. If ID Recap fails to raise sufficient funds on or
before April 30, 1999, then either InterDent or ID Recap may terminate the
merger agreement.
Leonard Green & Partners delivered to InterDent a "highly confident" letter
dated October 21, 1999 from Donaldson, Lufkin & Jenrette, setting forth that
Donaldson, Lufkin & Jenrette is highly confident that it will be able to sell
$160 million of subordinated debt securities required by InterDent to consummate
the merger. Donaldson, Lufkin & Jenrette's ability to consummate the sale of
such securities is subject to, among other things:
- the terms and conditions of the securities and all other debt and equity
financing for the recapitalization being satisfactory;
- the terms and conditions of the recapitalization being substantially the
same as represented to Donaldson, Lufkin & Jenrette;
- the execution and delivery of documentation of the recapitalization and
the securities satisfactory to Donaldson, Lufkin & Jenrette;
- the absence of any material adverse change in the business of InterDent;
- receipt of governmental, regulatory and third party approvals and
consents;
- availability of financial statements satisfactory to Donaldson, Lufkin &
Jenrette;
- completion of due diligence satisfactory to Donaldson, Lufkin & Jenrette;
- satisfactory market conditions; and
- reasonable time to market the securities.
Leonard Green & Partners also delivered to InterDent a "highly confident"
letter dated October 21, 1999 from Deutsche Bank Securities Inc. setting forth
that Deutsche Bank Securities Inc. is highly confident that it will be able to
sell $160 million of subordinated debt securities required by InterDent to
consummate the merger. The ability of Deutsche Bank Securities Inc. to sell the
securities is subject to, among other things:
- there not having been any material adverse change in the business of
InterDent;
- there not existing any pending or threatened claim which could have a
material adverse effect on InterDent;
- principal economic terms and structure of the merger and related
transactions shall be as described to Deutsche Bank Securities Inc.;
- terms of the equity securities shall be satisfactory to Deutsche Bank
Securities Inc.;
- receipt of all governmental, regulatory, or third party approvals;
- execution, delivery and effectiveness of satisfactory documentation for
the merger and related transactions and the sale of the debt securities;
- receipt of satisfactory environmental and solvency reports;
- availability of financial statements;
- satisfactory ratio of consolidated total debt to consolidated earnings;
- no disruption or material adverse change or development in the financial
or capital markets;
- Deutsche Bank Securities Inc. being satisfied with results of its due
diligence review of InterDent; and
- reasonable time to market the sale of the debt securities.
27
<PAGE>
RIGHTS OF DISSENTING STOCKHOLDERS
Holders of shares of InterDent Common Stock or Series D Preferred Stock are
entitled to appraisal rights under Section 262 of the Delaware General
Corporation Law ("DGCL"). A holder having a beneficial interest in such shares
held of record in the name of another person, such as a broker or nominee, must
act promptly to cause the record holder to follow the steps summarized below
properly and in a timely manner to perfect whatever appraisal rights the
beneficial owner may have.
The following discussion is not a complete statement of the law pertaining
to appraisal rights under the DGCL and is qualified in its entirety by the full
text of section 262 of the DGCL, which is reprinted in its entirety as
Appendix E to this proxy statement.
All references in Section 262 and in this summary to a "stockholder" are to
the record holder of shares of InterDent Common Stock or Series D Preferred
Stock as to which appraisal rights are asserted.
Holders of shares of InterDent Common Stock or Series D Preferred Stock who
do not wish to accept, pursuant to the merger, the $9.50 per share provided for
in the merger agreement and who follow the procedures set forth in Section 262
of the DGCL will be entitled to have their shares appraised by the Delaware
Court of Chancery and to receive payment in cash of the "fair value" of such
shares, exclusive of any element of value arising from the accomplishment or
expectation of the merger, together with a fair rate of interest, if any, as
determined by such court.
Under Section 262 of the DGCL, where a merger agreement is to be submitted
for approval and adoption at a meeting of stockholders, as in the case of the
special meeting, the corporation submitting the proposed merger to a vote of its
stockholders must notify each of its stockholders entitled to appraisal rights
that such appraisal rights are available. Such notice must be given by the
corporation to its stockholders entitled to appraisal rights no less than
20 days prior to the meeting at which the merger proposal will be submitted to
the stockholders for a vote and such notice must include a copy of Section 262
of the DGCL.
This proxy statement constitutes such notice to the holders of shares of
InterDent Common Stock and Series D Preferred Stock, and the applicable
statutory provisions of the DGCL are attached to this proxy statement as
Appendix E. Any holder who wishes to exercise such appraisal rights, or who
wishes to preserve rights to do so, should review the following discussion and
Appendix E carefully because failure to timely and properly comply with the
procedures specified will result in the loss of appraisal rights under the DGCL.
A holder of shares of InterDent Common Stock or Series D Preferred Stock
wishing to exercise appraisal rights must deliver to the Secretary of InterDent,
before the vote on the merger and the merger agreement at the special meeting, a
written demand for appraisal and must not vote such signed shares in favor of
approval and adoption of the merger agreement. Because a signed, dated proxy
which does not contain voting instructions will, unless revoked, be voted for
approval and adoption of the merger and the merger agreement, a stockholder who
votes by proxy and who wishes to exercise appraisal rights must:
- vote against approval and adoption of the merger agreement; or
- abstain from voting on approval and adoption of and the merger agreement.
Neither voting (in person or by proxy) against, abstaining from voting on or
failing to vote on the proposal to approve and adopt the merger agreement will
constitute a written demand for appraisal within the meaning of Section 262 of
the DGCL. The written demand for appraisal must be in addition to and separate
from any such proxy or vote. In addition, a stockholder wishing to exercise
appraisal rights must continue to hold such shares of stock from the date of the
demand for appraisal until the effective time of the merger.
28
<PAGE>
Only the person who is the stockholder of record on the date the written
demand for appraisal is made is entitled to assert appraisal rights for the
stock registered in that stockholder's name. A demand for appraisal should be
executed by or on behalf of the stockholder of record, fully and correctly, as
the stockholder's name appears on the stock certificate(s). If the shares of
stock are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of the demand should be made in that capacity,
and if the shares are owned of record by more than one person, as in a joint
tenancy and tenancy-in-common, the demand should be executed by or on behalf of
all joint owners. An authorized agent, including one or more joint owners, may
execute a demand for appraisal on behalf of a stockholder of record; however,
the agent must identify the record owner or owners and expressly disclose the
fact that, in executing the demand, the agent is agent for such owner or owners.
A record holder such as a broker who holds shares as nominee for several
beneficial owners may exercise appraisal rights with respect to the shares held
for one or more beneficial owners while not exercising such rights with respect
to the shares held for other beneficial owners; in such case, the written demand
should set forth the number of shares as to which appraisal is sought and when
no number of shares is expressly mentioned the demand will be presumed to cover
all shares held in the name of the record owner. Holders who hold their shares
in brokerage accounts or other nominee forms and who wish to exercise appraisal
rights are urged to consult with their brokers to determine the appropriate
procedures for the making of a demand for appraisal by such a nominee.
All written demands for appraisal should be delivered to the Secretary of
InterDent, either in person or by mail (certified mail, return receipt
requested, being the recommended form of transmittal), addressed to him at:
InterDent, Inc., 222 North Sepulveda Boulevard, Suite 740, El Segundo, CA
90245-4340.
Within 10 days after the effective time of the merger, InterDent must send a
notice as to the effectiveness of the merger to each former stockholder who has
made such a written demand for appraisal and who has not voted in favor of
approval and adoption of the merger and the merger agreement. Within 120 days
after the effective time, but not thereafter, InterDent, or any holder of
InterDent Common Stock or Series D Preferred Stock who is entitled to appraisal
rights under Section 262 of the DGCL and has complied with the requirements of
that section, may file a petition in the Delaware Court of Chancery demanding a
determination of the fair value of the shares. InterDent is under no obligation
to and does not presently intend to file a petition in respect of any such
appraisal. Accordingly, it is the obligation of the stockholders to initiate all
necessary action to perfect their appraisal rights within the time prescribed in
Section 262 of the DGCL.
Within 120 days after the effective time, any stockholder who has complied
with the requirements under Section 262 of the DGCL for exercise of appraisal
rights will be entitled, upon written request, to receive from InterDent a
statement setting forth the aggregate number of shares with respect to which
demands for appraisal have been received and which have not voted in favor of
approval and adoption of the merger and the merger agreement, and the aggregate
number of stockholders of such shares. Such statement must be mailed within
10 days after a written request therefor has been received by InterDent.
If a petition for appraisal is duly filed by a stockholder and a copy
thereof is delivered to InterDent, InterDent will then be obligated within
20 days to provide the Delaware Court of Chancery with a duly verified list
containing the names and addresses of all stockholders of shares who have
demanded appraisal of their shares. After notice to such stockholders, the
Delaware Court of Chancery is empowered to conduct a hearing upon the petition
to determine those stockholders who have complied with Section 262 of the DGCL
and who have become entitled to appraisal rights under that section. The
Delaware Court of Chancery may require the stockholders who have demanded
payment for their shares to submit their stock certificates to the Register in
Chancery for a notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Delaware Court
of Chancery may dismiss the proceedings as to such stockholder.
29
<PAGE>
After determining the stockholders entitled to appraisal, the Delaware Court
of Chancery will appraise the "fair value" of their shares, exclusive of any
element of value arising from the accomplishment or expectation of the merger,
together with a fair rate of interest, if any, to be paid upon the amount
determined to be the fair value. Stockholders considering seeking appraisal
should be aware that the fair value of their shares as determined under
Section 262 of the DGCL could be more than, the same as or less than the
consideration they would receive pursuant to the merger agreement if they did
not seek appraisal of their shares and that investment banking opinions as to
fairness from a financial point of view are not necessarily opinions as to fair
value under Section 262 of the DGCL. The Delaware Supreme Court has stated that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered in the appraisal proceedings. In addition, Delaware courts have
decided that the statutory appraisal remedy, depending on factual circumstances,
may or may not be a dissenter's exclusive remedy.
The court also will determine the amount of interest, if any, to be paid
upon the amounts to be received by persons whose shares have been appraised. The
costs of the action may be determined by the court and taxed upon the parties as
the court deems equitable. The court also may order that all or a portion of the
expenses incurred by any stockholder in connection with an appraisal, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts utilized in the appraisal proceeding, be charged pro rata against the
value of all of the shares that have effectively pursued appraisal.
From and after the effective time, a stockholder who has duly demanded an
appraisal in compliance with Section 262 of the DGCL will not be entitled to
vote the shares subject to the appraisal demand for any purpose or be entitled
to the payment of dividends or other distributions, if any, on those shares
(except dividends or other distributions, other than the merger consideration,
payable to holders of record of shares as of a date prior to the effective
time).
If any stockholder who demands appraisal under Section 262 of the DGCL fails
to perfect, or effectively withdraws or loses, his right to appraisal as
provided in the DGCL, the shares of such stockholder will be converted into the
right to receive the $9.50 per share in accordance with the merger agreement.
Among the ways a stockholder will fail to perfect, or effectively lose or
withdraw, the stockholder's right to appraisal include if the stockholder:
- was not a record owner of shares of InterDent Common Stock or Series D
Preferred Stock on the date of the demand for appraisal or failed to own
the shares through the effective time of the merger;
- fails to provide a written demand for appraisal before the taking of the
vote on the merger;
- votes for approval and adoption of the merger agreement (or submits an
executed proxy without voting instructions);
- does not file a petition for appraisal in the Court of Chancery within
120 days after the effective time of the merger; or
- delivers to InterDent a written withdrawal of his or her demand for
appraisal and an acceptance of the merger, except that any such attempt to
withdraw made more than 60 days after the effective time will require the
written approval of InterDent.
30
<PAGE>
PROPOSALS AT THE SPECIAL MEETING
THE MERGER
On October 22, 1999, InterDent and ID Recap entered into the merger
agreement. At the special meeting, InterDent stockholders will be asked to
approve and adopt the merger agreement and the transactions contemplated
thereby, pursuant to which each share of InterDent Common Stock and Series D
Preferred Stock, other than shares as to which appraisal rights have been
perfected under Delaware law and all shares then owned by ID Recap or held in
InterDent's treasury, will be automatically converted at the effective time into
the right to receive the merger consideration of $9.50 in cash. The following
summary includes a description of certain provisions of the merger agreement and
is qualified in its entirety by reference to the merger agreement, a copy of
which is attached hereto as Appendix A and is incorporated herein by reference.
The Board of Directors recommends that you vote FOR the approval and
adoption of the merger agreement and the transactions contemplated thereby.
TERMS OF THE MERGER
At the effective time of the merger, ID Recap will be merged with and into
InterDent and InterDent will continue as the surviving corporation. The
certificate of incorporation and by-laws of InterDent prior to the consummation
of the merger will be amended at the effective time of consummation of the
merger as set forth on Appendix F and, as so amended, will be the certificate of
incorporation and by-laws of the surviving corporation following the merger.
As of the effective time of the merger, by virtue of the merger and without
any action on the part of ID Recap, InterDent or its stockholders:
- each share of InterDent Common Stock and Preferred Stock owned by ID Recap
will be cancelled without being converted and ID Recap will not receive
any payment or distribution as part of the merger;
- except as described above, each share of InterDent Common Stock and
Series D Preferred Stock outstanding immediately prior to the effective
time will be converted into and become the right to receive the merger
consideration of $9.50 in cash, without interest, and will be canceled
upon conversion;
- each share of InterDent Series and Preferred Stock and Series C Preferred
Stock, if any, will be converted into the right to receive $1.00 in cash;
- each share of common stock of ID Recap will be converted into the right to
receive one new share of InterDent Common Stock and will be cancelled upon
such conversion;
- each share of preferred stock of ID Recap will be converted into the right
to receive one new share of InterDent Preferred Stock and will be
cancelled upon such conversion;
- each outstanding option and warrant, other than those options and warrants
that will remain outstanding, shall be cancelled and converted into the
right to receive cash equal to the excess of $9.50 per share of InterDent
Common Stock underlying each such security over the per share exercise
price of such security; and
- each outstanding InterDent 7% Convertible Subordinated Note shall be
cancelled and converted into the right to receive 101% of the outstanding
principal amount of, and any accrued and unpaid interest on, such canceled
note, plus $0.29 for each share of InterDent Common Stock which such
holder would have been entitled to purchase under a warrant that would
have been issued to such holder upon a prepayment of the note.
Shares of InterDent Common Stock or Series D Preferred Stock outstanding
immediately prior to the effective time held by a stockholder who has demanded
and perfected appraisal rights will not be converted. Any such stockholder will
instead be entitled to such rights as are afforded under the DGCL.
31
<PAGE>
EFFECTIVE TIME OF THE MERGER
The merger will become effective when a certificate of merger with respect
to the merger is duly filed with the Delaware Secretary of State in accordance
with the relevant provisions of the DGCL or at such other time as is permissible
in accordance with the DGCL and as InterDent and ID Recap may agree and as
specified in the certificate of merger. This is expected to take place shortly
after the satisfaction or waiver of the conditions precedent to the merger.
EXCHANGE AND PAYMENT PROCEDURES
Prior to the effective time of the merger, ID Recap, with InterDent's
approval, will appoint a bank or trust company to act as exchange agent for
payment of the cash payable pursuant to the merger agreement and will have, or
cause to be, deposited with the exchange agent for the benefit of InterDent's
security holders the aggregate amount of the cash. Promptly after the effective
time, the exchange agent will mail to each InterDent stockholder of record a
letter of transmittal and instructions for use in effecting the surrender of
certificates representing InterDent shares to be exchanged for the cash amount
payable pursuant to the merger agreement. Upon surrender to the exchange agent
of a certificate formerly representing shares of our Common Stock or Preferred
Stock and acceptance by the exchange agent, the holder of such certificate will
be entitled to the cash amount payable pursuant to the merger agreement, without
interest.
You should not deliver your stock certificates now. You should send them
only pursuant to instructions set forth in the letter of transmittal to be
mailed to you promptly after the effective time of the merger. In all cases, the
cash payable pursuant to the merger agreement will be provided only in
accordance with the procedures set forth in the merger agreement and such
letters of transmittal.
We strongly recommend that stock certificates and letters of transmittal be
transmitted only by registered United States mail, return receipt requested,
appropriately insured. Stockholders whose certificates are lost will be required
to make an affidavit claiming such certificate or certificates lost, stolen or
destroyed and, if required by InterDent, to post a bond in such amount as
InterDent may reasonably require as indemnity against any claim that may be made
against it with respect to such certificate.
Any cash amount payable pursuant to the merger agreement not validly claimed
by our stockholders for six months after the effective time will be delivered to
InterDent. Any stockholders who have not complied with the terms and conditions
for the exchange of certificates set forth in the merger agreement will
thereafter look only to InterDent, and only as general creditors, for the
payment of their claim to the cash payable pursuant to the merger agreement.
TRANSFER OF STOCK
No transfer of shares of our Common Stock or Preferred Stock will be made on
our stock transfer books after the close of business on the day immediately
prior to the effective time of the merger. If, on or after the effective time,
certificates for shares of such stock are presented, they will be canceled and
exchanged for the cash amount payable pursuant to the merger agreement, as
provided in the preceding section of this proxy statement.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties of
InterDent to ID Recap, including with respect to the following matters:
- the due organization and valid existence of InterDent and its subsidiaries
and similar corporate matters;
- the capitalization of InterDent and its subsidiaries;
- the due authorization, execution and delivery of the merger agreement and
its binding effect on InterDent;
32
<PAGE>
- required governmental and non-governmental third party consents;
- the execution, delivery and performance of the merger agreement by
InterDent not causing a breach or default of InterDent's charter documents
or material agreements;
- no brokers or finders employed by InterDent with respect to the merger;
- the completeness and accuracy of InterDent's filings with the Securities
and Exchange Commission and the accuracy of its financial statements;
- the absence of material adverse changes in our business since June 30,
1999;
- the lack of undisclosed liabilities;
- the lack of any takeover statutes applicable to the merger; and
- InterDent's receipt of the opinion of Deutsche Banc Alex. Brown regarding
the fairness of the merger consideration from a financial point of view.
The merger agreement also contains representations and warranties of ID
Recap to InterDent, including with respect to the following matters:
- the due organization and valid existence of ID Recap at the effective time
of the merger;
- the due authorization, execution and delivery of the merger agreement by
ID Recap and its binding effect upon ID Recap;
- there are no brokers or finders employed by ID Recap with respect to the
merger;
- the accuracy of the information provided by ID Recap for inclusion in this
proxy statement; and
- ID Recap will have sufficient funds to pay the merger consideration and
effect the transactions contemplated by the merger agreement, subject to
the conditions set forth in the financing letters previously described in
this proxy statement.
Such representations and warranties are subject, in certain cases, to
specified exceptions and qualifications. The representations and warranties of
each of the parties to the merger agreement will expire upon completion of the
merger. The above list does not include all representations and warranties of
InterDent contained in the merger agreement. Please refer to the merger
agreement attached to this proxy statement as Appendix A.
COVENANTS
InterDent has agreed to seek and solicit the requisite vote of InterDent
stockholders at the special meeting for the approval and adoption of the merger
agreement and the transactions contemplated thereby. Michael Fiore, Dr. Steven
Matzkin, Sprout Capital VII and certain related entities, CB Capital Investors
and the SRM 1993 Children's Trust have agreed to vote all of their shares of
InterDent Common Stock and Series D Preferred Stock at the special meeting for
the approval and adoption of the merger agreement and the transactions
contemplated thereby. These stockholders own, in the aggregate as of the record
date, approximately % of the outstanding shares of Common Stock and Series D
Preferred Stock. The voting agreement terminates upon termination of the merger
agreement.
We have agreed to various restrictions in the operation of our business
prior to closing the merger, including:
- operation of the business in the ordinary course consistent with past
practices;
- refraining from various extraordinary transactions;
- refraining from the declaration or payment of dividends or other
distributions; and
- using commercially reasonable efforts to maintain our business and assets
prior to the consummation of the merger.
We have further agreed to use commercially reasonable efforts to:
33
<PAGE>
- obtain any permits, approvals or consents that may be required to
consummate the transactions contemplated by the merger agreement;
- obtain the financing necessary for the merger; and
- fulfill the obligations of the borrower under the financing letters
previously described in this proxy statement.
We have agreed to provide ID Recap and its representatives with reasonable
access to our management, employees, agents and representatives and our
properties, books and records, and to prepare and provide ID Recap with certain
monthly, quarterly and annual financial information regarding InterDent.
We have agreed to prepare and file this proxy statement with the Securities
and Exchange Commission and to mail it to our stockholders in connection with
the special meeting, which we have agreed to convene. The Board of Directors has
also agreed to recommend the merger to our stockholders, subject to the
exceptions described below.
The Board of Directors has agreed that it will not withdraw its
recommendation of the merger agreement or recommend any alternative proposal,
unless the following conditions are satisfied:
- a majority of disinterested directors determine, in their good faith
judgment based upon advice of legal counsel, after receipt of an
alternative proposal, that their fiduciary duty requires such action; and
- we provide notice of the terms of the alternative proposal to ID Recap and
ID Recap does not respond within five business days with a proposal that a
majority of disinterested directors determines to be at least as favorable
as the alternative proposal.
We will not be able to enter into any agreement with respect to an
alternative proposal with a third party unless the merger agreement with ID
Recap is terminated and we pay any termination fee owed to ID Recap.
We have agreed that we will not solicit, initiate, encourage or engage in
any inquiries, discussions or negotiations for any alternative offer or proposal
for a merger or other transaction involving a purchase of all or a significant
portion of our assets or any of our equity securities except as required by our
fiduciary duties and only after providing ID Recap with required notice. We have
also agreed to cease any existing discussions or negotiations with any other
potential acquirers, of which there were no existing discussions or
negotiations, to notify ID Recap if we receive any new inquiries or proposals,
including the material terms of the proposal and the identity of the party, and
to furnish copies of any written inquiries or proposals.
We have agreed to use our reasonable best efforts to effect the transactions
contemplated by the merger agreement in connection with our outstanding options,
warrants and convertible notes and in the event of any anti-takeover statute, to
grant such approval as may be necessary to consummate the merger and
transactions contemplated by the merger agreement and act to eliminate the
effects of any such statute on such transactions.
ID Recap has agreed that the indemnification provisions with respect to our
officers and directors contained in our current certificate of incorporation and
by-laws will be carried over into the certificate of incorporation and by-laws
of InterDent following the merger. Subject to certain conditions, we have agreed
to maintain the current levels of directors' and officers' liability insurance
for six years from the effective time with respect to coverage of matters
occurring prior to the effective time, to the extent available, and providing
coverage equivalent to the maximum available coverage under such policies
currently in effect, paying up to 200% of the annual premiums currently paid by
InterDent.
Each of InterDent and ID Recap have agreed to cooperate and use our
respective commercially reasonable efforts in obtaining necessary governmental
approvals, including making required filings with the Federal Trade Commission
and United States Department of Justice pursuant to the Hart-Scott-
34
<PAGE>
Rodino Antitrust Improvements Act of 1976 and seeking early termination of any
applicable waiting periods under such Act.
InterDent and ID Recap have also agreed to promptly notify each other of
certain events, including notice from any person that a consent may be required,
notice from any governmental authority relating to the transactions contemplated
by the merger agreement, any action, suit, claim, investigation or proceeding
that materially affects InterDent or the transactions contemplated by the merger
agreement or any other event that is reasonably expected to have a material
adverse effect on InterDent.
CONDITIONS PRECEDENT
The obligations of each of InterDent and ID Recap to consummate the merger
are subject to the fulfillment or waiver, if permissible, at or prior to the
effective time of the merger of certain conditions, including the following:
- no statute, rule or regulation, shall have been enacted and no order of a
court or governmental entity shall be in effect directing that the
transactions contemplated by the merger agreement not be consummated;
- no party shall have been notified by any governmental entity that it
intends to commence proceedings to restrain or prohibit the transactions
contemplated by the merger agreement;
- all required consents, waivers and approvals of governmental entities
shall have been obtained and be in full force and effect;
- any applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, shall have expired or been terminated;
- the merger agreement and the transactions contemplated thereby shall have
been approved and adopted by the affirmative vote or written consent of a
majority of the outstanding shares of our capital stock entitled to vote
thereon; and
- we shall have received the requisite consent of the holders of our 7%
Convertible Subordinated Notes to the merger agreement and the
transactions contemplated thereby, which consent was obtained on
October 22, 1999.
Our obligation to effect the merger is further subject to the fulfillment or
waiver, if permissible, at or prior to the effective time of the following
conditions, among others:
- the representations and warranties of ID Recap in the merger agreement
shall be true and correct in all material respects as of the effective
time of the merger; and
- ID Recap shall have performed or complied in all material respects with
its covenants and conditions under the merger agreement.
The obligation of ID Recap to effect the merger is further subject to the
fulfillment or waiver, if permissible, at or prior to the effective time of the
merger of the following conditions, among others:
- our representations and warranties contained in the merger agreement shall
be true and correct in all material respects as of the effective time of
the merger;
- we shall have performed or complied in all material respects with our
covenants and conditions under the merger agreement;
- there shall have been no change in our business, assets, liabilities,
results of operations or financial condition since October 22, 1999, which
have had or are reasonably expected to have a material adverse effect on
InterDent;
- we shall have obtained all permits or approvals on terms reasonably
satisfactory to ID Recap required from any governmental entity or third
party in order to consummate the transactions contemplated by the merger
agreement and to permit us to continue our business as it is currently
being conducted;
35
<PAGE>
- ID Recap shall have obtained all financing necessary to consummate the
transactions contemplated by the merger agreement and which is reasonably
necessary to continue business as it is currently being conducted;
- certain significant stockholders shall have exchanged our Common Stock,
Series D Preferred Stock and 7% Convertible Subordinated Notes for shares
of ID Recap's common stock and preferred stock;
- we shall not have altered or modified and shall not have been required to
alter or modify any of our accounting principles, methods or practices
after our fiscal year ended December 31, 1998 and prior to the effective
time of the merger which have had or are reasonably expected to have a
material adverse effect on InterDent;
- there shall not have occurred a material change in accounting rules or
applicable securities laws or any actions by us which cause the basis of
the stock acquired in connection with the merger being "pushed down" to
InterDent resulting in a new accounting basis in our financial statements;
- the aggregate number of dissenting shares in accordance with Section 262
of the Delaware General Corporation Law at the effective time of the
merger shall not equal an aggregate of 15% or more of the shares of our
Common Stock and Series D Preferred Stock as of the record date for the
special meeting;
- we and Leonard Green & Partners or its affiliates shall have executed and
delivered the management services agreement previously described in this
proxy statement;
- certain parties required to enter into a stockholders agreement,
applicable to such stockholders following the merger, shall have executed
and delivered such stockholders agreement;
- we shall have delivered an opinion from the law firm of Foley & Lardner or
other law firm of national standing with expertise in the area of
California health plan regulation to the effect that the merger agreement
and transactions contemplated thereby shall not require prior approval of
the California Department of Corporations pursuant to the California
Knox-Keene Health Care Services Plan Act of 1975, as amended, and
regulations issued thereunder;
- each of Michael T. Fiore and Dr. Steven R. Matzkin shall have executed and
delivered the employment agreements previously described in this proxy
statement; and
- all of our directors, other than those continuing as directors after the
merger, shall have resigned from our Board of Directors.
TERMINATION; AMENDMENTS; WAIVER
The merger agreement provides that it may be terminated and the merger
abandoned at any time prior to the effective time, whether before or after
approval and adoption of the merger agreement and the transactions contemplated
thereby by our stockholders at the special meeting as set forth below:
(1) by mutual written consent of ID Recap and InterDent;
(2) by either ID Recap or InterDent if:
- the merger shall not have been consummated by April 30, 2000, provided
that the right to terminate the merger agreement in such event is not
available to any party whose breach of any of its representations,
warranties or agreements under the merger agreement results in the
failure of the merger to occur on or before such date;
- the other party is in material breach of any of its covenants contained
in the merger agreement, which breach is incapable of cure or is not
cured within 15 days following written notice to the party committing
such breach, provided that ID Recap may immediately terminate the
merger agreement without providing us with notice or opportunity to
cure such breach if we have breached covenants restricting our ability
to solicit alternative acquisition proposals from third parties; or
36
<PAGE>
- the other party is in breach of any of its representations or
warranties contained in the merger agreement which breach individually,
or together with all other breaches, is reasonably expected to have a
material adverse effect and either is incapable of being cured or is
not cured within 15 days following written notice;
(3) by ID Recap if:
- certain specified conditions to completion of the merger become
incapable of being fulfilled;
- our Board of Directors, or a committee of the Board of Directors, fails
to recommend or withdraws or modifies, or resolves to withdraw or
modify, its recommendation of the merger to its stockholders; or
- we take any action that would be prohibited by the non-solicitation
covenant, but for certain permitted actions based on fiduciary
obligations or in order to comply with applicable securities laws; or
(4) by InterDent if:
- a majority of our disinterested directors determine to withdraw the
Board of Directors' recommendation of the merger or to recommend an
alternative proposal in either case, based upon advice of legal
counsel, after receipt of an alternative proposal, that their fiduciary
duty requires such action and ID Recap does not respond within five
business days of being provided with notice of the terms of the
alternative proposal with a new proposal that a majority of our
disinterested directors determines to be at least as favorable as the
alternative proposal; or
- specified conditions to completion of the merger become incapable of
being fulfilled.
We will be required to pay to ID Recap a $7.5 million termination fee, plus
all fees and expenses not to exceed $1.5 million (excluding fees and expenses in
connection with financings) and all fees and expenses incurred by ID Recap in
connection with financings that we approve in advance, provided that the fees
and expenses set forth in the financing letters referenced in the merger
agreement will be deemed approved by us, under the following circumstances:
- if either party terminates the merger agreement based upon a failure to
obtain the requisite consent of the holders of our 7% Convertible
Subordinated Notes, which consent was obtained on October 22, 1999;
- if we terminate the merger agreement because the Board of Directors has
approved an alternative acquisition proposal from another third party
which offers higher consideration to our stockholders than the merger
proposal by ID Recap;
- if ID Recap terminates the merger agreement because the Board of
Directors or any committee of the Board of Directors fails to recommend
or withdraws or modifies or resolves to withdraw or modify its
recommendation of the merger; or
- if ID Recap terminates the merger agreement because we have materially
breached our covenants in the merger agreement not to solicit,
encourage, initiate or take other actions with respect to alternative
acquisition proposals, to file a proxy statement and a Schedule 13E-3
within a reasonable time after the date of execution of the merger
agreement, or to call and convene a special meeting of our stockholders
within 45 days after filing of a definitive proxy statement with the
Securities and Exchange Commission.
We will be required to pay ID Recap a fee in the amount of $1 million, if no
termination fee is otherwise due, plus all approved financing fees and expenses
and up to $1.5 million of non-financing fees and expenses incurred by ID Recap
in connection with the transactions contemplated by the merger agreement, if the
merger agreement is terminated as a result of the failure of our stockholders to
approve the merger. This fee will increase to $7.5 million if we enter into a
proposal to sell all or a significant portion of our assets by asset sale, stock
purchase or merger within 12 months from the date of such termination of the
merger agreement.
37
<PAGE>
We will be required to pay ID Recap an amount equal to all approved
financing fees and expenses and up to $1.5 million of non-financing fees and
expenses if no termination fee is otherwise due, incurred by ID Recap in
connection with the transactions contemplated by the merger agreement if ID
Recap exercises its right to terminate the merger agreement because we have
provided confidential information to a third party making an alternative
acquisition proposal to us during the first 30 days following public
announcement of the proposed merger. However, if we enter into an acquisition
proposal within 12 months from the date of such termination of the merger
agreement, then we will be required to pay an additional fee of $7.5 million to
ID Recap.
In the event that the merger agreement is terminated by either party and no
termination fee is otherwise due and payable to ID Recap, we will be required to
pay to ID Recap all approved financing expenses and up to $1.5 million of non
financing expenses, unless:
- ID Recap fails in any material respect to perform any of its material
obligations under the merger agreement and has not cured its
non-performance within 20 days after receiving written notice from us;
- ID Recap has materially breached any material representations or
warranties and such breach is not cured within 20 days after receiving
written notice from us; or
- the financing necessary to consummate the transaction contemplated by the
merger agreement is not obtained, except for a failure to obtain such
financing as a result of a breach of our representations and warranties,
failure to perform any of our material obligations under the merger
agreement or the occurrence of any event, individually or in the
aggregate, that would reasonably be expected to have a material adverse
effect on InterDent.
In the event of termination, the merger agreement will become null and void
and there will be no liability on the part of ID Recap or InterDent. However, no
termination will affect:
- the rights and remedies available to any party as a result of breach of
the merger agreement by the other party, except when ID Recap is otherwise
entitled to receive any fee as a result of a termination based upon such
breach, such fee will be ID Recap's sole and exclusive legal remedy;
- the responsibility of InterDent or ID Recap, as the case may be, for any
fees or commissions due to any broker or other third party retained by
InterDent; or
- any termination fees and expenses required to be paid by InterDent to ID
Recap pursuant to the merger agreement.
The merger agreement may be amended by the parties in writing provided that
any amendment of the merger agreement following approval by our stockholders
that adversely affects the rights of our stockholders under the merger agreement
shall require our stockholder's prior approval.
The merger agreement provides that the parties thereto may extend the time
for performance or waive compliance of the other party with any of the
agreements or fulfillment of conditions to its own obligations in whole or in
part if such waiver or extension is in writing and signed by the party so
waiving.
CERTAIN TAX CONSIDERATIONS
The following discussion summarizes material United States federal income
tax considerations relevant to the merger. This discussion is based on current
provisions of the Internal Revenue Code of 1986, existing and proposed
regulations under the Code, and current administrative rulings and court
decisions, all of which may change, possibly with retroactive effect. Any such
change could alter the tax considerations described here. This discussion does
not deal with all tax considerations that may be relevant to holders of
InterDent Common Stock or Series D Preferred Stock subject to special tax rules,
including financial institutions, broker-dealers, persons who are not citizens
or residents of the United States or who are foreign corporations, foreign
partnerships or foreign estates or trusts as to the United States, persons who
hold their shares as part of a "straddle" or other integrated instrument and
holders of
38
<PAGE>
options or holders who acquired their stock through the exercise of an employee
stock option or otherwise as compensation.
The receipt of cash in exchange for our Common Stock or Series D Preferred
Stock in the merger will be a taxable transaction for federal income tax
purposes. Except as provided in the following paragraph, each holder will
recognize gain or loss per share equal to the difference between $9.50 and the
holder's basis per share of our Common Stock or Series D Preferred Stock. A
stockholder generally must determine the amount, character and timing of such
gain or loss separately with respect to each block of shares such stockholder
owns. If a stockholder holds our Common Stock or Series D Preferred Stock as a
capital asset, the gain or loss from the exchange will be a capital gain or
loss. This gain or loss will be long-term if the stockholder has held the shares
for more than one year. Under current law, the federal government taxes net long
term capital gains of non-corporate taxpayers at a maximum income tax rate of
20%.
A holder of our Common Stock or Series D Preferred Stock who receives cash
for a portion of such holder's Common Stock or Series D Preferred Stock in the
merger, and who also continues to own shares of our stock (either directly or
constructively) after the merger, generally will not recognize gain or loss in
the above manner, but instead will be subject to dividend or capital gain
treatment on the cash received in the merger depending on the specific facts and
circumstances with respect to such stockholder. Therefore, any holder of our
Common Stock or Series D Preferred Stock, who will continue to own shares of our
stock after the merger (either directly or constructively by reason of the
ownership of such stock by a related person or entity) should consult his or her
own tax advisor in connection with the merger.
A holder of our Common Stock or Series D Preferred Stock who receives cash
in the merger may be subject to 31% backup withholding unless the stockholder:
- is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact; or
- provides a correct taxpayer identification number, certifies on IRS
Form W-9 or Substitute Form W-9 that he or she is not subject to backup
withholding and otherwise complies with applicable requirements of the
backup withholding rules.
The Internal Revenue Service may impose penalties as well as backup
withholding on a stockholder who does not provide his or her correct taxpayer
identification number to us or to our disbursing agent. Backup withholding is
not an additional tax. Rather, a stockholder may credit any amount withheld
under these rules against the stockholder's federal income tax liability,
provided that the stockholder gives certain required information to the Internal
Revenue Service. When required, we (or our disbursing agent) will report to the
holders of our Common Stock or Series D Preferred Stock and to the Internal
Revenue Service the amount of any payments made pursuant to the merger and the
amount of any tax withheld from such payments.
This tax discussion is included for general information only and is based
upon current law. You should consult your own tax advisor as to the specific tax
consequences of the merger to you, including the application and effect of
federal, state, local and other tax laws and the possible effect of changes in
such tax laws.
ACCOUNTING TREATMENT
We will treat the merger as a recapitalization for accounting purposes, as
we will not meet the requirements for a new accounting basis as a result of the
continuing shareholder interests. A recapitalization is a transaction structured
to transfer the controlling interests of an operating entity to a new investor,
with some owners also retaining an ownership interest. A recapitalization
results in no change in the accounting basis of the assets or liabilities
presented in the stand-alone financial statements of the operating entity. The
consideration for the shares is accounted for as a reduction in equity.
39
<PAGE>
REGULATORY REQUIREMENTS
We are not aware of any material United States federal or state or foreign
governmental regulatory requirement necessary to be complied with or approval
that must be obtained in connection with the merger, except for:
- the filing of the certificate of merger with the Secretary of State of the
State of Delaware pursuant to the Delaware General Corporation Law after
the approval and adoption of the merger agreement and the transactions
contemplated thereby;
- compliance with federal and state securities laws; and
- the expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act.
CERTAIN LITIGATION
Following our public announcement on October 22, 1999 that we entered into
the merger agreement, various stockholder lawsuits seeking class certification
were filed naming as defendants InterDent, certain of our officers and
directors, and Leonard Green & Partners. These lawsuits seek monetary damages
and injunctive relief in connection with the merger. See "BUSINESS OF THE
COMPANY--Legal Proceedings" at page 58 for a more complete description of these
lawsuits.
40
<PAGE>
BUSINESS OF THE COMPANY
OVERVIEW
InterDent is the largest provider of dental practice management services to
dental professional corporations and associations in the United States. As of
December 31, 1999, we provided comprehensive management services to a network of
226 dental offices and 1,941 operatories that employ 677 dentists (including 146
specialists) in selected markets in Arizona, California, Florida, Georgia,
Hawaii, Idaho, Indiana, Kansas, Michigan, Nevada, Oklahoma, Oregon, Pennsylvania
and Washington. Such dentists provide comprehensive general dentistry services
and offer specialty dental services, which include orthodontics, periodontics,
endodontics, pedodontics, prosthodontics, oral surgery and oral pathology.
As part of a delivery network of dental care, we provide management services
to affiliated dental practices under long-term management service agreements.
Under the terms of the management service agreements, we bill and collect
patient receivables and provide all administrative support services to the
affiliated dental practices. The dentists are employed by our network of
affiliated dental practices (which include endodontics, oral pathology, oral
surgery, orthodontics, pedodontics, periodontics, and prosthodontics). Our
practice management services facilitate the delivery of convenient, high
quality, comprehensive and affordable dental care to patients in a comfortable
environment. We seek to build geographically dense dental practice networks in
selected markets through a combination of affiliations with dental practices
existing in the area and selectively developing new offices.
InterDent began its business operations on March 12, 1999, as a result of a
business combination between Dental Care Alliance, Inc. and Gentle Dental
Service Corporation, each of which was a publicly-held provider of practice
management services to dental practices. Each of these other companies became
and is now our wholly owned subsidiary. The business combination was accounted
for as pooling of interests.
In addition, we have entered into a collaborative Internet arrangement with
Dental X Change, Inc. which is designed to create an integrated web portal for
both dentists and patients throughout the United States.
Our operating strategy is to provide value to our affiliated dental
practices through the introduction of a variety of practice enhancements. For
example:
- we provide general administrative services and implement established
procedures in conjunction with our affiliated dental practices designed to
optimize staffing ratios and patient scheduling;
- we assist in developing and implementing targeted advertising and
marketing programs and attracting additional dentists and dental
practices;
- we employ our affiliated dental practices' management and administrative
personnel working at our affiliated dental practices;
- we assist with setting standards of care at our affiliated dental
practices in order to promote the provision of high quality dental care.
However, the individual dental professional corporations and
administrative personnel are responsible for compliance with state and
local regulations of the practice of dentistry and with licensing and
certification requirements (including acquiring and maintaining
professional liability insurance); and
- to the extent applicable, we provide significant managed care expertise to
the affiliated dental practices.
We believe the implementation of these enhancements has resulted in significant
revenue growth at the affiliated dental practices.
We have established a network of dental directors comprised of leading
dental practitioners within our network of affiliated dental practices. The
network of dental directors works with affiliated dental practices to establish
and implement "best practices" procedures and protocols for the purpose of
maintaining high quality dental care. We provide educational services and a
training program covering non-clinical aspects
41
<PAGE>
of the dental practices. We also provide a management information system that
combines commercially available software with customized, proprietary software.
We believe that our enhanced system provides a competitive advantage by allowing
us to effectively manage a large geographically diverse network of dental
practices from a centralized base. We also intend to install our basic
management information system at each of our affiliated dental practices.
DENTAL SERVICES INDUSTRY
The Health Care Financing Administration, or HCFA, estimates that the annual
aggregate domestic market for dental services was approximately $54 billion for
1998, representing 4.7% of total health care expenditures in the United States.
Dental service expenditures grew at a compound annual growth rate of
approximately 8.9% from 1980 to 1998. According to HCFA, the dental services
industry is expected to experience this continued growth and is projected to
reach $95 billion by 2007. We believe that the anticipated growth in the dental
industry will be driven by several factors, including:
- growing demand for dental services due to demographic trends;
- evolving technology which makes dental care less traumatic and, therefore,
more attractive to patients;
- increasing focus on preventative and cosmetic dentistry; and
- improving dental benefits offered by employers.
The market for dental services in the United States consists of both general
and specialty dentistry services. General dentistry services include preventive
and diagnostic procedures such as cleanings, examinations and x-rays and
restorative treatments such as fillings of cavities, gum therapy and crowns.
Specialty dentistry services include orthodontics, periodontics, endodontics,
pedodontics, prosthodontics, oral surgery, and oral pathology.
Dental care services in the United States are generally delivered through a
fragmented system of local providers, primarily individual or small group
practices. According to a 1995 survey conducted by the American Dental
Association, there were approximately 153,000 actively practicing dental
professionals in the United States, approximately 70% of whom practiced alone.
We estimate that approximately 2% of general and specialty practitioners are
affiliated with practice management companies.
Based upon recent estimates, according to industry sources, approximately
34% of the estimated 147 million people covered by dental benefits in 1997 were
enrolled in managed dental care programs, including preferred provider
organizations ("PPO") and dental Health Maintenance Organizations ("HMOs").
Enrollment in dental HMOs, according to the National Association of Dental
Plans, is estimated to have grown from 7.8 million in 1990 to an estimated
31 million in 1998.
We believe that the trend toward consolidation in the dental services
industry will continue as dentists seek to affiliate with group practice
managers, such as us, due to the following:
- desire of dentists to focus on clinical aspects rather than on
administrative and regulatory aspects of their practices;
- increasing patient demands for more flexible evening and weekend hours;
- increasing demand for competitively-priced, high quality dental care at
multiple locations;
- increasing desire of recent dental school graduates to pursue alternatives
to the traditional solo practice of dentistry; and
- need for certifiable standards of care for patients.
OPERATING STRATEGY
Our strategic objective is to maintain and expand our leadership position in
the dental practice management industry. To achieve this objective, we seek to
enter selected geographic markets and develop
42
<PAGE>
locally prominent, multi-specialty dental delivery networks that provide gentle,
high quality, cost-effective dental care. The key elements of our strategy are
as follows:
PROVIDE CONVENIENT, COMPREHENSIVE DENTAL CARE.
Our affiliated dental practices provide patients with customer-friendly,
comprehensive and cost-effective dental care which is made available at
convenient times and locations. Because our affiliated dental practices
generally include both general practitioners and on-staff specialists who can
provide dental services (such as orthodontics, periodontics, endodontics,
pedodontics, prosthodontics, oral pathology and oral surgery), patients can rely
on our affiliated dental practices to provide comprehensive dental care needs.
By offering extended office hours and conveniently located offices, patients are
offered a dental care environment that makes it easier to schedule and keep
appointments. We also provide flexible payment options in an effort to reduce
patient financial burdens.
FOCUS ON QUALITY OF PATIENT CARE.
We have and continue to refine procedures, training and systems designed to
ensure optimum patient care. We seek to improve clinical outcomes through our
network of dental directors, which works directly with our affiliated dental
practices to institute quality assurance and utilization review programs.
Additional programs of the clinical services council include the following:
- the development and implementation of continuing education and training
programs for dental professionals;
- the design and implementation of treatment protocols;
- the evaluation of new techniques and technologies; and
- the monitoring of treatment outcomes.
Additionally, we seek to affiliate with dentists and specialists who are
committed to delivering high quality dental care.
ESTABLISH A COMPREHENSIVE DENTAL CARE NETWORK.
Our strategy is to increase the number of affiliated dental practices by
entering into management contracts with, acquiring the non-professional assets
of, and entering into license agreements with dental groups and practices in
selected markets. Our objective is to affiliate with dental groups and practices
that have a significant market position or, when combined with existing
affiliated dental practices, would result in a significant market position. We
also intend to selectively establish de novo dental offices in the markets in
which we operate, in order to augment our market presence. We believe that the
establishment of significant positions in the markets we serve will result in
economies of scale. Following each new affiliation with a dental practice, we
work closely with the professionals and staff in order to achieve network
integration and provide patients with convenient dental treatment.
ACHIEVE OPERATIONAL EFFICIENCIES AND ENHANCE REVENUE.
We believe we achieve operating efficiencies through the establishment of
centralized management and administrative functions (such as marketing, payroll,
accounts payable, general accounting and human resources services) for the
affiliated dental practices. At the same time, we maintain on-site functions
(such as patient scheduling and billing and collections) at each dental office
or on a regional basis. We also enhance dental practice revenues by providing
services and establishing procedures designed to optimize staff ratios and
patient scheduling, and utilizing our management information system to more
effectively support our affiliated dental practices. We believe that our network
configuration provides leverage in negotiating with third-party payors and
dental supply vendors to receive structured payments and contract terms that are
more favorable than those typically available to individual and small group
practitioners. The addition of specialists such as orthodontists and oral
surgeons who serve multiple offices within our
43
<PAGE>
affiliated network also allows us to capture incremental revenue from the higher
fees commanded by specialty services.
INTEGRATE AND LEVERAGE MANAGEMENT INFORMATION SYSTEMS.
Our management information system utilizes commercially available software,
which has been enhanced by our proprietary software. This management information
system allows us to more effectively enhance the affiliated dental practices.
The system is designed to assist each affiliated dental practice in:
- optimizing staffing ratios and patient scheduling;
- identifying and reducing unfinished patient treatment programs;
- maximizing billing and collection efforts; and
- actively monitoring the performance of managed care and other third party
contracts.
We believe that our management information system provides a distinct
competitive advantage by allowing us to effectively service a diverse network of
dental practices from a centralized base.
EXPAND PATIENT VOLUME THROUGH PROACTIVE MARKETING.
We seek to assist our affiliated dental practices in increasing patient
volume by focusing on patient satisfaction and targeting existing and new
patients through radio, direct mail, print advertising and other retail
marketing programs. We tailor our advertising to local markets, based upon
demographic characteristics of each market and the brand name recognition of our
affiliated dental practices in the respective markets. The affiliated dental
practices support this marketing program by offering convenient hours and
locations for the dental practices. Additional support from the affiliated
dental practices include:
- providing comprehensive dental care services such as same-day emergency
care;
- introducing or expanding specialty services at the dental practices; and
- utilizing our management information system to identify and reduce
incomplete patient treatments.
Our objective is to leverage our existing advertising programs to generate
revenue as it expands within our selected markets.
CAPITALIZE ON MANAGED CARE EXPERTISE.
We assist our affiliated dental practices by supplementing their
fee-for-service business with selected managed care contracts. We believe that
selected managed care contracts offer an attractive and profitable source of
incremental revenue for the affiliated dental practices. We also believe that
the financial and clinical data generated by our management information system
enables us to negotiate managed care contracts under favorable terms.
Additionally, we utilize our management information system to actively monitor
utilization of patient groups covered by the managed care plans. We believe that
our expertise in managed care represents a competitive advantage.
44
<PAGE>
DENTAL PRACTICE NETWORK
As of December 31, 1999, we provided comprehensive management services to a
dental practice network which employed 677 dentists, including 146 specialists,
practicing out of 226 dental offices and 1,941 operatories located in the
geographic markets set forth below.
<TABLE>
<CAPTION>
LOCATION DENTISTS OFFICES OPERATORIES
- -------- -------- -------- -----------
<S> <C> <C> <C>
Nevada.................................................... 33 13 128
Washington................................................ 19 9 72
Idaho..................................................... 15 2 53
Hawaii.................................................... 41 7 55
Oregon.................................................... 97 34 269
Northern California....................................... 150 30 349
Southern California....................................... 152 45 396
Florida................................................... 62 35 207
Georgia................................................... 29 8 106
Indiana................................................... 3 3 20
Michigan.................................................. 26 13 98
Pennsylvania.............................................. 22 18 102
Arizona................................................... 7 3 19
Oklahoma.................................................. 18 5 53
Kansas.................................................... 3 1 14
--- --- -----
Total................................................... 677 226 1,941
=== === =====
</TABLE>
EXPANSION STRATEGY
As a part of our strategy, we are pursuing an aggressive network expansion
plan. We believe that we have significant opportunities to affiliate with
additional dental practices resulting from favorable industry characteristics
and the professional and business relationships of our senior management.
We believe that the use of dental practice management companies will
continue to grow rapidly, resulting in significant consolidation opportunities
for us and other practice management organizations. In order to capitalize on
these consolidation opportunities, we utilize the extensive dental industry
experience of our senior management and our significant relationships with
numerous practitioners and other industry leaders throughout the United States.
We believe that these extensive relationships provide a competitive advantage to
us as we seek additional affiliation opportunities to further our growth.
We intend to continue to offer numerous significant benefits and value-added
services to attract dentists and specialty practitioners to our affiliated
provider network. Specific value-added services provided by us include billing,
reimbursement and collections services, payroll and staffing, patient
scheduling, advertising and marketing, product supply management and equipment
maintenance, dentist recruitment and capital resources. Additional benefits to
practitioners include clinical leadership and excellence, quality of care
standards and continuing education, and financial benefits including performance
bonuses. We believe that we will continue to be successful in attracting and
recruiting dentists for the affiliated dental practices by providing these
services and benefits. Furthermore, we believe that our name recognition and
market presence is and will continue to be attractive to practitioners from an
affiliation standpoint. As a result, we believe we will have greater
consolidation opportunities.
We use a wide range of evaluation criteria in selecting affiliation
candidates, including: number of practitioners and compensation, patient base,
reimbursement rates, quality of care, operating statistics, including number of
operatories, patient visits and revenue per chair, historical operating results
and financial condition, general versus specialty revenue mix, payor mix,
location, market demographics and competition, advertising expenditures,
reputation within the local community, non-professional staffing requirements,
and condition of facilities and equipment including information systems. We
intend to target
45
<PAGE>
individual and group practitioners, as well as local and regional consolidators.
Consideration for future affiliations may include a combination of cash and
seller financing.
Our affiliation integration process may include: centralization and
management of certain administrative functions, integration of management
information systems, initiation of quality assurance and peer review programs,
development of advertising and marketing programs, reviewing quality of care and
staff utilization, and modification of patient scheduling procedures. Such
integration is intended to improve the operations of the dental practices and to
position them for increased patient revenue and profit growth. We will also
continue our strategy of establishing de novo dental offices in selected markets
to augment existing market presence.
SERVICES AND OPERATIONS
We provide comprehensive management services with respect to all of the
operations of our network of affiliated dental practices, other than the
provision of dental treatment. We employ all non-clinical personnel at the
affiliated dental practices. Our services can be grouped into three broad
categories: administrative and financial services, personnel services and
operational services.
ADMINISTRATIVE AND FINANCIAL SERVICES
ADMINISTRATIVE. We provide administrative services to the affiliated dental
practices, including staffing, education and training, billing and collections,
patient scheduling, patient treatment follow-up, financial reporting and
analysis, productivity reporting and analysis, cash management, group
purchasing, inventory management, payroll processing, employee benefits
administration, advertising promotion and other marketing support. We also
assist in professional recruiting and provide support for dental practice
operations, new site development and other capital requirements. We believe the
dentists at the affiliated dental practices benefit from the support we provide
and that these services substantially reduce the amount of time they are
otherwise required to devote to administrative matters, thus enabling network
dentists to dedicate more time to the growth of their professional practices.
Through economies of scale, we are able to provide these services at a lower
cost than could be obtained by any of the affiliated dental practices
individually. In addition, because of our size and purchasing power, we have
been able to negotiate discounts on, among other things, dental and office
supplies, health and malpractice insurance, and equipment.
THIRD-PARTY PAYOR MANAGEMENT. We examine various factors to determine which
third-party payors' assignments we will recommend at each affiliated dental
practice. Factors considered by us in making this recommendation include:
- the types of procedures that are generally performed;
- the geographic area served by the particular plan; and
- the demographic characteristics of the typical plan participants.
Some element of managed care is present at most affiliated dental practices,
although generally not as the primary source of revenues. We assist our
affiliated dental practices in the negotiation of contracts with third-party
payors. As a result of our size, we are often able to negotiate better terms for
our affiliated dental practices with third-party payors than would be available
to solo practitioners or small group dental practices.
ACCOUNTING SERVICES. We provide affiliated dental practices with a full
range of accounting services, including preparation of financial statements,
management of accounts payable, oversight of accounts receivable, verification
of purchase orders, payroll administration and tax services. In addition, we
assist each affiliated dental practice in the preparation of operating and
financial budgets.
46
<PAGE>
THIRD-PARTY FINANCING. We have contracts with multiple non-recourse
third-party financing companies that enable our affiliated dental practices to
offer various third-party financing options directly to their patients, but we
are not a party to the financing agreements. The financing company is
responsible for all billing to, and collection from, the patient and has no
recourse for payment against us or our affiliated dental practices.
PERSONNEL SERVICES
STAFFING AND SCHEDULING. We provide management services that are designed
to optimize staffing ratios and patient scheduling at our affiliated dental
practices. We are responsible for the hiring, retention, salary and bonus
determination, job performance-related training and other similar matters
affecting our employees, which include non-dental professionals providing
services to the affiliated dental practices. Services provided by us include:
- payroll administration, including recordkeeping, payroll processing,
making payroll tax deposits, reporting payroll taxes and related matters;
- risk management, including on-site safety inspections and monitoring,
training, and workers' compensation claim management and administration;
- administering benefit plans;
- human resource materials, consulting and expertise on other human resource
issues;
- analysis and advice with respect to the optimal number of general
dentists, specialist dentists, dental assistants and hygienists at each
dental practice in an effort to provide high levels of quality care and
patient confidence while practicing at a heightened level of efficiency;
- assist dental practices with their scheduling in order to maximize
efficiency and minimize delays in treatment; and
- assist each affiliated dental practice, to the extent necessary, with
respect to expanding office hours, optimizing the flow of patients through
the offices and assisting dentists in the more efficient use of dental
assistants and hygienists.
In some circumstances, a professional employer organization assists us in
providing these services.
TRAINING AND EDUCATION. Staff and practice development programs are an
integral part of our operating strategy. Our programs are designed to motivate
staff to achieve optimum performance goals, increase the level of patient
satisfaction, and improve our ability to attract and retain qualified personnel.
We believe that our programs collectively have increased referrals from
patients, and have increased treatment acceptance rates.
We provide our affiliated dental practices with consulting and educational
services. These services include a training program covering non-clinical
aspects of the practice, together with specific training designed for the
efficient and effective use of our management information system. Specifically,
our training programs provide dental practice personnel with:
- guidelines for addressing patient concerns;
- techniques for explaining treatment procedures and length of treatment;
- parameters for establishing appropriate financial arrangements with
patients; and
- a systematic approach to monitoring the success of each area of training.
While we are not engaged in the practice of dentistry, we assist in training
and educating professional personnel by providing analyses that allow them to
determine training needs. All personnel, other than dentists, dental hygienists
and other dental professionals, are supervised and trained by us or, in some
47
<PAGE>
circumstances, our subcontractor. We also help to coordinate group meetings and
seminars. In addition, we encourage and facilitate team building of staff
through regularly scheduled staff meetings and social events.
RECRUITING. We continually assist our affiliated dental practices in
recruiting dentists to add to our network. Recruiting takes place at dental
schools through our contacts at schools, at regional dental conventions and
through advertising in regional and national dental publications.
OPERATIONAL SERVICES
ADVERTISING AND MARKETING. We assist our affiliated dental practices in
developing and implementing targeted advertising and marketing programs. Our
marketing programs, which include patient educational and prevention programs at
selected dental practices, are focused on the retention and reactivation of
existing patients. In addition, we also use external marketing programs such as
direct mail and yellow page advertising that are designed to identify the
convenience of individual locations, payment plans and service hours, and the
high standards of care at the practices in an attempt to attract new patients.
Our marketing programs may include the use of local radio, television and print
advertising, and other marketing promotions. In some instances, we seek to
promote brand name recognition of our affiliated dental practices through use of
regional brand names. For example, in Florida, several of our affiliated dental
practices use the name "Advanced Dental Care." Additionally, several of our
affiliated dental practices use the name "Gentle Dental." In some cases,
affiliated dental practices are marketed under the names used by the practices
prior to their affiliation with us to take advantage of the practices' existing
market positions.
DENTIST AFFILIATION. In order to continue our growth, we seek to enter into
management agreements with dental practices that employ dentists who become
affiliated with us. We believe that our affiliation structure allows many
dentists to reduce the financial constraints associated with having a
significant portion of their net worth invested in their practices. Further, we
believe that the practice of dentistry within our network allows dentists to
focus almost exclusively on practicing dentistry by avoiding the burden of
non-clinical administrative and management responsibilities. An affiliation with
us offers dentists the additional advantages of benefits such as health
insurance and continuing education.
QUALITY ASSURANCE. The clinical management procedures and treatment
protocols for our affiliated dental practices vary from region to region. Under
the guidance of our network of dental directors, key dentists in each region
review and determine these procedures and treatment protocols. We work closely
with dentists and hygienists at the affiliated dental practices to assist them
with developing and implementing procedures and protocols. In addition, the
network of dental directors helps our affiliated dental practices establish
business and administrative standards under which dental services are provided,
thereby creating a heightened clinical environment for the affiliated dental
practices to enhance patient care and clinical outcomes. Areas included among
the procedures and protocols to be determined by the network of dental directors
are treatment planning, diagnostic screening, radiographic records, record
keeping, specialty referrals and dental hygiene protocols. As part of the
affiliated dental practices' clinical enhancement program, we intend to assist
in providing quality assurance, peer review and utilization review programs. We
also perform patient surveys to monitor patient satisfaction, and periodically
audit patient charts and provide advice to the general dentists and dental
specialists employed by the affiliated dental practices.
MANAGEMENT INFORMATION SYSTEMS. Our management believes that access to
accurate, relevant and timely financial and operating information is a key
element of our practice management services. Our management information system
is a combination of commercially available software with proprietary
enhancements. It is designed to increase the efficiency and productivity of
dental practices by enabling us and our dental practices to cost-effectively
monitor the key business and professional operating aspects. We intend to
implement our basic management system at each dental practice with which we
affiliate. The
48
<PAGE>
system allows the affiliated dental practices to identify, track and schedule
each individual patient treatment process, thereby reducing unfinished patient
treatment programs which correspondingly increases practice revenues. The system
also contains features designed to maximize billing and collection efforts, and
to actively monitor the performance of managed care contracts.
We utilize our information systems to track data related to each affiliated
dental practice's operations and financial performance. Billing and collection
information is compiled on a daily basis, enabling us to monitor financial
performance and operational efficiency. We generate reports for each affiliated
dental practice containing information as to every visit, charge and procedure.
These reports are analyzed with respect to performance and efficiencies,
particularly the ratios of dollars per patient. The management information
systems function to optimize the practitioner's time through computerized
scheduling.
We believe that our enhanced management information systems provide a
critical competitive advantage, in that it allows us to more effectively manage
a geographically diverse network of dental practices from a centralized base.
Our current proprietary software enhancements, together with our capacity to
develop future enhancements, uniquely positions us for future expansion of our
affiliated dental practice management network. We believe this system has
increased the productivity of the affiliated dental practices that have
implemented it.
SCHEDULING. We implement patient scheduling systems at each of our
affiliated dental practices. These systems enable us to devise daily patient
schedules that maximize the efficiency of dental professionals. Patient visits
are scheduled in small time increments based upon our knowledge of the time
required for each type of dental procedure. In addition, office hours of each
affiliated dental practice are tailored to meet the needs of its patient
population. We believe that our scheduling systems result in more efficient
patient flow, thereby increasing productivity and patient volume.
MANAGEMENT, LICENSING AND COLLABORATION AGREEMENTS
As part of a delivery network of multi-specialty dental care, we provide
management and licensing services to our affiliated dental practices under
long-term management service and license agreements. The management agreements
generally follow one of two formats depending upon whether management services
are to be provided by Gentle Dental Service Corporation or Dental Care Alliance.
Under the terms of the management service agreements, we bill and collect
patient receivables and provide all administrative and management support
services to our affiliated dental practices. These administrative and management
support services include: financial, accounting, training, efficiency and
productivity enhancement, recruiting, team building, marketing, advertising,
purchasing, and related support personnel. Licensing services are generally
provided by Dental Care Alliance and include marketing, advertising and
purchasing. We have also entered into a collaborative Internet arrangement with
Dental X Change, Inc. and Bessemer Venture Partners which is designed to create
an integrated web portal for both dentists and patients throughout the United
States. Such management, licensing and collaboration agreements, and the fees
due under those agreements, will not be materially impacted by the merger.
GENTLE DENTAL MANAGEMENT AGREEMENTS
Gentle Dental Service Corporation has entered into long-term management
agreements with affiliated dental practices under which we are the exclusive
administrator of all non-clinical aspects of the dental practices conducted by
the affiliated dental practices, providing facilities, equipment, staffing,
management support and other ancillary services. Under these management
agreements, we:
- provide all facilities and equipment used by the affiliated dental
practices;
- bill and collect all receivables on behalf of the affiliated dental
practices;
- purchase and provide all supplies;
49
<PAGE>
- provide all clerical, accounting, payroll, human resources, computer and
other non-dental support personnel;
- supervise and maintain custody of all business records;
- provide management information reports;
- assist with market research and plan and implement marketing and
advertising programs;
- negotiate contracts on behalf of the affiliated dental practices with
managed care payors or other third parties; and
- assist in the recruitment of dentists.
In addition, although we establish guidelines for hiring and compensating
dentist and clinical personnel, such responsibility remains with the affiliated
dental practices. Specifically, the affiliated dental practices are responsible
for:
- hiring and compensating dentists and other dental professionals;
- purchasing and maintaining malpractice insurance;
- maintaining patient records; and
- ensuring that dentists have the required licenses and other
certifications.
In addition, the affiliated dental practices are exclusively in control of
all aspects of the practice of dentistry and the delivery of dental services.
As compensation for all services provided under the management agreements,
we receive service fees from the affiliated dental practices, typically equal to
reimbursement of expenses incurred in the performance of our obligations under
the management agreement, plus an additional fee equal to a percentage of the
net revenues of each affiliated dental practice, as defined. However, in a few
instances, management agreements provide for a flat fee of the net revenues of
the affiliated dental practice, as defined in those agreements. We collect
ongoing service fees out of the cash collections of the affiliated dental
practice, or, under certain management agreements, out of receivables assigned
to us by the affiliated dental practices.
The management agreements each have an initial term of 40 years with
automatic extensions ranging from five years to ten years thereafter, unless
either party gives notice before the end of the term. The management agreements
are not subject to early termination by the affiliated dental practices unless
we are the subject of bankruptcy proceedings or materially breach the management
agreement and do not cure the breach following notice. Certain management
agreements have additional termination events, including the refusal to comply
with the decisions of the joint operating committee, failure to pay the
management fee, and a material change in applicable federal or state law.
DENTAL CARE ALLIANCE MANAGEMENT AGREEMENTS
Dental Care Alliance has entered into management agreements with affiliated
dental practices under which we provide comprehensive administrative and
business services and support to the affiliated dental practices. Under these
management agreements we:
- assist in the identification of areas in which the performance of
affiliated dental practices and their dental professionals can be improved
to increase revenues and operating income;
- provide, maintain and repair all offices, equipment and furnishings;
- employ all non-professional personnel necessary for the operation of the
affiliated dental practices;
- provide payroll services;
50
<PAGE>
- implement standard business systems and procedures and provide or
facilitate systems and efficiencies training;
- order all general business inventory and supplies required by the
affiliated dental practices and handle accounts payable;
- establish and maintain information systems and provide accounting and
bookkeeping services;
- monitor compliance with rules and regulations applicable to the affiliated
dental practices business;
- provide marketing assistance; and
- provide assistance in billing and collections, all to the extent permitted
by law.
The management agreements provide that the affiliated dental practices are
responsible for, among other things:
- employing and supervising all affiliated dentists and dental hygienists;
- complying with all laws, rules and regulations relating to affiliated
dentists and dental hygienists;
- participating in quality assurance/utilization review programs;
- maintaining proper dental patient records;
- obtaining and maintaining professional liability insurance; and
- any other requirements to carry out the practice of dentistry.
Under the terms of the management agreements, the affiliated dental
practices are required to indemnify, hold harmless and defend us from and
against any and all claims from negligent or intentional acts or omissions,
including the performance of dental services, by the affiliated dental practices
and their employees. We are required to indemnify, hold harmless and defend the
affiliated dental practices from and against any and all claims resulting from
our negligent or intentional acts or omissions.
As compensation for our management services under the management agreements,
we earn a management fee equal to 63% to 74% of the net collected revenues
earned by the affiliated dental practices. We pay all of the operating and
nonoperating expenses incurred by the affiliated dental practices except for:
- salaries and benefits to the affiliated dentists and dental hygienists;
- licensing fees paid to us;
- debt and asset carrying costs related to the acquisition of the dental
practice; and
- any other direct cost to the affiliated dental practices not covered under
the management agreement.
The management agreements have 25-year terms, with automatic annual one-year
renewals, and are terminable by either party for cause or upon the insolvency of
the other party. In the event of a material default by the affiliated dental
practices or the owner of the affiliated dental practice, we have the option to
cause the sale of all of the stock or all of the assets of the affiliated dental
practices to a licensed dentist designated by us. In such an event, the owner of
the affiliated dental practice receives the proceeds of the sale, subject in
certain cases to preset formulas, less any amounts owed as a result of the
default. The affiliated dental practices or the owner of the affiliated dental
practice may terminate the management agreement without cause provided the
practice is sold to a dentist acceptable to us. The management agreements
provide that they shall be amended by the parties in the event of any regulatory
matters affecting the validity of the management agreement in a manner necessary
to bring the management agreements into compliance.
51
<PAGE>
During the terms of the management agreements, we and the affiliated dental
practices agree not to disclose certain confidential and proprietary information
regarding the other. The affiliated dental practices are required under the
management agreements to use their best efforts to enter into and enforce
written employment agreements with each of their professional employees
containing covenants not to compete with the affiliated dental practice in a
specified geographic area for a specified period of time, generally from one to
three years after termination of the employment agreement. The employment
agreements generally provide for injunctive relief in the event of a breach of
the covenant not to compete. However, the affiliated dental practices' ability
to enforce such covenants is uncertain.
DENTAL CARE ALLIANCE LICENSE AGREEMENTS
Dental Care Alliance has two forms of license agreements. The long form
license agreements generally have terms of five years, with automatic five-year
renewal terms, while the short form license agreements have terms that are
coterminous with the related management agreements. In consideration for the
payment of a monthly license fee, which has generally ranged from $600 to
$1,200, the licensee is entitled to identify its affiliated dental practice as a
member of our network, participate in our marketing programs, utilize our
discounted purchasing capabilities, and use one or more of our service marks,
logo types and commercial symbols. The long form license agreements also provide
for a monthly advertising fee of $1,000 which, if collected, would be used for
general marketing, advertising and promotion of the Company's network and such
licensed symbols. We have not collected any such monthly advertising fees and do
not intend to do so in the future. The manner in which the licensee intends to
use such licensed symbols must be approved by us in advance.
The short form license agreements terminate immediately upon the termination
of the related management agreement, and termination is governed by the
provisions thereof. We may terminate the long form license agreements upon
cancellation of, or failure to renew, the lease for the premises of the related
affiliated dental practice, the bankruptcy of the associated licensee or upon
the occurrence of certain other events set forth in the license agreement. The
long form licensees may terminate their license agreements for cause at any time
or without cause during the 30-day period commencing on the first anniversary of
the execution of the agreement. Any other termination by the long form licensee
constitutes a breach of the license agreement.
DENTAL X CHANGE, INC. COLLABORATION AGREEMENT
On September 3, 1999, we entered into a seven year collaborative Internet
strategy agreement with Dental X Change, Inc. Dental X Change is a commercial
Internet company servicing the professional dental market by providing web
development, hosting, content, education, e-commerce, practice management
services and dental oriented web services to dental practices and the dental
professional market and consumer dental market through its various web sites and
through intranets and other online technologies. The collaboration agreement
will assist us to utilize the Internet to:
- increase interaction and the flow of information between InterDent and its
affiliated dental practices;
- facilitate communication between InterDent's affiliated dental practices
and patients;
- facilitate communication between InterDent and its investors; and
- provide non-affiliated dental practices with access to business
information developed by InterDent.
In exchange for a cash contribution of $1,000,000 and for entering into the
collaboration agreement, we received 1,000,000 shares of Dental X Change Series
A Preferred Stock, 1,949,990 shares of Dental X
52
<PAGE>
Change common stock and a warrant to purchase 4,054,010 additional shares of
Dental X Change common stock at $.10 per share. Pursuant to the collaboration
agreement, InterDent, among other things:
- will utilize and use all reasonable commercial efforts to cause the
affiliated dental practices to utilize Dental X Change's Internet portal
exclusively for ordering and fulfillment of all dental supplies and
related products and distance learning, home study continuing education,
and other training and educational materials;
- has granted an exclusive license for the Compass System developed by
InterDent to Dental X Change to web enable the Compass System as content
or an online application;
- will use Dental X Change's listing and referral service on the Internet
for offices of our affiliated dental practices and their respective
affiliated dentists; and
- will use Dental X Change's recruitment services and help wanted
classifieds as a primary source for recruitment on the Internet.
In exchange for InterDent's commitments and in addition to the issuance of
Dental X Change common stock and warrants, Dental X Change, among other things:
- will continue to maintain and enable the portal and ensure that its online
products (i) are available in the desired quantity and on a timely basis
to meet the business and professional needs of InterDent and its
affiliated dental practices, (ii) are of high quality and standards
generally acceptable in the industry, and (iii) are provided to InterDent
and its affiliated dental practices on no less favorable terms than
provided to any other third party purchasing similar products;
- will pay to Interdent a royalty based on a percentage of net sales of the
web-enabled Compass System; and
- will list on the Internet all of InterDent's affiliated dental practices
and their respective dentists at no charge.
GOVERNMENT REGULATION
GENERAL.
The practice of dentistry is regulated extensively at both the state and
federal level. Regulatory oversight includes, but is not limited to,
considerations of fee-splitting, corporate practice of dentistry, anti-kickback
and anti-referral legislation and state insurance regulation. Although we
believe that our operations comply in all material respects with the laws to
which they are subject, there can be no assurance that a review of our business
relationships by courts or other regulatory authorities would not result in
determinations that could prohibit or otherwise adversely affect operations or
that the regulatory environment will not change, requiring us to reorganize,
change our methods of reporting revenues and other financial results or restrict
existing or future operations. Any such change could have a material adverse
effect on our business, financial condition and results of operations.
Every state imposes licensing and other requirements on individual dentists
and dental facilities and services. In addition, federal and state laws regulate
HMOs and other managed care organizations for which dentists may be providers.
In connection with our operations in existing markets and expansion into new
markets, we may become subject to compliance with additional laws, regulations
and interpretations or enforcement thereof. Our ability to operate profitably
will depend in part upon our and our affiliated dental practices obtaining and
maintaining all necessary licenses, certifications and other approvals and
operating in compliance with applicable health care regulations.
Dental practices must meet federal, state and local regulatory standards in
the areas of safety and health. Historically, these standards have not had any
material adverse effect on the operations of the
53
<PAGE>
affiliated dental practices. We believe that we and our affiliated dental
practices are in compliance in all material respects with applicable federal,
state and local laws and regulations relating to safety and health.
CORPORATE PRACTICE OF DENTISTRY; FEE SPLITTING.
The laws of many states prohibit, by statute or under common law, dentists
from splitting fees with non-dentists and prohibit non-dental entities such as
us 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 interpretation 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); and
- 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. However, the
states in which we conduct our business do not currently impose such
limitations. Some of these states allow leasing of equipment and office space to
a dental practice under a bona fide lease. Some states also prohibit a dentist
from operating more than two dental offices. The laws of many states also
prohibit dental practitioners from paying any portion of fees received for
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 assistants.
We provide management and administration services to dental practices, and
believe that the fees we charge for those services are consistent with the laws
and regulations of the jurisdictions in which we operate. We do not control the
clinical aspects of the practice of dentistry or employ dentists to practice
dentistry, except as permitted by law. Moreover, in states in which it is
prohibited, we do not employ dental hygienists or dental assistants. We believe
that our operations comply in all material respects with the above-described
laws to which we are subject. However, there can be no assurance that a review
of our business relationships by courts or other regulatory authorities would
not result in determinations that could prohibit or otherwise adversely affect
our operations. Furthermore, there can be no assurance that the regulatory
environment will not change, requiring us to reorganize or restrict our existing
or future 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 our business or our relationships with dentists or affiliated dental
practices will not be successfully challenged or that the enforceability of the
provisions of any management agreement will not be limited. The laws and
regulations of certain states in which we may seek to expand may require us to
change the form of our relationships with affiliated dental practices. Such a
change may restrict our operations or the way in which providers may be paid or
may prevent us from acquiring the non-dental assets of such practices or
managing dental practices in such states. Similarly, there can be no assurance
that the laws and regulations of the states in which we presently maintain
operations will not change or be interpreted in the future either to restrict or
adversely affect our existing or future relationships with our affiliated dental
practices. Any change in our relationships with our affiliated dental practices
resulting from the interpretation of corporate practice of dentistry and
fee-splitting statutes and regulations could have a material adverse effect on
our business and results of operations.
ANTI-KICKBACK AND ANTI-REFERRAL LEGISLATION.
Federal and many state laws prohibit the offer, payment, solicitation or
receipt of any form of remuneration in return for, or in order to induce the
referral of a person for services reimbursable under
54
<PAGE>
Medicare, Medicaid or other federal and state health care programs. Further
restrictions include the reimbursement by such regulatory agencies for the
furnishing or arranging for the furnishing of items or services, the purchase,
lease, order, arranging or recommending purchasing, leasing or ordering of any
item. These provisions apply to dental services covered under the Medicaid
program in which we 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 all types of patients, not just Medicare and Medicaid beneficiaries.
The applicability of these federal and state laws to transactions in the
health care industry such as those to which we are or may be a party has not
been the subject of judicial interpretation. There can be no assurance that
judicial or administrative authorities will not find these provisions applicable
to our operations, which could have a material adverse effect on our business.
Under current federal law, a physician or dentist or member of his or her
immediate family is prohibited from referring Medicare or Medicaid patients to
any entity providing "designated health services" in which the physician or
dentist has an ownership or investment interest, unless such an applicable
exception is available. A number of states also have laws that prohibit
referrals for certain services such as x-rays by dentists if the dentist has
certain enumerated financial relationships with the entity receiving the
referral, unless an exception applies. Any future expansion of these
prohibitions to other health services could restrict our ability to integrate
dental practices and carry out the development of our 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. While we make every effort to comply with the
anti-kickback and anti-referral laws, a determination of violation of these laws
by us or its affiliated dental practices could have a material adverse effect on
our business, financial condition and results of operations.
STATE INSURANCE LAWS AND REGULATIONS.
There are also certain regulatory risks associated with our role in
negotiating and administering managed care and capitation contracts. There are
risks, particularly in instances where the dental care provider typically is
paid a pre-determined amount per-patient per-month from the payor in exchange
for providing all necessary covered dental care services to patients covered
under the contracts. The application of state insurance laws to reimbursement
arrangements other than various types of fee-for-service arrangements is an
unsettled area of law and is subject to interpretation by regulators with broad
discretion. As we or our affiliated dental practices contract with third-party
payors, including self-insured plans, for certain non-fee-for-service
arrangements, we or our affiliated dental practice may become subject to state
insurance laws. Revenues could be adversely affected in the event we or our
affiliated dental practices are determined to be subject to licensure as an
insurance company or required to change the form of their relationships with
third-party payors and become subject to regulatory enforcement actions.
HEALTH CARE REFORM PROPOSALS.
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, as well as
changes in federal and state regulations could have a significant effect on the
health care industry and, thus, potentially materially adversely affect our
operations and those of our network of affiliated dental practices.
55
<PAGE>
REGULATORY COMPLIANCE.
We regularly monitor developments in laws and regulations relating to
dentistry. We may be required to modify our agreements, operations or marketing
from time to time in response to changes in business, statutory and regulatory
environments. We plan to structure all of our agreements, operations and
marketing in accordance with applicable law, although there can be no assurance
that our arrangements will not be successfully challenged or that the required
changes may not have a material adverse effect on operations or profitability.
COMPETITION
We compete with other dental practice management companies seeking to
affiliate with dental practices in the highly competitive dental practice
management industry. We believe that the industry will become more competitive
as it continues to develop. Key factors of competition currently include:
- acquisition methods and models;
- the reputations of the dental practices within dental care networks;
- the scope of services provided by dental care networks;
- management experience and expertise;
- the sophistication of management information, accounting, finance and
other systems; and
- network operating methods.
We believe that we have a competitive advantage to effectively compete in each
of these areas.
We currently compete with other dental practice management companies in our
existing markets. There are also a number of dental practice management
companies currently operating in other parts of the country which may enter our
existing markets in the future. Many of such competitors and potential
competitors have substantially greater financial resources than us, have
established large dental practice networks, or otherwise enjoy competitive
advantages which may make it difficult for us to compete against them or enter
into additional management agreements on terms acceptable to us. In addition, as
we seek to expand our operations into new markets, we are likely to face
competition from dental practice management companies which already have
established a strong presence in such markets.
The business of providing dental services is highly competitive in each of
the markets in which our affiliated dental practices operate or in which
operations are contemplated. The primary bases of such competition are quality
of care and reputation, marketing exposure, convenience and traffic flow of
location, relationships with managed care entities, appearance and usefulness of
facilities and equipment, price of services and hours of operation. The
affiliated dentist practices compete with other dentists who maintain single or
satellite offices, as well as with dentists who maintain group practices,
operate in multiple offices or are members of competing dental practice
management networks. Many of those dentists have established practices and
reputations in their markets. In addition to competing against established
practices for patients, the affiliated dental practices compete with such
practices in the retention and recruitment of general dentists, specialists and
hygienists. If the availability of dentists begins to decline in our existing or
targeted markets, it may become increasingly difficult to attract and retain the
dental professionals to staff the affiliated dental practices. There can be no
assurance that our affiliated dental practices will be able to compete
effectively with such other practices.
INSURANCE
We carry comprehensive liability and extended coverage insurance. Our
affiliated dental practices carry professional liability and general liability
insurance. Such insurance coverages are expanded to
56
<PAGE>
include all additional practices that we develop or affiliate, with policy
specifications, insured limits, and deductibles customarily carried for similar
dental practices.
SERVICE MARK
Our network of affiliated dental practices in Oregon and Washington are
operated and marketed under the name "Gentle Dental." Other affiliated practices
may or may not use such name depending upon each affiliated practice's name
recognition and other local market conditions. Gentle Dental is a federally
registered service mark owned by us. On April 19, 1989, the Company's
predecessor acquired title to the federal registration of this service mark as
originally issued on October 26, 1982. As part of the purchase, the seller was
granted an exclusive personal license to use the mark for the sale of dental
services in practices owned or controlled by the seller in the Boston,
Massachusetts, Baltimore, Maryland, and Washington, D.C. metropolitan areas.
Such license expired on April 19, 1999. As a result, we could not use the mark
in those markets until such license expired. We also recognize that there are
numerous other practices across the country using the name Gentle Dental. Any
entity that commenced use of our mark before October 26, 1982, may have rights
to the mark in its geographic market superior to our rights. Given the costs and
inherent uncertainties of service mark litigation, there can be no assurance
that we can successfully enforce our service mark rights in any particular
market.
EMPLOYEES
We have entered into an agreement with an unrelated third party co-employer
pursuant to which a significant number of our administrative and support staff
located in certain of our affiliated dental practices as well as certain of our
corporate office management and staff are co-employed. As of December 31, 1999,
we employed or co-employed approximately 3,340 persons, consisting of 1,354
dental assistants, 1,190 dental office staff, and 130 executive and
administrative staff.
In addition, a significant number of our affiliated dental practices have
entered into an agreement with the co-employer pursuant to which an affiliated
dental practice and the co-employer co-employ all professional staff. As of
December 31, 1999, such affiliated dental practices, in the aggregate, employed
or co-employed approximately 988 dental professionals, consisting of 677
dentists and 311 dental hygienists. We, or our affiliated dental practices, as
the case may be, are responsible for the hiring, retention, salary and bonus
determination, job performance-related training and other similar matters
affecting co-employees while the co-employer is responsible for:
- payroll administration, including recordkeeping, payroll processing,
making payroll tax deposits, reporting payroll, taxes and related matters;
- risk management, including on-site safety inspections, monitoring,
training and workers' compensation claim management and administration;
- administering benefit plans; and
- human resource consulting and expertise on other human resource issues.
The agreements with the co-employer are terminable by either party without cause
on 30 days written notice, or for cause on 24 hours written notice.
Also, as of December 31, 1999, approximately 130 clerical personnel and
dental assistants employed by certain affiliated dental practices with us were
subject to collective bargaining agreements that expire in 2000. These
agreements are presently due for negotiation. In addition, we have assumed
obligations under collective bargaining agreements by and between certain labor
unions and some or all of the non-professional employees servicing six of our
other affiliated dental practices. We have entered into contracts with certain
labor unions in Michigan (where certain of our managed professional associations
operate), pursuant to which we have agreed that such managed professional
associations in Michigan will
57
<PAGE>
treat such unions' members at specified discounts. In addition, the National
Labor Relations Board has ruled that we must engage in collective bargaining
relating to certain of our non-dental professional employees working at another
of our affiliated dental practices. Finally, our non-management employees at one
other affiliated dental practice have voted in favor of unionizing and entering
into a collective bargaining agreement with us. We are still in the process of
negotiating this agreement.
We believe we maintain good relationships with our employees.
PROPERTIES
The dental practice and business offices in our network are generally leased
from various parties pursuant to leases with remaining terms ranging through
2015. Several of the leases have options to renew, and we expect to renew or
replace leases as they expire. Our corporate headquarters is located in leased
office space in El Segundo, California. We also maintain executive offices in
leased office space in Vancouver, Washington, and in Sarasota, Florida. In
connection with the amendment of the management agreements with Oregon and
Washington professional corporations, we acquired an office building located in
Hazel Dell, Washington which is occupied by one of our clinical office
locations.
LEGAL PROCEEDINGS
Between October 25 and December 31, 1999, certain of our officers and
directors, and Leonard Green & Partners were named as defendants in civil suits
filed on behalf of certain owners of our Common Stock relating to the merger.
Six suits were filed in the Court of Chancery in the State of Delaware, New
Castle County and two in the Los Angeles County Superior Court in the State of
California. The lawsuits purport to be brought on behalf of the holders of
Common Stock and allege claims of breach of fiduciary duty and aiding and
abetting such breach in connection with the merger. In general, the plaintiffs
allege that:
- the merger consideration is unjust and inadequate in that the intrinsic
value of shares of Common Stock is allegedly greater than the merger
consideration, in view of our prospects;
- the merger consideration includes an inadequate premium; and
- the merger consideration is designed to cap the market price of the shares
of Common Stock before the trading price for the shares of Common Stock
could recover from an alleged temporary downturn in the market.
The lawsuits also generally seek an injunction of the merger (or, if it is
consummated, rescission thereof), compensatory and other damages, and an award
of attorneys' fees and expenses. The lawsuits seek certification of a
plaintiff's class. The six lawsuits in Delaware have been consolidated into one
action captioned IN RE INTERDENT, INC. STOCKHOLDERS LITIGATION, consolidated
C.A. 1796NC.
We have sought coverage under existing directors and officers insurance
policies for any settlements, judgments, and costs of defense in connection with
these cases, within outstanding policy limits. There can be no assurance,
however, that such insurance coverage will be adequate to cover all potential
liabilities and costs that may be incurred. We intend to engage in a vigorous
defense in these matters. Nevertheless, due to the uncertainties in litigation,
the ultimate disposition of such litigation cannot be presently determined.
Accordingly, no provision for any loss or recovery that may result upon
resolution of the suits has been made in our consolidated financial statements.
An adverse outcome could be material to our financial position, results of
operations and liquidity and could prevent our ability to complete the merger.
To the knowledge of our management, neither we nor our affiliated dental
practices are currently subject to any other material litigation or threatened
litigation against us or affiliated dental practices other than routine
litigation arising in the ordinary course of business, some of which are
expected to be covered by liability insurance and all of which collectively are
not expected to have a material adverse effect on our business, financial
condition or results of operations. Nevertheless, due to the uncertainties in
litigation, the ultimate disposition of such litigation cannot be presently
determined.
58
<PAGE>
MARKET PRICE INFORMATION; DIVIDENDS; AND RELATED
STOCKHOLDER MATTERS
Our Common Stock is listed on the Nasdaq National Market under the symbol
"DENT." Our Common Stock began trading on March 12, 1999, upon the consummation
of the business combination between Dental Care Alliance and Gentle Dental
Service Corporation. Prior to that date, there was no established trading market
for the Common Stock. The following table sets forth, for the periods indicated,
the highest and lowest per share sales price for our Common Stock as reported on
the Nasdaq National Market. Stockholders are encouraged to obtain current market
quotations:
<TABLE>
<CAPTION>
1999 HIGH LOW
- ---- -------- --------
<S> <C> <C>
First quarter (commencing March 12, 1999)................... $ 5.825 $ 4.00
Second quarter.............................................. 9.3125 4.50
Third quarter............................................... 9.125 6.075
Fourth quarter.............................................. 8.50 7.125
2000
- ------------------------------------------------------------
First quarter (through January 25, 2000).................... 8.50 8.125
</TABLE>
On October 22, 1999, the last full trading day prior to the day which the
merger was announced, the highest and lowest per share sales prices were $8.00
and $7.875, respectively, and the closing sale price was $8.00. As of such date,
there were approximately 184 holders of record of our Common Stock.
EFFECT OF MERGER ON PRINCIPAL STOCKHOLDERS OF INTERDENT
The following table sets forth certain information regarding the beneficial
ownership of InterDent Common Stock as of December 31, 1999, and after giving
effect to the merger, as if completed on such date, by (a) each person we
believe owns, or will own, beneficially more than five percent of InterDent
Common Stock, (b) each director of InterDent, and (c) all directors and
executive officers of InterDent as
59
<PAGE>
a group. Unless otherwise noted, it is believed that all persons listed in the
table have sole voting and investment power with respect to all shares of
InterDent Common Stock.
<TABLE>
<CAPTION>
SHARES OF
COMMON
STOCK
OUTSTANDING
AND ISSUABLE
AMOUNT AND UPON
NATURE CONVERSION OR
OF BENEFICIAL EXERCISE OF
OWNERSHIP OF OPTIONS,
COMMON STOCK WARRANTS,
PRIOR TO THE PREFERRED PERCENTAGE OF AMOUNT AND PERCENTAGE OF
MERGER STOCK AND/OR OUTSTANDING NATURE OF OUTSTANDING
(INCLUDES CONVERTIBLE SHARES OF BENEFICIAL SHARES OF
SHARES LISTED NOTES ON OR COMMON STOCK OWNERSHIP OF COMMON STOCK
IN BEFORE PRIOR TO THE COMMON STOCK AFTER THE
NAME OF BENEFICIAL OWNER OF COMMON STOCK COLUMN 2) , 2000 MERGER AFTER THE MERGER MERGER
- ---------------------------------------- ------------- ------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Green Equity Investors III, L.P......... -- -- -- 2,154,625 51.14%
Sprout Capital VII, L.P. and certain
related entities(1)................... 3,169,659 1,520,096 14.01% 503,370 11.95%
SRM 1993 Children's Trust............... 2,553,677 -- 12.01% 724,105 17.19%
CB Capital Investors, L.P.(2)........... 2,714,431 2,714,431 11.40% 242,005 5.74%
Michael T. Fiore(3)..................... 376,772 20,000 1.78% 194,737(7) 4.60%
Dr. Steven R. Matzkin................... 2,513,597 13,360 11.88% -- --
Robert Finzi(4)......................... 3,169,659 1,520,096 14.01% 503,370 11.95%
Eric Green(5)........................... 2,714,431 2,714,431 11.40% 242,005 5.74%
Paul H. Keckley......................... 3,600 3,600 * -- --
H. Wayne Posey.......................... 34,580 8,345 * -- --
Robert F. Raucci........................ 42,505 8,350 * -- --
Curtis Lee Smith, Jr.................... 763,145 8,350 3.61% -- --
All directors and officers as a group
(17 persons)(6)....................... 12,170,976 4,296,532 47.91% 4,213,053(7) 100%
</TABLE>
- --------------------------
*Less than one percent.
(1) DLJ Capital Corp. is the Managing General Partner of each of The Sprout CEO
Fund, L.P., Sprout Growth II, L.P. and Sprout Capital VII, L.P. and has
voting and investment control over the shares held by each of these three
shareholders. DLJ Capital Corp. is a wholly-owned subsidiary of Donaldson,
Lufkin & Jenrette, Inc., which has voting and investment control over DLJ
Capital Corp. DLJ LBO Plans Management Corporation is the manager of DLJ
First ESC L.L.C. and has voting and investment control over the shares held
by DLJ First ESC L.L.C. DLJ LBO Plans Management Corporation is an indirect
wholly-owned subsidiary of Donaldson, Lufkin & Jenrette, Inc., which has
voting and investment control over DLJ LBO Plans Management Corporation. The
beneficial ownership of Sprout Capital VII, L.P. and related entities
includes an aggregate of 380,033 shares of common stock issuable upon
conversion of Series D Preferred Stock.
(2) The general partner of CB Capital Investors, L.P. is CB Capital
Investors, Inc., a wholly-owned subsidiary of the Chase Manhattan Bank,
which has voting and investment control over CB Capital Investors, L.P. The
beneficial ownership of CB Capital Investors, L.P. includes 1,085,767 shares
of Common Stock issuable upon conversion of Series D Preferred Stock. In
addition, CP Capital Investors, L.P. is the beneficial owner of 100 shares
of Series A Preferred Stock which represents 100% of the issued and
outstanding shares of Series A Preferred Stock. The Series A Preferred is
not convertible into Common Stock.
(3) Includes 33,382 shares currently subject to repurchase by InterDent at $0.45
per share.
(4) Includes 3,169,659 shares beneficially owned by Sprout Capital VII, L.P. and
certain related entities, as described in footnote 1 above. 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 and
with respect to the shares of capital stock beneficially owned by such
entities after the merger. Mr. Finzi disclaims beneficial ownership of these
shares.
60
<PAGE>
(5) Includes 2,714,431 shares beneficially owned by CB Capital Investors, L.P.,
as described in footnote 2 above. 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 and with respect to the shares of capital stock
beneficially owned by CB Capital Investors, L.P. after the merger.
Mr. Green disclaims beneficial ownership of these shares.
(6) Includes 253,892 shares subject to repurchase by InterDent. Also includes
53,482 shares subject to repurchase by InterDent at a price of $0.225 per
share, which repurchase rights lapse at a rate of 2,431 shares per month
until August 31, 2001, at which time InterDent's repurchase rights will have
lapsed as to all such 53,482 shares.
(7) Includes 155,158 shares of Common Stock issuable upon exercise of
immediately exercisable options.
EFFECT OF MERGER ON INTERESTS IN NET BOOK VALUE AND NET EARNINGS OF INTERDENT
The following table sets forth certain information regarding interests by
members of the affiliate group in the net book value and net earnings of
InterDent.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING AFFILIATE AFFILIATE PERCENTAGE OF
SHARES OF INTEREST IN INTEREST IN OUTSTANDING AFFILIATE
COMMON NET BOOK NET SHARES OF INTEREST IN NET AFFILIATE
STOCK PRIOR VALUE PRIOR EARNINGS COMMON BOOK VALUE INTEREST IN NET
TO MERGER TO MERGER PRIOR TO STOCK AFTER AFTER MERGER LOSS AFTER
(1) (2) MERGER (2) MERGER (1) (3) MERGER (3)
------------- ----------- ----------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Green Equity Investors III,
L.P....................... -- -- -- 51.14% $(60,120,000) $(11,912,000)
Sprout Capital VII, L.P..... 14.01% $8,660,000 $506,000 11.95 (14,048,000) (2,783,000)
SRM 1993 Children's Trust... 12.01 7,424,000 434,000 17.19 (20,208,000) (4,004,000)
CB Capital Investors,
L.P....................... 11.40 7,047,000 412,000 5.74 (6,748,000) (1,337,000)
Michael T. Fiore............ 1.78 1,100,000 64,000 4.60 (5,408,000) (1,071,000)
Dr. Steven R. Matzkin....... 11.88 7,344,00 429,000 -- -- --
</TABLE>
- ------------------------
(1) Beneficial ownership of InterDent Common Stock computed pursuant to the
stockholder table set forth on page 60 of this proxy statement.
(2) Amounts have been computed using historical financial information of
InterDent as of and for the nine-months ended September 30, 1999. Please
refer to the Selected Financial Data set forth on page 63.
(3) Amounts have been computed using pro forma financial information of
InterDent as of and for the nine-months ended September 30, 1999, and
assumes consummation of the merger transaction and related financing as
described in this proxy statement. Please refer to the pro forma financial
information set forth on pages F-2 through F-6.
COMMITMENTS TO ISSUE COMMON STOCK TO DIRECTORS AND EXECUTIVE OFFICERS
We have adopted, and assumed as a result of acquisitions, stock option plans
pursuant to which certain of our officers and directors have the right to
purchase shares of InterDent Common Stock. As of December 31, 1999, our
executive officers and directors as a group held options to acquire an aggregate
of 828,288 shares of InterDent Common Stock. In addition, as of December 31,
1999, our executive officers and directors as a group held warrants to purchase
an aggregate of 85,667 shares of InterDent Common Stock.
AFFILIATE GROUP CAPITAL STOCK PURCHASE INFORMATION
InterDent was incorporated on October 13, 1998 and began its business
operations on March 12, 1999, as a result of a business combination between
Gentle Dental Service Corporation and Dental Care Alliance. As a result of the
business combination, members of the affiliate group who were stockholders of
61
<PAGE>
either Gentle Dental Service Corporation or Dental Care Alliance exchanged their
shares of capital stock in such companies for shares of capital stock of
InterDent. Subsequent to the business combination on March 12, 1999, members of
the affiliate group have collectively purchased the following amounts of
InterDent Common Stock during the quarterly periods indicated:
<TABLE>
<CAPTION>
NUMBER
OF HIGH LOW AVERAGE
SHARES PURCHASE PURCHASE PURCHASE
1999 PURCHASED PRICE PRICE PRICE
- ---- --------- -------- -------- --------
<S> <C> <C> <C> <C>
First quarter (commencing March 12, 1999)...... 2,000 $4.750 $4.500 $4.625
Second quarter................................. -- -- -- --
Third quarter.................................. -- -- -- --
Fourth quarter................................. -- -- -- --
2000
- -----------------------------------------------
First quarter (through January 26, 2000)....... -- -- -- --
</TABLE>
DIVIDENDS
The payment of dividends is within the discretion of our Board of Directors;
however, we intend to retain earnings from operations for use in the operation
and expansion of our business and do not expect to pay cash dividends in the
foreseeable future. Any future decision with respect to dividends will depend on
future earnings, operations, capital requirements and availability, restrictions
in future financing agreements and other business and financial considerations.
In addition, our senior lender currently prohibits the payment of cash
dividends.
62
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and other
financial information included elsewhere in this proxy statement. The
information for the years ended December 31, 1996, 1997 and 1998 has been
derived from the consolidated financial statements for the respective periods,
included elsewhere in this proxy statement. The selected data for the years
ended December 31, 1994 and 1995 presented below include unaudited proforma
adjustments necessary to present fairly the information set forth herein as if
InterDent and its wholly-owned subsidiaries would have elected C Corporation
status during all periods presented. The proforma adjustments are based upon tax
laws in effect during those periods. Also, due to the nature of InterDent's
capital structure during the year ended 1994, earnings per share and common
shares outstanding during the period are not applicable. The information for the
nine month periods ended September 30 has been derived from the unaudited
interim financial statements included elsewhere in this proxy statement. We
believe the interim financial statements include all normal and recurring
adjustments that are necessary for a fair presentation of our financial position
and operating results. Results and trends in the interim financial statements
may not be the same as those for the full year, as revenues and expenses can
vary between quarters during the year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Dental practice net patient service revenue.... $ -- $ -- $ 3,701 $29,327 $103,136 $67,534 $134,487
Net management fees............................ 3,404 10,294 12,002 21,664 30,827 21,069 31,798
Licensing and other fees....................... 43 263 348 291 695 466 752
------- ------- ------- ------- -------- ------- --------
Net revenues................................... 3,447 10,557 16,051 51,282 134,658 89,069 167,037
Cost and expenses:
Clinical salaries and benefits................. -- -- 1,605 14,712 50,894 33,487 64,362
Practice non-clinical salaries and benefits.... 612 2,819 4,391 9,683 19,418 13,145 22,744
Dental supplies and lab........................ 354 1,633 3,008 7,892 17,267 11,570 20,739
Practice occupancy............................. 198 911 1,670 4,525 8,884 6,007 10,091
Practice selling, general and administrative... 285 1,311 1,900 6,178 14,234 9,133 17,339
Corporate selling, general and
administrative............................... 1,159 2,513 3,779 6,592 8,613 6,173 8,530
Corporate restructure and merger costs......... -- -- -- 1,809 3,994 -- 6,130
Depreciation and amortization.................. 121 504 1,019 2,001 5,361 3,503 6,994
------- ------- ------- ------- -------- ------- --------
Operating income (loss)........................ 718 866 (1,321) (2,110) 5,993 6,051 10,108
------- ------- ------- ------- -------- ------- --------
Non-operating income (expense):
Interest expense, net.......................... 6 (284) (728) (390) (2,407) (1,309) (4,619)
Other income (expense), net.................... -- (101) (55) (74) (14) (11) 1
------- ------- ------- ------- -------- ------- --------
Non-operating income (expense), net............ 6 (385) (783) (464) (2,421) (1,320) (4,618)
------- ------- ------- ------- -------- ------- --------
Income (loss) before income taxes.............. 724 481 (2,104) (2,574) 3,572 4,731 5,490
Income tax expense (benefit)................... 253 234 (619) 187 2,302 1,614 1,867
------- ------- ------- ------- -------- ------- --------
Net income (loss).............................. 471 247 (1,485) (2,761) 1,270 3,117 3,623
Dividends on redeemable convertible preferred
stock........................................ -- -- (246) (1,032) -- -- --
Accretion of redeemable common stock........... 40 86 (282) (34) (22) (15) (9)
------- ------- ------- ------- -------- ------- --------
Net income (loss) attributable to common
stock........................................ $ 511 $ 333 $(2,013) $(3,827) $ 1,248 $ 3,102 $ 3,614
======= ======= ======= ======= ======== ======= ========
Net income (loss) per share:
Basic.......................................... $ N/A $ 0.04 $ (0.25) $ (0.31) $ 0.06 $ 0.16 $ 0.18
Diluted........................................ $ N/A $ 0.04 $ (0.25) $ (0.31) $ 0.06 $ 0.15 $ 0.16
Shares outstanding:
Basic.......................................... N/A 7,713 8,102 12,258 19,517 19,575 20,401
Diluted........................................ N/A 7,833 8,102 12,258 21,222 20,952 22,510
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ---------------------------------
YEARS ENDED ENDED YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
------------------- ---------------------- ------------- -----------------
1997 1998 1998 1999 1998 1999
-------- -------- -------- -------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to combined fixed charges and
preferred dividends.......................... N/A 1.77 2.70 1.77 N/A N/A
Deficiency of coverage of fixed charges
and preferred dividends...................... $3,640 N/A N/A N/A $38,442 $23,316
</TABLE>
<TABLE>
<CAPTION>
AT
SEPTEMBER
AT DECEMBER 31, 30,
---------------------------------------------------- ---------
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit).............................. $ (47) $ 1,439 $ 3,238 $22,591 $ 6,709 $ (1,878)
Total Assets........................................... 3,230 11,052 29,519 72,972 165,134 217,571
Long-term debt, including current maturities........... 1,407 3,371 3,732 16,086 71,098 108,363
Redeemable common stock................................ -- 710 14,848 2,130 2,102 1,794
Shareholders' equity................................... 1,386 4,241 3,718 43,939 68,990 73,905
Book value per common share............................ -- -- -- -- 2.76 2.95
</TABLE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain portions of this proxy statement, including "BUSINESS OF THE
COMPANY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," and the pro forma financial information set forth on
pages F-2 through F-5 contain various forward-looking statements which represent
InterDent's expectations or beliefs concerning future events. Forward-looking
statements relate to future operations, strategies, financial results or other
developments and are not based on historical information. In particular,
statements using verbs such as "anticipates," "believes," "estimates," "expects"
or words of similar meaning generally involve forward-looking statements.
InterDent cautions that its forward-looking statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward-looking statements. Such factors include, without
limitation:
- InterDent's ability to consummate the merger;
- the competitive nature of the market in which InterDent operates;
- risks associated with InterDent's growth strategy, including InterDent's
ability to successfully integrate acquisitions;
- InterDent's dependence on key personnel; and
- the ability of InterDent to maintain its relationships with its affiliated
dentists.
64
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
As of December 31, 1999, we provided comprehensive management services to a
dental practice network which employed 677 dentists, including 146 specialists,
practicing out of 226 dental offices and 1,941 operatories in selected markets
in Arizona, California, Florida, Georgia, Hawaii, Idaho, Indiana, Kansas,
Michigan, Nevada, Oklahoma, Oregon, Pennsylvania and Washington.
InterDent's practice management services facilitate the delivery of
convenient, high quality, comprehensive and affordable dental care to patients
in a comfortable environment. The dentists affiliated through our network of
affiliated dental practices provide comprehensive general dentistry services and
offer specialty dental services, which include endodontics, oral pathology, oral
surgery, orthodontics, pedodontics, periodontics, and prosthodontics. Our
strategic objective is to maintain and expand our leadership position in the
dental practice management industry. To achieve this objective, we seek to enter
selected geographic markets and develop locally prominent, multi-specialty
dental delivery networks. The key elements of our strategy are as follows:
- provide convenient, comprehensive dental care;
- focus on quality of patient care;
- establish a comprehensive dental care network;
- achieve operational efficiencies and enhance revenue;
- integrate and leverage management information systems;
- expand patient volume through proactive marketing; and
- capitalize on managed care expertise.
As part of a delivery network of multi-specialty dental care, we provide
management and licensing services to our affiliated dental practices under
long-term management service agreements. Under the terms of the management
service agreements, we bill and collect patient receivables and provide all
administrative and management support services to our affiliated dental
practices. These administrative and management support services include:
financial, accounting, training, efficiency and productivity enhancement,
recruiting, team building, marketing, advertising, purchasing, and related
support personnel. Licensing services include marketing, advertising and
purchasing.
As compensation for services provided under management service agreements,
we receive management fees from our affiliated dental practices. Depending upon
the individual management service agreement provisions, the management fee is
calculated based upon one of two methods. Under one method, the management fee
is equal to reimbursement of expenses incurred in the performance of our
obligations under the management service agreements, plus an additional fee
equal to a percentage of the net revenues of the affiliated dental practices.
Under the other method, the management fee is a set percentage of the net
revenues of the affiliated dental practices.
The management service agreements have initial terms ranging from 25 to
40 years with automatic extensions, unless either party gives notice before the
end of the term. The management service agreements are not subject to early
termination by the affiliated dental practices unless we are the subject of
bankruptcy proceedings or we materially breach the management service agreements
and do not cure the breach following notice. Certain management service
agreements have additional termination events, including the refusal to comply
with the decisions of the joint operating committee, failure to pay the
management fee, and a material change in applicable federal or state law.
65
<PAGE>
RESULTS OF OPERATIONS
The Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board 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. Our consolidated financial statements,
included elsewhere herein, are prepared in conformity with the consensus reached
in EITF 97-2.
Under those circumstances where the management service agreements meet the
criteria for consolidation as outlined in EITF 97-2, all the accounts of those
affiliated dental practices are included in our consolidated financial
statements included elsewhere herein. Accordingly, our consolidated statements
of operations include the dental practice net patient revenue and related
expenses of those affiliated dental practices. In instances where the management
service agreements have not met the criteria for consolidation, we do not
consolidate the accounts of the affiliated dental practices. Accordingly, our
consolidated statements of operations exclude the dental practice net patient
revenues and expenses of these affiliated dental practices. Rather, our
statements of operations include only our net management fees generated from
those management service agreements and our expenses incurred in the performance
of our obligations under those management service agreements. The following
discussion highlights changes in historical revenues and expense levels for the
nine months ended September 30, 1999 and 1998, and the years ended December 31,
1998, 1997 and 1996, as reported in our consolidated financial statements and
the related notes thereto appearing elsewhere herein.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
DENTAL PRACTICE NET PATIENT REVENUE.
Dental practice net patient revenue represents the clinical patient revenues
at 128 current clinical locations through September 30, 1999 where the
consolidation requirements of EITF 97-2 have been met. Dental practice net
patient revenue was $50.1 million for the third quarter of 1999 compared to
$29.0 million for the third quarter of 1998, representing a 72.5% increase of
$21.1 million. Dental practice net patient revenue also increased to
$134.5 million for the first nine months of 1999 compared to $67.5 million for
the first nine months of 1998, representing a 99% increase of $67.0 million.
We are pursuing an aggressive expansion strategy through the addition of
affiliated dental practices. As a result, the majority of this revenue growth is
due to the addition of 22 affiliated dental practices during 1998 and the first
nine months of 1999, representing 85 current clinical locations. These
affiliated dental practices have management service agreements that meet the
EITF's consolidation requirements.
We were also effectively able to increase total dental practice net patient
revenue at existing facilities. We worked with affiliated dental practices to
recruit new dentists to meet increased demand, negotiated additional contracts
with managed care organizations and third party-payors, leveraged additional
specialty dental services, and increased the number of patients successfully
completing their treatment programs with the use of internally developed
proprietary software. For those locations affiliated as of September 30, 1998,
where the management service agreements meet the EITF criteria for
consolidation, same-store dental practice net patient revenue for the third
quarter of 1999 increased by over 10% when compared to revenue for the third
quarter of 1998.
NET MANAGEMENT FEES.
Net management fees consist of revenue earned by InterDent in the
performance of its obligations under management service agreements as of
September 30, 1999, at 78 current unconsolidated affiliated
66
<PAGE>
dental practice clinical locations. Net management fees were $10.3 million for
the third quarter of 1999 compared to $8.3 million for the third quarter of
1998, representing a 23.6% increase of $2.0 million. Net management fees were
$31.8 million for the first nine months of 1999 compared to $21.1 million for
the first nine months of 1998, representing a 50.9% increase of $10.7 million.
We are pursuing an aggressive expansion strategy through the addition of
affiliated dental practices. As a result, the majority of this growth is related
to the the addition of 49 affiliated dental practice clinical locations during
1998 and the first nine months of 1999.
LICENSING AND OTHER FEES.
We earn certain fees from unconsolidated affiliated dental practices for
various licensing and consulting services. Licensing and other fees were
$0.8 million for the first nine months of 1999 compared to $0.5 million for
1998, representing a 61% increase of $0.3 million. This increase is entirely
attributed to the addition of 47 unconsolidated affiliated dental practice
clinical locations during 1998 and 1999.
PRACTICE OPERATING EXPENSES.
Practice operating expenses represent the direct costs associated with
operating and managing the practice facility locations, including regional
support departments. These costs are comprised of the following expenses:
- CLINICAL SALARIES AND BENEFITS AND PROVIDER COSTS include all patient
service provider staff compensation and related payroll costs at the
consolidated affiliated dental practices, including dentists, hygienists
and dental assistants, and dental assistants for the unconsolidated
affiliated dental practices;
- PRACTICE NONCLINICAL SALARIES AND BENEFITS COSTS include all staff
compensation and related payroll costs at all dental and regional
facilities other than dentists, hygienists, and dental assistants;
- DENTAL SUPPLIES AND LAB COSTS include all direct supply costs in the
performance of patient treatment programs;
- PRACTICE OCCUPANCY EXPENSES include facility leases, property taxes,
utilities, janitorial services, repairs and maintenance; and
- PRACTICE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES include general
office, advertising, professional services (excluding dentistry), office
supplies, bank processing fees, local taxes, insurance, bad debt expense,
and other miscellaneous costs at the dental facilities and regional
centers.
Practice operating expenses have increased significantly during the third
quarter and the first nine months of 1999 compared to the same periods in 1998.
Practice operating expenses were $49.0 million for the third quarter of 1999
compared to $30.6 million for the third quarter of 1998, representing a 60.2%
increase of $18.4 million. Practice operating expenses were $135.3 million for
the first nine months of 1999 compared to $73.3 million for the first nine
months of 1998, representing an 84.4% increase of $62.0 million. The majority of
this increase in practice operating expenses is due to the addition of 42
affiliated dental practices clinical locators (representing 134 current clinical
locations) during 1998 and the first nine months of 1999, as a result of our
aggressive expansion strategy. Of the 42 affiliated dental practice clinical
locations added in 1998 and the first nine months of 1999, 22 have management
services agreements that meet the EITF's consolidation requirements.
During the third quarter and the first nine months of 1999, most categories
of practice operating expenses varied slightly as a percentage of net revenues
when compared to the third quarter and the first nine months of 1998,
respectively. During the first nine months of 1999, we have reported
improvements in the reduction of total practice operating expenses as a
percentage of net revenues. As a percentage of net revenues, practice operating
expenses for the third quarter of 1999 were 80.8% compared to 81.4% for the
third quarter of 1998, and 81.0% for the first nine months of 1999 compared to
82.3% for the first nine
67
<PAGE>
months of 1998. This overall reduction in practice operating expenses is a
result of the successful implementation of our operating model at existing
facilities and the proven strong operational and financial track records of our
current affiliated dental practices. As a result, the overall practice operating
margin for the third quarter of 1999 was 19.2% compared to 18.6% for the third
quarter of 1998, and 19.0% for the first nine months of 1999 compared to 17.7%
for the first nine months of 1998.
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Corporate selling, general and administrative expenses include: corporate
salaries, general office costs, investor relations expense, legal and audit
fees, general insurance, director and officer liability insurance, corporate
office supplies, and other miscellaneous costs at our corporate facilities.
Corporate selling, general and administrative expenses were $2.7 million for the
third quarter of 1999 compared to $2.4 million for the third quarter of 1998,
representing a 14.6% increase of $0.3 million. Corporate selling, general and
administrative expenses were $8.5 million for the first nine months of 1999
compared to $6.2 million for the first nine months of 1998, a 38.2% increase of
$2.3 million.
The rise in total corporate selling, general and administrative expenses is
the result of increasing corporate staffing levels in our marketing, human
resource, finance, and operations departments to accommodate the addition of
affiliated dental practices. Additionally, resources have been added to respond
to the increasing needs of our affiliated dental practices for information
systems implementation, clinical management and mentoring programs, and to
appropriately develop our support infrastructure. At the same time, we seek to
maximize the effectiveness of corporate infrastructure costs. As a result,
corporate selling, general and administrative expenses as a percentage of net
revenues had steadily declined. Corporate selling, general and administrative
expenses for the third quarter of 1999 were 4.5% of net revenues as compared to
6.4% for the third quarter of 1998. Corporate selling, general and
administrative expenses for the first nine months of 1999 were 5.1% of net
revenues as compared to 6.9% for the first nine months of 1998.
CORPORATE RESTRUCTURING AND MERGER COSTS.
We recorded corporate restructuring and merger costs associated with the
business combination between Gentle Dental Service Corporation and Dental Care
Alliance, each of which became a wholly-owned subsidiary of InterDent in
March 1999. The business combination has been accounted for as a
pooling-of-interests. As a result of the business combination, we recorded
corporate restructuring and merger costs of $1.1 million for the third quarter
of 1999 and $6.1 million for the first nine months of 1999. Approximately
$3.2 million of the total expense relates to merger costs consisting of
investment banker fees, advisors fees, investor relations expense, legal fees,
accounting fees, printing costs, and other costs. The remaining $2.9 million
relates to our restructuring plan, including charges for employee related costs
and the redirection of certain duplicative operations and systems costs.
DEPRECIATION AND AMORTIZATION.
Depreciation and amortization were $2.6 million for the third quarter of
1999 compared to $1.6 million for the third quarter of 1998. Depreciation and
amortization increased $3.5 million to $7.0 million for the first nine months of
1999 compared to $3.5 million for the first nine months of 1998. These increases
of 68% and 100%, respectively, are primarily due to additional property and
equipment, intangible costs assigned to management services agreements and
goodwill associated with dental practice affiliations completed in 1998 and
1999. It is anticipated that future acquisitions and earn-out payments on
completed acquisitions will result in additional depreciation and amortization
throughout 1999 and future periods.
68
<PAGE>
INTEREST EXPENSE.
Interest expense was $1.9 million for the third quarter of 1999 compared to
$0.7 million for the third quarter of 1998, representing a 183% increase of $1.2
million. Interest expense was $4.6 million for the first nine months of 1999
compared to $1.3 million for the first nine months of 1998, representing a 253%
increase of $3.3 million. These increases in interest expense were due to
additional debt incurred under our credit facility and private placement to
complete the rapid expansion of additional affiliated dental practices
throughout 1998 and 1999. It is anticipated that future acquisitions will
require additional borrowings under our existing credit facility. Accordingly,
we anticipate that interest expense will increase throughout 1999 and future
periods.
PROVISION FOR INCOME TAXES.
Our current expected tax rate approximates the statutory rate as certain
merger related expenses are not deductible for income tax purposes, which are
offset by the carry forward of net operating losses from our subsidiaries and
affiliates. We expect to fully utilize our net operating loss carryforwards in
1999. For the nine months ended September 30, 1999, we recorded an expected
annual effective tax rate of approximately 34% as compared to the effective rate
of 38% recorded during the same period in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
DENTAL PRACTICE NET PATIENT REVENUE.
Dental practice net patient revenue was $103.1 million for 1998 compared to
$29.3 million for 1997, representing a 252% increase of $73.8 million. Of this
growth, $49.2 million is primarily due to the addition of six affiliated dental
practices in 1997 and the addition of 13 affiliated dental practices in 1998,
representing 63 current affiliated dental practice clinical locations. These
affiliated dental practices have management service agreements that meet the
EITF consolidation requirements. The remaining growth of $24.6 million is due to
the consolidation of the operating results of certain Oregon and Washington
affiliated dental practices during 1998 as a result of their new management
service agreements dated January 1, 1998. These contracts met the EITF criteria
for consolidation.
NET MANAGEMENT FEES.
Net management fees were $30.8 million for 1998 compared to $21.7 million
for 1997, representing a 42.3% increase of $9.2 million. Management fees
increased by $21.1 million due to our aggressive expansion strategy, resulting
in the addition of 49 unconsolidated affiliated dental practice clinical
locations during 1998. However, such fees were offset by a reduction of
$11.9 million in management fees associated with the revision of certain
management service agreements of certain Oregon and Washington affiliated dental
practices.
LICENSING AND OTHER FEES.
Licensing and other fees were $0.7 million for 1998 compared to
$0.3 million for 1997, representing a 139% increase of $0.4 million. The
increase is attributable to the addition of 49 unconsolidated affiliated dental
practice clinical locations during 1998.
PRACTICE OPERATING EXPENSES.
Practice operating expenses have increased significantly during 1998 when
compared to 1997. Practice operating expenses were $110.7 million for 1998
compared to $43.0 million for 1997, representing a 158% increase of
$67.7 million. Most categories of practice operating expenses varied only
slightly as a percentage of net revenues when comparing 1998 to 1997. During
1998, we reported improvements in the reduction of total practice operating
expenses as a percentage of net revenues. As a percentage of net
69
<PAGE>
revenues, practice operating expenses for 1998 were 82.2% compared to 83.8% for
1997. The overall reduction in practice operating expenses is a result of the
successful implementation of our operating model at existing facilities and the
improvement of current affiliated dental practices. As a result, the overall
practice operating margin for 1998 was 17.8% compared to 16.2% for 1997.
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Corporate selling, general and administrative expenses were $8.6 million for
1998 compared to $6.6 million for 1997, representing a 30.7% increase of $2.0
million.
The rise in total corporate selling, general and administrative expenses is
the result of increasing corporate staffing levels in our marketing, human
resource, finance, and operations departments to accommodate the addition of
affiliated dental practices. Additionally, resources have been added to respond
to the increasing needs of our affiliated dental practices for information
systems implementation, clinical management and mentoring programs, and to
appropriately develop our support infrastructure. At the same time, we seek to
maximize the effectiveness of corporate infrastructure costs. As a result,
corporate selling, general and administrative expenses as a percentage of net
revenues have steadily declined. Corporate selling, general and administrative
expenses for 1998 were 6.4% of net revenues as compared to 12.9% for 1997.
CORPORATE RESTRUCTURE AND MERGER COSTS.
We recorded $4.0 million in corporate restructure and merger costs in 1998.
Of such costs, $0.3 million relates to corporate restructure and merger costs
resulting from the business combination between Gentle Dental Service
Corporation and GMS Dental Group, Inc. consummated in November 1997. The
remaining $3.7 million relates to merger and severance costs associated with the
business combination between Gentle Dental Service Corporation and Dental Care
Alliance consummated in March 1999.
DEPRECIATION AND AMORTIZATION.
Depreciation and amortization was $5.4 million for 1998 compared to $2.0
million for 1997, representing a 168% increase of $3.4 million. This increase
was primarily due to the addition of property and equipment, intangible costs
assigned to management service agreements and goodwill associated with the
addition of affiliated dental practices in 1998 and 1997.
INTEREST EXPENSE.
Interest expense was $2.4 million for 1998 compared to $0.4 million for
1997, representing a 517% increase of $2.0 million. This increase in interest
expense was due to the additional debt we incurred in connection with the
addition of affiliated dental practices in 1998 and 1997. We also completed a
private placement of debt and preferred stock in 1998 and increased our credit
facility to enable us to continue the addition of affiliated dental practices.
PROVISION FOR INCOME TAXES.
We recorded a net tax expense of $2.3 million in 1998 on income before
income taxes of $3.6 million, compared to income tax expense of $0.2 million on
a loss before income taxes of $2.6 million in 1997. In 1998, the difference in
the effective tax rate from the statutory rate for the year is related to
certain merger related expenses which are not deductible for income tax
purposes, and the carry forward of net operating losses from certain of our
subsidiaries and affiliates, for which realization was not reasonably assured.
In 1997, we incurred income tax expense due to earnings in certain states, and
did not recognize the benefit of net operating losses.
70
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
DENTAL PRACTICE NET PATIENT REVENUE.
Dental practice net patient revenue was $29.3 million for 1997 compared to
$3.7 million for 1996, representing a 692% increase of $25.6 million.
We are pursuing an aggressive expansion strategy through the addition of
affiliated dental practices. As a result, the majority of this revenue growth is
due to the addition of six affiliated dental practices during 1997 and five
affiliated dental practices during the three months ended December 31, 1996,
representing 23 affiliated dental practice clinical locations. These affiliated
dental practices have management service agreements that meet the EITF's
consolidation requirements.
NET MANAGEMENT FEES.
Net management fees were $21.7 million for 1997 compared to $12.0 million
for 1996, representing an 80.5% increase of $9.7 million. Of this increase,
$3.2 million represents the revision of certain management service agreements in
October 1996. Effective October 1996, DentalCare Alliance, Inc. revised the
terms of all of its then existing management service agreements such that it
would be responsible for payment of all non-professional expenses of the managed
affiliated dental practices. Ten management service agreements were also revised
to base DentalCare Alliance, Inc.'s management fee on a percentage of net
profits at each affiliated dental practice to a percentage of net patient
revenues from each affiliated dental practice. Prior to the revisions on 12
management service agreements, all non-professional expenses and related
revenues were reflected in the financial statements in each associated
affiliated dental practice. Of the increase in revenues, $0.5 million is
attributable to increases in the percentages of patient revenue payable under
management service agreements with two affiliated dental practices in Washington
and Oregon. Also, we were pursuing an aggressive expansion strategy through the
addition of affiliated dental practices. As a result, the remaining revenue
growth is related to the addition of 20 unconsolidated affiliated dental
practice clinical locations during 1997.
LICENSING AND OTHER FEES.
Licensing and other fees were $0.3 million for 1997 compared to
$0.3 million in 1996, representing no increase.
PRACTICE OPERATING EXPENSES.
Practice operating expenses have increased significantly during 1997 when
compared to 1996. Operating expenses were $43.0 million for 1997 compared to
$12.6 million for 1996, representing a 242% increase of $30.4 million. The
majority of the increase in practice operating expenses is due to the addition
of 43 affiliated dental practice clinical locations during 1997 and the fourth
quarter of 1996 as a result of the Company's aggressive expansion strategy. Of
the 43 affiliated dental practice clinical locations added during this period,
23 have management service agreements that meet the EITF's consolidation
requirements. In addition, the increase in total operating expenses is
associated with the revision of certain management service agreements.
As a percentage of net revenues, practice operating expenses for 1997 were
83.8% compared to 78.3% for 1996. This increase in practice operating costs as a
percentage of net revenues is directly associated with the revision of 12
management service agreements entered into in October 1996. While total practice
operating expenses are higher as a percentage of revenues in 1997, actual profit
margin related to those affiliated dental practices increased as a result of the
larger associated revenue base.
71
<PAGE>
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Corporate selling, general and administrative expenses were $6.6 million for
1997 compared to $3.8 million for 1996, a 74.4% increase of $2.8 million.
The rise in total corporate selling, general and administrative expenses is
the result of increasing corporate staffing levels in our marketing, human
resource, finance, and operations departments to accommodate the addition of
affiliated dental practices. Additionally, resources have been added to respond
to the increasing needs of our affiliated dental practices for information
systems implementation, clinical management and mentoring programs, and to
appropriately develop our support infrastructure. At the same time, we seek to
maximize the effectiveness of corporate infrastructure costs. As a result,
corporate selling, general and administrative expenses as a percentage of net
revenues have steadily declined. Corporate selling, general and administrative
expenses for 1997 was 12.9% of net revenues as compared to 23.5% for 1996.
CORPORATE RESTRUCTURING AND MERGER COSTS.
During 1997, the Company recorded corporate restructuring and merger costs
associated with the business combination between Gentle Dental Service
Corporation and GMS Dental Group, Inc. consummated in November 1997. The
combination has been accounted for as a pooling-of-interests. As a result of the
business combination, we recorded expense of $1.8 million during the third
quarter of 1997. Of such expenses, $0.7 million relates to corporate
restructuring and merger costs consisting of investment banker fees, advisors
fees, investor relations expense, legal fees, accounting fees, printing costs,
and other costs. The remaining $1.1 million relates to our restructuring plan,
including charges for employee related costs and the redirection of certain
duplicative operations and systems costs.
DEPRECIATION AND AMORTIZATION.
Depreciation and amortization was $2.0 million for 1997 compared to
$1.0 million for 1996, representing a 96.4% increase of $1.0 million. This
increase is primarily due to the addition of property and equipment, intangible
costs assigned to management service agreements and goodwill associated with the
addition of affiliated dental practices during 1997 and 1996.
INTEREST EXPENSE.
Interest expense was $0.4 million for 1997 compared to $0.7 million for 1996
representing a 46.4% decrease of $0.3 million. This decrease in interest expense
resulted from our repayment of $4.4 million under various bank loan arrangements
with the proceeds from the initial public offering of Gentle Dental Service
Corporation, partly offset by additional debt incurred to complete the addition
of affiliated dental practices in 1997.
PROVISION FOR INCOME TAXES.
In 1997, we recorded a net tax expense of $0.2 million on a net loss of
$2.6 million. We incurred income tax expense due to earnings in certain states,
and did not recognize the benefit of net operating loss carryforwards due to the
uncertainty of our ability to utilize those carryforwards. Furthermore, we
incurred certain merger related expenses which are not deductible for income tax
purposes. In 1996, we recorded a tax benefit related to our net operating loss.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, cash and cash equivalents were $0.8 million,
representing a $7.5 million decrease in cash and cash equivalents of
$8.3 million available at December 31, 1998. This decline is due to the
amendment to our credit facility, which allowed us to consolidate cash balances
between subsidiaries
72
<PAGE>
and pay down the credit facility balances. Our negative working capital at
September 30, 1999 of $1.9 million represents a decrease from working capital of
$6.7 million at December 31, 1998. This decrease in working capital is primarily
attributable to acquisition earn-out and merger and restructure payables and
accruals of approximately $2.9 million (excluding amounts paid during 1999),
payment of earn-out consideration, and utilization of cash to pay down
borrowings under our credit facility.
Net cash provided by operations (which includes merger and restructure
expenses) amounted to $8.1 million for the nine months ended September 30, 1999
compared to net cash provided by operations of $0.9 million for the nine months
ended September 30, 1998. The increase of net cash provided by operations during
the nine months ended September 30, 1999 is attributed to improvements in our
results of operations and increases in accrued payroll and payroll related
costs. Excluding merger and restructure costs, operating income for the nine
months ended September 30, 1999 and 1998 was $16.2 million and $6.1 million,
respectively. As a result, excluding merger and restructure costs, net cash
provided by operations amounted to $14.2 million for the nine months ended
September 30, 1999 compared to $2.1 million for the nine months ended
September 30, 1998.
Net cash used in investing activities was $44.9 million for the nine months
ended September 30, 1999. Included in the investing activities is cash paid for
affiliated dental practices of $30.6 million, and $5.8 million paid for property
and equipment. These uses of cash were primarily funded through borrowing under
our existing credit facility. As a result, cash provided from the credit
facility amounted to $34.3 million for the nine months ended September 30, 1999.
During the nine months ended September 30, 1999, we acquired substantially
all of the assets of 41 affiliated dental practice clinical locations, including
cash, accounts receivable, supplies and fixed assets. The addition of these
affiliated dental practices has been accounted for using the purchase method of
accounting. The aggregate dental practice acquisition purchase price recorded
during the nine months ended September 30, 1999, representing the fair value of
the assets acquired, including intangible assets, was $48.5 million.
Approximately $39.1 million of the purchase price has been allocated to
intangible assets. The total purchase price included $31.9 million in cash,
$11.3 million in liabilities incurred and assumed, and $5.3 million in accrued
earn-out from transactions completed in current and prior periods.
In connection with the addition of certain affiliated dental practices, we
have agreed to pay to the selling parties possible future consideration in the
form of cash and InterDent Common Stock. The amount of future consideration
payable by us under earn-outs is generally computed based upon financial
performance of the affiliated dental practices during certain specified periods.
We accrue for earn-out payments with respect to affiliated dental practice
acquisitions when such amounts are probable and reasonably estimable. During the
nine months ended September 30, 1999, we paid $5.0 million in additional
earn-out consideration.
As of September 30, 1999, we have accrued $7.0 million for future earn-out
payments, of which $0.3 million is included in additional paid-in capital for
anticipated stock to be issued and the remaining anticipated cash payments are
included in other current liabilities. For those acquisitions with earn-out
provisions, we estimate the total maximum earn-out that could be paid, including
amounts already accrued, is between $20 million and $30 million from
January 1999 to December 2002, of which the majority is expected to be paid in
cash. In future years, such additional earn-out consideration could result in
additional amortization of $0.4 million to $0.8 million annually.
We previously have made loans to various unconsolidated affiliated dental
practices in connection with their acquisition of assets of dental practices and
have made working capital advances to certain unconsolidated affiliated dental
practices 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. The owners of our affiliated dental practices generally personally
guarantee both the loans and advances.
73
<PAGE>
We currently have a credit facility providing a maximum credit line of
$90 million. The credit facility has a revolving feature expiring 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 the Company's option, at varying margins over
LIBOR (2.25%-3.0%) or the prime rate (0.5%-1.25%), based on the level of
InterDent's leverage ratio. Our credit facility requires us to pay an unused
commitment fee (depending on amounts of unused available credit). This fee is
based on the average daily amount by which the bank commitment under the credit
facility exceeds the aggregate amount of all loans then outstanding.
Our credit facility contains several covenants including restrictions on our
ability to incur indebtedness; repurchase, or make dividends with respect to,
our capital stock; and requirements relating to maintenance of a specified net
worth and compliance with specified financial ratios. In addition, the credit
facility requires us to notify certain lenders prior to making any acquisitions
and to obtain the consent of the lenders prior to making acquisitions with
purchase prices exceeding a certain amount of cash and purchase price. Our
obligations under the credit facility and our subsidiaries under the guarantees
are secured by a security interest in certain equipment, fixtures, inventories,
receivables, subsidiary stock, certain debt instruments, accounts and general
intangibles of each of such entities.
We have outstanding $30 million of 7% Subordinated Convertible Notes and
$12 million of Preferred Stock. The 7% Subordinated Convertible Notes have
eight-year terms and are convertible into shares of our Common Stock at $9.21
for each share of Common Stock issuable upon conversion of outstanding principal
and accrued but unpaid interest on such 7% Subordinated Convertible Notes. If
certain events of default occur, the 7% Subordinated Convertible Notes then
outstanding will automatically convert into shares of our Series B Preferred
Stock at a rate of one share of Series B Preferred Stock for each $1,000 in
outstanding principal and accrued but unpaid interest on the 7% Subordinated
Convertible Notes, subject to adjustment for stock splits, reverse splits, stock
dividends, reorganizations and the like. The 7% Subordinated Convertible Notes
and all outstanding shares of our Preferred Stock shall be automatically
converted into our Common Stock (or, in the case of Series A Preferred Stock and
Series C Preferred Stock, redeemed at nominal cost) if the rolling 21-day
average closing market price of our Common Stock on 20 out of any 30 consecutive
trading days is more than $16.85 on or prior to May 18, 2000, or more than
$17.98 at any time thereafter.
We are authorized to issue 30,000,000 shares of Preferred Stock. Presently
authorized series of our Preferred Stock include the following series:
- Series A--100 shares authorized, issued and outstanding;
- Series B--70,000 shares authorized, zero issued or outstanding;
- Series C--100 shares authorized, zero shares issued or outstanding; and
- Series D--2,000,000 shares authorized, 1,628,663 shares are issued and
outstanding.
The shares of Series B Preferred Stock are convertible into shares of our Common
Stock at the rate of 108.58 shares of Common Stock for each share of Series B
Preferred Stock (assuming there are no declared but unpaid dividends on the
Series B Preferred Stock), and the shares of Series D Preferred Stock are
convertible into shares of our Common Stock on a share for share basis (assuming
there are no declared but unpaid dividends on the Series D Preferred Stock), in
each case subject to adjustment for stock splits, reverse splits, stock
dividends, reorganizations and similar events. The Series A Preferred Stock and
Series C Preferred Stock are not convertible.
A total of 254,901 and 339,246 outstanding shares of InterDent Common Stock
issued at a price of $0.45 and $0.225 per share, respectively, are subject to
repurchase as a result of a subsidiary's failure to achieve certain specified
performance targets through December 31, 1998. It is anticipated that these
shares will be repurchased in the future.
74
<PAGE>
On October 22, 1999, we announced the signing of the merger agreement. Under
the terms of the agreement, our stockholders (other than certain members of our
management) at the date of the transaction will receive $9.50 per share in cash.
Completion of the transaction is subject to stockholder approval, receipt of
regulatory approvals, and completion of debt financing required to fund the
transaction, valued at $325 million. We currently anticipate completing the
transaction in the first calendar quarter of 2000.
We believe that proceeds from our existing credit facility and cash flow
from operations will be sufficient to fund our operations through the next
fiscal year. We also believe that such funds will be sufficient to complete a
number of other future dental practice affiliations and any possible future
consideration to be paid. However, to execute our long term business strategy,
we 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 or will be available on terms acceptable to
InterDent.
75
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Pro Forma Unaudited Financial Statements.................... F-2
Pro Forma Balance Sheet as of September 30, 1999............ F-3
Pro Forma Statement of Operations for the year ended
December 31, 1998......................................... F-4
Pro Forma Statements of Operations for the nine months ended
September 30, 1999 and 1998............................... F-5
Independent Auditors' Reports............................... F-7
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-10
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997
and 1998.................................................. F-12
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1997, and 1998............. F-13
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997
and 1998.................................................. F-16
Notes to Consolidated Financial Statements.................. F-18
Condensed Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998................................ F-44
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and 1998... F-45
Condensed Consolidated Statements of Cash Flows for the nine
months September 30, 1999 and 1998........................ F-46
Notes to Condensed Consolidated Financial Statements........ F-47
</TABLE>
F-1
<PAGE>
UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS
The Unaudited Pro Forma Condensed Balance Sheet as of September 30, 1999 and the
Pro Forma Statements of Operations for the nine months ended September 30, 1998
and 1999 and the year ended December 31, 1998 have been prepared by InterDent,
Inc. management. The Pro Forma Condensed Financial Statements assume the
completion of the merger transaction and related financing as described in this
proxy statement and reflect certain assumptions and adjustments as described in
the notes to the pro forma financial statements.
The Pro Forma Statements of Operations for the nine months ended September 30,
1998 and 1999 and the year ended December 31, 1998 were prepared as if we
completed the proposed merger as of January 1, 1998. The Pro Forma Condensed
Balance Sheet reflects the merger transaction as if it had occurred as of
September 30, 1999. The following pro forma financial statements are unaudited
and were prepared by management on the same basis as the financial statements
included elsewhere herein and, in the opinion of management, include all
adjustments necessary to present fairly the information set forth herein.
The Pro Forma Financial Statements do not purport to be indicative of the
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>
INTERDENT, INC.
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------
REPORTED ADJUSTMENTS 1999
-------- ----------- --------
<S> <C> <C> <C>
Current assets........................................ $ 32,940 $ 168,217 (1) $ 34,122
147,407 (2)
(250,316)(5)
(64,126)(5)
Property and equipment................................ 28,010 28,010
Intangible assets..................................... 140,495 140,495
(2,159 )(4)
Other assets.......................................... 16,126 12,593 (3)(4) 26,560
-------- --------- --------
Total assets.......................................... $217,571 $ 11,616 $229,187
======== ========= ========
Current liabilities................................... $ 34,818 $ 34,818
Other liabilities..................................... 3,199 3,199
Long-term debt, excluding current maturities.......... 103,855 $ 160,000 (2) 169,729
(94,126)(5)
Redeemable common stock............................... 1,794 (1,794)(5) --
(2,159)(4)
168,217 (1)
Shareholders' equity.................................. 73,905 (218,522)(5) 21,441
-------- --------- --------
Total liabilities, redeemable common and shareholders'
equity.............................................. $217,571 $ 11,616 $229,187
======== ========= ========
</TABLE>
F-3
<PAGE>
INTERDENT, INC.
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------
REPORTED ADJUSTMENTS 1998
-------- ----------- --------
<S> <C> <C> <C>
Dental group net patient service revenue............... $103,136 $103,136
Net management fees.................................... 30,827 30,827
Consulting and licensing fees.......................... 695 695
-------- ------- --------
Net revenues........................................... 134,658 -- 134,658
Costs and expenses
Clinical salaries and benefits....................... 50,894 50,894
Practice nonclinical salaries and benefits........... 19,418 19,418
Dental supplies and lab expenses..................... 17,267 17,267
Practice occupancy expenses.......................... 8,884 8,884
Practice selling, general and administrative
expenses........................................... 14,234 14,234
Corporate selling, general and administrative
expenses........................................... 8,613 8,613
Corporate restructure and merger costs............... 3,994 3,994
Depreciation and amortization........................ 5,361 5,361
-------- ------- --------
Total operating expenses........................... 128,665 -- 128,665
-------- ------- --------
Operating income................................... 5,993 -- 5,993
-------- ------- --------
2,219 (3)(4)
Nonoperating income (expense).......................... (2,754)(6)
Interest expense, net................................ (2,407) 20,000 (2) (21,872)
Other income (expense)............................... (14) 2,547 (7) (2,561)
-------- ------- --------
Nonoperating (expense), net........................ (2,421) 22,012 (24,433)
-------- ------- --------
Income (loss) before income taxes...................... 3,572 22,012 (18,440)
Provision for income taxes............................. 2,302 (2,252)(8) 50
-------- ------- --------
Net income (loss)...................................... 1,270 19,760 (18,490)
Accretion of redeemable common stock................... (22) (22)(9) --
Dividends on preferred stock........................... 20,002 (1) (20,002)
-------- ------- --------
Net income (loss) attributable to common stock....... $ 1,248 $39,740 $(38,492)
======== ======= ========
</TABLE>
F-4
<PAGE>
INTERDENT, INC.
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
REPORTED ADJUSTMENTS 1999 REPORTED ADJUSTMENTS 1998
-------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Dental group net patient service
revenue......................... $134,487 $134,487 $67,534 $ 67,534
Net management fees............... 31,798 31,798 21,069 21,069
Consulting and licensing fees..... 752 752 466 466
-------- ------- -------- ------- ------- --------
Net revenues...................... 167,037 -- 167,037 89,069 -- 89,069
Costs and expenses
Clinical salaries and
benefits...................... 64,362 64,362 33,487 33,487
Practice nonclinical salaries
and benefits.................. 22,744 22,744 13,145 13,145
Dental supplies and lab
expenses...................... 20,739 20,739 11,570 11,570
Practice occupancy expenses..... 10,091 10,091 6,007 6,007
Practice selling, general and
administrative expenses....... 17,339 17,339 9,133 9,133
Corporate selling, general and
administrative expenses....... 8,530 8,530 6,173 6,173
Corporate restructure and merger
costs......................... 6,130 6,130 -- --
Depreciation and amortization... 6,994 6,994 3,503 3,503
-------- ------- -------- ------- ------- --------
Total operating expenses...... 156,929 -- 156,929 83,018 -- 83,018
-------- ------- -------- ------- ------- --------
Operating income.............. 10,108 -- 10,108 6,051 -- 6,051
-------- ------- -------- ------- ------- --------
1,664 (3)(4) 1,664 (3)(4)
Nonoperating income (expense)..... (4,631)(6) (1,767)(6)
Interest expense, net........... (4,619) 15,000 (2) (16,652) (1,309) 15,000 (2) (16,206)
Other income (expense).......... 1 1,910 (7) (1,909) (11) 1,910 (7) (1,921)
-------- ------- -------- ------- ------- --------
Nonoperating (expense), net... (4,618) 13,943 (18,561) (1,320) 16,807 (18,127)
-------- ------- -------- ------- ------- --------
Income (loss) before income
taxes........................... 5,490 13,943 (8,453) 4,731 16,807 (12,076)
Provision for income taxes........ 1,867 (1,791)(8) 76 1,614 (1,569)(8) 45
-------- ------- -------- ------- ------- --------
Net income (loss)................. 3,623 12,152 (8,529) 3,117 15,238 (12,121)
Accretion of redeemable common
stock........................... (9) (9)(9) -- (15) (15)(9) --
Dividends on preferred stock...... 14,863 (1) (14,863) 14,863 (1) (14,863)
-------- ------- -------- ------- ------- --------
Net income (loss) attributable
to common stock............... $ 3,614 $27,006 $(23,292) $ 3,102 $30,086 $(26,984)
======== ======= ======== ======= ======= ========
</TABLE>
F-5
<PAGE>
INTERDENT, INC.
NOTES TO PRO FORMA UNAUDITED FINANCIAL STATEMENTS
The Unaudited Pro Forma Balance Sheet as of September 30, 1999 and Pro Forma
Statements of Operations for the nine months ended September 30, 1998 and 1999
and the year ended December 31, 1998 have been prepared by InterDent, Inc.
management. The Pro Forma Consolidated Financial Statements are based on certain
assumptions and adjustments described below.
The Pro Forma Consolidated Statements of Operations for the nine months
ended September 30, 1998 and 1999 and the Pro Forma Statement of Operations for
the year ended December 31, 1998 were prepared as if the proposed merger had
been completed at January 1, 1998. The Pro Forma Condensed Balance Sheet
reflects the merger transaction as if it had occurred as of September 30, 1999.
The Pro Forma Statements of Operations and Balance Sheet contain the following
assumptions and adjustments (amounts in 000's):
(1) The sale of the following equity securities to new investors:
a--Common stock issued for $35,374
b--Senior preferred stock issued for $72,000 generating dividends at
14% annually, compounded quarterly
c--Junior preferred stock issued for $67,000 generating dividends at
14% annually
d--Issuance costs of $6,157 were netted with the proceeds.
(2) Issuance of $160,000 in subordinated debentures with an interest rate
payable of 12.5% annually.
As further described in notes 3 and 4, issuance costs of $12,593 are
netted against the proceeds of debt issued.
(3) Fees and expenses of $2,100 incurred to secure a senior line of
credit for $100,000. Amortization of the fees will occur over 5 years. An
annual fee of .75% of the unused balance will be paid. These pro forma
financial statements assume that the line of credit will be unused.
(4) Additional fees and expenses of $16,650 incurred to complete the
merger includes the cost of issuing equity and debt. The fees related to the
previous debt of $2,159 will be written off, however this expense has not
been reflected in the pro forma statements of operations since the charge is
non-recurring. Amortization of the new fees will be over 10 years for the
subordinated debt. The subordinated debt fees assumed to be capitalized are
$10,493.
(5) The Company purchases existing equity securities for $250,316 which
includes the existing common stock, redeemable common stock ($1,794),
preferred stock ($12,090), stock options ($6,800), warrants ($1,927), and
senior subordinated debt converted to common stock ($30,000) and repays the
existing balance in the credit facility ($64,126).
(6) Elimination of the interest from the existing credit facility and
the existing subordinated debenture interest of $1,767, $4,631, and $2,754
for the nine months ended September 30, 1998 and 1999, and the year ended
December 31, 1998 respectively.
(7) An annual management fee will be paid based on 1.6% of debt and
equity securities owned by Leonard Green & Partners, CB Capital Investors,
LP and Sprout Capital VII and related entities.
(8) The pro forma provision for income tax reflects the minimum tax for
the Company based on losses generated in the periods presented.
(9) Elimination of accretion of redeemable common stock.
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Interdent, Inc.
We have audited the accompanying consolidated balance sheets of
Interdent, Inc. and subsidiaries as of December 31, 1997 and 1998 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
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 audits. We did not audit the financial
statements of Dental Care Alliance, Inc. and subsidiaries, which financial
statements reflect total assets constituting 39% and 25% as of December 31, 1997
and 1998, respectively, and total revenues constituting 10%, 15% and 22% for
each of the years in the three-year period ended December 31, 1998,
respectively, of the related consolidated totals. Those financial statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Dental Care
Alliance, Inc. and subsidiaries, is based solely on the report of the other
auditors. Separate financial statements of Gentle Dental Service Corporation and
subsidiaries also included in the 1996 consolidated financial statements were
audited by other auditors whose report dated February 28, 1997, expressed an
unqualified opinion on those financial statements. The contribution of Gentle
Dental Service Corporation and subsidiaries to total revenues and net loss
amounted to 66% and 66% of the respective totals for 1996.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Interdent, Inc. and subsidiaries as
of December 31, 1997 and 1998, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
Orange County, California
May 27, 1999
F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Gentle Dental Service Corporation:
In our opinion, the 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 results of operations of
Gentle Dental Service Corporation and its cash flows for the year ended December
31, 1996, 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/ PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
February 28, 1997
F-8
<PAGE>
REPORT OF INDEPENDENT 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 25, 1999
F-9
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
ASSETS (NOTE 7)
Current assets:
Cash and cash equivalents................................. $20,670 $ 8,244
Accounts receivable, net of allowances of $4,159 and
$6,855 in 1997 and 1998, respectively................... 6,395 10,616
Management fee receivables................................ 2,645 4,536
Current portion of notes and advances receivable from
professional associations, net.......................... 567 1,157
Supplies inventory........................................ 1,238 2,887
Prepaid expenses and other current assets................. 1,851 3,164
------- --------
Total current assets.................................. 33,366 30,604
Property and equipment, net (note 4)........................ 11,207 21,379
Intangible assets, net (note 5)............................. 27,584 105,111
Notes and advances receivable from professional
associations, net of current portion...................... 314 4,062
Other assets................................................ 501 3,978
------- --------
Total assets.......................................... $72,972 $165,134
======= ========
LIABILITIES, REDEEMABLE COMMON
STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,090 $ 4,223
Accrued payroll and payroll related costs................. 2,149 4,862
Other current liabilities (note 6)........................ 4,690 10,809
Current portion of long-term debt and capital lease
obligations (notes 7 and 14)............................ 846 4,001
------- --------
Total current liabilities............................. 10,775 23,895
Long-term liabilities:
Obligations under capital lease, net of current portion
(note 14)............................................... 833 1,243
Long-term debt, net of current portion (note 7)........... 14,407 35,854
Convertible senior subordinated debt...................... -- 30,000
Deferred income taxes..................................... 773 2,914
Other long-term liabilities............................... 115 136
------- --------
Total long-term liabilities........................... 16,128 70,147
------- --------
Total liabilities..................................... 26,903 94,042
======= ========
</TABLE>
F-10
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Redeemable common stock, no par value, 183,686 and 180,712
shares issued and outstanding in 1997 and 1998,
respectively (note 9)..................................... $ 2,130 $ 2,102
Shareholders' equity (notes 8 and 10):
Preferred stock, 30,000,000 shares authorized:
Preferred stock--Series A, no par value, 100 shares
authorized; zero and 100 shares issued and outstanding
in 1997 and 1998, respectively........................ -- 1
Convertible preferred stock--Series B, no par value,
70,000 shares authorized, zero shares issued and
outstanding in 1997 and 1998, respectively............ -- --
Preferred stock--Series C, no par value, 100 shares
authorized; zero shares issued and outstanding in 1997
and 1998, respectively................................ -- --
Convertible preferred stock--Series D, no par value,
2,000,000 shares authorized; zero and 1,628,663 shares
issued and outstanding in 1997 and 1998,
respectively.......................................... -- 12,089
Common stock, $0.001 par value, 50,000,000 authorized,
19,183,540 and 20,584,416 shares issued and outstanding
in 1997 and 1998, respectively.......................... 19 21
Additional paid-in capital................................ 49,399 61,129
Shareholder notes receivable.............................. (577) (596)
Accumulated deficit....................................... (4,902) (3,654)
------- --------
Total shareholders' equity............................ 43,939 68,990
Commitments and contingencies (notes 3 and 14)
------- --------
Total liabilities, redeemable common stock and
shareholders' equity................................ $72,972 $165,134
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Dental practice net patient service revenue................. $ 3,701 $29,327 $103,136
Net management fees......................................... 12,002 21,664 30,827
Licensing and other fees.................................... 348 291 695
------- ------- --------
Total revenues........................................ 16,051 51,282 134,658
------- ------- --------
Costs and expenses:
Clinical salaries and benefits and provider costs......... 1,605 14,712 50,894
Practice nonclinical salaries and benefits................ 4,391 9,683 19,418
Dental supplies and lab expenses.......................... 3,008 7,892 17,267
Practice occupancy expenses............................... 1,670 4,525 8,884
Practice selling, general and administrative expenses..... 1,900 6,178 14,234
Corporate selling, general and administrative expenses.... 3,779 6,592 8,613
Corporate restructure and merger costs.................... -- 1,809 3,994
Depreciation and amortization............................. 1,019 2,001 5,361
------- ------- --------
Total operating expenses.............................. 17,372 53,392 128,665
------- ------- --------
Operating income (loss)............................... (1,321) (2,110) 5,993
------- ------- --------
Nonoperating expense:
Interest expense, net..................................... (728) (390) (2,407)
Other expense, net........................................ (55) (74) (14)
------- ------- --------
Nonoperating expense, net............................. (783) (464) (2,421)
------- ------- --------
Income (loss) before income taxes........................... (2,104) (2,574) 3,572
Provision (benefit) for income taxes........................ (619) 187 2,302
------- ------- --------
Net income (loss)..................................... (1,485) (2,761) 1,270
Dividends on redeemable convertible preferred stock......... (246) (1,032) --
Accretion of redeemable common stock........................ (282) (34) (22)
------- ------- --------
Net income (loss) attributable to common stock........ $(2,013) $(3,827) $ 1,248
======= ======= ========
Net income (loss) per share attributable to common stock:
Basic..................................................... $ (0.25) $ (0.31) $ 0.06
Diluted................................................... (0.25) (0.31) 0.06
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL SHAREHOLDER RETAINED
PREFERRED COMMON PAID-IN NOTES EARNINGS
STOCK STOCK CAPITAL RECEIVABLE (DEFICIT) TOTAL
--------- -------- ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995................ $-- $ 8 $ 3,219 $ (40) $ 922 $ 4,109
Reclassification of members capital upon
C-Corporation election.................. -- -- 175 -- (175) --
Redeemable convertible preferred stock--
Series B initial issuance and issuance
costs................................... -- -- (1,266) -- -- (1,266)
Convertible preferred stock--Series A
issued for acquisitions................. 1 -- 295 -- -- 296
Convertible preferred stock--Series C
issued for acquisitions................. 1 -- 1,733 -- -- 1,734
Common stock issued in connection with:
Acquisitions............................ -- -- 99 -- -- 99
Other................................... -- -- 332 -- -- 332
Exchange for shareholder notes
receivable............................ -- -- 137 (136) -- 1
Stock warrants issued related to debt
financing............................. -- 1 309 -- -- 310
Common stock and options granted to
nonemployees.......................... -- -- 77 -- -- 77
Accretion of redeemable common stock...... -- -- (191) -- (91) (282)
Payments on shareholder notes
receivable.............................. -- -- -- 40 -- 40
Dividends on redeemable convertible
preferred stock......................... -- -- -- -- (246) (246)
Net loss.................................. -- -- -- -- (1,485) (1,485)
--- ------ ------- ------ -------- -------
Balance, December 31, 1996................ $ 2 $ 9 $ 4,919 $ (136) $ (1,075) $ 3,719
=== ====== ======= ====== ======== =======
</TABLE>
F-13
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL SHAREHOLDER
PREFERRED COMMON PAID-IN NOTES ACCUMULATED
STOCK STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
--------- -------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Convertible preferred stock--Series C
issued for acquisitions............... $-- $ -- $ 1,156 $ -- $ -- $ 1,156
Common stock issued in connection
with:................................. -- -- -- -- -- --
Acquisitions.......................... -- -- 475 -- -- 475
Initial public offerings, net of
issuance costs...................... -- 5 27,307 -- -- 27,312
Other................................. -- 1 676 -- -- 677
Stock subscription receivable......... -- -- -- (273) -- (273)
Employee purchase plan................ -- -- 17 -- -- 17
Pursuant to options for shareholder
notes receivable.................... -- -- 151 (150) -- 1
Exercise of stock options............. -- -- 520 -- -- 520
Stock options granted to nonemployees... -- -- 56 -- -- 56
Conversion of convertible preferred
stock--Series A, B and C into common
stock................................. (2) 3 12,173 -- -- 12,174
Adjustment to redemption value of
mandatorily redeemable preferred
stock................................. -- -- -- -- (11) (11)
Conversion of mandatorily redeemable
preferred stock....................... -- 1 1,784 -- 11 1,796
Accrued dividends on mandatorily
redeemable preferred stock............ -- -- -- -- (1,032) (1,032)
Accretion of redeemable common stock.... -- -- -- -- (34) (34)
Elimination of put rights on common
stock................................. -- -- (191) -- -- (191)
Interest accrued on shareholder notes
receivable............................ -- -- -- (18) -- (18)
Value of shares to be issued under
earn-outs............................. -- -- 356 -- -- 356
Net loss................................ -- -- -- -- (2,761) (2,761)
--- ------- ------- ------ ------- -------
Balance, December 31, 1997.............. $-- $ 19 $49,399 $ (577) $(4,902) $43,939
=== ======= ======= ====== ======= =======
</TABLE>
F-14
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL SHAREHOLDER
PREFERRED COMMON PAID-IN NOTES ACCUMULATED
STOCK STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
--------- -------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock--Series A issued for
private placement..................... $ 1 $ -- $ -- $ -- $ -- $ 1
Convertible preferred stock--Series D
issued for private placement, net of
issuance costs........................ 12,089 -- -- -- -- 12,089
Common stock issued in connection with:
Acquisitions.......................... -- 2 10,495 -- -- 10,497
Employee purchase plan................ -- -- 172 -- -- 172
Exercise of stock options............... -- -- 126 -- -- 126
Stock options granted to nonemployees... -- -- 196 -- -- 196
Accretion of redeemable common stock.... -- -- -- -- (22) (22)
Interest accrued on shareholder notes
receivable............................ -- -- -- (19) -- (19)
Issuance of common stock warrants for
financing............................. -- -- 92 -- -- 92
Value of shares to be issued under
earn-outs............................. -- -- 649 -- -- 649
Net income.............................. -- -- -- -- 1,270 1,270
------- ------- ------- ----- ------- -------
Balance, December 31, 1998.............. $12,090 $ 21 $61,129 $(596) $(3,654) $68,990
======= ======= ======= ===== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(1,485) $ (2,761) $ 1,270
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 1,019 2,001 5,361
Loss on disposal of assets.............................. 63 31 4
Loss on investment in joint venture..................... 95 135 4
Non-employee stock options granted and stock issued for
fees and compensation................................. 77 56 59
Interest accrued on shareholder notes receivable........ -- (18) (19)
Amortization of deferred financing costs................ 242 25 204
Deferred income taxes................................... (146) 91 169
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable, net................................ (1,144) (6) (614)
Management fee receivable from Professional
Associations.......................................... (916) (1,138) (3,610)
Supplies inventory...................................... 63 (399) (335)
Prepaid expenses and other current assets............... 52 (1,155) (661)
Other assets............................................ (161) 266 (922)
Accounts payable........................................ 803 354 (800)
Accrued payroll and payroll related costs............... 1,253 423 539
Other liabilities....................................... 74 1,699 1,686
------- -------- --------
Net cash provided by (used in) operating activities... (111) (396) 2,335
------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment........................ $ (877) $ (3,413) $ (8,348)
Net payments received (advances) on notes receivable from
Professional Associations............................... 3 (370) (336)
Cash paid for investment in joint venture................. (82) -- --
Advances to Professional Associations..................... (17) (467) (3,860)
Cash paid for acquisitions, including directs costs, net
of cash acquired........................................ (7,754) (10,729) (62,959)
------- -------- --------
Net cash used in investing activities................. (8,727) (14,979) (75,503)
Cash flows from financing activities:
Net proceeds (payments) on short-term borrowings.......... 1,048 (2,097) --
Net borrowings from credit facilities..................... -- 10,000 19,874
Proceeds from issuance of long-term debt.................. 584 327 31,545
Payments of long-term debt and obligations under capital
leases.................................................. (1,298) (3,617) (1,319)
Payments of deferred financing costs...................... (150) (30) (1,784)
Proceeds from issuance of common and preferred stock...... 11,946 28,490 15,265
Common and preferred stock issuance costs................. (500) (918) (2,818)
Payments on shareholder notes receivable.................. 40 -- --
Exercise of put rights.................................... (90) (103) (50)
Exercise of options....................................... -- 520 29
------- -------- --------
Net cash provided by financing activities............. 11,580 32,572 60,742
------- -------- --------
Increase (decrease) in cash and cash equivalents...... 2,742 17,197 (12,426)
Cash and cash equivalents, beginning of year................ 731 3,473 20,670
------- -------- --------
Cash and cash equivalents, end of year...................... $ 3,473 $ 20,670 $ 8,244
======= ======== ========
</TABLE>
F-16
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid (received) during period:
Interest................................................ $ 503 $ 654 $ 2,567
Income taxes............................................ (159) 128 1,899
Non cash transactions:
Purchase of property and equipment under capital leases... 825 278 --
Issuance of shareholder notes receivable.................. 136 150 --
Interest accrued on shareholders notes receivable......... -- 18 19
Accretion of redeemable common stock...................... 282 34 22
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 shares of common stock....................... -- 12,714 --
Conversion of mandatorily redeemable preferred stock into
shares of common stock.................................. -- 1,796 --
Warrants issued in connection with public and private
offerings............................................... -- 150 92
Effect of acquisition:
Liabilities assumed or issued........................... 2,921 8,887 16,353
Common and convertible preferred stock and warrants
issued................................................ 2,725 1,635 10,496
Value of shares to be issued under earn-out
agreements............................................ -- 356 649
Elimination of put rights on common stock................. -- 191 --
Elimination of minority interest.......................... 19 -- --
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) ORGANIZATION
InterDent, Inc. ("InterDent" or the "Company"), incorporated on October 13,
1998, is a Delaware corporation headquartered in El Segundo, California. The
Company is one of the largest providers of dental practice management services
to multi-specialty dental professional corporations and associations ("PAs") in
the United States. Each PA employs and directs the professional dental staff and
provides all of the clinical services to the patients. The Company provides
management services to dental practices in selected markets in California,
Florida, Georgia, Hawaii, Idaho, Indiana, Michigan, Nevada, Oregon, Pennsylvania
and Washington.
As part of a delivery network of multi-specialty dental care, the Company
provides management services to affiliated PAs under long-term management
service agreements. Under the terms of the management service agreements, the
Company bills and collects patient receivables and provides all administrative
support services to the PAs. The dentists employed through the Company'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. The
Company's practice management services facilitate the delivery of convenient,
high quality, comprehensive and affordable dental care to patients in a
comfortable environment. The Company seeks to build geographically dense dental
practice networks in selected markets through a combination of affiliating with
existing dental practices and/or selectively developing new offices.
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
On March 12, 1999, Gentle Dental Service Corporation ("GDSC") and Dental
Care Alliance, Inc. ("DCA") completed mergers in which each entity became a
wholly owned subsidiary of InterDent, Inc. a newly formed corporation. These
consolidated financial statements have been prepared following the
pooling-of-interest method of accounting and reflect the combined financial
position and operating results of GDSC and DCA (and certain PAs as discussed
below) for all periods presented.
The Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board reached a consensus on the accounting for transactions between
physician practice management companies and physician practices and the
financial reporting of such entities (EITF issue number 97-2). 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. All significant
intercompany transactions and accounts have been eliminated.
Corporate practice of medicine laws in the states in which Interdent
currently operates prohibit it from owning dental practices. In response to
these laws the Company has executed management services agreements ("MSAs") with
various PAs. Under those circumstances where the MSAs meet the criteria for
consolidation as outlined in EITF 97-2, all the accounts of those Pas are
included in the accompanying consolidated financial statements. Accordingly, the
consolidated statements of operations include the net patient revenues and
related expenses of these PAs.
F-18
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In instances where the MSAs have not met the criteria for consolidation, the
Company does not consolidate the accounts of the PAs. Accordingly, the
consolidated statements of operations exclude the net patient revenues and
expenses of these PAs. Rather, the consolidated statements of operations include
only the Company's net management fee revenues generated from those MSAs and the
Company's expenses associated with those MSAs.
DEPENDENCE ON PAS
The Company receives fees for services provided to the PAs under MSAs 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 offices
during the term of the MSAs is essential to the Company's long-term success.
NET REVENUES
Revenues consist primarily of PA net patient service revenue ("net patient
revenue") and Company net management fees. Net patient revenue represents the
consolidated revenue of the PAs 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 PAs on an agreed-upon percentage of the PAs net patient service
revenue under MSAs, net of provisions for contractual adjustments and doubtful
accounts.
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 PAs and are
recorded net of contractual adjustments and allowance for doubtful accounts.
Contractual allowances, included as a reduction of net receivables, represent an
estimate of the difference between the amount billed by the Company and the
amount which the patient, third party payor or others are contractually
obligated to pay the Company. A provision for doubtful accounts is provided
based upon expected collections and is included in practice selling, general and
administrative expenses.
RECEIVABLES FROM PAS
Management fee receivable represents amounts owed to the Company from
unconsolidated PAs related to revenue recorded in accordance with their MSAs and
is recorded based upon the net realizable value of patient accounts receivables
of the PAs. The Company reviews the collectibility of the patient accounts
receivables of the PAs and adjusts its management fee receivable accordingly.
F-19
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advances consist primarily of receivables from PAs due in connection with
working capital advances made to certain unconsolidated PAs. 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 on demand. All
advances and payables between PAs and the Company under common ownership have a
right of offset included in the agreement. The Company has established a reserve
for these advances of $86 and $149 as of December 31, 1997 and 1998,
respectively. Notes receivable from PAs relate to financing of certain medical
and non-medical capital additions made by certain unconsolidated PAs. Notes
receivables from PAs generally have terms of 2 to 10 years, bearing interest
with rates between 8 1/2% and 18 1/2%, and are secured by the assets of the PAs
and personally guaranteed by the PA owners.
Advance and note amounts to be collected within the next year are classified
as current assets in the accompanying consolidated balance sheets.
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 improvements are
capitalized.
Equipment held under capital leases is stated at the present value of
minimum lease payments at the inception of the lease. Leasehold improvements are
amortized over their estimated useful life or the remaining lease period,
whichever is less. Depreciation of property and equipment is recorded using the
straight-line method over the shorter of the related lease term or the estimated
useful lives, which are as follows:
<TABLE>
<CAPTION>
RANGE OF LIVES
(IN YEARS)
--------------
<S> <C>
Dental equipment............................................ 3-15
Computer equipment.......................................... 3
Furniture, fixtures, & equipment............................ 3-15
Leasehold improvements...................................... 3-20
Vehicles.................................................... 5
Buildings................................................... 25
</TABLE>
F-20
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, MSAs, and goodwill associated with dental practice
acquisitions. Intangibles relating to MSAs consist of the costs of purchasing
the rights to provide management support services to PAs over the initial
noncancelable terms of the related agreements, usually 25 to 40 years. Under
these agreements, the PAs have agreed to provide dental services on an exclusive
basis only through facilities provided by the Company, which is the exclusive
administrator of all non-dental aspects of the acquired PAs, 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, ranging from
5 years for other intangibles to 25 years for MSAs and goodwill.
LONG-LIVED ASSETS
The Company reviews its asset 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, 1997 and 1998.
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The Company estimates the fair value of its monetary assets and liabilities
based upon the existing interest rates related to such assets and liabilities,
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 and liabilities approximates
fair value as of December 31, 1997 and 1998.
USE OF ESTIMATES
In preparing the financial statements conforming to Generally Accepted
Accounting Principals ("GAAP"), we have made estimates and assumptions that
affect the following:
- Reported amounts of assets and liabilities at the date of the financial
statements;
- Disclosure of contingent assets and liabilities at the date of the
financial statements; and
- Reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
F-21
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) PER SHARE
The Company utilizes Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128"). In accordance with SFAS 128, the Company
presents "basic" earnings per share, which is net income divided by the average
weighted common shares outstanding during period, and "diluted" earnings per
share, which considers the impact of common share equivalents. Dilutive
potential common shares represent shares issuable using the treasury stock
method. Dilutive potential common shares comprising convertible preferred stock,
convertible subordinated debt, contingent shares, and the exercise of certain
options, warrants, and put rights have been excluded from the computation of
diluted loss per share for the years ended December 31, 1996 and 1997 as their
effect is anti-dilutive. Such excluded issuable shares were 131,033 and 589,242,
respectively, for the years ended December 31, 1996 and 1997.
The following table summarizes the computation of earnings (loss) per share:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) attributable to common stock--basic
and diluted.......................................... $ (2,013) $ (3,827) $ 1,248
========== =========== ===========
Basic shares reconciliation:
Weighted average common shares outstanding........... 8,101,573 12,258,393 20,087,462
Contingently repurchaseable common shares............ -- -- (570,890)
---------- ----------- -----------
Basic shares....................................... 8,101,573 12,258,393 19,516,572
---------- ----------- -----------
Convertible preferred stock.......................... -- -- 1,023,159
Warrants............................................. -- -- 108,888
Put rights........................................... -- -- 64,862
Contingent shares.................................... -- -- 68,329
Assumed conversion of options........................ -- -- 440,425
---------- ----------- -----------
Diluted shares..................................... 8,101,573 12,258,393 21,222,235
---------- ----------- -----------
Net income (loss) attributable to common stock:
Basic.............................................. $ (0.25) $ (0.31) $ 0.06
Diluted............................................ (0.25) (0.31) 0.06
========== =========== ===========
</TABLE>
COMPREHENSIVE INCOME
The Company adopted the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
income ("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses).
The adoption of SFAS 130 did not have an effect on the Company's financial
position or results of operations as the Company does not have components of
other comprehensive income.
F-22
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are accounted for under the asset and liability method in
accordance with Statement of Financial and Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS No. 109"). Upon its incorporation on
October 23, 1996, DCA, a wholly owned subsidiary of InterDent, Inc. terminated
its predecessor status as a Limited Liability Corporation and became subject to
income taxes.
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 123"). 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 ("APB 25"), Accounting for Stock Issued to Employees, and
disclose in the notes to 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 APB 25.
SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS"
131"). SFAS 131 supersedes SFAS 14, Financial Reporting for Segments of a
Business Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal reporting
that is used by management for making operating decisions and assessing the
performance as the source of the Company's reportable segments. The adoption of
SFAS 131 did not have an impact for the reporting and display of segment
information as each of the affiliated dental practices are considered to have
similar economic characteristics, as defined in the pronouncement, and therefore
are aggregated.
(3) BUSINESS COMBINATIONS, DENTAL PRACTICE AFFILIATIONS AND ACQUISITIONS
BUSINESS COMBINATIONS
On March 12, 1999, the Company completed mergers with GDSC and DCA through
the exchange of 1 share for each share of GDSC common stock and 1.67 shares for
each share of DCA common stock. In the completed combination, GDSC and DCA each
became a wholly-owned subsidiary of the Company. See note 15. The mergers have
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
F-23
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(3) BUSINESS COMBINATIONS, DENTAL PRACTICE AFFILIATIONS AND ACQUISITIONS
(CONTINUED)
assets. The related adjustments were not material to the financial statements.
The results of operations of GDSC and DCA for 1997 through the date of the
merger are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Dental practice net patient
service revenue:
GDSC.......................................... $ 3,701 $29,327 $103,136
DCA........................................... -- -- --
------- ------- --------
Total....................................... $ 3,701 $29,327 $103,136
======= ======= ========
Net management fees:
GDSC.......................................... $10,712 $14,076 $ 2,186
DCA........................................... 1,290 7,588 28,641
------- ------- --------
Total....................................... $12,002 $21,664 $ 30,827
======= ======= ========
Consulting and licensing fees:
GDSC.......................................... $ -- $ -- $ --
DCA........................................... 348 291 695
------- ------- --------
Total....................................... 348 291 695
======= ======= ========
Net income loss:
GDSC.......................................... $(1,687) $(3,187) $ (1,800)
DCA........................................... 202 420 3,098
Adjustments to conform accounting methods..... -- 6 (28)
------- ------- --------
Total....................................... $(1,485) $(2,761) $ 1,270
======= ======= ========
</TABLE>
In connection with the mergers, the Company recorded direct merger expenses of
$2,241 in the fourth quarter of 1998. These expenses consist primarily of
accounting, legal and other advisory fees. Also, the Company recorded a
restructuring charge in 1998 of $1,590 relating to severance packages. The
Company anticipates additional merger and restructure charges to be incurred
throughout 1999.
On November 4, 1997, GMS Dental Group, Inc. merged into GDSC. 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 GDSC. The
merger has been accounted for as a pooling of interest.
As a result of the merger, GDSC recorded direct merger expenses of $677.
These expenses consist primarily of accounting, legal and other advisory fees.
Also, GDSC recorded a restructuring charge of $1,295, of which $1,132 was
recorded in 1997 while an additional $163 was recorded when incurred in 1998.
The charge included $289 for employee related costs, $311 for facility
consolidation and related leasehold and fixed asset write-offs and $695 for the
redirection of certain duplicative operations and programs and other costs.
These charges were substantially completed in 1998 as the remaining obligation
related to the
F-24
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(3) BUSINESS COMBINATIONS, DENTAL PRACTICE AFFILIATIONS AND ACQUISITIONS
(CONTINUED)
restructuring charges was approximately $130 at December 31, 1998 and included
in other current liabilities in the accompanying financial statements.
DENTAL PRACTICE AFFILIATIONS AND ACQUISITIONS
During 1997, the Company entered into 11 MSAs representing 11 office
locations. The MSAs have not met the EITF consolidation requirements.
Accordingly, the consolidated statements of operations exclude the net patient
revenues and expenses of the PAs associated with these MSAs. Rather, the
consolidated statements of operations include only the management fees revenues
from those MSAs and the Company's expense associated with those MSAs.
In 1997, the Company also acquired substantially all of the assets of 15
dental office locations, including cash, accounts receivable, supplies and fixed
assets and entered into MSAs with the PAs that met the EITF consolidation
requirements. Accordingly, the consolidated statements of operations include the
net patient revenues and related expenses of the PAs.
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 (the "Merger") of Marketplace with and into Dental Care
Alliance of Florida, Inc. ("DCA Florida"), a wholly-owned subsidiary of the
Company. DCA Florida ("DCA") 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 DCA 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 133,600 shares of
unregistered common stock of the Company and an amount in cash of approximately
$500, which is included other current liabilities. Approximately $1,760 of the
purchase price has been allocated to intangible assets.
The total price for the fair value of the assets acquired, including
intangible assets was $21,251. Approximately $11,187 of the purchase price has
been allocated to intangible assets. The total purchase consideration included
$10,729 in cash, $1,635 in nonredeemable preferred and common stock, warrants,
and $8,827 in liabilities issued or assumed. Additional shares may be issued for
future earnouts based upon the financial performance of the PAs.
The Company and its related Washington and Oregon PAs entered into asset
purchase and management service agreements (collectively, the "Agreements") on
January 1, 1998. The new Agreement meet the criteria for consolidation of the PA
accounts with the Company for financial reporting purposes.
Under the terms of the Agreements, the Company acquired all of the fixed
assets and assumed certain liabilities of the PAs. In exchange, the Company paid
consideration of $1,674 in addition to the assumption of certain liabilities,
which was offset by the Company's $1,674 receivable from the PAs. In addition,
the Company will pay $575 in cash over 18 equal monthly installments and may pay
future consideration, to be determined upon the achievement of certain financial
results, as described in the Agreements.
F-25
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(3) BUSINESS COMBINATIONS, DENTAL PRACTICE AFFILIATIONS AND ACQUISITIONS
(CONTINUED)
During 1998, the Company entered into twenty-one MSAs representing 44 office
locations. The MSAs have not met the EITF consolidation requirements.
Accordingly, the consolidated statements of operations exclude the net patient
revenues and expenses of the PAs associated with these MSAs. Rather, the
consolidated statements of operations include only the management fees revenues
from those MSAs and the Company's expense associated with those MSAs.
The Company also acquired substantially all of the assets of 41 dental
office locations, including cash, accounts receivable, supplies and fixed assets
and entered into MSAs with the PAs that met the EITF consolidation requirements.
Accordingly, the consolidated statements of operations include the net patient
revenues and related expenses of these. Additionally, the Company acquired all
of the outstanding capital stock of the following entities:
- Capitol Dental Care, Inc., ("CDC") an Oregon corporation. CDC provides
capitated dental services under the Oregon Health Plan pursuant to a
contract with the State of Oregon Office of Medical Assistance Programs.
- Managed Dental Care of Oregon, Inc., ("MDCO"). MDCO is a dental care
entity that contracts with the Oregon Health Plan pursuant to a contract
with the State of Oregon Office of Medical Assistance Programs.
- Dedicated Dental Systems, Inc. ("Dedicated Dental"), a Bakersfield,
California company. Dedicated Dental owns and operates 11 staff model
dental offices pursuant to a license granted under the California
Knox-Keene Health Care Service Plan Act of 1975.
- Dental One Associates, Inc., a Georgia corporation ("Dental One").
The aggregate dental practice acquisition purchase price recorded by the
Company during the year ended December 31, 1998, representing the fair value of
the assets acquired in the above affiliations and earnout consideration accrued
or paid for transactions completed in current and prior periods was $90,457.
Approximately $80,837 of the purchase price has been allocated to intangible
assets. The total purchase consideration included $62,959 in cash, $10,496 in
common stock issued (1,264,361 shares), and $16,353 in liabilities incurred and
assumed. Additionally, an aggregate value of $649 shares have been earned under
earn-out agreements and additional amounts may be earned under earn-out
agreements.
In connection with certain completed affiliation transactions, the Company
has agreed to pay to the seller's possible future consideration in the form of
cash and Company capital stock. The amount of future consideration payable by
the Company under earn-outs is generally computed based upon financial
performance of the affiliated dental practices during certain specified periods.
The Company accrues for earn-out payments with respect to prior practice
acquisitions when such amounts are probable and reasonably estimable.
As of December 31, 1998, the Company had accrued $3,985 for future earnout
payments, of which $1,005 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
F-26
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(3) BUSINESS COMBINATIONS, DENTAL PRACTICE AFFILIATIONS AND ACQUISITIONS
(CONTINUED)
provisions, the Company estimates the total maximum earn-out that could be paid,
including amounts already accrued, is between $20 and $27 million from
January 1999 to December 2002, of which the majority is expected to be paid in
cash. In future years, such additional earn-out consideration could result in
additional amortization of $800 to $1,080 annually.
The above transactions 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 are being amortized
over the lesser of the term of the related management service agreements or
25 years using the straight-line method. The results of operations for these
practices have been included in the consolidated financial statements of the
Company since the dates of their affiliation.
The following unaudited pro forma information presents the condensed
consolidated results of operations as if the 1997 and 1998 affiliations and
acquisitions discussed above, and related financing activities had occurred as
of January 1, 1997. 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 1998
-------- -------- --------
<S> <C> <C> <C>
As Reported:
DP net patient service revenue.............................. $ 3,701 $ 29,327 $103,136
Net management licensing and other fees..................... 12,350 21,955 31,522
Net income (loss) attributable to common stock.............. (2,013) (3,827) 1,248
Net income (loss) per share attributed to common stock:
Diluted..................................................... $ (0.25) $ (0.31) $ 0.06
======= ======== ========
Pro forma:
DP net patient service revenue.............................. $31,006 $138,157 $145,387
Net management licensing and other fees..................... 15,991 15,638 32,674
Net income (loss)........................................... (1,080) 3,458 4,882
Net income (loss) per share attributed to common stock:
Diluted..................................................... $ (0.12) $ 0.19 $ 0.21
======= ======== ========
</TABLE>
Net income (loss) amounts reflected above include the effect of merger and
restructure costs of $1,809 and $3,994 during the years ended December 31, 1997
and 1998, respectively, as outlined in the business combination discussion
above.
F-27
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(4) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Dental equipment.......................................... $ 6,207 $11,876
Computer equipment........................................ 2,028 3,411
Furniture, fixtures and equipment......................... 1,278 3,075
Leasehold improvements.................................... 3,962 6,646
Vehicles.................................................. 46 70
Buildings................................................. 48 792
Land...................................................... 10 395
------- -------
Total property and equipment.......................... 13,579 26,265
Less accumulated depreciation and amortization............ (2,372) (4,886)
------- -------
$11,207 $21,379
======= =======
</TABLE>
(5) INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Management Services Agreements........................... $28,468 $ 70,581
Goodwill................................................. -- 38,166
Other.................................................... 127 205
------- --------
Total intangible assets.................................. 28,595 108,952
Less accumulated depreciation............................ (1,011) (3,841)
------- --------
$27,584 $105,111
======= ========
</TABLE>
(6) OTHER CURRENT LIABILITIES
Other current liabilities consists of the following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Accrued earn-outs.......................................... $ 386 $ 2,980
Merger and restructure costs............................... 1,266 2,212
Acquisition and affiliation obligations.................... 920 --
Other...................................................... 2,118 5,617
------ -------
$4,690 $10,809
====== =======
</TABLE>
F-28
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(7) DEBT
The Company has two credit facilities at December 31, 1998, providing for a
maximum borrowing of $60,000. One credit facility provides for a maximum
borrowing of $45,000. 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 (7.48% at December 31, 1998), at varying amounts
over LIBOR (2.25% - 3.00%) or the prime rate (0.50% - 1.25%), at the Company's
option, based on the level of their leverage ratio. The credit facility requires
the Company to pay an unused commitment fee in an amount ranging from 0.375% to
0.750% per annum of 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 restrictions on the
ability of the Company to incur indebtedness, repurchase of shares, pay
dividends without prior approval; and contains requirements relating to
maintenance of a specified net worth and compliance with specified financial
ratios. 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 acquisitions over a specified purchase price. 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.
In March 1998, the Company also executed an agreement for a $15,000 line of
credit (Revolving Note) with a financial institution. The Revolving Note is
subject to a fee for the unused portion of the line of credit of 0.25%. Certain
restrictive covenants, including debt liquidity ratios and interest, liability
and liquidity coverage, were included in the agreement and as of December 31,
1998, the Company was in compliance with such covenants. The Revolving Note
expires in May 1999, and the financial institution has provided notice of their
intention to renew for one additional year under similar terms. As such, these
amounts are included in the long-term portion of debt.
On June 3, 1998, the Company issued $30,000 of subordinated convertible
notes ("Notes"). The Notes have an eight-year term and bear interest at 7.0%.
See note 8 for discussion on the conversion of the Notes.
F-29
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(7) DEBT (CONTINUED)
Long term debt is summarized as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Credit facility, interest at 3.25% in excess of LIBOR rate,
terminated and repaid during 1998......................... $10,000 $ --
Credit facility, interest at 7.48% at December 31, 1998..... -- 23,518
Revolving note, interest at 1.75% over the Eurodollar rate
payable monthly........................................... -- 6,356
Senior subordinated note payable, face value of $2,083
discounted interest at 8%; due July 2002.................. 1,448 1,568
Subordinated note payable, interest at 8%, interest payable
annually through January 2002; due January 2002........... 696 696
Senior subordinated note payable, interest at 8%; due in
monthly installments of principal and interest of $14; due
July 2002................................................. 637 515
Senior subordinated note payable, face value of $500
discounted interest at 8%; due in July 1999............... 441 478
Note payable, interest at 9.375%; payable in monthly
installments of $4, secured by land and building; due
April 1999................................................ -- 381
Note payable to seller, interest at 8.5%, principal and
interest payable quarterly, maturing in March 2003,
secured by stock in subsidiary............................ -- 917
Various unsecured acquisition notes payable, due in monthly
and quarterly installments of principal and interest at
rates ranging from 8.25% to 10.0%; due through November
2003...................................................... 1,449 4,582
Notes payable, secured by underlying assets at specific
dental practices, interest at rates ranging from 2.65% to
11.9%, maturing through 2002.............................. 117 114
------- -------
14,788 39,125
Less current portion........................................ (381) (3,271)
------- -------
$14,407 $35,854
======= =======
</TABLE>
At December 31, 1998, the aggregate maturities of long-term debt for each of
the next five years are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 3,271
2000........................................................ 7,847
2001........................................................ 1,720
2002........................................................ 2,524
2003........................................................ 117
Thereafter.................................................. 23,646
-------
$39,125
=======
</TABLE>
F-30
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(8) SHAREHOLDERS' EQUITY
In 1997 GMS merged into GDSC. GMS had preferred stock outstanding consisting
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 GDSC common stock) of GMS common stock on November 4, 1997 prior to
the GMS merger. Upon closing of the merger between GMS and the GDSC, all
10,218,578 outstanding GMS common shares were converted into 4,548,161 shares of
GDSC's common stock. A reconciliation of the total shares of preferred and
common stock outstanding during the years ended December 31, 1996, 1997 and 1998
is as follows:
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
STOCK-- STOCK-- STOCK-- STOCK-- STOCK-- COMMON
SERIES A SERIES A SERIES C SERIES C SERIES D STOCK
----------- --------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995................. -- -- -- -- -- 7,698,134
Convertible preferred stock--Series A
issued for acquisitions.................. 395 -- -- -- -- --
Convertible preferred stock--Series C
issued for acquisitions.................. -- -- 1,777 -- -- --
Common stock issued in connection with:
Acquisitions............................... -- -- -- -- -- 226,452
Other...................................... -- -- -- -- -- 340,430
Pursuant to options for shareholder notes
receivable............................... -- -- -- -- -- 608,524
Exercise of stock options.................. -- -- -- -- -- 2,000
Repurchase of common stock................. -- -- -- -- -- (24,000)
Common stock granted to nonemployees....... -- -- -- -- -- 2,500
---- ------ ------ --------- --------- ----------
Balance, December 31, 1996................. 395 -- 1,777 -- -- 8,854,040
Convertible preferred stock--Series C
issued for acquisitions.................. -- -- 1,156 -- -- --
Common stock issued in connection with:
Acquisitions............................... -- -- -- -- -- 109,039
Initial public offering.................... -- -- -- -- -- 4,840,000
Employee purchase plan..................... -- -- -- -- -- 1,902
Other...................................... -- -- -- -- -- 133,600
Pursuant to options on shareholder notes
receivable............................... -- -- -- -- -- 333,816
Exercise of stock options.................. -- -- -- -- -- 434,063
Conversion of preferred stock.............. -- -- -- -- -- 1,092,778
Conversion of preferred stock--Series A, B
and C into common stock.................. (395) -- (2,933) -- -- 3,384,302
---- ------ ------ --------- --------- ----------
</TABLE>
F-31
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(8) SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
STOCK-- STOCK-- STOCK-- STOCK-- STOCK-- COMMON
SERIES A SERIES A SERIES C SERIES C SERIES D STOCK
----------- --------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997................. -- -- -- -- -- 19,183,540
Preferred stock--Series A issued for
private placement........................ -- 100 -- -- -- --
Preferred stock--Series C issued for
private placement, convert into common
stock.................................... -- -- -- -- -- 10
Convertible preferred stock--Series D for
private placement........................ -- -- -- -- 1,628,663 --
Common stock issued in connection with:
Acquisitions............................... -- -- -- -- -- 1,264,361
Employee purchase plan..................... -- -- -- -- -- 23,497
Other...................................... -- -- -- -- -- 89,323
Exercise of warrants....................... -- -- -- -- -- 1,961
Exercise of options........................ -- -- -- -- -- 21,734
---- ------ ------ --------- --------- ----------
Balance, December 31, 1998................. -- 100 -- -- 1,628,663 20,584,426
==== ====== ====== ========= ========= ==========
</TABLE>
COMMON STOCK
An aggregate of 608,524 shares of common stock were issued in 1996 at a
purchase price of $.225 per share. 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.
A total of 254,901 and 339,246 outstanding shares of the Company common
stock, issued at a price of $.45 and $.225 per share, respectively are subject
to repurchase at cost as a result of the Company's failure to achieve certain
specified performance targets through December 31, 1998. These shares are
expected to be repurchased in the future.
PREFERRED STOCK
The Board of Directors may issue preferred stock with preferences to be
determined at the time of issuance.
On June 3, 1998, the Company completed a $45,000 private placement,
consisting of $30,000 of subordinated notes and $15,000 of preferred stock. The
subordinated notes have eight year terms and are convertible into shares of the
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 Series B preferred stock
at a rate of one share of Series B preferred stock for each thousand dollars in
outstanding principal and accrued but unpaid interest on the subordinated notes,
subject to adjustment for
F-32
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(8) SHAREHOLDERS' EQUITY (CONTINUED)
stock splits, reverse splits, stock dividends, reorganizations and the like. The
subordinated notes and all outstanding shares of preferred stock shall be
automatically converted into common stock (or, in the case of Series A preferred
stock and Series C preferred stock, redeemed at nominal cost) if the rolling
21-day average closing market price of the common stock on 20 out of any 30
consecutive trading days is more than $15.73 on or prior to May 18, 1999, more
than $16.85 on or prior to May 18, 2000, or more than $17.98 at any time
thereafter.
The presently authorized Series of preferred stock include the following
series: 100 shares of Series A preferred stock, all of which is issued and
outstanding; 70,000 shares of Series B preferred stock, none of which is
presently outstanding but which will be issued automatically upon conversion of
the then outstanding subordinated notes; 100 shares of Series C preferred stock,
none of which is presently outstanding; and 2,000,000 shares of Series D
preferred stock of which 1,628,663 shares are issued and outstanding. The shares
of convertible Series B preferred stock are convertible into shares of common
stock at the rate of 108.58 shares of common stock for each share of Series B
preferred stock, and the shares of Series D preferred stock are convertible into
shares of 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 Series A and Series C preferred stock are not convertible.
STOCK WARRANTS
In May 1996 the Company issued warrants to purchase 4,333 shares of its
common stock at $7.50 per share to a lender in connection with a line of credit
agreement. Concurrently, 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. The line-of-credit is no longer available and has
been fully repaid. All stock warrants expire in May 2001 and no such stock
warrants have been exercised to date.
In connection with the Company's former $10,000 credit facility, warrants
were issued in 1996 entitling the bank to purchase 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.
On January 26, 1994 and October 25, 1996, the Company issued to one of its
officers warrants to purchase 136,172 shares of stock (at each grant date), with
an exercise price at the then fair market value (aggregate value of $148 and
$125 respectively) 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.
In connection with the GDSC'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. As of December 31,
1998, there were 145,875 of these warrants outstanding, which expire in
February 2002.
F-33
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(8) SHAREHOLDERS' EQUITY (CONTINUED)
In connection with the acquisition of the net assets of dental practices,
the Company issued warrants to purchase approximately 239,160 shares of common
stock ranging at a price from $7.86 to $9.44 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 was recorded as part of the
consideration for the acquisition.
In connection with the Company's $45,000 private placement, warrants were
issued in 1998 entitling the holder to purchase of 40,000 shares of the
Company's common stock at a price of $9.21 per share. The warrants estimated
fair market value of $92 is recorded as preferred stock issuance costs in the
accompanying financial statements. These warrants expire in 2005.
In connection with an exclusive corporate development advisory agreement,
the Company issued 5 year warrants to purchase up to 48,709 shares of the
Company's common stock at an exercise price of $7.12 per share. Also, the
Company issued 88,512 warrants to purchase the Company's common stock at an
exercise price of $1.04 per share. The warrants expire in 2002.
(9) REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
The following summary presents the changes in the redeemable preferred and
common stock:
<TABLE>
<CAPTION>
SHARES OF
MANDATORILY REDEEMABLE SHARES OF REDEEMABLE SHARES OF
REDEEMABLE PREFERRED REDEEMABLE PREFERRED REDEEMABLE REDEEMABLE
PREFERRED STOCK-- STOCK-- STOCK-- COMMON COMMON
STOCK SERIES B SERIES B SERIES B STOCK STOCK
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996..... 15,000 $1,402 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... (15,000) (1,402) (6,287,142) (12,175) -- --
------- ------ ---------- ------- -------- ------
Balance, December 31, 1997..... -- -- -- -- 183,686 2,130
Accretion of put rights........ -- -- -- -- -- 22
Exercise of put rights......... -- -- -- -- (2,974) (50)
------- ------ ---------- ------- -------- ------
Balance, December 31, 1998..... -- $ -- -- $ -- 180,712 $2,102
======= ====== ========== ======= ======== ======
</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 80,712 shares
of its common stock, at a redemption price
F-34
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(9) REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK (CONTINUED)
ranging from $13.38 to $19.62 per share. If all shareholders with such
outstanding put rights exercise their options, the Company would be required to
repurchase the above shares of common stock for $1,166. The redemption periods
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 6,616 shares of redeemable common stock
for $103 during 1997 and 2,974 shares for $50 during 1998.
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 three years in the period ended December 31, 1998. 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, 1997 and 1998 was $91, $34
and $22, respectively. Such common stock at December 31, 1998 is redeemable as
follows:
<TABLE>
<CAPTION>
SHARES AMOUNT PRICE RANGE
-------- -------- -------------------
<S> <C> <C> <C>
1999................. 22,754 $ 318 $ 13.38 - 18.16
2000................. 20,849 308 13.60 - 19.62
2001................. 29,681 438 13.60 - 18.80
2002................. 3,714 51 13.60
2003................. 3,714 51 13.60
------- ------
80,712 $1,166
======= ======
</TABLE>
PRIVATE PLACEMENT OF REDEEMABLE COMMON STOCK AND WARRANTS
In 1996, GDSC completed a private placement offering (the "Placement
Offering ") of 100,000 shares of GDSC's redeemable common stock which include
warrants to purchase 100,000 additional shares of GDSC's common stock at an
exercise price of $7.50 per share. The stock warrants expire on December 14,
2001; no stock warrants have been exercised to date. In connection with the
Placement Offering, the shareholder received certain put rights which are
exercisable after June 21, 2001 but not later than June 21, 2003 if GDSC 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 GDSC of at least $10,000. The
per share price applicable to the put rights is 20 times GDSC's average adjusted
net income per share for the two most recent fiscal years preceding the exercise
of the rights. As of December 31, 1998, GDSC has not recorded any accretion
related to the above put rights.
F-35
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(10) STOCK OPTIONS
Under GDSC's stock incentive plan and DCA's 1997 executive incentive
compensation plan and DCA's 1997 non-qualified stock option plan (collectively
the "Plans"), incentive stock options, non-statutory stock options, stock
appreciation rights or bonus rights, award of stock bonuses, and/or sale of
restricted stock of the Company have been and may be granted to employees and
non-employees. The Plans provide for the issuance of up to 3,127,000 shares of
Company common stock. The Company's Board of Directors administers the Plans.
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 Plans are generally subject to a three to five-year vesting schedule
from the date of grant and expire ten years from the original grant date.
Concurrent with its initial public offering, GDSC repriced all employee
stock options then 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. No compensation expense related to the repricing of the
employee stock options was recorded as the adjusted exercise price was not below
the fair value of the common stock as of the repricing date.
Prior to the merger of GDSC and GMS, GMS had two stock-based option plans
("Former Plans") which offered essentially the same awards and stock option
terms as the GDSC's stock incentive plan. Upon consummation of the merger of GMS
with GDSC, 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 GDSC share (and subsequently
Company share) and share price equivalent utilizing the same conversion ratio of
GMS common stock to GDSC 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, 1997 and 1998 was $77,
$56 and $59, respectively.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 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 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, 1997 and 1998. The options have been valued using the Black-Scholes
F-36
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(10) STOCK OPTIONS (CONTINUED)
pricing model as prescribed by SFAS 123. The following weighted average
assumptions have been used for grants of stock options:
<TABLE>
<CAPTION>
GDSC PLAN DCA PLAN
----------------------- -----------------------
<S> <C> <C>
Risk free interest rate................ 5.7% - 6.4% 4.6% - 5.8%
Expected dividend yield................ -- --
Expected lives......................... 5 - 6 years 3 - 4 years
Expected volatility.................... 60% - 74% 6% - 11%
</TABLE>
Options were assumed to be exercised over the expected lives for the purpose
of this valuation. Adjustments are made for options forfeited prior to vesting.
The total estimated value of options granted which would be amortized over the
vesting period of the options is $705, $1,262 and $4,047 for the years ended
December 31, 1996, 1997 and 1998, respectively. The options granted during 1996,
1997 and 1998 were valued at a per share amount ranging from $0.82 to $5.32.
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 income (loss) attributable to common stock:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
As reported....................................... $(2,013) $(3,827) $ 1,248
Pro forma......................................... (2,334) (4,623) (1,035)
======= ======= =======
</TABLE>
Pro forma net income (loss) per share attributable to common stock:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
As reported--basic................................... $(0.25) $(0.31) $ 0.06
Pro forma--basic..................................... (0.26) (0.35) (0.05)
As reported--diluted................................. (0.25) (0.31) 0.06
Pro forma--diluted................................... (0.26) (0.35) (0.05)
====== ====== ======
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosures for
1996, 1997 and 1998 are not likely to be representative of the effects on
reported net income (loss) and net income (loss) per common equivalent share for
future years, because options vest over several years and additional awards
generally
F-37
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(10) STOCK OPTIONS (CONTINUED)
are made each year. The following summary presents the options granted and
outstanding under the Plans and Former Plans and the 1997 Plans as of
December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------ WEIGHTED AVERAGE
EMPLOYEE NON-EMPLOYEE TOTAL EXERCISE PRICE
--------- ------------ --------- ----------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1995.............. 351,172 297,881 649,053 $2.98
Granted................................... 328,284 38,705 366,989 2.50
Exercised................................. (2,000) -- (2,000) --
Canceled.................................. (96,549) (5,833) (102,382) 8.19
--------- -------- --------- -----
Outstanding, December 31, 1996.............. 580,907 330,753 911,660 2.20
Granted................................... 849,009 208,280 1,057,289 4.25
Exercised................................. (626,260) (141,619) (767,879) 0.87
Canceled.................................. (142,100) (1,200) (143,300) 4.78
--------- -------- --------- -----
Outstanding, December 31, 1997.............. 661,556 396,214 1,057,770 5.22
Granted................................... 757,015 611,433 1,368,448 7.41
Exercised................................. (6,484) (103,762) (110,246) 1.10
Canceled.................................. (112,238) (69,955) (182,193) 6.60
--------- -------- --------- -----
Outstanding, December 31, 1998.............. 1,299,849 833,930 2,133,779 $6.81
========= ======== ========= =====
</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 Plans and Former Plans at
December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OPTIONS
-------------------------- CONTRACTUAL
EXERCISE PRICE OUTSTANDING EXERCISABLE LIFE REMAINING
- -------------- ----------- ----------- --------------
<S> <C> <C> <C>
$0.45-0.67 75,152 41,024 8.25 years
4.13-6.07 648,775 187,790 5.17
6.13-8.75 1,369,843 55,150 5.79
10.00 40,000 37,000 6.36
--------- ------- -----------
$ 6.81 2,133,779 320,964 5.77 years
========== ========= ======= ===========
</TABLE>
At December 31, 1997 there were a total of 1,057,770 shares outstanding of
which 192,287 shares were exercisable under the Plans. As of December 31, 1998,
there are 841,613 shares available for future option grants under the Plans.
(11) EMPLOYEE BENEFITS
The Company participates in two defined contribution retirement plans in
accordance with Section 401(k) of the Internal Revenue Code ("IRS"). The plans
cover substantially all employees of GDSC.
F-38
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(11) EMPLOYEE BENEFITS (CONTINUED)
Contributions to the plans by the Company are discretionary. There were no
Company contributions to the plans during the years ended December 31, 1996,
1997 and 1998. Effective December 31, 1998, one plan was terminated while the
other is currently frozen awaiting approval for termination from the IRS.
Effective January 1, 1999 a new plan was established in accordance with
Section 401(k) of the Internal Revenue Code. The assets of the terminated plans
are expected to be transferred into the new plan and/or into other qualified
individual investment plans.
(12) INCOME TAXES
Income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1996
------------------------------
CURRENT DEFERRED TOTAL
-------- -------- --------
<S> <C> <C> <C>
U.S. Federal........................................ $(158) $(406) $(564)
State and local..................................... (3) (52) (55)
----- ----- -----
$(161) $(458) $(619)
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------
CURRENT DEFERRED TOTAL
-------- -------- --------
<S> <C> <C> <C>
U.S. Federal......................................... $136 $(2) $134
State and local...................................... 59 (6) 53
---- --- ----
$195 $(8) $187
==== === ====
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------
CURRENT DEFERRED TOTAL
-------- -------- --------
<S> <C> <C> <C>
U.S. Federal....................................... $1,836 $62 $1,898
State and local.................................... 398 6 404
------ --- ------
$2,234 $68 $2,302
====== === ======
</TABLE>
The effective tax rate differed from the U.S. statutory Federal rate of 34%
due to the following:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
U.S. Federal taxes at statutory rate................. $(713) $(880) $1,215
Increase (decrease):
State income taxes, net of federal tax benefit..... (86) 27 178
Flow through entity income......................... (52) -- --
Valuation allowance for deferred tax assets........ 75 691 776
Bad debt and other reserves........................ -- 189 (125)
Non-deductible transaction costs................... -- -- 200
</TABLE>
F-39
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(12) INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Amortization of nondeductible goodwill and other
nondeductible items.............................. 163 85 19
Other.............................................. (6) 75 39
----- ----- ------
Income tax provision (benefit)............... $(619) $ 187 $2,302
===== ===== ======
</TABLE>
Through October 23, 1996, DCA consisted predominantly of a group of Limited
Liability Corporations and was not subject to direct income taxes during that
time period.
Deferred tax assets (liabilities) are comprised of the following components:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ 645 $ 846
Allowance for doubtful accounts........................... 1,697 1,423
Intangible assets, principally due to differences in
amortization and capitalized costs...................... 164 226
Accrued payroll and related costs......................... 85 85
Compensated absences, principally due to accrual for
financial reporting purposes............................ 146 246
Restructure and severance accrual......................... -- 832
Other accruals............................................ -- 315
Other..................................................... 38 195
------ -------
Total gross deferred tax assets..................... 2,775 4,168
Less valuation allowance.................................. (766) (1,542)
------ -------
Deferred tax assets, net of valuation allowance..... 2,009 2,626
------ -------
Deferred tax liabilities:
Accounts receivable....................................... (1,410) (1,038)
Property and equipment principally due to differences in
depreciation and capitalized costs...................... (521) (1,030)
Intangible assets, principally due to accrual for
financial reporting purposes............................ (777) (3,310)
Cash versus accrual reporting for tax purposes............ (38) (11)
Pre-acquisition payables.................................. -- (39)
Other..................................................... (2) (55)
------ -------
Deferred tax liabilities............................ (2,748) (5,483)
------ -------
Net deferred tax liability.......................... $ (739) $(2,857)
====== =======
Reconciliation of net deferred tax liability:
Deferred tax asset, current............................... $ 34 $ 57
Deferred tax liability, long-term......................... (773) (2,914)
------ -------
Net deferred tax liability.......................... $ (739) $(2,857)
</TABLE>
F-40
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(12) INCOME TAXES (CONTINUED)
At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $2,300 which are available to
offset future taxable income, if any, through 2018. In addition, the Company has
alternative minimum tax credit carryforwards of approximately $12 which are
available to reduce future regular income taxes, if any, over an indefinite
period. The Company also has certain state net operating loss carryforwards,
which are available to offset future taxable income.
In accordance with the Internal Revenue Code, the annual utilization of net
operating loss carryforwards and credits existing prior to a change in control
in the Company may be limited.
(13) MALPRACTICE INSURANCE
The Company, its affiliated dental practices, and associated 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.
(14) COMMITMENTS AND CONTINGENCIES
The Company has entered into a staff leasing agreement whereby certain
Company corporate employees and non-clinical facility employees are leased.
The Company has guaranteed a portion of the PAs debt. The guarantees relate
primarily to debt incurred related to the acquisition of dental practices and is
in addition to collateral already provided by the PA. As of December 31, 1998,
the amount of PA debt guaranteed by the Company is approximately $5,900.
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, 1997 and 1998 was $1,550, $3,130 and $7,317, respectively.
The future minimum lease payments under capital and noncancelable operating
leases with remaining terms of one or more years consist of the following at
December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
-------- ---------
<S> <C> <C>
1999...................................................... $ 926 $ 8,271
2000...................................................... 765 7,475
2001...................................................... 391 6,511
2002...................................................... 232 5,590
2003...................................................... 50 4,083
</TABLE>
F-41
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(14) COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
CAPITAL OPERATING
-------- ---------
<S> <C> <C>
Thereafter................................................ -- 11,582
------ -------
Total minimum lease obligations......................... 2,364 $43,512
=======
Less portion attributable to interest..................... (391)
======
Obligations under capital lease....................... 1,973
Less current portion...................................... 730
======
$1,243
======
</TABLE>
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.
(15) SUBSEQUENT EVENTS
In January 1999, the Company completed the acquisition of three PAs located
in Nevada and southern California, representing six clinical office locations.
The total assets acquired, including intangibles was $3,002. These affiliations
were accounted for using the purchase method of accounting and the related MSAs
have met the criteria for consolidation of the PAs operating activities. The
total purchase price was $4,476.
In January 1999, the Company executed a MSA with a dental practice in
Kissimmee, Florida. This MSA has not met the criteria for consolidation of the
PAs operating activities. The total purchase price was $27 and is being
accounting for using the purchase method of accounting.
In February 1999, the Company purchased tangible assets and executed MSAs
with seven dental practices in Michigan. These MSAs have not met the criteria
for consolidation of the PAs operating activities. The total purchase price was
$4,900 and is being accounting for using the purchase method of accounting.
On March 12, 1999, the Company completed the previously announced mergers
with Gentle Dental Service Corporation ("GDSC") and Dental Care Alliance, Inc.
("DCA"). In the completed combination, GDSC and DCA each became a wholly-owned
subsidiary of InterDent, Inc. ("InterDent"), a new Delaware corporation
headquartered in El Segundo, California. InterDent is traded on the Nasdaq
National Market under the trading symbol DENT.
In the mergers each share of DCA's 7,031,187 common stock was exchanged for
1.67 shares of InterDent Common Stock. Also, each share of GDSC's 9,178,602
total shares of outstanding common stock, including earn-out shares that were
earned but not yet issued, automatically converted into one share of common
stock of InterDent. Each 10 shares of GDSC's 100 outstanding shares of Preferred
F-42
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(15) SUBSEQUENT EVENTS (CONTINUED)
Stock--Series C automatically converted into one share of common stock of
InterDent. Also, each share of GDSC's 100 outstanding shares of Preferred
Stock--Series A and 1,628,663 outstanding shares of Convertible Preferred
Stock--Series D converted into one share of preferred stock of InterDent with
the same rights, preferences, and privileges as to InterDent as the share of
Preferred Stock had with respect to GDSC.
The mergers have 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. The related adjustments were not material to
the financial statements.
In April 1999, the Company completed the acquisition of two PAs,
representing three clinical office locations in Oregon and Florida. The purchase
price for these affiliations totaled $1,275. The total purchase price included
cash paid of $747 and liabilities issued or assumed of $528, plus contingent
payments to be made based on future performance. These affiliations were
accounted for using the purchase method of accounting.
In May 1999, the Company completed the acquisition of ten PAs, representing
eleven clinical office locations in northern California. The purchase price for
these affiliations totaled $9,300. The total purchase price included cash paid
of $8,500 and liabilities issued of $800, plus contingent payments to be made
based on future performance. These affiliations were accounted for using the
purchase method of accounting.
F-43
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 762 $ 8,244
Accounts receivable, net.................................. 16,852 10,616
Management fee receivables................................ 6,085 4,536
Current portion of notes and advances receivable from
professional associations, net.......................... 1,177 1,157
Supplies inventory........................................ 3,690 2,887
Prepaid and other current assets.......................... 4,374 3,164
-------- --------
Total current assets.................................. 32,940 30,604
-------- --------
Property and equipment, net................................. 28,010 21,379
Intangible assets, net...................................... 140,495 105,111
Notes and advances receivable from professional
associations, net of current portion...................... 11,329 4,062
Other assets................................................ 4,797 3,978
-------- --------
Total assets.......................................... $217,571 $165,134
======== ========
LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,603 $ 4,223
Accrued payroll and payroll related costs................. 8,351 4,862
Other current liabilities................................. 18,356 10,809
Current portion of long-term debt and capital lease
obligations............................................. 4,508 4,001
-------- --------
Total current liabilities............................. 34,818 23,895
-------- --------
Long-term liabilities:
Obligations under capital leases, net of current
portion................................................. 2,885 1,243
Long-term debt, net of current portion.................... 70,970 35,854
Convertible senior subordinated debt...................... 30,000 30,000
Deferred income taxes..................................... 2,955 2,914
Other long-term liabilities............................... 244 136
-------- --------
Total long-term liabilities........................... 107,054 70,147
-------- --------
Total liabilities..................................... 141,872 94,042
-------- --------
Redeemable common stock, no par value, 157,958 and 180,712
shares issued and outstanding in 1999 and 1998,
respectively.............................................. 1,794 2,102
-------- --------
Shareholders' equity:
Preferred stock, 30,000,000 shares authorized:
Preferred stock--Series A, no par value, 100 shares
authorized and outstanding............................. 1 1
Convertible Preferred stock--Series B, no par value,
70,000 shares authorized, zero shares issued and
outstanding............................................ -- --
Preferred stock--Series C, no par value, 100 shares
authorized, zero shares issued and outstanding......... -- --
Convertible Preferred stock--Series D, no par value,
2,000,000 shares authorized, 1,628,663 shares issued
and outstanding........................................ 12,089 12,089
Common stock, $0.001 par value, 50,000,000 shares
authorized, 20,937,920 and 20,584,416 shares issued and
outstanding in 1999 and 1998, respectively.............. 21 21
Additional paid-in capital................................ 62,445 61,129
Shareholder notes receivable.............................. (611) (596)
Accumulated deficit....................................... (40) (3,654)
-------- --------
Total shareholders' equity............................ 73,905 68,990
-------- --------
Total liabilities, redeemable common stock and
shareholders' equity................................. $217,571 $165,134
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-44
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Dental practice net patient service revenue............ $50,071 $29,031 $134,487 $67,534
Net management fees.................................... 10,297 8,332 31,798 21,069
Licensing and other fees............................... 228 171 752 466
------- ------- -------- -------
Net revenues................................... 60,596 37,534 167,037 89,069
Cost and expenses:
Clinical salaries and benefits....................... 23,523 14,162 64,362 33,487
Practice non-clinical salaries and benefits.......... 8,271 5,371 22,744 13,145
Dental supplies and lab expenses..................... 7,454 4,879 20,739 11,570
Practice occupancy expenses.......................... 3,779 2,467 10,091 6,007
Practice selling, general and administrative
expenses............................................. 5,924 3,683 17,339 9,133
Corporate selling, general and administrative
expenses............................................. 2,735 2,387 8,530 6,173
Corporate restructure and merger costs............... 1,101 -- 6,130 --
Depreciation and amortization........................ 2,645 1,575 6,994 3,503
------- ------- -------- -------
Operating income............................... 5,164 3,010 10,108 6,051
------- ------- -------- -------
Non-operating income (expense):
Interest expense, net................................ (1,859) (656) (4,619) (1,309)
Other income (expense), net.......................... 9 (4) 1 (11)
------- ------- -------- -------
Non-operating expense, net..................... (1,850) (660) (4,618) (1,320)
------- ------- -------- -------
Income before income taxes..................... 3,314 2,350 5,490 4,731
Provision for income taxes............................. 1,127 699 1,867 1,614
------- ------- -------- -------
Net income..................................... 2,187 1,651 3,623 3,117
Accretion of redeemable common stock................... (2) (3) (9) (15)
------- ------- -------- -------
Net income attributable to common stock........ $ 2,185 $ 1,648 $ 3,614 $ 3,102
======= ======= ======== =======
Income per share attributable to common stock--basic... $ 0.11 $ 0.08 $ 0.18 $ 0.16
======= ======= ======== =======
Income per share attributable to common
stock--diluted....................................... $ 0.10 $ 0.07 $ 0.16 $ 0.15
======= ======= ======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-45
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 3,623 $ 3,117
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 6,994 3,503
Loss on disposal of assets.............................. -- 4
Loss on investment in joint venture..................... -- 4
Non-employee stock options granted and stock issued for
fees and compensation.................................. 41 45
Interest accrued on shareholder notes receivables....... (15) (14)
Amortization of deferred financing costs................ 231 7
Deferred income taxes................................... 41 90
Changes in assets and liabilities, net of the effect of
acquisitions:
Accounts receivable, net................................ (3,032) 364
Management fee receivables from professional
associations........................................... (1,035) (3,075)
Supplies inventory...................................... (82) (87)
Prepaid expenses and other current assets............... (678) (1,230)
Other assets............................................ (316) (748)
Accounts payable........................................ (1,329) (838)
Accrued payroll and payroll related costs............... 2,603 702
Accrued merger and restructure.......................... (140) (1,199)
Other liabilities....................................... 1,183 251
------- -------
Net cash provided by operating activities....... 8,089 896
------- -------
Cash flows from investing activities:
Purchase of property and equipment........................ (5,830) (5,378)
Net payments received (advances) on notes receivable from
professional associations............................... 179 (365)
Advances to professional associations..................... (6,875) (2,532)
Cash paid for acquisitions, including direct costs, net of
cash acquired........................................... (31,263) (49,946)
Investment in joint venture............................... (1,122) --
------- -------
Net cash used in investing activities........... (44,911) (58,221)
------- -------
Cash flows from financing activities:
Net proceeds from credit facilities....................... 34,252 1,400
Proceeds from issuance of long term debt.................. -- 32,299
Payments on long-term debt and obligations under capital
leases.................................................. (3,938) (929)
Payments of deferred financing costs...................... (664) (368)
Proceeds from issuance of common and preferred stock...... 56 13,749
Payments to cancel warrants............................... (55) --
Exercise of put rights.................................... (318) (50)
Exercise of stock options................................. 7 28
------- -------
Net cash provided by financing activities....... 29,340 46,129
------- -------
Decrease in cash and cash equivalents........... (7,482) (11,196)
Cash and cash equivalents, beginning of period.............. 8,244 20,670
------- -------
Cash and cash equivalents, end of period.................... $ 762 $ 9,474
======= =======
Cash paid for interest...................................... $ 4,610 $ 1,301
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-46
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(1) ORGANIZATION
InterDent, Inc. ("InterDent" or the "Company"), is a Delaware corporation
headquartered in El Segundo, California. InterDent is one of the largest
providers of dental practice management services to multi-specialty dental
professional corporations and associations ("PAs") in the United States.
Including affiliations completed through November 1, 1999, InterDent provides
management services to professional dental associations at 209 dental offices
with 625 dentists, including 141 specialists, and 1,787 operatories in selected
markets in California, Florida, Georgia, Hawaii, Idaho, Indiana, Michigan,
Nevada, Oregon, Pennsylvania, and Washington.
As part of a delivery network of multi-specialty dental care, the Company
provides management services to affiliated PAs under long-term management
service agreements. Under the terms of the management service agreements, the
Company bills and collects patient receivables and provides all administrative
support services to the PAs. The dentists employed through the Company's network
of PAs provide comprehensive general dentistry services and offer specialty
dental services, which include endodontics, oral pathology, oral surgery,
orthodontics, pedodontics, periodontics, and prosthodontics. The Company's
practice management services facilitate the delivery of convenient, high
quality, comprehensive and affordable dental care to patients in a comfortable
environment. The Company seeks to build geographically dense dental practice
networks in selected markets through a combination of affiliations with dental
practices existing in the area and selectively developing new offices.
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On March 12, 1999, Gentle Dental Service Corporation ("GDSC") and Dental
Care Alliance, Inc. ("DCA") completed mergers in which each entity became a
wholly-owned subsidiary of InterDent, Inc., a newly formed corporation. The
combination has been accounted for using the pooling-of-interests method of
accounting, therefore the consolidated financial statements reflect the combined
financial position and operating results of GDSC and DCA for all periods
presented. The consolidated financial statements include the accounts of
InterDent, Inc. and its subsidiaries and certain PAs, as discussed below. All
significant intercompany transactions and accounts have been eliminated.
The Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board has 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 InterDent
currently operates generally prohibit the Company from owning dental practices.
In response to these laws, the Company has executed management services
agreements ("MSAs") with various PAs. Under those circumstances where the MSAs
meet the criteria for consolidation as outlined in EITF 97-2, all the accounts
of those PAs are included in
F-47
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the accompanying consolidated financial statements. Accordingly, the condensed
consolidated statements of operations include the net patient revenues and
related expenses of those PAs. As of September 30, 1999, there are 128 clinical
locations included within the condensed consolidated statements of operations,
including the related net patient revenues and related expenses of the PAs.
In instances where the MSAs have not met the criteria for consolidation, the
Company does not consolidate the accounts of the PAs. Accordingly, the
consolidated statements of operations exclude the net patient revenues and
expenses of these PAs, and include only the Company's net management fee revenue
generated from those MSAs and the Company's corresponding expenses associated
with fulfilling its obligations under those MSAs. There are 78 clinical
locations accounted for in this manner within the condensed consolidated
statements of operations as of September 30, 1999.
INTERIM REPORTING
The accompanying unaudited interim consolidated financial statements of
InterDent have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and note
disclosures normally included in annual consolidated financial statements have
been condensed or omitted as permitted under those rules and regulations. We
believe all adjustments, consisting only of normal, recurring adjustments
considered necessary for a fair presentation, have been included and that the
disclosures made are adequate to insure that the information presented is not
misleading. To obtain a more detailed understanding of our results, it is
suggested that these financial statements be read in conjunction with the
consolidated financial statements and related notes for the year ended
December 31, 1998 included in Form 8-K/A filed on May 28, 1999. The results of
operations for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results of operations for the entire year.
NET REVENUES
Revenues consist primarily of PA net patient service revenue and Company net
management fees. Net patient revenue represents the consolidated revenue of the
PAs at normal and customary rates from patients, third party payors and others
for services rendered, net of contractual adjustments. Net management fees
represent amounts charged under MSAs to the unconsolidated PAs on an agreed-upon
percentage of the PAs net patient service revenue, net of provisions for
contractual adjustments and doubtful accounts.
RECEIVABLES FROM PAS
Management fee receivables represent amounts owed to the Company from
unconsolidated PAs related to revenue recorded in accordance with their MSAs and
is recorded based upon the net realizable value of patient accounts receivables
of the PAs. The Company reviews the collectibility of the patient accounts
receivable of the PAs and adjusts its management fee receivables accordingly.
Advances consist primarily of receivables due in connection with working
capital advances made to certain unconsolidated PAs. Such advances bear interest
at 8.5%, adjusted for any changes in the
F-48
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company's borrowing rate, and are due upon demand. Notes receivable relate to
the financing of medical and non-medical capital additions made by certain
unconsolidated PAs. The notes, which are personally guaranteed by the PA owners,
bear interest at rates ranging between 8.5% and 18.5%. The collectibility of
receivables from PAs is reviewed based upon the cash flow of the PAs and, where
appropriate, the fair market value of collateral assets. Advance and note
amounts to be collected within the next year are classified as current assets in
the accompanying condensed consolidated balance sheets and are recorded net of a
provision for estimated uncollectible amounts.
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
non-competition covenants, management services agreements, and goodwill
associated with dental practice acquisition asset and stock purchase
transactions. Intangibles relating to management service agreements consist of
the costs of purchasing the rights to provide management support services to PAs
over the initial non-cancelable terms of the related agreements. Under these
agreements, the PAs have agreed to provide dental services on an exclusive basis
only through facilities provided by the Company which is the exclusive
administrator of all non-dental aspects of the affiliated PAs, providing
facilities, equipment, support staffing, management and other ancillary
services. The agreements, which are generally for 25 to 40 year terms, are
non-cancelable except for performance defaults, as defined. Intangible assets
are amortized on the straight-line method, ranging from 5 years for other
intangible assets to 25 years for MSAs and goodwill.
NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards
No. 128, Earnings Per Share ("SFAS 128"). In accordance with SFAS 128, the
Company presents "basic" earnings per share, which is net income divided by the
average weighted common shares outstanding during the period, and "diluted"
earnings per share, which considers the impact of common share equivalents.
Dilutive potential common shares represent shares issuable using the treasury
stock method. Dilutive potential common shares comprised of convertible
subordinated debt have been excluded from the computation of diluted income per
share for the three and nine months ended September 30, 1999 and 1998, as their
effect is anti-dilutive.
F-49
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Such excluded issuable shares were 3,257,328. The following table summarizes the
computation of income per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income attributable to common stock... $ 2,185 $ 1,648 $ 3,614 $ 3,102
Basic Shares Reconciliation:
Weighted average common shares
outstanding............................. 21,072,786 20,390,485 20,968,155 19,769,522
Contingently issuable common shares..... -- 57,564 -- 91,396
Contingently repurchasable common
shares.................................. (569,937) (284,334) (567,193) (286,040)
----------- ----------- ----------- -----------
Basic shares........................ 20,502,849 20,163,715 20,400,962 19,574,878
=========== =========== =========== ===========
Income per share attributable to common
stock--basic............................ $ 0.11 $ 0.08 $ 0.18 $ 0.16
=========== =========== =========== ===========
Diluted Shares Reconciliation:
Basic shares............................ $20,502,849 $20,163,715 $20,400,962 $19,574,878
Effects of dilutive potential common
shares:
Convertible preferred stock........... 1,628,665 1,628,665 1,628,665 813,139
Warrants.............................. 114,021 138,493 93,107 206,686
Stock options......................... 412,733 242,408 260,071 299,050
Put rights............................ 51,655 79,965 78,217 58,044
Contingent shares, non-issuable....... 49,573 -- 48,646 --
----------- ----------- ----------- -----------
Diluted shares...................... 22,759,496 22,253,246 22,509,668 20,951,797
=========== =========== =========== ===========
Income per share attributable to common
stock--diluted.......................... $ 0.10 $ 0.07 $ 0.16 $ 0.15
=========== =========== =========== ===========
</TABLE>
INVESTMENT IN JOINT VENTURE
On August 10, 1999, the Company announced involvement in a new collaborative
Internet strategy designed to create an integrated web portal for dentists and
patients throughout the United States. The Company and Bessemer Venture Partners
(an existing investor of the Company), have agreed to invest in Dental X Change,
a leading web site for dental professionals. Dental X Change offers an extensive
array of information, including continuing education courses, dental product
information, manufacturer directories, classifieds, dental industry news, and
on-line insurance eligibility verification through a partnership with Dental
Connect. The Company contributed $1,020 to the joint venture and no gain or loss
was recognized as result of the transaction. As the Company is not able to
exercise control in the joint venture and the Company's ownership is less than
20%, the investment is accounted for using the cost basis method of accounting.
F-50
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 supersedes SFAS 14, Financial Reporting for Segments of a
Business Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal reporting
that is used by management for making operating decisions and assessing the
performance as the source of the Company's reportable segments. The affiliated
practices of the Company do not meet the SFAS 131 for separate reporting, and
therefore have not been separately reported on the condensed consolidated
financial statements.
USE OF ESTIMATES
In preparing the financial statements conforming to Generally Accepted
Accounting Principles ("GAAP"), we have made estimates and assumptions that
affect the following:
- Reported amounts of assets and liabilities at the date of the financial
statements;
- Disclosure of contingent assets and liabilities at the date of the
financial statements; and
- Reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
(3) NET REVENUE
Revenues consist primarily of PA net patient service revenue and Company net
management fees. Net patient revenue represents the consolidated revenue of the
PAs at normal and customary rates from patients, third party payors and others
for services rendered, net of contractual adjustments. Net management fees
represent amounts charged under MSAs to the unconsolidated PAs on an agreed-upon
percentage of the PAs net patient service revenue, net of provisions for
contractual adjustments and doubtful accounts.
F-51
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(3) NET REVENUE (CONTINUED)
The following represents amounts included in the determination of dental
practice net patient service revenue and net management fees:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Dental practice net patient service revenue--all PAs... $65,595 $41,112 $181,598 $98,190
LESS:
Dental practice net patient service
revenue--Unconsolidated PAs.......................... (15,524) (12,081) (47,109) (30,656)
------- ------- -------- -------
Reported practice net patient service revenue.......... $50,071 $29,031 $134,487 $67,534
======= ======= ======== =======
Dental practice net patient service
revenue--unconsolidated PAs.......................... $15,524 $12,252 $ 47,109 $31,121
LESS:
Amounts retained by dentists........................... (5,227) (3,920) (15,311) (10,052)
------- ------- -------- -------
Net management fees.................................... $10,297 $ 8,332 $ 31,798 $21,069
======= ======= ======== =======
</TABLE>
(4) BUSINESS COMBINATIONS AND DENTAL PRACTICE ACQUISITIONS
BUSINESS COMBINATIONS
On March 12, 1999, GDSC and DCA completed mergers in which each entity
became a wholly-owned subsidiary of InterDent, Inc. In the mergers, each share
of GDSC's 9,178,602 total shares of outstanding common stock, including earn-out
shares that were earned but not yet issued, automatically converted into one
share of common stock of InterDent. Each 10 shares of GDSC's 100 outstanding
shares of Preferred Stock--Series C automatically converted into one share of
common stock of InterDent. Also, each share of GDSC's 100 outstanding shares of
Preferred Stock--Series A and 1,628,663 outstanding shares of Convertible
Preferred Stock--Series D converted into one share of preferred stock of
InterDent with the same rights, preferences, and privileges as to InterDent as
the share of preferred stock had with respect to GDSC. Each share of DCA's
7,031,187 total shares of outstanding common stock was exchanged for 1.67 shares
of InterDent stock. Upon consummation of the mergers, GDSC and DCA stockholders
represented a 43.5% and 56.5%, respective ownership of InterDent, excluding
common share equivalents. Including the impact of potential dilutive common
shares outstanding, upon consummation of the mergers, GDSC and DCA stockholder
ownership was approximately 53.5% and 46.5%, respectively.
The mergers have 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. The
individual results of operations
F-52
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(4) BUSINESS COMBINATIONS AND DENTAL PRACTICE ACQUISITIONS (CONTINUED)
of GDSC and DCA for 1999 through February 28, 1999, representing the latest
available financial statements of the individual corporations prior to the
mergers, are as follows:
<TABLE>
<CAPTION>
GDSC DCA
-------- --------
<S> <C> <C>
PA net patient service revenue..................... $26,048 $ --
Management, consulting, and licensing fees......... 532 6,441
Net income......................................... 1,129 595
</TABLE>
As a result of the mergers the Company recorded direct merger expenses of
$3,246 during the nine months ended September 30, 1999, consisting of investment
banker fees, advisors fees, investor relations expense, legal fees, accounting
fees, printing expense, and other costs. Also, the Company recorded a
restructuring charge of $2,884 relating to the Company's restructuring plan,
including charges for employee related costs, redirection of certain duplicative
operations and programs, and other costs. Total restructure costs paid during
the nine months ended September 30, 1999 were $2,814. During the three months
ended September 30, 1999, the Company recorded direct merger expenses of
$386 thousand and a restructuring charge of $715 thousand. Total restructure
costs paid during the three months ended September 30, 1999 were $909 thousand.
Included in accounts payable and other current liabilities at September 30, 1999
is $2,879 in accrued merger and restructure costs, of which $1,678 relates to
accrued restructure costs. At December 31, 1998 these liabilities were $3,142.
DENTAL PRACTICE AFFILIATIONS
During the nine months ended September 30, 1999, the Company acquired
substantially all of the assets of 41 dental office locations, including cash,
accounts receivable, supplies and fixed assets. The aggregate dental practice
acquisition purchase price recorded during the nine months ended September 30,
1999, representing the fair value of the assets acquired in the above
affiliations and earn-out consideration accrued or paid for transactions
completed in current and prior periods was $48,517. Approximately $39,097 of the
purchase price has been allocated to intangible assets. The total purchase
consideration included $31,963 in cash (including $700 thousand on deposit at
December 31, 1998), $11,293 in liabilities incurred and assumed, and $5,261
aggregate value of payments accrued and shares reserved under earn-out
agreements.
In connection with the completion of certain affiliation transactions, the
Company has agreed to pay to the selling parties possible future consideration
in the form of cash and InterDent common stock. The amount of future
consideration payable by the Company under earn-outs is generally computed based
upon financial performance of the affiliated dental practices during certain
specified periods and is generally recorded as additional goodwill when earned.
The Company accrues earn-out payments with respect to practice acquisitions when
such amounts are probable and reasonably estimable. During the nine months ended
September 30, 1999 the Company paid $4,959 in additional earn-out consideration.
As of September 30, 1999, the Company has accrued $7,010 for future earn-out
payments, of which $339 is included in additional paid-in capital for
anticipated stock to be issued while the remaining accrual for anticipated cash
payments is included in other current liabilities. For those acquisitions with
earn-out
F-53
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(4) BUSINESS COMBINATIONS AND DENTAL PRACTICE ACQUISITIONS (CONTINUED)
provisions, the Company estimates the total maximum earn-out that could be paid,
including amounts already accrued, is between $20,000 and $30,000 from
September 1999 to December 2002, of which the majority is expected to be paid in
cash. In future years, such additional earn-out consideration could result in
additional amortization of $800 to $1,200 annually.
The above asset purchases in 1999 have been accounted for using the purchase
method of accounting. The excess of the total purchase price over the fair value
of the net tangible and identifiable intangible assets acquired representing the
estimated future value of the management services agreements are being amortized
over the lesser of the term of the related management service agreements or
25 years using the straight-line method. The results of operations for these
practices have been included in the consolidated financial statements of the
Company since the dates of their affiliation.
(5) DEBT
Through June 15, 1999, the Company had two credit facilities providing for a
maximum borrowing of $60,000. Effective June 15, 1999, the Company amended and
restated one of the existing agreements, increasing the revolving credit
commitment from $45,000 to $90,000, with the syndication of banks led by Chase
Manhattan Bank. Proceeds from the amended credit agreement were used to pay-down
the outstanding $15,000 credit facility which has been terminated. The amended
and restated credit agreement has a revolving feature that 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. All amounts due under the credit
facility are included in long-term debt. The financial institution in which the
$15,000 credit facility was terminated has elected to participate in the
syndication of the $90,000 facility amendment.
The credit facility requires the Company to pay unused commitment fees and
contains several covenants including restrictions on the ability of the Company
to incur indebtedness, prohibitions on dividends without prior approval, and
requirements relating to maintenance of a specified net worth and compliance
with specified financial ratios. In addition, the credit facility requires the
Company to notify the lenders prior to making any acquisitions and to obtain the
consent of the lenders prior to making acquisitions over a specified purchase
price. 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, inventories, receivables, subsidiary stock, certain debt
instruments, accounts and general intangibles of each of such entities.
The Company has issued $30,000 of subordinated convertible notes ("Notes").
The Notes have an eight-year term and bear interest at 7.0%. See note 6 for
discussion on the conversion of the Notes.
(6) SHAREHOLDERS' EQUITY
The Company completed a $45,000 private placement on June 30, 1998,
consisting of $30,000 of subordinated convertible notes and $15,000 of preferred
stock. The subordinated notes have eight-year terms and are convertible into
shares of the 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
F-54
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
into shares of Series B preferred stock at a rate of one share of Series B
preferred stock for each thousand dollars in outstanding principal and accrued
but unpaid interest on the subordinated notes, subject to adjustment for stock
splits, reverse splits, stock dividends, reorganizations and the like. The
subordinated notes and all outstanding shares of preferred stock, if any, shall
be automatically converted into common stock (or, in the case of Series A
preferred stock and Series C preferred stock, redeemed at nominal cost) if the
rolling 21-day average closing market price of the common stock on 20 out of any
30 consecutive trading days is more than $15.73 on or prior to May 18, 1999,
more than $16.85 on or prior to May 18, 2000, or more than $17.98 at any time
thereafter.
The Company is authorized to issue 30,000,000 shares of preferred stock.
Presently authorized series of preferred stock include the following series:
- Series A--100 shares authorized, issued and outstanding
- Series B--70,000 shares authorized, zero issued or outstanding
- Series C--100 shares authorized, zero shares issued or outstanding
- Series D--2,000,000 shares authorized, 1,628,663 shares issued and
outstanding.
The shares of Series B preferred stock are convertible into shares of common
stock at the rate of 108.58 shares of common stock for each share of Series B
preferred stock (assuming there are no declared but unpaid dividends on the
Series B preferred stock), and the shares of Series D preferred stock are
convertible into shares of common stock on a share for share basis (assuming
there are no declared but unpaid dividends on the Series D preferred stock), in
each case subject to adjustment for stock splits, reverse splits, stock
dividends, reorganizations and the like. The Series A preferred stock and
Series C preferred stock are not convertible.
A total of 254,901 and 339,246 outstanding shares of InterDent common stock
issued at a price of $0.45 and $0.225 per share, respectively are subject to
repurchase as a result of a subsidiary's failure to achieve certain specified
performance targets through December 31,1998. It is anticipated that these
shares will be repurchased in the future.
(7) CONTINGENCIES
The Company has been named as a defendant in various lawsuits in the normal
course of business. In the opinion of management any liabilities resulting from
these matters will not have a material impact on the Company's consolidated
financial position or results of operations.
(8) SUBSEQUENT EVENTS
Subsequent to September 30, 1999, the Company completed the acquisition of 3
PAs, representing three clinical office locations. The purchase price for these
affiliations totaled $2,114. The total purchase price included cash paid of
$1,228 and liabilities issued or assumed of $886, plus contingent payments to be
made based on future performance. These affiliations were accounted for using
the purchase method of accounting. Funds for the acquisitions were provided
under borrowings on the credit facility.
F-55
<PAGE>
INTERDENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(8) SUBSEQUENT EVENTS (CONTINUED)
On October 22, 1999, the Company announced the signing of a definitive
merger agreement between the Company and a group consisting of an affiliate of
Leonard Green & Partners, L.P., and certain members of Company management,
including Michael Fiore, Co-chairman and CEO, and Steven Matzkin, DDS,
Co-chairman, President, and Chief Dental Officer. Additionally, existing
investors in the Company, the Sprout Group and Chase Capital Partners, intend to
participate in the transaction by maintaining ownership in the Company. Under
the terms of the agreement, the Company's stockholders at the date of the
transaction will receive $9.50 per share in cash. Completion of the transaction
is subject to stockholder approval, receipt of regulatory approvals, and
completion of debt financing required to fund the transaction, valued at
approximately $325 million. The Company currently anticipates completing the
transaction in the first calendar quarter of the year 2000.
Subsequent to the October 22, 1999 announcement, certain Company officers
and directors, and Leonard Green & Partners, L.P., were named as defendants in
civil suits filed in the State of Delaware on behalf of certain owners of the
Company's common stock. The lawsuits claim breach of fiduciary duty and aiding
and abetting such breach in connection with the merger. The lawsuits generally
seek injunctive relief, an injunction of the merger (or, if consummated, a
rescission of the merger), compensatory and other damages, and an award of
attorneys' fees and expenses. The complaints seek certification of a plaintiff's
class and the Company expects that the suits will be consolidated into one suit.
The Company has sought coverage under existing directors and officers insurance
policies for any settlements, judgments, and costs of defense in connection with
these cases, within outstanding policy limits. The Company believes the suits
are without merit and intends to engage in a vigorous defense in these matters.
F-56
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
ID RECAP, INC.,
A DELAWARE CORPORATION
AND
INTERDENT, INC.
A DELAWARE CORPORATION
DATED AS OF OCTOBER 22, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is entered into as of October 22, 1999 by
and between ID Recap, Inc., a Delaware corporation ('Recap') wholly owned by
Green Equity Investors III, L.P. ("GEI"), and InterDent, Inc., a Delaware
corporation (together with its Subsidiaries from time to time (except as the
context may otherwise require), the "Company"), with respect to the following
facts and circumstances:
A. The Special Committee of the Company, the Board of Directors of the
Company and the Board of Directors of Recap have each determined that it is
advisable and in the best interests of its respective stockholders to effect the
Merger of Recap with and into the Company upon the terms and subject to the
conditions set forth herein.
B. Pursuant to the Merger, all shares of capital stock of the Company
(other than Dissenting Shares and shares held by Recap or in the Company's
treasury) shall be cancelled and converted automatically into the right to
receive an amount in cash per share, without interest, as set forth in Section
2.2 of this Agreement.
C. Concurrently with the execution and delivery of this Agreement and in
order to induce Recap to enter into this Agreement, Recap and certain Rollover
Holders (defined below) are entering into Voting Agreements in the form attached
hereto as EXHIBIT A, pursuant to which, among other things, the Rollover Holders
will agree to vote their shares of the Company in favor of the Merger.
D. In connection with the transactions contemplated by the Merger, certain
members of management of and certain investors in the Company (the "Rollover
Holders") have entered into Exchange and Subscription Agreements in the form
attached hereto as EXHIBIT B (the "Exchange Agreement") with Recap, pursuant to
which the Rollover Holders will exchange a portion of their Existing Shares (the
"Rollover Shares") of the Company for shares of Recap prior to the closing of
the Merger (the "Recapitalization").
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties and covenants contained herein and intending to be
legally bound, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
1.1. CERTAIN TERMS. For all purposes of this Agreement, except as
otherwise expressly provided:
(a) the terms defined in this Article I have the meanings assigned to
them in this Article I and include the plural as well as the singular;
(b) all accounting terms not otherwise defined herein have the meanings
assigned under GAAP;
(c) all references in this Agreement to designated "Articles,"
"Sections" and other subdivisions are to the designated Articles, Sections
and other subdivisions of the body of this Agreement;
(d) pronouns of either gender or neuter shall include, as appropriate,
the other pronoun forms;
(e) the words "include," "includes" and "including" shall be deemed in
each case to be followed by the words "without limitation";
(f) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision; and
A-1
<PAGE>
(g) the term "party" or "parties" when used herein refer to Recap, on
the one hand, and the Company, on the other.
1.2. DEFINITIONS. As used in this Agreement and the Exhibits and Schedules
delivered pursuant to this Agreement, the following definitions shall apply:
(a) "Acquisition Proposal" has the meaning set forth in Section 7.5
hereof.
(b) "Action" means any action, complaint, petition, investigation,
suit, litigation or other proceeding, whether civil or criminal, in law or
in equity, or before any court, tribunal, arbitrator or Governmental Entity.
(c) "Affiliate" means, with respect to any person or entity, any person
or entity directly or indirectly controlling, controlled by or under common
control with such person or entity.
(d) "Agreement" means this Agreement, as amended or supplemented,
together with all Exhibits and Schedules attached or incorporated by
reference, in each case as amended or supplemented.
(e) "Approval" means any approval, authorization, consent,
qualification or registration, or any waiver of any of the foregoing,
required to be obtained from or made with, or any notice, statement or other
communication required to be filed with or delivered to, any Governmental
Entity or any other Person.
(f) "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.
(g) "Balance Sheet" has the meaning set forth in Section 5.12.
(h) "Business Day" means any day that is not a Saturday, Sunday or
legal holiday in the State of California.
(i) "Certificate" has the meaning set forth in Section 4.1 hereof.
(j) "Certificate of Merger" has the meaning set forth in Section 2.1(b)
hereof.
(k) "Closing" has the meaning set forth in Section 3.1 hereof.
(l) "Closing Date" means the date and time of the Closing.
(m) "Code" means the Internal Revenue Code of 1986, as amended.
(n) "Common Stock" means the Company's common stock, no par value.
(o) "Company" means InterDent, Inc., a Delaware corporation (together
with its Subsidiaries from time to time (except as the context may otherwise
require)).
(p) "Company Benefit Plans" has the meaning set forth in Section
5.14(a).
(q) "Company Board" means, as applicable, the Board of Directors and/or
the Special Committee of the Board of Directors of the Company.
(r) "Company Computer System" has the meaning set forth in Section
5.16.
(s) "Company Employees" has the meaning set forth in Section 5.14(a).
(t) "Company Pension Plan" has the meaning set forth in Section
5.14(b).
A-2
<PAGE>
(u) "Company Performance Shares" has the meaning set forth in Section
5.3.
(v) "Company Plans" has the meaning set forth in Section 5.14(b).
(w) "Company Proxy Statement" has the meaning set forth in Section 7.9
hereof.
(x) "Company SEC Reports" means all of the forms, statements,
schedules, reports and other documents filed or required to be filed by the
Company or any Subsidiary with the SEC since December 31, 1996.
(y) "Convertible Notes" means the Company's 7% convertible subordinated
notes issued on May 18, 1998 and June 3, 1998 pursuant to the Securities
Purchase Agreement dated May 12, 1998.
(z) "DGCL" means the Delaware General Corporation Law.
(aa) "Dissenting Shares" has the meaning set forth in Section 2.4.
(bb) "Earn Out Shares" means the shares of capital stock of the Company
that the Company is obligated to issue to a third party in connection with
or arising from any earn out payments, including but not limited to those
parties and obligations identified on Schedule 5.3.
(cc) "Effective Time" has the meaning set forth in Section 2.1(b)
hereof.
(dd) "Encumbrance" means any charge, encumbrance, security interest,
lien, option, equity, adverse claim or restriction, except for any
restrictions on transfer generally arising under any applicable Law.
(ee) "Environmental Law" has the meaning set forth in Section 5.17(b)
hereof.
(ff) "ERISA" means the Employee Retirement Income Security Act of 1934,
as amended.
(gg) "ERISA Affiliate" has the meaning set forth in Section 5.14(c)
hereof.
(hh) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(ii) "Exchange Agreement" means the exchange and subscription agreement
in the form attached hereto as EXHIBIT B.
(jj) "Exchange Ratio" has the meaning set forth in Section 2.2(h)
hereof.
(kk) "Existing Shares" means all of the Company's issued and
outstanding Common Stock, Series A Preferred Stock, Series B Preferred Stock
(if any), Series C Preferred Stock (if any) and Series D Preferred Stock.
(ll) "Expenses" has the meaning set forth in Section 9.3 hereof.
(mm) "Financing" has the meaning set forth in Section 6.5.
(nn) "Financing Letters" has the meaning set forth in Section 6.5.
(oo) "GAAP" means generally accepted accounting principles in the
United States, as in effect from time to time, consistently applied.
(pp) "GEI" has the meaning set forth in the preamble.
(qq) "Governmental Entity" means any government or any agency, bureau,
board, commission, court, department, official, political subdivision,
tribunal or other instrumentality of any government, whether federal, state
or local, domestic or foreign.
(rr) "Hazardous Substance" has the meaning set forth in Section 5.17(b)
hereof.
(ss) "H-S-R Act" has the meaning set forth in Section 7.6(a) hereof.
A-3
<PAGE>
(tt) "Indebtedness" means all obligations for borrowed money and
accounts payable, however evidenced, including principal and interest.
(uu) "Indemnified Party" has the meaning set forth in Section 7.13.
(vv) "Insurance Policies" has the meaning set forth in Section 5.20.
(ww) "Knox-Keene Act" has the meaning set forth in Section 8.3.14.
(xx) "Law" means any statute, rule, regulation, administrative requirement,
code or ordinance of any Governmental Entity.
(yy) "Leased Real Estate" has the meaning set forth in Section 5.24(b).
(zz) "Liabilities" means all liabilities, obligations, debts and
expenses whatsoever of the business of the Company, whether matured or
unmatured, liquidated or unliquidated, fixed or contingent.
(aaa) "Material Adverse Effect" means a material adverse effect on (i)
the ability of the subject Person to perform its obligations under, and
consummate the transactions contemplated by this Agreement on a timely basis
or (ii) the condition (financial or otherwise), results of operations,
assets, liabilities, prospects or business of the subject Person and its
Subsidiaries taken as a whole.
(bbb) "Merger" has the meaning set forth in Section 2.1(a) of this
Agreement.
(ccc) "Merger Consideration" means all of the cash paid to the holders
of the Existing Shares and the holders of Convertible Notes, Options and
Warrants pursuant to Article II hereof.
(ddd) "New Financing Letters" has the meaning set forth in Section 6.5.
(eee) "Notice of Superior Proposal" has the meaning set forth in
Section 7.5(b).
(fff) "Options" means the options to purchase shares of capital stock
of the Company.
(ggg) "Order" means any decree, injunction, judgment, order, ruling,
arbitration award, assessment or writ issued by any Governmental Entity.
(hhh) "Owned Real Estate" has the meaning set forth in Section 5.24(a).
(iii) "Paying Agent" has the meaning set forth in Section 2.3(a)
hereof.
(jjj) "Permit" means any license, permit, franchise or authorization.
(kkk) "Permitted Acquisitions" has the meaning set forth in Section
7.1(d) hereof.
(lll) "Permitted Encumbrances" means (i) Encumbrances disclosed on
SCHEDULE 1.2(lll) hereto, (ii) liens for Taxes, assessments, governmental
charges or levies or mechanics' and other statutory liens which are not
material in amount relative to the property affected, and which are not yet
delinquent or can be paid without penalty or are being contested in good
faith and by appropriate proceedings in respect thereof, and (iii)
imperfections of title which are not substantial in amount relative to the
property affected and which do not materially interfere with the present use
of the property subject thereto or affected thereby.
(mmm) "Person" means an association, a corporation, an individual, a
partnership, a limited liability company or limited liability partnership, a
trust or any other entity or organization, including a Governmental Entity.
(nnn) "Preferred Stock" means the Company's Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred
Stock.
(ooo) "Preliminary Termination Fee" has the meaning set forth in
Section 9.3.
(ppp) "Recap" means ID Recap, Inc., a Delaware corporation.
A-4
<PAGE>
(qqq) "Recapitalization" has the meaning set forth in the recitals.
(rrr) "Representatives" means Persons acting on behalf of another
Person, including such Person's officers, directors, employees,
representatives, agents, independent accountants, investment bankers and
counsel.
(sss) "Rollover Holders" has the meaning set forth in the recitals.
(ttt) "Rollover Options" means the Options issued under the Stock
Options Plans set forth on SCHEDULE 1.2(ttt), that will continue in the
Surviving Corporation; provided, however, the excess of the aggregate cash
amount that would be paid with respect to the Existing Shares subject to
such Options, if the Options were exercised, over the aggregate exercise
price with respect to such Options shall not exceed $2,330,000.
(uuu) "Rollover Shares" has the meaning set forth in the recitals.
(vvv) "SEC" means the United States Securities and Exchange Commission.
(www) "SEC Reports" has the meaning set forth in Section 5.6(a).
(xxx) "Securities Act" means the Securities Act of 1933, as amended.
(yyy) "Series A Preferred Stock" means the Series A Preferred Stock, no
par value of the Company.
(zzz) "Series B Preferred Stock" means the Series B Preferred Stock, no
par value of the Company.
(aaaa) "Series C Preferred Stock" means the Series C Preferred Stock,
no par value of the Company.
(bbbb) "Series D Preferred Stock" means the Series D Preferred Stock,
no par value of the Company.
(cccc) "Service" means the Internal Revenue Service or any successor
entity.
(dddd) "Special Committee" means the special committee of the Board of
Directors of the Company established to consider the fairness of the
transaction as contemplated by this Agreement.
(eeee) "Special Meeting" has the meaning set forth in Section 7.10
hereof.
(ffff) "Stock Option Plans" means, collectively, the InterDent, Inc.
1999 Stock Incentive Plan, the InterDent, Inc. Employee Stock Purchase Plan
of 1999, the InterDent, Inc. Dental Professional Stock Purchase Plan of
1999, Gentle Dental Service Corporation 1993 Stock Incentive Plan, as
amended on June 4, 1998, Dental Care Alliance, Inc. 1997 Executive Incentive
Compensation Plan, Dental Care Alliance, Inc. 1997 Non-Qualified Stock
Option Plan, GMS Dental Group, Inc. 1996 Stock Option Plan and GMS Dental
Group, Inc. 1996 Performance Stock Option Plan.
(gggg) "Subsidiary" of a company means any Person in which such company
has a direct or indirect equity or ownership interest by vote or value of in
excess of 50%. Subsidiaries of the Company shall include, but not be limited
to, Gentle Dental Service Corporation, a Delaware corporation, and Dental
Care Alliance, Inc., a Delaware corporation, for all purposes except where
the context otherwise requires; provided, however, that dental practices
managed (but not owned) by InterDent, Inc. or any of its Subsidiaries shall
not be included within the definition of a "Subsidiary" for purposes of the
Agreement.
(hhhh) "Superior Proposal" has the meaning set forth in Section 7.5(d)
hereof.
(iiii) "Surviving Corporation" has the meaning set forth in Section
2.1(a) hereof.
A-5
<PAGE>
(jjjj) "Takeover Statute" has the meaning set forth in Section 7.15
hereof.
(kkkk) "Tax" or "Taxes", as the context may require, include: (i) any
income, alternative or add-on minimum tax, gross income, gross receipts,
franchise, profits, sales, use, ad valorem, business license, withholding,
payroll, employment, excise, stamp, transfer, recording, occupation,
premium, property, value added, custom duty, severance, windfall profit or
license tax, governmental fee, including estimated taxes relating to any of
the foregoing, or other similar tax or other like assessment or charge of
similar kind whatsoever together with any interest and any penalty, addition
to tax or additional amount imposed by any Governmental Entity responsible
for the imposition of any such Tax; or (ii) any liability of a Person for
the payment of any taxes, interest, penalty, addition to tax or like
additional amount resulting from the application of Treas. Reg. Section
1.1502-6 or comparable provisions of any Governmental Entity in respect of a
consolidated or combined return.
(llll) "Tax Return" means any return (including any information
return), report, statement, schedule, notice, form, or other document or
information filed with or submitted to, or required to be filed with or
submitted to, any Governmental Entity in connection with the determination,
assessment, collection, or payment of any Tax or in connection with the
administration, implementation, or enforcement of or compliance with any Law
relating to any Tax.
(mmmm) "Termination Fee" shall have the meaning set forth in Section
9.3 hereof.
(nnnn) "Update Statements" has the meaning set forth in Section 7.7
hereof.
(oooo) "Voting Agreement" means the voting agreement in the form
attached hereto as EXHIBIT A.
(pppp) "Warrants" means the warrants to purchase shares of capital
stock of the Company.
(qqqq) "Year 2000 Compliant" has the meaning set forth in Section 5.16.
ARTICLE II.
THE MERGER
2.1. THE MERGER.
(a) At the Effective Time, Recap shall be merged with and into the
Company in accordance with DGCL and the terms and conditions hereof (the
"Merger"). Upon consummation of the Merger, the separate existence of Recap
shall cease and the Company shall be the surviving corporation (the "Surviving
Corporation").
(b) As soon as practicable after the Closing, the Company will file a
certificate of merger (the "Certificate of Merger") with the Secretary of State
of the State of Delaware in accordance with DGCL and make all other filings or
recordings required by Law in connection with the Merger. The Merger shall
become effective at such time as the Certificate of Merger is filed with the
Secretary of State of the State of Delaware or at such later time as is
specified in the Certificate of Merger (the "Effective Time").
(c) The Merger shall have the effects set forth in Sections 251, 259
and 261 of DGCL.
2.2. MERGER CONSIDERATION AND CANCELLATION OF EXISTING SHARES AND
CONVERTIBLE NOTES. At the Effective Time, pursuant to this Agreement and by
virtue of the Merger and without any action on the part of Recap, the Company,
or the holders of any of the following securities:
(a) Each share of Common Stock issued and outstanding immediately prior
to the Effective Time (including shares of Common Stock issued upon exercise of
options, warrants and other convertible securities of the Company, including the
Company's convertible securities pursuant to that certain Securities Purchase
Agreement dated May 12, 1998, by and among Gentle Dental Service Corporation and
A-6
<PAGE>
the Purchasers set forth on SCHEDULE 1 to that agreement), other than any
Dissenting Shares and shares to be cancelled pursuant to Section 2.2(g), shall
be cancelled and shall be converted automatically into the right to receive an
amount equal to $9.50 in cash, without interest, payable to the holder thereof
upon surrender of the certificate formerly representing such share of Common
Stock in the manner provided in Section 2.3;
(b) Each share of Series A Preferred Stock issued and outstanding
immediately prior to the Effective Time, other than any Dissenting Shares and
shares to be cancelled pursuant to Section 2.2(g), shall be cancelled and shall
be converted automatically into the right to receive $1 in cash, without
interest, payable to the holder thereof upon surrender of the certificate
formerly representing such share of Series A Preferred Stock in the manner
provided in Section 2.3;
(c) Each share of Series B Preferred Stock issued and outstanding
immediately prior to the Effective Time (if any such shares are issued and
outstanding), other than any Dissenting Shares and shares to be cancelled
pursuant to Section 2.2(g), shall be cancelled and shall be converted
automatically into the right to receive an amount equal $1,031.49 in cash,
without interest, payable to the holder thereof upon surrender of the
certificate formerly representing such share of Series B Preferred Stock in the
manner provided in Section 2.3, and the right to receive certain Warrants
pursuant to the terms of such Series B Preferred Stock shall be cancelled;
(d) Each share of Series C Preferred Stock issued and outstanding
immediately prior to the Effective Time (if any such shares are issued and
outstanding), other than any Dissenting Shares and shares to be cancelled
pursuant to Section 2.2(g), shall be cancelled and shall be converted
automatically into the right to receive $1 in cash, without interest, payable to
the holder thereof upon surrender of the certificate formerly representing such
share of Series C Preferred Stock in the manner provided in Section 2.3;
(e) Each share of Series D Preferred Stock issued and outstanding
immediately prior to the Effective Time, other than any Dissenting Shares and
shares to be cancelled pursuant to Section 2.2(g), shall be cancelled and shall
be converted automatically into the right to receive an amount equal to $9.50 in
cash, without interest, payable to the holder thereof upon surrender of the
certificate formerly representing such share of Series D Preferred Stock in the
manner provided in Section 2.3, and the right to receive certain Warrants
pursuant to the terms of such Series D Preferred Stock shall be cancelled;
(f) The Company's Convertible Notes issued and outstanding immediately
prior to the Effective Time, other than any Convertible Notes to be cancelled
pursuant to Section 2.2(g), shall be cancelled and shall be converted
automatically into the right to receive prepayment equal to 101% of the
outstanding principal amount (which includes any amounts payable in a change of
control) and any accrued but unpaid interest thereon, and the right to receive a
cash payment equal to $0.29 for each share of Common Stock that would be issued
following exercise of the Warrants that would be issued in a redemption of the
Convertible Notes, in lieu of the right to receive such Warrants pursuant to the
terms of the Convertible Notes, which right to receive such Warrant shall be
cancelled;
(g) Each Existing Share and/or the Convertible Notes owned by Recap or
held in the treasury of the Company, if any, immediately prior to the Effective
Time shall be cancelled without any conversion thereof and no payment or
distribution shall be made with respect thereto.
(h) Each share of capital stock of Recap that is issued and outstanding
immediately prior to the Effective Time shall be converted into one newly
issued, fully paid and nonassessable share of capital stock, with identical
rights, preferences and privileges, of the Surviving Corporation (the 'Exchange
Ratio').
(i) If between the date of this Agreement and the Effective Time the
number of outstanding shares of capital stock of the Company shall have been
changed into a different number of shares or a different class, by reason of any
stock dividend, subdivision, reclassification, recapitalization, split-up,
A-7
<PAGE>
combination, exchange of shares or the like other than pursuant to the Merger,
the amount of the pro rata portion of the Merger Consideration and the Exchange
Ratio shall be correspondingly adjusted; provided, however, the aggregate amount
of the Merger Consideration shall remain unchanged.
2.3. PAYMENT OF CASH FOR EXISTING SHARES; CONVERTIBLE NOTES, OPTIONS AND
WARRANTS.
(a) At the Effective Time, the Surviving Corporation shall irrevocably
deposit or cause to be deposited with a paying agent appointed by Recap with the
Company's prior approval (the "Paying Agent"), as agent for the holders of
Existing Shares, Convertible Notes, Options and Warrants to be cancelled in
accordance with Sections 2.2, 2.5 and 2.6, cash in the aggregate amount required
to pay the Merger Consideration in respect of such securities outstanding
immediately prior to the Effective Time. Pending distribution pursuant to
Section 2.3(b) hereof of the cash deposited with the Paying Agent, such cash
shall be held in trust for the benefit of the holders of Existing Shares,
Convertible Notes, Options and Warrants cancelled in the Merger and such cash
shall not be used for any other purposes. Each holder of a certificate or
certificates representing Existing Shares cancelled and extinguished at the
Effective Time pursuant to Section 2.2 hereof may thereafter surrender such
certificate or certificates to the Paying Agent, as agent for such holder of
Existing Shares, in exchange for payment of the pro rata portion of the Merger
Consideration as set forth in Section 2.2 for a period ending six months after
the Effective Time. Each holder of Convertible Notes cancelled and extinguished
at the Effective Time pursuant to Sections 2.2 hereof may thereafter surrender
and deliver such notes to the Paying Agent, as agent for such holder of
Convertible Notes, in exchange for payment of the pro rata portion of the Merger
Consideration as set forth in Section 2.2 for a period ending six months after
the Effective Time. Each holder of Warrants cancelled and extinguished at the
Effective Time pursuant to Sections 2.2 and 2.6 hereof may thereafter surrender
and deliver such warrants to the Paying Agent, as agent for such holder of
Warrants, in exchange for payment of the pro rata portion of the Merger
Consideration as set forth in Section 2.6 for a period ending six months after
the Effective Time. Each holder of Options cancelled and extinguished at the
Effective Time pursuant to Section 2.5 hereof shall be entitled to receive from
the Paying Agent its pro rata portion of the Merger Consideration as set forth
in Section 2.5 following the Effective Time.
(b) After surrender to the Paying Agent of any certificate, note,
warrant or other instrument which prior to the Effective Time shall have
represented any Existing Shares, Convertible Notes or Warrants (as applicable),
the Paying Agent shall promptly distribute to the person in whose name such
certificate, note, warrant or other instrument shall have been registered, a
check in the amount into which such Existing Shares, Convertible Notes or
Warrants shall have been converted at the Effective Time pursuant to Sections
2.2 and 2.6 hereof. Until so surrendered and cancelled, each such certificate,
note, warrant or other instrument shall, after the Effective Time, be deemed to
represent only the right to receive its pro rata portion of the Merger
Consideration, and until such surrender and cancellation, no cash shall be paid
to the holder of such outstanding certificate, note, warrant or other instrument
in respect thereof. From and after the Effective Time, the holders of Existing
Shares, Convertible Notes and Warrants outstanding immediately prior to the
Effective Time shall cease to have any rights with respect to such Existing
Shares, Convertible Notes or Warrants other than the right to receive the
portion of the Merger Consideration as provided in this Agreement. The Surviving
Corporation shall promptly after the Effective Time cause to be distributed to
such holders appropriate materials to facilitate such surrender.
(c) If payment is to be made to a Person other than the registered
holder of the Existing Shares, Convertible Notes or Warrants represented by the
certificate, note, warrant or other instrument so surrendered in exchange
therefor, it shall be a condition to such payment that the certificate, note,
warrant or other instrument so surrendered shall be properly endorsed or
otherwise be in proper form for transfer and that the Person requesting such
payment shall pay to the Paying Agent any transfer or other taxes required as a
result of such payment to a Person other than the registered holder of such
Existing Shares, Convertible Notes or Warrants or establish to the satisfaction
of the Paying Agent that such tax has been paid or is not payable.
A-8
<PAGE>
(d) After the Effective Time, there shall be no further transfers on
the stock transfer books of the Surviving Corporation of the Existing Shares
that were outstanding immediately prior to the Effective Time. If, after the
Effective Time, certificates representing Existing Shares are presented to the
Surviving Corporation, they shall be cancelled and exchanged for the cash amount
provided for, and in accordance with the procedures set forth, in this Article
II.
(e) If any cash deposited with the Paying Agent for purposes of payment
in exchange for Existing Shares, Convertible Notes, Warrants or Options remains
unclaimed six months after the Effective Time, such cash shall be returned to
the Surviving Corporation, upon demand, and any such holder who has not
converted his Existing Shares, Convertible Notes, Warrant or Options into the
cash amount or otherwise received the cash amount pursuant to this Agreement
prior to that time shall thereafter look only to the Surviving Corporation for
payment of the cash amount. Notwithstanding the foregoing, the Surviving
Corporation shall not be liable to any holder of Existing Shares, Convertible
Notes, Warrants or Options for any amount paid to a public official pursuant to
applicable unclaimed property laws. Any amounts remaining unclaimed by holders
of Existing Shares, Convertible Notes, Warrants or Options, seven (7) years
after the Effective Time (or such earlier date immediately prior to such time as
such amounts would otherwise escheat to or become property of any Governmental
Authority) shall, to the extent permitted by applicable Law, become the property
of the Surviving Corporation free and clear of any claims or interest of any
Person previously entitled thereto.
(f) Any portion of the Merger Consideration made available to the
Paying Agent pursuant to Section 2.4 to pay for Existing Shares for which
dissenter's rights have been perfected shall be returned to the Surviving
Corporation, upon demand.
(g) No dividends or other distributions with respect to capital stock
of the Surviving Corporation with a record date after the Effective Time shall
be paid to the holder of any unsurrendered certificate for Existing Shares.
(h) In the event that any certificate, note, warrant or other
instrument representing the Existing Shares, Convertible Notes, or Warrants
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming such certificate, note, warrant or other
instrument to be lost, stolen or destroyed and, if required by the Company, the
posting by such holder of a bond in such reasonable amount as the Company may
direct as indemnity against any claim that may be made against it with respect
to such certificate, note, warrant or other instrument, the Paying Agent will
issue in exchange for and in lieu of such lost, stolen or destroyed Existing
Share certificate the cash amount, and unpaid dividends and distributions on
Existing Shares deliverable in respect thereof pursuant to this Agreement and
the Merger.
2.4. DISSENTING SHARES. Notwithstanding Section 2.2, Existing Shares which
are issued and outstanding immediately prior to the Effective Time and which are
held by a holder who has not voted such shares of capital stock of the Company
in favor of the Merger and who has delivered a written demand for relief as a
dissenting stockholder in the manner provided by DGCL and who, as of the
Effective Time, shall not have effectively withdrawn or lost such right to
relief as a dissenting stockholder ("Dissenting Shares") shall not be converted
into a right to receive the pro rata portion of the Merger Consideration. The
holders thereof shall be entitled only to such rights as are granted by Section
262 of DGCL. Each holder of Dissenting Shares who becomes entitled to payment
for such Dissenting Shares pursuant to Section 262 of DGCL shall receive payment
therefor from the Surviving Corporation in accordance with DGCL; PROVIDED,
HOWEVER, that if any such holder of Dissenting Shares (i) shall have failed to
establish his entitlement to relief as a dissenting stockholder as provided in
Section 262 of DGCL, (ii) shall have effectively withdrawn his demand for relief
as a dissenting stockholder with respect to such Dissenting Shares or lost his
right to relief as a dissenting stockholder and payment for his Dissenting
Shares under Section 262 of DGCL or (iii) shall have failed to file a complaint
with the appropriate court seeking relief as to determination of the value of
all Dissenting Shares within the time
A-9
<PAGE>
provided in Section 262 of DGCL, such holder shall forfeit the right to relief
as a dissenting stockholder with respect to such Dissenting Shares and each such
Dissenting Share shall be converted into the right to receive the appropriate
cash amount, without interest thereon, from the Surviving Corporation as
provided in Section 2.2. The Company shall give Recap prompt notice of any
demands received by the Company prior to the Effective Time for relief as a
dissenting stockholder, and Recap shall have the right to participate in all
negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of Recap, make any payment with
respect to, or settle or offer to settle, any such demands.
2.5. STOCK OPTIONS.
(a) Except as may be otherwise agreed to in writing between Recap and
the holder of any Rollover Options, each Option that has an exercise price of
equal to or greater than the cash amount payable in the Merger per share of
Common Stock shall be cancelled at the Effective Time without any payment or
other consideration therefor.
(b) At the Effective Time, all other Options (other than the Rollover
Options) shall be cancelled and, in lieu thereof, as soon as reasonably
practicable after the Effective Time, each holder of such Options shall receive
a cash payment from the Paying Agent equal to the excess of the aggregate cash
amount that would be paid with respect to the shares of Common Stock subject to
such Options, if the Options were exercised, over the aggregate exercise price
with respect to such Options, as reduced by any required withholding of taxes.
The Rollover Options at the Effective Time shall survive the Closing and the
Surviving Corporation shall assume all the rights, liabilities and obligations
of such Rollover Options in accordance with the respective Stock Option Plan or
any successor or replacement stock option plan of the Surviving Corporation.
(c) Prior to the Effective Time, the Company shall (i) take all
reasonable steps necessary to make any amendments to the terms of such Stock
Option Plans, individual Option agreement or Option that are necessary to give
effect to the transactions contemplated by this Agreement, and (ii) use all
reasonable and necessary efforts to obtain at the earliest practicable date all
written consents (if necessary) from holders of Options to effect the
cancellation of such holder's Options to take effect at the Effective Time.
(d) At or prior to the Effective Time, the Company shall take all
reasonable and necessary action to fully advise the holders of Options of their
respective rights under this Agreement, the Options and the respective Stock
Option Plan, to facilitate the timely exercise of such rights and obligations to
effectuate the provisions of this Section 2.5. From and after the Effective
Time, other than as expressly set forth in this Section 2.5 or any written
agreement between Recap and the holder of the Rollover Options, no holder of
Options shall have any rights in respect of such Options, other than to receive
the pro rata portion of the Merger Consideration for such Options in the manner
described in this Section 2.5. The surrender of any Option or the receipt of the
pro rata portion of the Merger Consideration by such holder of an Option shall
be deemed a release of any and all rights the holder of such Option had or may
have had in respect of such Option.
2.6. WARRANTS.
(a) Each Warrant that has an exercise price of equal to or greater than
the cash amount payable per share of Common Stock shall be cancelled at the
Effective Time without payment or other consideration.
(b) Any right to receive a Warrant pursuant to the Series B Preferred
Stock, the Series D Preferred Stock or Convertible Notes shall be cancelled at
the Effective Time.
(c) Immediately prior to the Effective Time, all other outstanding
Warrants (other than any Warrants (or right to receive a Warrant) that are
governed by Sections 2.6 (a) and (b) above), shall be
A-10
<PAGE>
cancelled and, in lieu thereof, as soon as reasonably practicable as of or after
the Effective Time, the holders of such Warrants shall receive a cash payment
from the Paying Agent equal to the excess of the aggregate cash amount that
would be paid with respect to the Existing Shares subject to such Warrants, if
the Warrants were exercised, over the aggregate exercise price with respect to
such Warrants, as reduced by any required withholding of taxes.
(d) Prior to the Effective Time, the Company shall (i) take all
reasonable steps necessary to cause the Warrants, if any, to be terminated on or
prior to the Effective Time and to otherwise make any amendments to the terms of
such Warrants that are necessary to give effect to the transactions contemplated
by this Agreement, and (ii) use all reasonable and necessary efforts to obtain
at the earliest practicable date all written consents from holders of Warrants
to effect the cancellation of such holder's Warrants to take effect at the
Effective Time.
(e) Notwithstanding any provision in this Section 2.6 to the contrary,
Warrants held by two members of management of the Company that do not exceed an
aggregate value of $155,000 may not be cancelled in the Merger and may remain
outstanding as continuing obligations of the Surviving Corporation.
ARTICLE III.
CLOSING
3.1. CLOSING. The closing of the Merger (the "Closing") shall take place
(i) at the offices of Irell & Manella LLP, 333 South Hope Street, Los Angeles,
California at 9:00 A.M. (Los Angeles time) on the Business Day on which the
parties hereto designate as the closing date following the fulfillment or waiver
of the conditions set forth in Article IX hereof in accordance with this
Agreement or (ii) at such other place and time and/or on such other date as the
Company and Recap may agree.
ARTICLE IV.
CERTIFICATE OF INCORPORATION AND BYLAWS;
OFFICERS AND DIRECTORS OF THE SURVIVING CORPORATION
4.1. THE CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
the Company (the "Certificate") in effect at the Effective Time shall be amended
and restated as of the Effective Time and shall be the Certificate of
Incorporation of the Surviving Corporation, until duly amended in accordance
with the terms thereof and the DGCL.
4.2. THE BYLAWS. The Bylaws of Recap in effect at the Effective Time shall
be the Bylaws of the Surviving Corporation, until duly amended in accordance
with the terms thereof and the DGCL.
4.3. OFFICERS AND DIRECTORS. From and after the Effective Time, the
directors of the Surviving Corporation shall be as set forth on SCHEDULE 4.3
attached hereto, and the officers of the Company at the Effective Time, shall be
the officers of the Surviving Corporation, until their successors have been duly
elected or appointed and qualified or until their earlier death, resignation or
removal in accordance with the Surviving Corporation's Certificate of
Incorporation and Bylaws.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the corresponding sections of the Disclosure
Schedules, the Company hereby represents and warrants to Recap as follows:
5.1. ORGANIZATION, STANDING AND AUTHORITY. Each of the Company and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its respective state of incorporation. Each of the
Company and its Subsidiaries is duly qualified to do business and is in
A-11
<PAGE>
good standing in the states of the United States and any foreign jurisdictions
where its respective ownership or leasing of property or assets or the conduct
of its business requires it to be so qualified, except as set forth on SCHEDULE
5.1. The Company has made available to Recap a complete and correct copy of the
certificate of incorporation, bylaws or other organizational documents, each as
amended to date, of each of the Company and its Subsidiaries. Each of the
certificates of incorporation, bylaws or other organizational documents so made
available is in full force and effect. The corporate records and minute books of
the Company and its Subsidiaries reflect all material action taken and
authorizations made at meetings of such companies' boards of directors or any
committees thereof and at any stockholders' meetings thereof.
5.2. SUBSIDIARIES.
(a) (i) The Company has provided in SCHEDULE 5.2 a list of the true,
accurate and complete legal names, jurisdiction of incorporation or organization
and foreign qualification of each of the Company and its Subsidiaries, (ii) 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
options, warrants, or otherwise, (iii) except as set forth on SCHEDULE 5.2,
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), and (iv) except as set forth on SCHEDULE 5.2, there are no
contracts, commitments, understandings, or arrangements relating to the
Subsidiary's rights to vote or to dispose of such securities.
(b) Except as provided in SCHEDULE 5.2, the Company does not own
beneficially, directly or indirectly, any equity securities or similar interests
of any Person, or any interest in a partnership, limited liability company,
joint venture or other entity or organization, other than its Subsidiaries.
5.3. COMPANY CAPITAL STOCK. As of October 19, 1999, the authorized capital
stock of the Company consists solely of 50,000,000 shares of Common Stock, of
which 21,095,087 are issued and outstanding and 30,000,000 shares of Preferred
Stock of which the following series are authorized, issued and outstanding:
<TABLE>
<CAPTION>
SHARES SHARES ISSUED
SERIES AUTHORIZED AND OUTSTANDING
- --------------------- ---------- ---------------
<S> <C> <C>
A.................... 100 100
B.................... 70,000 -0-
C.................... 100 -0-
D.................... 2,000,000 1,628,663
</TABLE>
As of the date hereof, except for such shares as may be repurchased by the
Company as contemplated by Section 7.18 of this Agreement, no shares of Common
Stock or Preferred Stock were held in treasury by the Company or otherwise
beneficially owned by the Company or its Subsidiaries. The outstanding shares of
Common Stock and Preferred Stock have been duly authorized and validly issued,
are fully paid and nonassessable, subject to no preemptive rights, and were not
issued in violation of any preemptive rights. Except as set forth in SCHEDULE
5.3, each of the outstanding shares of capital stock of each of the Company's
Subsidiaries have been duly authorized, and validly issued and are fully paid
and non-assessable and not subject to any preemptive right and owned, either
directly or indirectly, by the Company free and clear of all Encumbrances.
Except as set forth in SCHEDULE 5.3, there are no pre-emptive rights or
outstanding subscriptions, options, warrants, rights, convertible securities or
other agreements or commitments of any character relating to the issued or
unissued capital stock or other securities of the Company or any of its
Subsidiaries. Except as disclosed in SCHEDULE 5.3, the Company does not have
shares subject to repurchase in the event certain performance targets have not
been met (the 'Company Performance Shares'). SCHEDULE 5.3 also sets forth the
number and type of the equity securities of the Company or its Subsidiaries that
will be issued, in accordance with and subject to any and all earn-out payment
or other obligations of the Company.
A-12
<PAGE>
5.4. CORPORATE POWER. The Company and its Subsidiaries each 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. Except as set forth in
SCHEDULE 5.4, subject to receipt of the requisite approval of the Merger by the
holders of its capital stock and the holders of the Convertible Notes entitled
to vote thereon, this Agreement and the transactions contemplated hereby and
thereby have been authorized by all necessary corporate action of the Company
and the Company Board on or prior to the date hereof. This Agreement has been
duly executed and delivered by the Company and is a valid and legally binding
obligation of the Company, enforceable against the Company 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).
5.5. CONSENTS AND APPROVALS; NO DEFAULTS.
(a) No consents or approvals of, or filings or registrations with, any
Governmental Entity or with any third party are required to be made or obtained
by the Company or any of its Subsidiaries in connection with the execution,
delivery or performance by the Company 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, (ii) the requisite approval of this Agreement
by the holders of the capital stock of the Company and the holders of the
Convertible Notes entitled to vote thereon, (iii) the filing of the Certificate
of Merger with the Delaware Secretary pursuant to the DGCL and (iv) consents,
approvals, filings, or registrations listed on SCHEDULE 5.5(a) or which would
not, individually or in the aggregate, have a Material Adverse Effect on the
Company.
(b) Subject to receipt of the approvals referred to in the preceding
paragraph, and the expiration of related waiting periods, except as set forth in
SCHEDULE 5.5(b), the execution, delivery and performance of this Agreement, the
consummation of the transactions contemplated hereby, and compliance with the
provisions hereof do not and will not (i) violate, or conflict with, or result
in any breach of the terms, conditions, or provisions of the respective charter,
bylaws or other organizational documents of the Company and each of its
Subsidiaries; (ii) violate, or conflict with, or result in a breach of any
provisions of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or give rise to a right of
termination, cancellation, modification or acceleration of the performance
required by or a loss of a material benefit under, or result in the creation or
imposition of (or the obligation to create or impose) any Encumbrance (other
than Permitted Encumbrances) upon any of the properties or assets of the Company
under, any of the terms, conditions or provisions of any material agreement,
indenture, note, bond, mortgage, deed of trust, undertaking, permit, lease,
franchise, license or other instrument to which the Company is a party or by
which it or any of its properties or assets may be bound or affected; or (iii)
to the knowledge of the Company, violate any Law or Order applicable to the
Company, except for any such violation, conflict, breach, default, event, right
or Encumbrance which would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
(c) SCHEDULE 5.5(c) contains a list of all Approvals of Governmental
Entities that, to the knowledge of the Company, are required to be given or
obtained by the Company from any and all Governmental Entities in connection
with the consummation of the transactions contemplated by this Agreement, except
where the failure to be given or obtain such Approvals, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect.
(d) SCHEDULE 5.5(d) contains a list of all non-governmental Approvals
that, to the knowledge of the Company, are required to be given or obtained by
the Company from any and all third parties in connection with the consummation
of the transactions contemplated by this Agreement, except where the failure to
give or obtain such Approvals, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect.
5.6. FINANCIAL REPORTS AND REGULATORY DOCUMENTS.
A-13
<PAGE>
(a) The Company has heretofore delivered or made available to Recap a
complete and correct copy of each registration statement, offering circular
relating to the offering of securities, report, proxy statement, schedule or
information statement prepared by it or any of its Subsidiaries since December
31, 1996, including, without limitation, (A) any Annual Reports on Form 10-K,
and (B) any Quarterly Reports on Form 10-Q, each in the form (including exhibits
and any amendments thereto) filed with the SEC (collectively, the "SEC
Reports"). As of their respective dates or, if amended, as of the date of the
last such amendment prior to the date of this Agreement, the Company's SEC
Reports did not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading. None of the Subsidiaries is required to file any forms,
reports or other documents with the SEC. Except as set forth on SCHEDULE 5.6,
each of the Company's consolidated balance sheets included in or incorporated by
reference into its SEC Reports (including the related notes and schedules)
fairly presents the consolidated financial position of the Company as of its
date and each of the consolidated statements of income, cash flows and
stockholders' equity included in or incorporated by reference into its SEC
Reports (including any related notes and schedules) fairly presents the
consolidated results of operations, retained earnings and cash flows, as the
case may be, of the Company for the periods set forth therein (subject, in the
case of unaudited statements, to normal year-end audit adjustments), in each
case in accordance with GAAP (except, in the case of unaudited statements, as
permitted by applicable instructions or regulations of the SEC relating to the
preparation of quarterly reports on Form 10-Q) consistently applied through the
periods indicated.
(b) Each of the Company and its Subsidiaries has timely filed all
notices, reports, registrations, schedules and statements, together with any
amendments required to be made with respect thereto, that they were required to
file with the United States Department of Justice, the Federal Trade Commission,
NASD, the SEC and state securities authorities and all other material reports
and statements required to be filed by it with any Governmental Entity,
including, without limitation, any report or statement required to be filed
pursuant to the laws of the United States, and has paid all fees and assessments
due and payable in connection therewith, except where the failure to file or pay
such fees or expenses would not, individually or in the aggregate, be reasonably
expected to have a Material Adverse Effect on the Company.
(c) Since June 30, 1999, the Company and its Subsidiaries have not
incurred any material liability other than in the ordinary course of business
consistent with past practice.
(d) Except as disclosed in the Company SEC Reports, in SCHEDULE 5.6, or
as contemplated by this Agreement, since June 30, 1999 to the date hereof, the
Company's business has been conducted in the ordinary course, and there has not
been any:
(i) adverse and material change in the condition (financial or
otherwise), results of operations, assets, liabilities, prospects or
business of the Company;
(ii) amendment to the Company's or any of the Company's Subsidiaries'
charter, bylaws or other organizational documents;
(iii) sale, assignment, disposition, transfer, pledge, mortgage or
lease of any material assets primarily used or held for use in the Company's
business;
(iv) incurrence of any Indebtedness, other than accounts payable
arising in the ordinary course of business, consistent with past practice,
and other than under the existing revolving credit facility in the ordinary
course of business;
(v) material reduction in any cash or short-term investments or their
equivalent, other than to meet cash needs arising in the ordinary course of
business, consistent with past practices;
A-14
<PAGE>
(vi) sale, assignment, disposition, transfer, pledge, mortgage or lease
of any material Owned Real Estate or Leased Real Estate;
(vii) increase in the compensation or fringe benefits payable or to
become payable to any officers or salaried employees of the Company, other
than routine increases made in the ordinary course of business and
consistent with past practice or as required by law or under any existing
agreements heretofore disclosed to Recap;
(viii) issuance, sale or disposition of any capital stock or other
equity interest in the Company or options, warrants or other rights to
purchase any such capital stock or equity interest or any securities
convertible into or exchangeable for such capital stock or equity interest
or any other change in the issued and outstanding capitalization of the
Company;
(ix) any amendment, alteration or modification in the terms of any
currently outstanding options, warrants or other rights to purchase any
capital stock or equity interest in the Company or any securities
convertible into or exchangeable for such capital stock or equity interest,
including without limitation any reduction in the exercise or conversion
price of any such rights or securities, any change to the vesting or
acceleration terms of any such rights or securities, or any change to terms
relating to the grant of any such rights or securities;
(x) declaration or payment of any dividend or other distribution, or
the transfer of any assets, by the Company to any stockholders of the
Company, or any redemption, repurchase or other acquisition by the Company
of its capital stock, except in the ordinary course of business;
(xi) change by the Company in any of its accounting principles, methods
or practices, including any change in its policies with respect to reserves
(whether for bad debts, contingent liabilities or otherwise), any change in
depreciation or amortization policies or rates or any change in the policies
pertaining to the recognition of accounts receivable or the discharge of
accounts payable;
(xii) changes in the business policies (including advertising,
investment, marketing, pricing, purchasing, production, personnel, sales or
budgeting) or organization of the Company, or the Company's relationships
with dentists, hygienists, technicians, employees, suppliers, agents,
servicers or customers that are material to the Company, except for changes
that would not, individually or in the aggregate, be reasonably expected to
have a Material Adverse Effect on the Company;
(xiii) closure, shut down or other elimination of any of the Company's
offices, franchises or any other change in the character of its business,
properties or assets, except, for closures, shut downs, or other
eliminations that would not, individually or in the aggregate, be reasonably
expected to have a Material Adverse Effect on the Company;
(xiv) loan or advance to or other such agreement with any of its
stockholders, officers, directors, employees, agents, consultants or other
Representatives, except in the ordinary course of business, consistent with
past practice;
(xv) damage, destruction or loss with respect to any of the properties
or assets of the Company that would have a Material Adverse Effect; or
(xvi) agreement to do, cause or suffer any of the foregoing.
5.7. DISCLOSURE DOCUMENTS. The proxy statement on Schedule 14A in respect
of the Special Meeting of the Company's stockholders to vote upon the Merger
(the "Company Proxy Statement") to be filed with the SEC in connection with the
Merger will not, at the date it is first mailed to stockholders of the Company
or at the time of the Special Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Company Proxy
Statement will comply as to form in all material respects with the requirements
of the Exchange Act. No
A-15
<PAGE>
representation is made by the Company with respect to statements made in the
Company Proxy Statement based on information supplied by Recap for inclusion
therein.
5.8. LITIGATION. Except as set forth in SCHEDULE 5.8, there are no Actions
pending or, to the knowledge of the Company, claims threatened against the
Company, at law or in equity, and there is no investigation or proceeding
pending or, to the knowledge of the Company, threatened before or by any
Governmental Entity nor is there any currently effective Order against the
Company, except for any such Actions, claims, investigations, proceedings or
Orders that would not, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect. SCHEDULE 5.8 identifies those pending or, to
the knowledge of the Company, threatened claims listed therein which (i) may not
be covered by third party insurance or (ii) with respect to which the insurance
carrier has denied coverage or has advised the Company that it is defending such
claim under reservation of rights or (iii) for which the Company is self-
insured.
5.9. REGULATORY MATTERS.
(a) Except as set forth on SCHEDULE 5.9, neither the Company 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 Entity.
(b) Except as set forth on SCHEDULE 5.9, neither the Company nor any of
its Subsidiaries has been advised by any Governmental Entity that such
Governmental Entity 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) Except as set forth in SCHEDULE 5.10, the Company 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 business of the Company and its
Subsidiaries 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 Entities 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 the Company's knowledge, no suspension or cancellation of any of them is
threatened; and (iii) has not received any notification or communication from
any Governmental Entity (a) asserting that the Company or any of its
Subsidiaries is not in compliance with any of the statutes, regulations or
ordinances which such Governmental Entity enforces or (b) threatening to revoke
any license, franchise, permit or governmental authorization (nor, to the
Company's knowledge, do any grounds for any of the foregoing exist).
(b) The terms and conditions set forth in the management agreements
between the Company 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, referral fees, and patient brokering and those relating to such
practices.
5.11. MATERIAL CONTRACTS; DEFAULTS.
(a) SCHEDULE 5.11 lists (a) all contracts or commitments that provide
for the aggregate payments to or from the Company in excess of Five Hundred
Thousand Dollars ($500,000) per contract per annum which cannot or in reasonable
probability will not be completed within ninety (90) days from the Closing Date
or cannot be terminated within ninety (90) days from the Closing Date without
the
A-16
<PAGE>
payment of a penalty or the equivalent thereof in excess of Two Hundred Fifty
Thousand Dollars ($250,000) or can be terminated by the other party thereto
within ninety (90) days from the Closing Date; (b) all contracts or commitments
affecting ownership of, title to, use of, or any interest in material real
property; (c) all bonuses, incentive compensation, pension, group insurance, or
employee welfare plans of any nature whatsoever that provides for aggregate
payments from the Company in excess of Five Hundred Thousand Dollars ($500,000)
per annum; (d) all documents evidencing any Indebtedness in excess of Two
Hundred Fifty Thousand Dollars ($250,000) to or from the Company; (e) all other
contracts or commitments providing for payments based in any manner upon the
sales, fees, services, purchases or profits in excess of Five Hundred Thousand
Dollars ($500,000) per annum; (f) all contracts or commitments, whether in the
ordinary course of business or not, which involve future payments, earnouts,
performance of services or delivery of goods, equipment or supplies to or by the
Company of an aggregate amount or value in excess of Two Hundred Fifty Thousand
Dollars ($250,000); (g) all business acquisition agreements, merger agreements
(whether by sale of assets, consolidation, reorganization or otherwise),
management services agreements, agency, dealership, license or royalty
agreements, nondisclosure agreements, non-compete agreements, partnership,
joint-venture agreements and commission agreements that require continuing or
future payments by the Company in excess of Two Hundred Fifty Thousand Dollars
($250,000) entered into since January 1, 1999; (h) all agreements between the
Company and any five percent (5%) or greater stockholder, any executive officer,
director, Affiliate or any member of the immediate family of any of the
foregoing persons of the Company; (i) all other material agreements and
commitments with respect to intellectual property; (j) all material contracts to
indemnify or share tax liability or sharing of fees, rebating charges or similar
arrangements; and (k) all other agreements and commitments the absence or
termination of which would have a Material Adverse Effect on the Company;
PROVIDED THAT SCHEDULE 5.11 shall not include any leases for tangible personal
property requiring monthly payments of less than Fifty Thousand Dollars
($50,000) or any contract between a Subsidiary of the Company and any provider
or third party payor regarding payment for the provisions of professional dental
services that are made in the ordinary course of business. Copies of all of the
agreements, contracts and arrangements referred to in this Section have been
heretofore made available to Recap.
(b) Except as set forth in SCHEDULE 5.11, (i) the Company is not, and
to the knowledge of the Company no other party is, in violation of any contract
listed on said SCHEDULE 5.11 or in default with respect thereto, except for such
violation or default that would not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect on the Company; (ii) each
contract listed on said Disclosure Schedule is a valid, binding and enforceable
obligation of the Company and, to the knowledge of the Company, the other
parties thereto and is in full force and effect, except where the failure to be
valid, binding, enforceable and in full force and effect would not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect on
the Company, and (iii) none of the contracts listed on such SCHEDULE 5.11
contains provisions that upon a change in control of the Company would have a
Material Adverse Effect on the Company.
5.12. NO BROKERS. No action has been taken by the Company 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. ABSENCE OF UNDISCLOSED LIABILITIES. Except as accrued on the balance
sheet of the Company and/or its Subsidiaries at December 31, 1998 included in
Form 10-K (the "Balance Sheet") or set forth in the notes thereto, and except as
set forth in SCHEDULE 5.13, the Company and its Subsidiaries do not have any
liability (whether absolute, accrued, contingent, or otherwise, matured or
unmatured, and whether due or to become due), which liability is required (or
would be required had such liabilities existed at December 31, 1998) to be
reflected on the Balance Sheet or the notes thereto in accordance with GAAP,
except for liabilities and obligations incurred since December 31, 1998 in the
A-17
<PAGE>
ordinary course of business and consistent with past practice which would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on the Company.
5.14. EMPLOYEE BENEFIT PLANS.
(a) All benefit and compensation plans, contracts, policies or
arrangements covering current employees or former employees of the Company and
its Subsidiaries (collectively, the "Company Employees") and current or former
directors of the Company, 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 "Company Benefit Plans"), are disclosed in
SCHEDULE 5.14. True and complete copies of all the Company Benefit Plans,
including, but not limited to, any trust instruments and insurance contracts
forming a part of any the Company Benefit Plans, and all amendments thereto have
been provided or made available to the other parties hereto.
(b) Except as set forth in SCHEDULE 5.14, all employee benefit plans,
other than "multiemployer plans" within the meaning of Section 3(37) of ERISA,
covering the Company Employees (the "Company 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. The Company is not a party to any "employee pension benefit plan"
within the meaning of Section 3(2) of ERISA (the "Company 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 Recap, that such
plan is, and each such plan in fact is, qualified and exempt from federal income
taxes. Except as set forth in SCHEDULE 5.14, there is no pending or, to the
knowledge of the Company, threatened litigation relating to any Company Plan.
Except as set forth in SCHEDULE 5.14, there are no audits, inquiries, reviews,
proceedings, claims or demands pending with any governmental or regulatory
agency. Neither the Company nor any of its Subsidiaries has engaged in a
transaction with respect to any Company Plan that, assuming the taxable period
of such transaction expired as of the date hereof, could subject the Company or
any of its Subsidiaries to a material tax or penalty imposed by either Section
4975 of the Code or Section 502(i) of ERISA.
(c) No material liability under Subtitle C or D of Title IV of ERISA
has been or is expected to be incurred by the Company 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 the Company under Section 4001 of ERISA or Section 414 of the Code
(an "ERISA Affiliate"). Neither the Company, any of its Subsidiaries nor an
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 the Company Pension Plan or by any
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 the
Company Plan have been timely made or have been reflected on the consolidated
financial statements of the Company referred to in Section 5.6. Neither any the
Company 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 the Company nor any of its Subsidiaries has
provided, or is required to provide, security to any Company Pension Plan or to
any single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of
the Code.
A-18
<PAGE>
(e) Under each Company 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 Company Plan's most recent actuarial
valuation), did not exceed then current value of the assets of such Company
Plan, and there has been no material change in the financial condition of such
Company Plan since the last day of the most recent plan year.
(f) Neither the Company nor any of its Subsidiaries has any material
obligations for retiree health and life benefits under any Company Benefit Plan.
The Company or its Subsidiaries may amend or terminate any such Company Benefit
Plan at any time without incurring any material liability thereunder.
(g) Except as contemplated by this Agreement, the consummation of the
transactions contemplated by this Agreement will not (i) entitle any employees
of the Company 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 Company Benefit Plans or (iii) result in any breach or
violation of, or a default under, any of the Company Benefit Plans. Without
limiting the foregoing, as a result of the consummation of the transactions
contemplated by this Agreement, neither the Company 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.
Except as set forth on SCHEDULE 5.14, there is no contract, agreement, plan or
arrangement covering any employee or former employee of the Company or any of
its affiliates that would obligate the Company to make any payments that will
not be fully deductible by virtue of Section 162(m) of the Code.
5.15. LABOR AND EMPLOYMENT MATTERS.
(a) Except as set forth on SCHEDULE 5.15, neither the Company 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 the Company 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 the Company 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 the
Company's knowledge, threatened, nor is the Company 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.
(b) SCHEDULE 5.15 is an accurate list of each employment contract of
the Company which provides for aggregate annual payments of more than $200,000
for personal services or employment which is not terminable on 30 days (or less)
notice by the Company without penalty or obligation to make payments related to
such termination. Except in accordance with the contracts, agreements, plans or
programs identified in SCHEDULE 5.15, no individual will accrue or receive
material additional benefits, service or accelerated rights to payment of
benefits as a result of the transactions contemplated by this Agreement (either
alone or combined with any other event or transaction).
(c) The Company is in compliance in all material respects with all
applicable Laws relating to the employment of labor, including those related to
wages, hours, occupational safety and health, plant closings and mass layoffs,
collective bargaining and the payment and withholding of taxes and other sums as
required by appropriate Governmental Entities, and there has been withheld and
paid to the appropriate Governmental Entities, or there is being held for
payment not yet due to such Governmental Entities, all amounts required to be
withheld from the employees of the Company, and the Company is not liable for
any arrears of wages, taxes, penalties or other sums for failure to comply with
any of the foregoing except for such failures which would not, individually or
in the aggregate, be expected to have a Material Adverse Effect on the Company.
A-19
<PAGE>
(d) As of the date hereof, and except as set forth in SCHEDULE 5.15,
there is no (i) unfair labor practice complaint against the Company pending
before the National Labor Relations Board or any other federal, state, local or
foreign agency; (ii) pending labor strike, work stoppage, work slow down or
lockout affecting the Company; (iii) pending material grievance or unfair
dismissal proceeding relating to the Company; (iv) material claim by employees
of the Company alleging discrimination under any federal, state or local law or
constitution, including claims of discrimination or retaliation based on race,
color, creed, age, sex, sexual orientation, national origin, religion or
disability; (v) other material claims affecting the Company relating to
employment, including those based on statute, contract or tort; (vi) pending
representation question or union organizing activities respecting a significant
number of the employees of the Company; or (vii) to the knowledge of the
Company, threat, investigation, charge or complaint with regard to any of the
foregoing relating to the Company.
5.16. YEAR 2000 COMPLIANCE. Except as set forth on SCHEDULE 5.16, (i) the
computer software and related hardware of the Company and its Subsidiaries (the
"Company 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 the Company, all of the suppliers, customers and third party
providers of the Company are, or will be prior to the year 2000, Year 2000
Compliant; and (iii) the Company is taking or has taken all commercially
reasonable and appropriate action to address and remedy any deficiencies in the
Company Computer System which would keep it from becoming Year 2000 Compliant.
As used herein, 'Year 2000 Compliant' shall mean the ability of the Company
Computer System, 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.
5.17. ENVIRONMENTAL MATTERS.
(a) Except as set forth on SCHEDULE 5.17, the Company and each of its
Subsidiaries has complied at all times in all material respects with applicable
Environmental Laws; (i) no real property (including buildings or other
structures) currently or formerly owned, leased or operated by the Company or
any of its Subsidiaries has been contaminated with, or has had any release of,
any Hazardous Substance that the Company would reasonably be expected to be
liable for any potential material investigation, clean-up, claims or material
liability from such real property; (ii) neither the Company nor any of its
Subsidiaries is subject to liability for any Hazardous Substance disposal or
contamination on any third party property; (iii) neither the Company nor any of
its Subsidiaries has received any notice, demand letter, claim or request for
information alleging any material violation of, or material liability under, any
Environmental Law; (iv) neither the Company nor any of its Subsidiaries is
subject to any order, decree, injunction or other agreement with any
Governmental Entity or any third party relating to any Environmental Law; (v) to
the best of the Company'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 any currently or formerly owned or operated
property of the Company or any of its Subsidiaries, that could reasonably be
expected to result in any material claims, liability or investigations against
the Company or any of its Subsidiaries or result in any material restrictions on
the ownership, use, or transfer of any property pursuant to any Environmental
Law; and (vi) the Company has delivered to Recap copies of all environmental
reports, studies, sampling
A-20
<PAGE>
data, correspondence, filings and other environmental information in its
possession or reasonably available to it relating to the Company, any Subsidiary
of the Company and any currently or formerly owned, leased or operated property.
(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 Entity in connection with
any Environmental Law.
5.18. 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 the
Company 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 the Company or its Subsidiaries. The Company has made available
to Recap true and correct copies of the United States federal income Tax Returns
filed by the Company and its Subsidiaries for each of the three most recent
fiscal years ended on or before December 31, 1998. Neither the Company 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 the Company 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 the Company SEC Reports filed on or prior to the date
hereof. Except as set forth on SCHEDULE 5.18, neither the Company 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 the Company) or
otherwise has any liability for the Taxes of any person (other than the Company
and its Subsidiaries).
(b) Except as set forth on SCHEDULE 5.18, no Tax is required to be
withheld pursuant to Section 1445 of the Code as a result of the transfer
contemplated by this Agreement.
5.19. BOOKS AND RECORDS. The books and records of the Company 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 the Company and its Subsidiaries.
5.20. INSURANCE. SCHEDULE 5.20 lists all of the insurance policies,
binders, or bonds maintained by the Company or its Subsidiaries ('Insurance
Policies'). The Company and its Subsidiaries are insured with reputable insurers
against such risks and in such amounts as the management of the Company
reasonably has determined to be prudent for its business, operations, properties
and assets. All the Insurance Policies are in full force and effect; the Company
and its Subsidiaries are not in material default thereunder; and all claims
thereunder have been filed in due and timely fashion. No material claim by the
Company on or in respect of an insurance policy or bond has ever been declined
or refused by the relevant insurer or insurers. Between the date hereof and the
Closing Date, the Company will maintain the levels of insurance coverage in
effect on the date hereof and will submit all claims existing prior to the
Closing Date to its insurance carrier on or before the Closing Date.
A-21
<PAGE>
5.21. ASSETS.
(a) Except as indicated in SCHEDULE 5.21, the Company holds title to or
a leasehold, consignment or license in each item of material tangible personal
property owned by or in the possession of the Company. Except as indicated in
SCHEDULE 5.21 or on the Balance Sheet or the notes thereto:
(i) each item of tangible personal property listed in the fixed asset
ledger of the Company as being owned is owned by the Company, and will at
the Closing be owned by the Company, free and clear of all Encumbrances
except for Permitted Encumbrances; and
(ii) the Company is not in default with respect to any term or
condition of any lease of personal property, nor has any event occurred
which through the passage of time or the giving of notice, or both, would
result in such a default, in each case except as would not individually or
in the aggregate reasonably be expected to have a Material Adverse Effect;
and
(iii) except for such items of equipment as are undergoing repair or
refurbishment or are being held for replacement, in each case in the
ordinary course of business and consistent with past practice, and except to
the extent that no material liability will be incurred in restoring
equipment to reasonable operating condition, all of the equipment (including
tools, operating and office supplies, and computer hardware and softwares)
owned or leased or otherwise used by the Company are in reasonable operating
condition and, subject to normal maintenance, are available for use.
(b) All accounts receivable, unbilled invoices and other receivables of
the Company due or recorded in the records and books of account of the
Company as being due to the Company (less the amount of any provision or
reserve therefor made in the records and books of account of the Company)
(i) arose in the ordinary course of business, and (ii) are reasonably
expected to be collectible.
(c) Except as set forth in SCHEDULE 5.21, the values at which
inventories of the Company are carried on the balance sheet as of December
31, 1998 referred to in Section 5.6 reflect the inventory valuation policy
of the Company consistent with its past practice and in accordance with
GAAP.
5.22. STATEMENTS TRUE AND CORRECT. None of the information (including this
Agreement) supplied or to be supplied by the Company or any of its Subsidiaries
to any Governmental Entity in connection with the transactions contemplated
hereby will, at the respective time such documents are supplied, 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 omit to state any material fact
necessary to correct any statement in any earlier communication to any
Governmental Entity. All documents that the Company or any Subsidiary thereof is
responsible for filing with any Governmental Entity in connection with the
transactions contemplated hereby will comply as to form in all material respects
with the provisions of applicable law. Except as disclosed in this Agreement
(including any Exhibit or Schedule) and such other documents and certificates,
there is no fact known to the Company which constitutes a Material Adverse
Effect on the Company.
5.23. REGULATORY APPROVALS. Except as set forth on SCHEDULE 5.23 hereto,
neither the Company nor any of its Subsidiaries has taken any action or has any
knowledge of any fact or circumstance that is reasonably likely to materially
impede or delay receipt of any consents of a Governmental Entity or result in
the imposition of a condition or restriction.
5.24. REAL PROPERTY AND LEASEHOLDS.
(a) SCHEDULE 5.24 lists and identifies all material parcels of real
property currently owned in fee by the Company (the 'Owned Real Estate'). The
Company holds marketable and legal title to each of the real properties
constituting Owned Real Estate, free and clear of all Encumbrances, except for
Permitted Encumbrances.
A-22
<PAGE>
(b) SCHEDULE 5.24 lists and identifies all material parcels of real
property leased or subleased to the Company (collectively, the "Leased Real
Estate"). Except as set forth on SCHEDULE 5.24, to the knowledge of the Company,
the Company holds valid and subsisting leasehold interests to each of the
leaseholds constituting Leased Real Estate, free and clear of all Encumbrances,
except for Permitted Encumbrances.
(c) With respect to each lease, master lease or sublease of any real
estate described in SCHEDULE 5.24, except as set forth in SCHEDULE 5.24 and to
the knowledge of the Company, the Company is not and no other party thereto is,
in default with respect to any material term or condition thereof, nor has any
event occurred that through the passage of time or the giving of notice, or
both, would constitute a material default thereunder, except in each such case
for such defaults as would not reasonably be expected to result in any adverse
consequence that, individually or in the aggregate, would have a Material
Adverse Effect on the Company.
(d) Except as set forth on SCHEDULE 5.24 and to the knowledge of the
Company, all the real property leases relating to the Leased Real Estate are in
full force and effect (including those that have expired original terms and are
continuing on a month-to-month or similar basis) and the Company is entitled to
all the rights of a tenant thereunder, taking into account the consummation of
the transactions contemplated by this Agreement. Except as set forth on SCHEDULE
5.24, no Action against the Company is pending or, to the knowledge of the
Company, threatened in connection with any such real property leases, except for
any Action (not involving the failure to pay rent) that is not, individually or
in the aggregate, reasonably expected to have a Material Adverse Effect.
5.25. COMPANY ACTION. The Company Board or Special Committee has adopted
resolutions recommending that this Agreement and the Merger be approved by its
stockholders and note holders (as applicable) and directing that this Agreement
and the Merger be submitted for consideration by its stockholders at the Special
Meeting.
5.26. TAKEOVER STATUTES. Except for Section 203 of the DGCL, no Takeover
Statute applicable to the Company is applicable to the Merger, the
Recapitalization or the other transactions contemplated hereby.
5.27. EARN OUT PAYMENTS. SCHEDULE 5.27 sets forth a summary of the material
terms of any and all earn out payment obligations of the Company, including but
not limited to the payment of cash, the issuance of equity and incurring of
Indebtedness by the Company. Such summary shall contain the identity of the
party due such earn out payment, the amount of the payment, the transaction
related to such earn out and the earn out performance thresholds.
5.28. OPINION. The Special Committee has engaged Deutsche Bank Securities
Inc. and has received the opinion of Deutsche Bank Securities Inc. to the effect
that, as of the date of this Agreement, the cash consideration to be received in
the Merger by the holders of the shares of Common Stock (other than the Rollover
Holders) is fair to such holders from a financial point of view.
ARTICLE VI.
REPRESENTATIONS AND WARRANTIES OF RECAP
Recap hereby represents and warrants to the Company as follows:
6.1. ORGANIZATION AND GOOD STANDING; AUTHORITY. Recap is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power and authority and has taken all corporate
action necessary in order to execute and deliver this Agreement and consummate
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by Recap and is a valid and legally binding obligation of it,
enforceable against Recap in accordance with its terms (except as enforceability
may be limited by applicable bankruptcy,
A-23
<PAGE>
insolvency, reorganization, moratorium, fraudulent transfer and similar laws of
general applicability relating to or affecting creditors' rights or by general
equity principles).
6.2. ABSENCE OF CONFLICT. Subject to the receipt of the approvals set forth
in SCHEDULE 6.2, the execution, delivery and performance of this Agreement, the
consummation of the transactions contemplated hereby, and compliance with the
provisions hereof do not and will not (i) violate, or conflict with, or result
in a breach of the terms, conditions, or provisions of the charter or bylaws of
Recap; (ii) violate, or conflict with, or result in a breach of any provisions
of, or constitute a default (or an event that, with the notice or lapse of time
or both, would constitute a default) under, or give rise to a right of
termination, cancellation, modification or acceleration of the performance
required by or a loss of a material benefit under, or result in the creation or
imposition of (or the obligation to create or impose) any Encumbrance upon any
of the properties or assets of Recap under any of the terms, conditions or
provisions of any material agreement, indenture, note, bond, mortgage, deed of
trust, undertaking, permit, lease, franchise, license or other instrument to
which Recap is a party or by which it or any of its properties or assets may be
bound or affected; or (iii) to the knowledge of Recap, violate any Law or Order
applicable to Recap, except for any such violation, conflict, breach, default,
event, right or Encumbrance which would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
6.3. APPROVALS. SCHEDULE 6.3 contains a list of all Approvals of
Governmental Entities which, to the knowledge of Recap, are required to be given
or obtained by Recap from any and all Governmental Entities in connection with
the consummation of the transactions contemplated by this Agreement, except
where the failure to be given or obtain such Approvals, individually or in the
aggregate, would not reasonable be expected to have a Material Adverse Effect.
6.4. BROKERS. All negotiations relative to this Agreement and the
transactions contemplated hereby have been conducted by Recap in such manner as
not to give rise to, and the consummation of the transactions contemplated
hereby will not give rise to, any valid claim against the Company or any of its
directors, officers, stockholders or affiliates for a brokerage commission,
finder's fee or other like payment to any person or entity.
6.5. FINANCING. Recap will have at the Closing sufficient cash through a
combination of committed capital from its investors (including, without
limitation, equity cash contributions by GEI in the amounts contemplated by the
Financing Letters (as defined below)) and financing from financial institutions,
subject to the fulfillment of the conditions precedent to borrowings set forth
in the Financing Letters, to enable it to pay the full Merger Consideration as
provided herein, to make all other necessary payments by it in connection with
the Merger (including the repayment of certain outstanding indebtedness of the
Surviving Corporation, including the current senior credit facility of the
Company and the Convertible Notes) and to pay all of the related fees and
expenses (the "Financing"). The Company shall use all reasonable efforts to
cooperate with and assist Recap in obtaining the Financing. The parties
acknowledge that financing letters from the following Persons have been
delivered to the Board of Directors of the Company: (i) Deutsche Bank Securities
Inc. and (ii) Donaldson, Lufkin & Jenrette Securities Corporation (collectively,
the "Financing Letters"). Notwithstanding anything in this Section 6.5 to the
contrary, the Financing Letters delivered to the Board of Directors of the
Company on or before the date of this Agreement may be superseded at the option
of Recap after the date hereof but prior to the Effective Time by letters (the
"New Financing Letters") delivered to the Board of Directors of the Company,
which New Financing Letters shall be substantially similar to the Financing
Letters, provided that the terms of the New Financing Letters shall not have any
adverse effect upon the ability to consummate, or expand upon the conditions
precedent to, the Financing as set forth in the Financing Letters. In such
event, the term "Financing Letters" as used herein shall be deemed to refer to
the New Financing Letters.
6.6. STATEMENTS TRUE AND CORRECT. None of the information supplied or to be
supplied by Recap or any of its Affiliates to the Company or any of its
Affiliates in connection with any filing or
A-24
<PAGE>
communication with any Governmental Entity in connection with the transactions
contemplated hereby will, at the respective time such documents are supplied, 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 omit to state any
material fact necessary to correct any statement in any earlier communication to
or filing with any Governmental Entity. All documents that Recap or any of its
Affiliates is responsible for filing with any Governmental Entity in connection
with the transactions contemplated hereby will comply as to form in all material
respects with the provisions of applicable law.
ARTICLE VII.
COVENANTS
7.1. CONDUCT OF BUSINESS PENDING CLOSING. Except for actions contemplated
by subparagraphs below, the Company agrees that on and after the date hereof and
prior to the Closing Date, except as otherwise consented to by Recap in writing
(which consent shall not be unreasonably withheld), as set forth in SCHEDULE
7.1, or as otherwise contemplated by this Agreement:
(a) The Company shall conduct its business in the ordinary course in
all material respects;
(b) The Company shall (i) discharge accounts payable and other current
liabilities and obligations of the Company in accordance with past practice, and
(ii) discharge on a timely basis in accordance with past practice any and all
liabilities as and to the extent such liabilities or any portion thereof become
due prior to the Closing; PROVIDED, HOWEVER, that the Company shall not prepay,
redeem or repurchase any Indebtedness or other obligations that are not due and
payable prior to the Closing other than as contemplated by this Agreement or
pursuant to its existing revolving credit facility in the ordinary course of
business;
(c) The Company shall use commercially reasonable efforts to preserve
the business organization of the Company intact, to preserve the goodwill of
suppliers, customers, employees and others with whom business relationships
exist and maintain all Permits, licenses and franchises;
(d) Other than in connection with acquisitions in the ordinary course
of business, not to exceed $15,000,000 individually or $40,000,000 in the
aggregate in total consideration (including but not limited to cash paid, seller
notes, Indebtedness assumed or other such consideration including earn out
obligations) (the "Permitted Acquisitions") following adequate notice to Recap,
the Company shall not borrow any money, incur any Indebtedness or guarantee any
Indebtedness or obligation of any Person, other than accounts payable arising in
the ordinary course of business, consistent with past practice, and other than
pursuant to its existing revolving credit facility in the ordinary course of
business;
(e) The Company shall not issue, sell or dispose of any capital stock
or other equity interest in the Company or options, warrants or other rights to
purchase any such capital stock or equity interest or any securities convertible
into or exchangeable for such capital stock or equity interests or otherwise
make or effect any change in the issued and outstanding capitalization of the
Company;
(f) Except as otherwise contemplated pursuant to this Agreement, the
Company shall not cause or permit any amendment, alteration or modification in
the terms of any currently outstanding options, warrants or other rights to
purchase any capital stock or equity interest in the Company or any securities
convertible into or exchangeable for such capital stock or equity interest,
including without limitation any reduction in the exercise or conversion price
of any such rights or securities, any change to the vesting or acceleration
terms of any such rights or securities, or any change to terms relating to the
grant of any such rights or securities;
(g) Except as set forth on SCHEDULE 7.1(g), the Company shall not
declare or pay any dividend or make any other distribution, or transfer any
assets, to any stockholders of the Company, or
A-25
<PAGE>
redeem, repurchase or otherwise reacquire any of its capital stock, except in
the ordinary course of business;
(h) Other than Permitted Acquisitions or agreements to manage dental
practices on the standard form agreements of the Company in accordance with past
practice, following adequate notice to Recap, the Company shall not enter into
any contracts or agreements (written or oral) that provide for aggregate
payments by any party in excess of $500,000 per contract per annum, and that are
not terminable upon 90 days (or less) notice by the Company without penalty or
obligation to make payments related to such termination and, to the extent the
Company is a party to any such contract or agreement as of the date hereof, the
Company shall not amend or waive any material rights under any such contract;
(i) Other than Permitted Acquisitions following adequate notice to
Recap, the Company shall not purchase, lease or otherwise acquire all or any
substantial part of the properties or assets of, or otherwise acquire, merge or
consolidate with, any Person (or division thereof);
(j) The Company shall not sell, lease, transfer, assign or otherwise
dispose of any material properties or assets, except for sales in connection
with any transaction to which the Company is contractually obligated prior to
the date hereof described on SCHEDULE 7.1(j) or as consistent with past business
practice;
(k) Except as set forth on SCHEDULE 7.1(k), the Company shall not sell,
lease, transfer, assign or otherwise dispose of any material Owned Real Estate
or Leased Real Estate, and the Company shall not permit any lease or sublease of
Leased Real Estate to terminate or expire, in each case except as otherwise
provided in this Agreement or as consistent with past business practice;
(l) Except as may be required by law or under any existing agreements
heretofore disclosed to Recap, the Company shall not increase the compensation
or fringe benefits payable or to become payable by the Company to any of the
officers or salaried employees of the Company, other than routine or customary
increases made in the ordinary course of business and consistent with past
practice;
(m) Except as set forth on SCHEDULE 7.1(m), the Company shall not
close, shut down or otherwise eliminate any of its offices or make any other
material change in the character of its business, properties or assets other
than in the ordinary course of business consistent with past practice except for
closures, shut downs, eliminations or changes that would not, individually or in
the aggregate, be reasonably expected to have a Material Adverse Effect on the
Company;
(n) Except as disclosed on SCHEDULE 7.1(n) hereof, the Company shall
not change its accounting principles, methods or practices, including any change
in its policies with respect to reserves (whether for bad debts, contingent
liabilities or otherwise), any change in depreciation or amortization policies
or rates or any change in the policies pertaining to the recognition of accounts
receivable or the discharge of accounts payable or accounting for inventories
other than in the ordinary course of business and/or would have a detrimental
impact on the financial condition of the Company;
(o) Other than in the ordinary course or as otherwise contemplated by
this Agreement as part of the transactions to be consummated pursuant to this
Agreement, the Company shall not make any representation or proposal to, or
engage in substantive discussions with, any of the holders (or their
representatives) of any Indebtedness, or to or with any party which has issued a
letter of credit that benefits the Company, without prior consultation with and
approval of Recap (which shall not be unreasonably withheld);
(p) The Company shall (i) use commercially reasonable efforts to
maintain its existing Permits and Approvals, and (ii) be in compliance with
applicable Law, except for failures to comply that would not, individually or in
the aggregate, be reasonably expected to have a Material Adverse Effect on the
Company;
A-26
<PAGE>
(q) The Company shall use commercially reasonable efforts to maintain
in full force and effect all policies of insurance now in effect and give all
notices and present all claims under all such policies in a timely fashion;
(r) The Company shall not enter into any agreement or take or commit to
take any action that would, if taken on or before the Closing, result in a
breach of any of the foregoing covenants contained in this Section 7.1 or of any
representation or warranty of the Company contained in this Agreement;
(s) The Company shall not take any action, enter into any agreement,
alter any policy or commit to any of the foregoing if such action, agreement or
policy would delay or hinder the consummation of the Recapitalization or the
Merger, or would result in or trigger push-down accounting treatment of the
Merger and the transactions contemplated herein;
(t) The Company shall not settle or resolve any single litigation,
arbitration or other adjudication matter, if such settlement or resolution would
result in a payment in excess of $750,000 without the prior written consent of
Recap which consent shall not be unreasonably withheld; and
(u) The Company may not make any single capital expenditures other than
capital expenditures in the ordinary course of business consistent with past
practice in amounts not exceeding $500,000.
7.2. ACCESS. The Company shall permit Recap and its Representatives to have
reasonable access during normal business hours, upon reasonable notice and in
such manner as will not unreasonably interfere with the conduct of the Company's
business, to all of the directors, officers, employees, agents and
Representatives of the Company and all properties, books, records, operating
instructions, procedures and Tax Returns of the Company and all other
information with respect to the Company, its business and operations and its
assets and properties as Recap or its Representatives may from time to time
reasonably request, and to make copies of such books, records and other
documents.
7.3. PERMITS AND APPROVALS. The Company and Recap shall use commercially
reasonable efforts to obtain all Permits and Approvals reasonably necessary for
the consummation of the transactions contemplated hereby and to permit the
Company, following the Closing, to continue to conduct its business in
substantially the manner it is being conducted as of the date hereof, except as
would not otherwise, individually or in the aggregate, be reasonably expected to
have a Material Adverse Effect on the Company. The Company shall use
commercially reasonable efforts to obtain all authorizations from any Person as
may be required for it to consummate the transactions contemplated hereby in
accordance with the terms of this Agreement, and if the Company, despite such
efforts, is unable to obtain any such authorizations, the Company shall take, or
cause to be taken, all other reasonable actions necessary, proper or advisable
in order for it to fulfill its obligations hereunder and to carry out the
intentions of the parties expressed herein.
7.4. LITIGATION. Until the Closing, each of the Company and Recap shall
promptly notify the other of any action, suit, proceeding, claim or
investigation which is threatened or commenced that materially relates to or
materially affects the Company, its business, its properties or assets, this
Agreement or the transactions contemplated hereby.
7.5. ACQUISITION PROPOSALS.
(a) The Company agrees that neither it nor any of its officers and
directors shall, and the Company shall direct and use its best efforts to cause
its employees and Representatives (including, without limitation, any investment
banker, attorney or accountant) not to, initiate, solicit or encourage, directly
or indirectly, any inquiries, discussions, negotiations or the making of any
proposal or offer (including, without limitation, any proposal or offer to
stockholders of the Company) with respect to a merger, consolidation or similar
transaction, other than pursuant to this Agreement, involving, or any purchase
of all or any significant portion of the properties and assets or any equity
securities of, the Company (any such proposal or offer being hereinafter
referred to as an 'Acquisition Proposal') or engage
A-27
<PAGE>
in any negotiations concerning, or provide any confidential information or data
to, or have any discussions with, any Person relating to an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal. The Company will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing and shall make all
reasonable efforts to enforce any confidentiality agreements to which it is a
party. The Company will take the necessary steps to inform the appropriate
individuals or entities referred to in the first sentence hereof of the
obligations undertaken in this Section 7.5. The Company will notify Recap
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with the Company, including setting forth
the material terms of the proposal and the identity of the party making such
proposal, and Company shall promptly notify Recap of the status and any material
developments concerning the same, including furnishing copies of any such
written inquiries or proposals.
(b) Except as set forth in this Section 7.5(b), the Company Board shall
not withdraw its recommendation of the transactions contemplated hereby or
approve or recommend, or cause the Company to enter into any agreement with
respect to any Acquisition Proposal. If the Company Board, by a majority
disinterested vote determines in its good faith judgment after consultation with
and based, among other things, upon the advice of legal counsel, that it is
required to do so in order to comply with its fiduciary duties, the Company
Board may withdraw its recommendation of the transactions contemplated hereby or
approve or recommend a Superior Proposal (as defined in subsection (d) below),
but in each case only if the following conditions are met:
(i) the Company Board after providing written notice to Recap (a
"Notice of Superior Proposal") advising Recap that the Company Board has
received a Superior Proposal, and specifies the material terms and
conditions of such Superior Proposal and identifies the person making such
Superior Proposal; and
(ii) if Recap does not, within five (5) business days of Recap's
receipt of the Notice of Superior Proposal, make an offer that the Company
Board by a majority disinterested vote determines in its good faith judgment
(after consultation with a financial adviser of nationally recognized
reputation) to be at least as favorable to the Company's stockholders as
such Superior Proposal; provided, however, that the Company shall not be
entitled to enter into any agreement with respect to a Superior Proposal
unless and until this Agreement is terminated by its terms pursuant to
Section 9.1 and the Company has paid all amounts due to Recap pursuant to
Section 9.3.
Any disclosure that the Company Board may be compelled to make with respect
to the receipt of an Acquisition Proposal or otherwise in order to comply with
its fiduciary duties or Rule 14d-9 or 14e-2 will not constitute a violation of
this Agreement, provided that such disclosure states that no action will be
taken by the Company Board in violation of this Section 7.5(b).
(c) Should the Company, within 30 days following the public
announcement of this Agreement, receive an unsolicited Acquisition Proposal and
provided that the Company shall not have otherwise violated the provisions of
Section 7.5(a) hereof with respect to such unsolicited Acquisition Proposal, the
Company may for a period not to exceed 30 days from the date that the Company
received such unsolicited Acquisition Proposal, notwithstanding the provisions
of Section 7.5(a), provide confidential information or data to and have
discussions with the Person making such unsolicited Acquisition Proposal
(subject to the execution and delivery of customary confidentiality agreements),
if the Company Board by a majority disinterested vote determines in its good
faith judgment after consultation with and based, among other things, upon the
advice of legal counsel, that it is required to do so in order to comply with
its fiduciary duties.
(d) For purposes of this Agreement, a "Superior Proposal" means any
bona fide Acquisition Proposal the terms of which contain a consideration higher
than the cash consideration to be paid to the holders of the Common Stock of the
Company in the Merger by Recap and that the Company Board by a
A-28
<PAGE>
majority vote determines in its good faith judgment (after consultation with a
financial advisor of nationally recognized reputation) to be more favorable to
the Company's stockholders than the Merger.
7.6. H-S-R NOTIFICATION. (a) FILINGS. As soon as reasonably practicable
after the execution of this Agreement, each of the Company and Recap shall file,
or cause to be filed, with the Federal Trade Commission and the Antitrust
Division of the United States Department of Justice pursuant to the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the 'H-S-R Act'),
the notification and documentary material required in connection with the
transactions contemplated hereby.
(b) COOPERATION. Recap and the Company shall promptly file any additional
information requested as soon as reasonably practicable after receipt of a
request for additional information. Recap and the Company shall use their
commercially reasonable efforts to obtain early termination of the applicable
waiting period under the H-S-R Act. The parties hereto will coordinate and
cooperate with one another in exchanging such information and providing such
reasonable assistance as may be requested in connection with such filings.
(c) OTHER ACTIONS. The Company agrees that, in order to comply with the
H-S-R Act in connection with the transactions contemplated hereby, Recap shall
be entitled, in its sole discretion, to acquiesce to any divestitures, operating
restrictions or other constraints imposed or required by any Governmental
Entity, provided that such divestitures, operating restrictions or other
constraints shall not have any material effect on the terms of the Merger.
7.7. FINANCIAL STATEMENT DELIVERIES. As soon as is reasonably practicable
and in no event later than thirty (30) days from the last day of each fiscal
month, each fiscal quarter and each fiscal year between the date of this
Agreement and the Closing Date, the Company shall prepare and provide to Recap
monthly, quarterly or yearly historical financial statements, as applicable (the
"Update Financial Statements") for the Company, utilizing the same format and
methodology used in preparing the financial statements that are provided
internally to management. As soon as reasonably practicable between the date of
this Agreement and the Closing Date, the Company shall deliver drafts of any
Form 10-Q or Form 10-K, including any revisions or amendments thereto, prepared
or filed by the Company.
7.8. COVENANT TO SATISFY CONDITIONS. Each of the Company and Recap will use
reasonable best efforts to ensure that the conditions set forth in Article 8
hereof are satisfied, insofar as such matters are within the control of such
party. Each such party shall promptly consult with the other with respect to,
and provide to the other any legally permitted information and copies of all
filings made by such party with any Governmental Entity or any other information
supplied by such party to a Governmental Entity (other than confidential
personnel information) in connection with this Agreement and the transactions
contemplated hereby. Recap and the Company further covenant and agree, with
respect to any pending or threatened Action, preliminary or permanent injunction
or other Order, decree or ruling or statute, rule, regulation or executive order
that would adversely affect the ability of the parties hereto to consummate the
transactions contemplated hereby, to use reasonable best efforts to prevent or
lift the entry, enactment or promulgation thereof, as the case may be. Upon the
request of Recap, the Company agrees that it shall use reasonable best efforts
to secure waivers and/or consents from such third parties as may be necessary or
desirable in Recap's reasonable judgment in order to consummate the transactions
contemplated hereby.
7.9. PROXY STATEMENT. As soon as reasonably practicable after the date
hereof, the Company shall prepare the Company Proxy Statement, file such proxy
statement and such other reports, schedules or other information (including
without limitation Schedule 13E-3 under the Exchange Act) as may be required
with the SEC, respond to comments of the staff of the SEC, if any, file the
definitive proxy statement as soon as practicable, and promptly thereafter mail
such proxy statement to all holders of record (as of the applicable record date)
of Existing Shares. The Company and Recap shall cooperate reasonably with each
other in the preparation of the proxy statement and such other materials. Recap
shall provide the Company and any of its Affiliates with any information for
inclusion in the Company Proxy
A-29
<PAGE>
Statement or any other filings required to be made by the Company or any of its
Affiliates with any Governmental Entity in connection with the transactions
contemplated by this Agreement which may be required under applicable law and
which is reasonably requested by the Company or any of its Affiliates. The
Company agrees that Recap shall be given reasonable opportunity to review and
comment on the proxy statement and such other materials and to approve the proxy
statement and such other materials prior to its filing (which approval will not
be unreasonably withheld) and thereafter to participate in discussions
concerning the comments of the SEC staff and to approve all responses thereto
(which approval will not be unreasonably withheld). The Company shall promptly
notify Recap of the receipt of the comments of the SEC and of any request from
the SEC for amendments or supplements to the Company Proxy Statement or for
additional information, and will promptly supply Recap with copies of all
correspondence between the Company or its representatives, on the one hand, and
the SEC or members of its staff, on the other hand, with respect to the Company
Proxy Statement or the Merger. If at any time prior to the Special Meeting any
event should occur which is required by applicable law to be set forth in an
amendment of, or a supplement to, the Company Proxy Statement, the Company will
promptly inform Recap. In such case, the Company, with the cooperation of Recap,
will, upon earning of such event, promptly prepare and mail such amendment or
supplement; provided, that prior to such mailing, the Company shall consult with
Recap with respect to such amendment or supplement and shall afford Recap
reasonable opportunity to comment thereon. The Company will notify Recap at
least 24 hours prior to the mailing of the Company Proxy Statement, or any
amendment or supplement thereto, to the stockholders of the Company.
7.10. STOCKHOLDERS' MEETING. The Company shall take all action necessary,
in accordance with applicable law and its certificate of incorporation and
bylaws, to convene a Special Meeting of the holders of the Existing Shares (the
'Special Meeting') as promptly as practicable, but in no event more than 45 days
after a definitive proxy statement has been filed with the SEC (unless Recap
requests or consents to an extension of such 45 day period), for the purpose of
approving the Merger. The Company Board shall recommend at such Special Meeting
that the Merger be approved by its stockholders. Notwithstanding the foregoing,
if, as a result of actions taken in compliance with Section 7.5 hereof and
subject to the provisions of Article 9 hereof, the Company receives a formal
unsolicited Acquisition Proposal concerning a transaction in which all the
holders of Existing Shares will receive the consideration in a Superior
Proposal, the Company Board may withdraw or modify such recommendation prior to
the Special Meeting; PROVIDED, HOWEVER, that the Company shall have consulted
with its legal counsel and conclude in its good faith that the Company Board is
legally required to do so in the discharge of its fiduciary duties; and PROVIDED
FURTHER, that the Company shall give Recap five (5) Business Days' prior notice
of such withdrawal or modification, specifying the material terms of such
unsolicited Acquisition Proposal.
7.11. FINANCING. Each of the Company and Recap agrees to use its
commercially reasonable efforts to obtain all of the financing necessary in
connection with the consummation of the transactions contemplated by this
Agreement. Without limiting the generality of the foregoing, the Company
acknowledges receipt of the 'Financing Letters' referred to in Section 6.5
hereof and undertakes to use its commercially reasonable efforts to fulfill, or
cause to be fulfilled, the obligations of 'Borrower' thereunder. Each of the
Company and Recap shall use their respective best commercial efforts to (i)
commence the process to obtain the financing as contemplated in this Section
7.11 (including marketing of debt instruments) promptly following approval of
the Merger and this Agreement by the requisite vote of the holders of capital
stock and Convertible Notes of the Company (provided that Recap shall not
required to commence any marketing of debt instruments prior to January 15,
2000), and (ii) obtain such financing by the earlier to occur of eight (8) weeks
from the date the Merger and this Agreement are approved by the requisite vote
of the holders of capital stock and Convertible Notes of the Company or April
30, 2000.
7.12. DISCLOSURE PRIOR TO CLOSING. In the event that, at any time prior to
the Closing, the Company or Recap becomes aware of any matter that, if existing
or known as of the date of this
A-30
<PAGE>
Agreement, would have been required to be set forth or described in the
Schedules hereto or would otherwise have rendered any representation or warranty
false, such party shall promptly provide written notice of such matters to the
other party. However, no such notice provided under this Section 7.12 shall be
deemed to cure any breach of any representation or warranty made in this
Agreement whether for purposes of determining whether or not the conditions set
forth in Article 8 hereof have been satisfied or otherwise. In addition, the
Company shall promptly provide written notice of any events occurring after the
date hereof that individually or in the aggregate have had or are reasonably
expected to have a Material Adverse Effect on the Company.
7.13. DIRECTORS' AND OFFICERS' INSURANCE AND INDEMNIFICATION. The Surviving
Corporation will indemnify each person who is now, or has been at any time prior
to the date hereof, a director or officer of the Company or its successors and
assigns (individually an 'Indemnified Party' and collectively the 'Indemnified
Parties'), to the fullest extent required or permitted under the certificate of
incorporation or Bylaws of the Company, or any agreement with the Company in
each case as in effect immediately prior to the execution of this Agreement,
with respect to any claim, liability, loss, damage, judgment, fine, penalty,
amount paid in settlement or compromise, cost or expense, including reasonable
fees and expenses of legal counsel (whenever asserted or claimed), based in hole
or in part on, or arising in whole or in part out of, any matter, state of
affairs or occurrence existing or occurring at or prior to the Effective Time
whether commenced, asserted or claimed before or after the Effective Time,
including, without limitation, liability arising under the Securities Act, the
Exchange Act, or state law. The Surviving Corporation will maintain in effect
for not less than six years after the Effective Time the current policies of
directors' and officers' liability insurance maintained by the Company on the
date hereof (provided that Recap may substitute therefor policies having at
least the same coverage, with a comparably rated issuer and containing terms and
conditions which are no less advantageous to the persons currently covered by
such policies as insured) with respect to matters existing or occurring at or
prior to the Effective Time; PROVIDED, HOWEVER, that if the aggregate annual
premiums for such insurance during such period exceed 200% of the per annum rate
of the aggregate premium currently paid by the Company for such insurance on the
date of this Agreement, then the Surviving Corporation will provide the maximum
coverage that will then be available at an annual premium equal to 200% of such
rate. The rights under this Section 7.13 are in addition to rights that an
Indemnified Party may have under the certificate of incorporation, Bylaws or
other similar organizational documents of the Company or any Subsidiary or under
the DGCL. The rights under this Section 7.13 are contingent upon the occurrence
of, and will survive consummation of, the Merger and are expressly intended to
benefit each Indemnified Party.
7.14. OPTIONS, WARRANTS AND CONVERTIBLE NOTES. The Company shall use its
reasonable best efforts to obtain the rollover, the exercise or the cancellation
of the Options and Rollover Options as set forth in Section 2.5. The Surviving
Corporation shall assume the Rollover Options pursuant to Section 2.5 and in
accordance with the respective Stock Option Plan, and the exercise price and
number of shares underlying each such option shall be adjusted equitably to
reflect the effect of the Merger. The Company shall use its reasonable best
efforts to obtain the cancellation and surrender of the Warrants as set forth in
Section 2.6, and the receipt of any approvals or consents from the holder
thereof to this Agreement and the transactions contemplated hereby. The Company
shall use its reasonable best efforts to obtain the cancellation and surrender
of the Convertible Notes as set forth in Section 2.2, and the receipt of any
approvals or consents from the holders thereof to this Agreement and the
transactions contemplated hereby.
7.15. ANTITAKEOVER STATUTES. If any Takeover Statute (as defined below) is
or may become applicable to the transactions contemplated hereby, the Company
Board will grant such approvals and take such actions as are necessary so that
the transactions contemplated hereby and thereby may be consummated as promptly
as practicable on the terms contemplated hereby and thereby and otherwise act to
eliminate the effects of any Takeover Statute on any of the transactions
contemplated hereby or thereby. For purposes of this Agreement, a "Takeover
Statute" means a "fair price", "moratorium", "control share
A-31
<PAGE>
acquisition" or other similar antitakeover statute or regulation enacted under
state or federal laws in the United States, including without limitation Section
203 of the DGCL.
7.16. REGULATORY APPLICATIONS. (a) Each of the Company and Recap 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 Entities necessary to consummate the transactions contemplated by
this Agreement. Each of the Company and Recap 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 Entity 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 Entities 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
Entity.
7.17. NOTICES OF CERTAIN EVENTS. Each of the parties hereto shall promptly
notify the other party of:
(a) the receipt by such party of any notice or other communication from any
Person alleging that the consent of such Person is or may be required in
connection with the transactions contemplated by this Agreement.
(b) the receipt by such party of any notice or other communication from any
Governmental Authority in connection with the transactions contemplated by this
Agreement; and
(c) any actions, suits, claims, investigations or proceedings commenced or,
to the best of such party's knowledge threatened against, or affecting such
party which, if pending on the date of this Agreement, would have been required
to have been disclosed pursuant to this Agreement or which relate to the
consummation of the transactions contemplated by this Agreement.
7.18. REDEMPTION OR CANCELLATION OF SECURITIES. The Company agrees to
redeem and/or cancel the securities set forth on SCHEDULE 7.18, in accordance
with the provisions of this Agreement and in order to consummate the Merger.
7.19. DELIVERY OF OPINION OF FINANCIAL ADVISOR. The Company agrees to
deliver to Recap a true and complete copy of the written opinion of Deutsche
Bank Securities Inc., promptly following the execution and delivery of this
Agreement.
ARTICLE VIII.
CONDITIONS OF MERGER
8.1. GENERAL CONDITIONS. The obligations of the parties to effect the
Closing shall be subject to the following conditions unless waived in writing by
both parties:
8.1.1. NO LAW OR ORDERS. No Law or Order shall have been enacted,
entered, issued or promulgated by any Governmental Entity (and be in effect)
which prohibits or materially restricts the consummation of the transactions
contemplated hereby.
A-32
<PAGE>
8.1.2. H-S-R. Any applicable waiting period under the H-S-R Act shall
have expired or have been terminated with respect to the transactions
contemplated hereby.
8.1.3. LEGAL PROCEEDINGS. No Governmental Entity shall have notified
either party to this Agreement that it intends to commence proceedings to
restrain or prohibit the transactions contemplated hereby or force rescission,
unless such Governmental Entity shall have withdrawn such notice and abandoned
any such proceedings prior to the time which otherwise would have been the
Closing Date.
8.1.4. STOCKHOLDER APPROVAL. The Merger and the other transactions
contemplated hereby shall have been approved by the requisite vote of the
holders of the outstanding capital stock of the Company entitled to vote
thereon.
8.1.5. REGULATORY APPROVAL. 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 Recap's Board
reasonably determines would (i) following the Effective Time, have a Material
Adverse Effect on the Surviving Corporation taken as a whole or (ii) reduce the
benefits of the transactions contemplated hereby to such a degree that Recap
would not have entered into this Agreement had such conditions, restrictions or
requirements been known at the date hereof.
8.1.6. THIRD PARTY CONSENTS. The Company 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 the Company and Recap, and of the Purchasers (as that term is
defined in the Securities Purchase Agreement) pursuant to the Subordinated Notes
and the Securities Purchase Agreement signed in connection therewith.
8.1.7. CONVERTIBLE NOTE HOLDERS APPROVAL. The Merger and the other
transactions contemplated hereby shall have been approved by the requisite vote
or consent of the holders of the Convertible Notes entitled to vote or consent
thereon.
8.2. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY. The
obligations of the Company to close the transactions contemplated by this
Agreement shall be subject to the satisfaction on or prior to the Closing Date
of each of the following conditions precedent, any of which may be waived by the
Company:
8.2.1. ACCURACY OF RECAP'S REPRESENTATIONS AND PERFORMANCE OF
OBLIGATIONS.
(a) All representations and warranties made by Recap in this Agreement, any
Schedule or any agreement, certificate or instrument to be executed by Recap
pursuant hereto shall be true and correct in all respects on the date when made
and on and as of the Closing Date (unless the representations and warranties
address matters as of a particular date, in which case they shall remain true
and correct in all respects as of such date) with the same effect as if made on
and as of the Closing Date (without regard to any amendment or supplement of any
such Schedule, agreement or instrument after the date hereof), except where such
failures, in each case or in the aggregate, have not had and are not reasonably
expected to have a Material Adverse Effect on Recap, PROVIDED THAT, whenever any
such representation or warranty is conditioned by reference to materiality or a
Material Adverse Effect, for the purposes of this Section 8.2.1(a), such
representation or warranty shall be treated as if such representation or
warranty did not contain any limitation as to materiality or Material Adverse
Effect as stated therein.
(b) Recap shall have performed or complied in all material respects with
all covenants and conditions contained in this Agreement, any Schedule or any
agreement, certificate or instrument to be
A-33
<PAGE>
executed by Recap pursuant hereto required to be performed or complied with by
Recap either at or prior to the Closing.
8.2.2. RECAP DELIVERIES. Recap shall have delivered, or shall have
caused to be delivered, to the Company at or prior to the Closing the following:
(a) a certified copy of the resolutions duly adopted by the board of
directors of Recap authorizing this Agreement and the transactions
contemplated hereby and thereby;
(b) such other documents, instruments or certificates as shall be
reasonably requested by the Company or its counsel; and
(c) a certificate of the president or any vice president and secretary
or any assistant secretary of Recap certifying to the matters set forth in
Section 8.2.1(a) and (b) above.
8.3. CONDITIONS PRECEDENT TO OBLIGATIONS OF RECAP. The obligations of Recap
to close the transactions contemplated by this Agreement shall be subject to the
satisfaction on or prior to the Closing Date of each of the following conditions
precedent, any of which may be waived by Recap:
8.3.1. ACCURACY OF THE COMPANY'S REPRESENTATIONS AND PERFORMANCE OF
OBLIGATIONS.
(a) All representations and warranties made by the Company in this
Agreement, any Schedule or any agreement, certificate or instrument to be
executed by the Company pursuant hereto shall be true and correct in all
respects on the date when made and on and as of the Closing Date (unless the
representations and warranties address matters as of a particular date, in which
case they shall remain true and correct in all respects as of such date) with
the same effect as if made on and as of the Closing Date (without regard to any
amendment or supplement of any such Schedule, agreement or instrument after the
date hereof), except where such failures, in each case or in the aggregate, have
not had and are not reasonably expected to have a Material Adverse Effect on the
Company, PROVIDED THAT, whenever any such representation or warranty is
conditioned by reference to materiality or a Material Adverse Effect, for the
purposes of this Section 8.3.1(a), such representation or warranty shall be
treated as if such representation or warranty did not contain any limitation as
to materiality or Material Adverse Effect as stated therein.
(b) Except for any action requested or required to be taken by the
Company pursuant to Section 7.6(c) hereof, the Company shall have performed or
complied in all material respects with all covenants and conditions contained in
this Agreement, any Schedule or any agreement, certificate or instrument to be
executed by the Company pursuant hereto required to be performed or complied
with by the Company either at or prior to the Closing.
8.3.2. PERMITS AND APPROVALS. The Company shall have made or obtained, on
terms reasonably satisfactory to Recap, all Permits and Approvals required from
any Governmental Entity or any third party in order to consummate the
transactions contemplated hereby and permit the Surviving Corporation to
continue the Company's business in substantially the manner as it is being
conducted as of the date hereof, except where the failure to obtain such Permits
or Approvals, individually or in the aggregate, would not reasonably be expected
to have a Material Adverse Effect.
8.3.3. COMPANY ADVERSE CHANGES. There shall not have occurred after the
date hereof any events which individually or in the aggregate have had or are
reasonably expected to have a Material Adverse Effect on the Company.
8.3.4. DELIVERIES. The Company shall have delivered, or shall have caused
to be delivered, to Recap at or prior to the Closing the following:
(a) to the extent requested by Recap, resignations of the directors of
the Company and each of the Company's Subsidiaries effective as of the Closing;
A-34
<PAGE>
(b) certified copies of the resolutions duly adopted by the Company
Board and by the holders of the Existing Shares, authorizing this Agreement and
the transactions contemplated hereby;
(c) a certificate of the chief executive officer, president or any vice
president and secretary or any assistant secretary of the Company certifying to
the matters set forth in Section 8.3.1(a) and (b) above;
(d) the corporate seal, minute books and stock transfer books of the
Company; and
(e) such other documents, instruments or certificates as shall be
reasonably requested by Recap or its counsel.
8.3.5. FINANCING. Recap shall have made or obtained all financing (i)
necessary in connection with the consummation of the transactions contemplated
by this Agreement and the 'Financing Letters' referred to in Section 6.5 and
(ii) which is reasonably necessary to continue after the Closing the business of
the Surviving Corporation in substantially the manner it is currently being
conducted or is planned to be conducted.
8.3.6. RECAPITALIZATION. The Recapitalization shall have been consummated.
8.3.7. ACCOUNTING PRINCIPLES. Except as set forth on SCHEDULE 8.3.7, from
the fiscal year ended December 31, 1998 and prior to the Effective Time, the
Company shall not have altered, modified or amended, and the Company shall not
have been required in the future to make any alteration, modification or
amendment (which in Recap's reasonable belief would have a Material Adverse
Effect on the Company) of, any of its material accounting principles, methods or
practices (that are limited and directed to the Company specifically and not
applicable generally to all companies), whether or not required or requested to
make such alteration, modification or amendment by any Governmental Entity, by
the Company's independent auditors or otherwise.
8.3.8. PUSH-DOWN ACCOUNTING. There shall not have occurred any material
change in accounting rules (including but not limited to GAAP), or in the
applicable federal and state securities Laws, or any action by the Company or
its Subsidiaries, which results in or triggers push-down accounting treatment
for the Merger.
8.3.9. DISSENTING SHARES. The aggregate number of Dissenting Shares shall
not equal 15% or more of the shares of the Company outstanding as of the record
date for the Special Meeting.
8.3.10. SHARE EXCHANGE AND SUBSCRIPTION. Subject to the terms and
conditions of the Exchange Agreement, the Rollover Holders and Recap shall have
consummated a transfer and exchange of the Rollover Shares held by the Rollover
Holders with Recap, in exchange for newly issued shares of capital stock of
Recap to the Rollover Holders, prior to the Effective Time.
8.3.11. MANAGEMENT SERVICES AGREEMENT. The Company (and/or the
Subsidiaries) and Leonard Green & Partners, L.P. (and/or its Affiliates) shall
have executed and delivered the management services agreement prior to the
Closing.
8.3.12. STOCKHOLDERS AGREEMENT. Each of the respective parties to the
stockholders agreement shall have executed and delivered such agreement prior to
the Closing.
8.3.13. DUE DILIGENCE OF DENTISTS AND DENTAL PROFESSIONALS. For a period of
thirty (30) days from the date of this Agreement, Recap shall be entitled to
meet with and perform due diligence on certain dentists, other dental
professionals and certain dental practices affiliated with the Company,
identified and selected by Recap at its discretion after reasonable notice to
and consultation with the Company. The discoveries by Recap from such due
diligence shall not reasonably be expected to have a Material Adverse Effect on
the Company.
8.3.14. KNOX-KEENE OPINION. The Company shall deliver an opinion letter
from Foley Lardner or other law firm of national standing with expertise in the
area of California health plan regulation to the
A-35
<PAGE>
effect that the Agreement and the transactions contemplated hereby shall not
require prior approval from the California Department of Corporations pursuant
to the California Knox-Keene Health Care Service Plan Act of 1975, as amended,
and the regulations issued thereunder (the 'Knox-Keene Act'), by virtue of the
licensure of the Company's Subsidiary, Dedicated Dental Systems, Inc. as a
specialized health care service plan under the Knox-Keene Act and other than any
issues arising from the notice and prior approval from the California Department
of Corporations pursuant to the Knox-Keene Act, the Agreement and the
transactions contemplated hereby would not otherwise violate the Knox-Keene Act.
8.3.15. EMPLOYMENT AGREEMENTS. Each of Michael Fiore and Steven Matzkin
shall have executed and delivered an employment agreement substantially in the
form attached hereto as Exhibit C prior to the Closing.
8.3.16. CANCELLATION OF OPTIONS, WARRANTS AND CONVERTIBLE NOTES. The
Company shall have obtained the rollover, the exercise or the cancellation of
the Options and Rollover Options as set forth in Section 2.5 and received any
necessary agreements, approvals or consents from the holders thereof. The
Company shall have obtained the cancellation and surrender of the outstanding
Warrants as set forth in Section 2.6 (except for Warrants held by two members of
management of the Company not to exceed an aggregate value of $155,000 which may
not be cancelled and may remain outstanding) and received any necessary
approvals or consents from the holders thereof. The Company shall have obtained
the cancellation and surrender of the Convertible Notes as set forth in Section
2.2(f).
8.3.17. AGREEMENTS WITH POTENTIAL RECIPIENTS OF EARN OUT SHARES. The
Company shall have entered into an agreement with each potential recipient of
Earn Out Shares, including but not limited to those recipients set forth on
Schedule 5.3, to the effect that such recipient agrees to accept cash in lieu of
any Earn Out Shares to be issued to such recipient in the event that the earn
out obligation is incurred by the Company.
8.3.18. RESIGNATION OF DIRECTORS. All of the directors of the Company,
other than those persons set forth on SCHEDULE 4.3, shall have resigned from the
Board of Directors effective as of the Closing Date.
ARTICLE IX.
TERMINATION
9.1. TERMINATION. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated and the transactions
contemplated hereby abandoned at any time prior to the Effective Time, whether
before or after stockholder approval of the Merger:
(a) MUTUAL CONSENT. By mutual written consent of the parties hereto;
(b) BY RECAP. By Recap, if (i) any of the conditions set forth in
Section 8.1 or 8.3 shall have become incapable of fulfillment, (ii) the Company
Board or any committee thereof fails to recommend or withdraws or modifies, or
resolves to withdraw or modify, its recommendation of the Merger, whether or not
in compliance with Section 7.10 hereof, or (iii) the Company, the Company Board
or any Representative of the Company shall take any other actions that would be
proscribed by Section 7.5 hereof but for the exceptions therein set forth in
Section 7.5(b) allowing certain actions to be taken based on the fiduciary
obligations of the Company Board or in order to comply with applicable
securities law requirements;
(c) BY THE COMPANY. By the Company, if (i) the Company Board has
approved a Superior Proposal in accordance with the terms of Section 7.5 or (ii)
any of the conditions set forth in Section 8.1 or 8.2 shall have become
incapable of fulfillment;
(d) FAILURE OF CONDITIONS. By Recap or the Company, if the transactions
contemplated hereby are not consummated on or before April 30, 2000 and if the
failure to consummate such
A-36
<PAGE>
transactions on or before such date did not result from the breach of any
representation, warranty or agreement herein of the party seeking such
termination;
(e) BREACH OF COVENANT. By Recap or the Company, if the other party
shall be in material breach of any of its covenants contained in this Agreement
and such breach either is incapable of cure or is not cured within 15 days after
notice from the party wishing to terminate; PROVIDED THAT the party seeking such
termination shall not also then be in material breach of this Agreement;
PROVIDED FURTHER that any breach of the provisions of Section 7.5 hereof shall
entitle Recap to an immediate right of termination without any notice or cure
requirement.
(f) BREACH OF REPRESENTATIONS AND WARRANTIES. By Recap or the Company,
if the other party shall be in breach of any of its representations or
warranties contained in this Agreement, which breach, individually or together
with all other breaches, is reasonably expected to have a Material Adverse
Effect on the Company or Recap, as applicable, and such breach either is
incapable of cure or is not cured within 15 days after notice from the party
wishing to terminate, PROVIDED, that the party seeking such termination shall
not also then be in material breach of this Agreement.
9.2. MANNER AND EFFECT OF TERMINATION. Termination shall be effected by
the giving of written notice to that effect by the party seeking termination. If
this Agreement is validly terminated and the transactions contemplated hereby
are not consummated, this Agreement shall become null and void and of no further
force and effect and no party shall be obligated to the others hereunder;
PROVIDED, HOWEVER, that termination shall not affect (i) the rights and remedies
available to a party as a result of the breach by the other party hereunder
(provided that, the provisions of Section 9.3 shall constitute the exclusive
legal remedy of Recap with respect to breach by the Company described therein),
(ii) the provisions of Sections 5.12 and 6.4 hereof, or (iii) the obligations of
the Company pursuant to Section 9.3 below.
9.3. CERTAIN PAYMENTS UPON TERMINATION.
(a) In the event that: (i) either party terminates this Agreement under
Section 9.1(b)(i), 9.1(c)(ii) or 9.1(d) due to the failure of the condition
specified in Section 8.1.7 to be satisfied; (ii) the Company terminates this
Agreement under Section 9.1(c)(i); (iii) Recap terminates this Agreement under
Section 9.1(b)(ii); or (iv) Recap terminates this Agreement under Section 9.1(e)
based on the violation or breach by the Company of the covenants set forth in
Sections 7.5, 7.9, or 7.10 hereof, the Company shall pay to Recap a termination
fee in the amount of $7,500,000 (the 'Termination Fee'), plus all Expenses. In
the event that this Agreement is terminated by either party under Section
9.1(b)(i), 9.1(c)(ii) or 9.1(d) due to a failure of the condition specified in
Section 8.1.4 and the Termination Fee is not then otherwise payable pursuant to
the preceding sentence, the Company shall pay Recap a preliminary termination
fee in the amount of $1,000,000 (the 'Preliminary Termination Fee'), plus all
Expenses; provided, however, that if the Company enters into an Acquisition
Proposal within twelve months from the date of the termination of this Agreement
under such circumstance, the Company shall pay to Recap an additional
$6,500,000. In the event that Recap terminates this Agreement under Section
9.1(b)(iii) the Company shall pay Recap for all Expenses; and if the Termination
Fee is not otherwise payable, the Company shall pay Recap the Termination Fee if
the Company enters into an Acquisition Proposal within twelve months from the
date of the termination of this Agreement.
(b) In the event this Agreement is terminated under Section 9.1 and
neither the Termination Fee nor the Preliminary Termination Fee is payable under
Section 9.3(a), the Company shall pay, or reimburse Recap, upon submission of
one or more statements thereof, accompanied by reasonable supporting
documentation, for all Expenses incurred in connection with or related to this
Agreement, the Merger and the consummation of all transactions contemplated by
this Agreement, unless: (i) Recap fails in any material respect to perform any
of its material obligations under this Agreement and has not cured such
non-performance within 20 days after Recap has received written notice from the
Company specifying
A-37
<PAGE>
the nature of such non-performance; (ii) Recap has materially breached any of
the material representations or warranties made by it in Article VI, and such
breach is not cured (if the same is susceptible of being cured) within 20 days
after Recap has received written notice from the Company specifying the nature
of such breach; or (iii) the financing necessary to consummate the transactions
contemplated by this Agreement is not obtained, except for the failure to obtain
such financing as a result of a breach of the Company's representations and
warranties made in Article V, the failure of the Company to perform any of its
material obligations under this Agreement, or the occurrence of any event,
individually or in the aggregate, that would reasonably expected to have a
Material Adverse Effect on the Company.
(c) For purposes of this Section 9.3, "Expenses" shall mean (A) all
fees and expenses (including those of counsel, accountants and other advisors,
but not including any fees and expenses in connection with financings) not to
exceed $1,500,000 and (B) all fees and expenses in connection with financings
(that have been approved in advance by the Company), incurred by any of Recap
and its affiliates in connection with the transactions contemplated by this
Agreement; PROVIDED, HOWEVER, any fees and expenses set forth in the Financing
Letters shall be deemed approved by the Company. All payments required to be
made hereunder shall be made by wire transfer of immediately available funds
within two (2) Business Days of the event giving rise to the payment of such
Expenses. The Company acknowledges that the agreements contained in this Section
9.3 are an integral part of the transactions contemplated by this Agreement and
that, without said agreements, Recap would not enter into this Agreement;
accordingly, if the Company fails promptly to pay the Termination Fee and
Expenses due pursuant to this Section 9.3, and, in order to obtain such payment,
Recap commences a suit which results in a judgment against the Company for the
fees and expenses set forth herein, the Company will pay to Recap Recap's
reasonable expenses (including attorneys' fees and expenses) in connection with
such suit, together with interest on the amounts due hereunder at the legal rate
determined by the court rendering such judgment.
ARTICLE X.
OTHER AGREEMENTS
10.1. CONFIDENTIALITY. The Company agrees that from the date hereof until
the Closing Date or earlier termination of this Agreement it will not, and will
use reasonable best efforts to ensure that none of its directors, officers,
Representatives, agents or employees will, without the prior written consent of
Recap, submit or disclose to or file with any other Person, or use, any
confidential or non-public information relating to the Company or Recap, except
for such disclosure as may be required by Law or applicable accounting
regulations. Recap agrees that from the date hereof until the Closing Date or
earlier termination of this Agreement it will not, and will use reasonable best
efforts to ensure that none of its directors, officers, Representatives, agents
or employees will, without the prior written consent of the Company, submit or
disclose to or file with any other Person, or use, any confidential or
non-public information relating to the Company, except for such disclosure as
may be required by Law or applicable accounting regulations. Without limiting
the generality of the foregoing, Recap and the Company agree and acknowledge
that, until the Closing, they will continue to be bound by the Confidentiality
Agreement dated August 10, 1999 between the Company and Leonard Green &
Partners, L.P.
ARTICLE XI.
MISCELLANEOUS
11.1. EXPENSES. Except as otherwise specifically provided for herein
(including without limitation under Article IX hereof), each of the Company, on
the one hand, and Recap, on the other, shall pay all of its costs and expenses
(including attorneys', accountants' and investment bankers' fees) incurred in
connection with this Agreement and the transactions contemplated hereby.
11.2. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given upon receipt if delivered personally or sent by facsimile
transmission (receipt of which is confirmed) or by courier service promising
overnight delivery
A-38
<PAGE>
(with delivery confirmed the next day) or three (3) Business Days after sent by
registered or certified mail (postage prepaid, return receipt requested).
Notices shall be addressed as follows:
<TABLE>
<S> <C>
To The Company: InterDent, Inc.
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
18101 Von Karman Avenue
Suite 1100
Irvine, California 92612
Attention: Richard J. Babcock, Esq.
Facsimile: (949) 851-9348
To Recap: ID Recap, Inc.
c/o Leonard Green & Partners, L.P.
11111 Santa Monica Boulevard
Suite 2000
Los Angeles, California 90025
Attention: John Baumer
Facsimile: (310) 954-0404
With a copy to: Irell & Manella LLP
333 South Hope Street, 33rd Floor
Los Angeles, California 90071
Attention: Edmund M. Kaufman, Esq.
Facsimile: (213) 229-0515
</TABLE>
Either party may from time to time change its address for the purpose of notices
by a similar notice specifying the new address but no such change shall be
effective as against any Person until such Person shall have actually received
it.
11.3. ENTIRE AGREEMENT. This Agreement contains the final and entire
agreement between the parties with respect to the transactions contemplated
hereby and supersedes all written or verbal representations, warranties,
commitments and other understandings prior to the date hereof, other than the
Confidentiality Agreement, dated August 10,1999. No reference shall be made to
any draft of this Agreement for purposes of interpretation or resolution of
ambiguity or otherwise. All Exhibits annexed hereto, and all Schedules referred
to herein, are hereby incorporated in and made a part of this Agreement as if
set forth in full herein.
11.4. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
11.5. SEVERABILITY. If any provision hereof shall be held to be
unenforceable or invalid by any court of competent jurisdiction or as a result
of future legislative action, such holding or action shall be strictly construed
and shall not alter the enforceability, validity or effect of any other
provision hereof.
11.6. ASSIGNABILITY. This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the parties hereto and their respective
successors and permitted assigns; PROVIDED, HOWEVER, that neither this Agreement
nor any right or obligation hereunder may be assigned by either party without
the prior written consent of the other to be given in the other party's sole
discretion.
A-39
<PAGE>
11.7. CAPTIONS. The descriptive headings herein are inserted for
convenience only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement.
11.8. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
11.9. SPECIFIC PERFORMANCE. The parties hereto agree that if any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached, irreparable damage would occur, no
adequate remedy at law would exist and damages would be difficult to determine,
and that the parties shall be entitled to specific performance of the terms
hereof (without requirement to post bond), in addition to any and all other
remedies at law or in equity.
11.10. AMENDMENT AND WAIVER. This Agreement may be amended, modified or
supplemented at any time, whether before or after stockholder approval only by
an instrument in writing signed by all parties hereto; PROVIDED, HOWEVER, this
Agreement may not be amended, modified or supplemented following approval of the
Merger by the holders of the Company's outstanding capital stock entitled to
vote thereon without the further approval of such stockholders if such
amendment, modification or supplement would adversely affect such stockholders.
No waiver by any party of any of the provisions hereof shall be effective unless
set forth in writing and executed by the party so waiving. Any waiver or failure
to insist upon strict compliance with any obligation, covenant, agreement,
provision, term or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure to comply.
11.11. FURTHER ASSURANCES. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all commercially reasonable
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper or advisable, whether under applicable laws
and regulations or otherwise, to remove any injunctions or other impediments or
delays, legal or otherwise, in order to consummate and make effective the
transactions contemplated by this Agreement.
11.12. PUBLICITY. Except as hereinafter provided, the Company and Recap
shall not, and each of them shall use commercially reasonable efforts to cause
their respective directors, officers, employees, Representatives and agents not
to, discuss publicly or make any public statement with respect to this Agreement
or the transactions contemplated hereby without the other party's approval.
Before making any such public announcements, the parties hereto shall use good
faith efforts to agree upon the text of a joint announcement to be made by the
parties hereto or use good faith efforts to obtain the other party's approval of
the text of any public announcement to be made solely on behalf of such party.
If the parties hereto are unable to agree on or approve such a public statement
or announcement and legal counsel for a party is of the opinion that such
statement or announcement is required by law or the rules of any stock exchange
on which the parties' securities are traded, then such party may make or issue
the legally required statement or announcement.
11.13. FORCE MAJEURE. Anything to the contrary in this Agreement
notwithstanding, no party hereto shall be liable to the other parties hereto for
any loss, injury, delay, damages or other casualty suffered or incurred by such
other party hereto due to strikes, riots, storms, fires, explosions, acts of
God, war, governmental action, or any other cause similar thereto which is
beyond the reasonable control of such parties, and any failure or delay by any
party hereto in performance of any of its obligations under this Agreement due
to one or more of the foregoing causes shall not be considered as a breach of
this Agreement. In the event that performance of any of the material obligations
under this Agreement shall be suspended due to one or more of the foregoing
causes and such suspension shall have a material adverse impact on consummation
of the transactions as contemplated in this Agreement or on the operations or
financial conditions or prospects of the Company, then the aggrieved party which
shall be materially and adversely affected thereby may terminate this Agreement.
A-40
<PAGE>
11.14. ATTORNEY'S FEES. In any suit or proceeding arising out of this
Agreement or to interpret or enforce any provision of this Agreement, the
prevailing party shall be entitled to all reasonable out-of-pocket expenses and
reasonable attorneys' fees incurred by such party in connection with such suit
or proceeding.
11.15. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of
the representations, warranties, covenants and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except for the agreements contained in Article II, and Sections
5.12, 6.4 and 7.13 hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
INTERDENT, INC.
a Delaware corporation
By: /s/ Michael T. Fiore______________
Name: Michael T. Fiore
Title: Chief Executive Officer
ID RECAP, INC.,
a Delaware corporation
By: /s/ John Danhakl__________________
Name: John Danhakl
Title: President
A-41
<PAGE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Voting Agreement
Exhibit B Recapitalization Agreement
Exhibit C Employment Agreement
SCHEDULES
Schedule 1.2(lll) Permitted Encumbrances
Schedule 1.2(ttt) Rollover Options
Schedule 4.3 Directors
Schedule 5.1 Organization, Standing and Authority
Schedule 5.2 Company, Subsidiaries and Equity
Schedule 5.3 Company Capital Stock
Schedule 5.4 Corporate Power
Schedule 5.5(a) Consent and Approvals; No Defaults
Schedule 5.5(b) Conflicts
Schedule 5.5(c) Governmental Approvals
Schedule 5.5(d) Non-Governmental Approvals
Schedule 5.6 Financial Reports and Regulatory Documents; Changes
Schedule 5.8 Litigation
Schedule 5.9 Regulatory Matters
Schedule 5.10 Compliance with Laws
Schedule 5.11 Material Contracts; Defaults
Schedule 5.13 Undisclosed Liabilities
Schedule 5.14 Employee Benefit Plans
Schedule 5.15 Labor and Employment Matters
Schedule 5.16 Year 2000 Compliance
Schedule 5.17 Environmental Matters
Schedule 5.18 Tax Matters
Schedule 5.20 Insurance
Schedule 5.21 Assets
Schedule 5.23 Regulatory Approvals
Schedule 5.24 Real Property and Leaseholds
Schedule 5.27 Earn out Payments
Schedule 6.2 Conflicts
Schedule 6.3 Approvals
Schedule 7.1 Conduct of Business Pending Closing
Schedule 7.18 Redemption or Cancellation of Securities
Schedule 8.3.7 Accounting Principles
</TABLE>
A-42
<PAGE>
APPENDIX B
[LETTERHEAD OF DEUTSCHE BANK SECURITIES INC.]
October 22, 1999
Board of Directors and
Special Committee of the Board of Directors
InterDent, Inc.
222 North Sepulveda Boulevard, Suite 740
El Segundo, California 90245-4340
Members of the Board and Special Committee:
Deutsche Bank Securities Inc. ("Deutsche Bank") has been requested by
InterDent, Inc. ("InterDent") to render an opinion, as more fully described
below, in connection with the proposed transaction involving InterDent and
Leonard Green & Partners, L.P. ("LGP") pursuant to the Agreement and Plan of
Merger, dated as of October 22, 1999 (the "Merger Agreement"), between ID Recap,
Inc. ("Recap"), a wholly owned subsidiary of Green Equity Investors III, L.P.
("GEI"), an affiliate of LGP, and InterDent, which provides, among other things,
for the merger of Recap with and into InterDent (the "Merger"). As set forth
more fully in the Merger Agreement, as a result of the Merger, each outstanding
share of the common stock, no par value, of InterDent (the "InterDent Common
Stock") will be converted into the right to receive $9.50 in cash (the "Merger
Consideration"). The Merger Agreement also provides for the conversion of the
outstanding shares of preferred stock of InterDent and the outstanding 7%
convertible subordinated notes of InterDent into the right to receive cash, as
more fully described in the Merger Agreement. We have been advised by
representatives of InterDent that certain members of the management and certain
investors of InterDent (the "Rollover Holders") will, in connection with the
transactions contemplated by the Merger, have the right to exchange a portion of
their shares of InterDent Common Stock for shares of the common stock of Recap,
which will be converted, upon effectiveness of the Merger, into the right to
receive newly issued common stock of the surviving corporation in the Merger.
You have requested Deutsche Bank's opinion as to the fairness, from a
financial point of view, of the Merger Consideration to the holders of InterDent
Common Stock (other than Rollover Holders).
In arriving at its opinion, Deutsche Bank has reviewed certain publicly
available financial and other information concerning InterDent and certain
internal analyses and other information furnished to or discussed with it by
InterDent and its advisors. Deutsche Bank has also held discussions with members
of the senior management of InterDent regarding the business and prospects of
InterDent. In addition, Deutsche Bank has (i) reviewed the reported prices and
trading activity for InterDent Common Stock, (ii) compared certain financial and
stock market information for InterDent with similar information for certain
other companies whose securities are publicly traded, (iii) reviewed the
financial terms of certain recent business combinations which it deemed
comparable in whole or in part, (iv) reviewed the terms of the Merger Agreement,
and (v) performed such other studies and analyses and considered such other
factors as it deemed appropriate.
Deutsche Bank has not assumed responsibility for independent verification
of, and has not independently verified, any information, whether publicly
available or furnished to it, concerning InterDent, including, without
limitation, any financial information, forecasts or projections considered in
connection with the rendering of its opinion. Accordingly, for purposes of its
opinion, Deutsche Bank has assumed and relied upon the accuracy and completeness
of all such information and Deutsche Bank has not conducted a physical
inspection of any of the properties or assets, and has not prepared or obtained
any independent evaluation or appraisal of any of the assets or liabilities, of
InterDent. With respect to the financial forecasts and projections made
available to Deutsche Bank and used in its analyses, Deutsche Bank has assumed
that they have been prepared on bases reflecting the best currently available
estimates and
B-1
<PAGE>
Board of Directors and
Special Committee of the Board of Directors
InterDent, Inc.
Ocotber 22, 1999
Page 2
judgments of InterDent as to the matters covered thereby. In rendering its
opinion, Deutsche Bank expresses no view as to the reasonableness of such
forecasts and projections or the assumptions on which they are based. In
connection with its engagement, Deutsche Bank was not requested to, and did not,
participate in the negotiation or structuring of the Merger, nor was Deutsche
Bank authorized to, and it did not, solicit indications of interest from any
party with respect to the acquisition of all or a part of InterDent. Deutsche
Bank's opinion is necessarily based upon economic, market and other conditions
as in effect on, and the information made available to it as of, the date
hereof.
For purposes of rendering its opinion, Deutsche Bank has assumed that, in
all respects material to its analysis, the representations and warranties of
InterDent and Recap contained in the Merger Agreement are true and correct,
InterDent and Recap will each perform all of the covenants and agreements to be
performed by it under the Merger Agreement and all conditions to the obligations
of each of InterDent and Recap to consummate the Merger will be satisfied
without any waiver thereof. Deutsche Bank has also assumed that all material
governmental, regulatory or other approvals and consents required in connection
with the consummation of the Merger will be obtained and that in connection with
obtaining any necessary governmental, regulatory or other approvals and
consents, or any amendments, modifications or waivers to any agreements,
instruments or orders to which either InterDent or Recap is a party or is
subject or by which it is bound, no limitations, restrictions or conditions will
be imposed or amendments, modifications or waivers made that would have a
material adverse effect on InterDent or materially reduce the contemplated
benefits of the Merger to InterDent.
This opinion is addressed to, and for the use and benefit of, the Board of
Directors and the Special Committee of the Board of Directors of InterDent and
is not a recommendation to any stockholder as to how such stockholder should
vote with respect to matters relating to the proposed Merger. This opinion is
limited to the fairness, from a financial point of view, of the Merger
Consideration to the holders of InterDent Common Stock (other than Rollover
Holders), and Deutsche Bank expresses no opinion as to the merits of the
underlying decision by InterDent to engage in the Merger.
Deutsche Bank, as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements and
valuations for estate, corporate and other purposes. Deutsche Bank will receive
a fee for its services with respect to this opinion upon delivery of this
opinion. Deutsche Bank and its affiliates have in the past provided financial
services to LGP and its affiliates unrelated to the proposed Merger, including
having acted as lead managing underwriter in connection with various financings
relating to the securities of LGP and certain affiliates of LGP, for which
services Deutsche Bank and its affiliates have received compensation. In
addition, Deutsche Bank will participate in the financing for the Merger, for
which services Deutsche Bank will receive compensation, and is a limited partner
in GEI. Deutsche Bank maintains a market in InterDent Common Stock and regularly
publishes research reports regarding the businesses and securities of InterDent
and other publicly traded companies in the healthcare services industry. In the
ordinary course of business, Deutsche Bank and its affiliates may actively trade
or hold the securities and other instruments and obligations of InterDent for
their own account and for the accounts of customers and, accordingly, may at any
time hold a long or short position in such securities, instruments or
obligations.
Based upon and subject to the foregoing, it is Deutsche Bank's opinion that,
as of the date of this letter, the Merger Consideration is fair, from a
financial point of view, to the holders of InterDent Common Stock (other than
Rollover Holders).
Very truly yours,
/S/ DEUTSCHE BANK SECURITIES INC.
DEUTSCHE BANK SECURITIES INC.
B-2
<PAGE>
APPENDIX C
THE SHARES OF COMMON STOCK AND PREFERRED STOCK SUBSCRIBED FOR BY THIS AGREEMENT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
OTHER APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD UNLESS
REGISTERED THEREUNDER OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. TRANSFER OF SUCH SHARES IS ALSO RESTRICTED BY THE TERMS OF THIS
AGREEMENT AND BY THE TERMS OF THE VOTING AGREEMENT OF ID RECAP, INC.
EXCHANGE AND SUBSCRIPTION AGREEMENT
This EXCHANGE AND SUBSCRIPTION AGREEMENT (the "AGREEMENT"), dated as of
October , 1999, by and between (the "INVESTOR") and ID
Recap, Inc., a Delaware corporation (the "COMPANY").
WHEREAS, Investor is currently a stockholder in InterDent, Inc., a Delaware
corporation ("INTERDENT"), and is the owner of the number of shares set forth
opposite Investor's name under the caption "Rolled Securities" in SCHEDULE 1
attached hereto.
WHEREAS, in connection with that certain Agreement and Plan of Merger, dated
contemporaneously herewith (the "MERGER AGREEMENT"), the Company will merge with
and into InterDent with InterDent as the surviving corporation (the "MERGER").
WHEREAS, subject to the terms and conditions in this Agreement, Investor
desires to contribute the shares (the "ROLLOVER SHARES") set forth under the
caption "Rolled Securities" in SCHEDULE 1 attached hereto in a transaction
intended to qualify under Section 351 of the Internal Revenue Code, as amended
in exchange (the "EXCHANGE") for newly issued shares of capital stock of the
Company (the "SHARES"), in the amounts set forth under the captions "Common
Exchange Shares," "Senior Preferred Exchange Shares," and "Junior Preferred
Exchange Shares," in SCHEDULE 1.
NOW, THEREFORE, in order to implement the foregoing and in consideration of
the mutual representations, warranties, covenants and agreements contained
herein and for other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereto agree as follows.
1. CONTRIBUTION OF THE ROLLOVER SHARES.
1.1. CONTRIBUTION OF THE ROLLOVER SHARES IN SUBSCRIPTION FOR THE SHARES. On
the terms and conditions set forth herein, Investor agrees to subscribe
for and the Company agrees to issue to Investor the Shares of the Company
set forth under the captions "Common Exchange Shares," "Senior Preferred
Exchange Shares" and "Junior Preferred Exchange Shares" in SCHEDULE 1 in
exchange for the Rollover Shares set forth in SCHEDULE 1.
1.2. CLOSING. The closing (the "CLOSING") of the Exchange shall be at the
time and date established by the Company; provided, the Company shall
provide at least three (3) business days notice of such time and date to
Investor. The Closing shall take place at the offices of Irell & Manella
LLP, 333 South Hope Street, Los Angeles, California 90071.
1.3. CONDITIONS TO CLOSING. The Closing shall be subject to the following
conditions unless waived in writing by the Company:
(a) NO LAW OR ORDERS. No law or order shall have been enacted, entered,
issued or promulgated by any governmental entity (and be in effect)
which prohibits or materially restricts the consummation of the
transactions contemplated hereby.
C-1
<PAGE>
(b) LEGAL PROCEEDINGS. No governmental entity shall have notified either
party to this Agreement that it intends to commence proceedings to
restrain or prohibit the transactions contemplated hereby or force
rescission, unless such governmental entity shall have withdrawn such
notice and abandoned any such proceedings prior to the time which
otherwise would have been the Closing date.
(c) STOCKHOLDER APPROVAL. The Merger and the other transactions
contemplated by the Merger Agreement shall have been approved by the
requisite vote of the holders of the outstanding capital stock of
InterDent entitled to vote thereon.
(d) REPRESENTATIONS AND WARRANTIES. All representations and warranties
in this Agreement by the Investor shall be true and correct in all
respects on the date when made and on and as of the Closing date with
the same effect as if made on and as of the Closing date.
(e) COVENANTS AND AGREEMENTS. The Investor shall have performed or
complied in all material respects with all covenants and conditions
contained in this Agreement or in any agreement, certificate or
instrument to be executed pursuant hereto required to be performed or
complied with at or prior to the Closing.
(f) PERMITS AND APPROVALS. The Company shall have obtained, on terms
reasonably satisfactory to it, all permits and approvals required
from any governmental entity or any third party in order to
consummate the transactions contemplated hereby.
(g) COMPANY ADVERSE CHANGES. There shall not have occurred any events
which individually or in the aggregate have had or are reasonably
expected to have a material adverse effect on the Company or its
ability to consummate the Merger.
1.4. COMPANY DELIVERIES. At the Closing, the Company shall deliver to
Investor stock certificates representing the Shares to be received by
Investor.
1.5. INVESTOR DELIVERIES. At the Closing, Investor shall deliver to the
Company the following:
(a) an executed Investment Qualification Questionnaire in the form
attached hereto;
(b) certificate(s) evidencing the Rollover Shares together with duly
executed stock powers thereof; and
(c) a certificate of Investor confirming the fulfillment of the
conditions set forth in Sections 1.3(d) and (e).
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Investor as follows.
2.1. ORGANIZATION. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware,
having full power and authority to own its properties and to carry on its
business as conducted.
2.2. AUTHORITY. The Company has the requisite corporate power and authority
to deliver this Agreement, perform its obligations herein, and consummate
the transactions contemplated hereby. The Company has duly executed and
delivered this Agreement. This Agreement is a valid, legal and binding
obligation of the Company enforceable against the Company in accordance
with its terms, except to the extent that enforceability may be limited
by applicable bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally and subject to general
principles of equity (regardless of whether such enforcement is
considered in a proceeding at law or at equity).
C-2
<PAGE>
2.3. SHARES DULY AUTHORIZED. All of the Shares to be issued to the Investor
pursuant to this Agreement, when issued and delivered in accordance with
the terms of this Agreement, will be duly authorized, validly issued,
fully paid and non-assessable.
3. REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR. Investor hereby represents
and warrants to the Company as follows.
3.1. ORGANIZATION. Investor, if an entity, is duly organized, validly
existing and in good standing under the laws of state of its
incorporation or organization, having full power and authority to own its
properties and to carry on its business as conducted. Investor, if a
natural person, is of legal age, competent to enter into a contractual
obligation, and a citizen of the United States of America. The principal
place of business or principal residence of Investor is as shown on the
signature page of this Agreement.
3.2. OWNERSHIP OF THE ROLLOVER SHARES. Investor is the sole record and
beneficial owner of the Rollover Shares set forth under Investor's name
in SCHEDULE 1 hereto, free and clear of any claim, lien, security
interest, mortgage, deed of trust, pledge, charge, conditional sale or
other title retention agreement, lease, preemptive right, right of first
refusal, option, restriction, tenancy, easement, license or other
encumbrance of any kind. Except as set forth in SCHEDULE 3.2, neither
Investor nor any of its affiliates is a party to, or bound by, any
arrangement, agreement, instrument or order (i) relating to the sale,
repurchase, assignment, or other transfer of any capital stock or equity
securities of InterDent, (ii) relating to the receipt of dividends, proxy
rights, or voting rights of any capital stock or other equity securities
of InterDent, or (iii) relating to rights to registration under the
Securities Act of 1933 or the Securities Exchange Act of 1934 of any
capital stock or equity securities of InterDent.
3.3. AUTHORITY. Investor has the requisite power and authority to deliver
this Agreement, perform Investor's obligations herein, and consummate the
transactions contemplated hereby. Investor has duly executed and
delivered this Agreement and has obtained the necessary authorization to
execute and deliver this Agreement and to perform Investor's obligations
herein and to consummate the transactions contemplated hereby. This
Agreement is a valid, legal and binding obligation of Investor
enforceable against Investor in accordance with its terms, except to the
extent that enforceability may be limited by applicable bankruptcy,
insolvency or similar laws affecting the enforcement of creditors' rights
generally and subject to general principles of equity (regardless of
whether such enforcement is considered in a proceeding at law or at
equity).
3.4. INVESTOR INTENT. Unless Investor is acting in a fiduciary capacity as
provided in Section 3.5 below, Investor is acquiring the Shares for
Investor's own account as principal, for investment purposes only, not
for any other person or entity and not for the purpose of resale or
distribution.
3.5. FIDUCIARY CAPACITY. If Investor is subscribing for the Shares from the
Company in a fiduciary capacity, Investor makes these representations and
warranties on behalf of the person(s) or entity(ies) for whom Investor
will contribute and exchange the Rollover Shares for the Company's
Shares.
3.6. FINANCIAL STATUS. Investor, alone or together with its Purchase
Representative (as defined in Rule 501(h) of Regulation D), if
applicable, has such knowledge and experience in financial and business
matters as will enable Investor to evaluate the merits and risks of an
investment in the Company. Investor, if a natural person, has adequate
means of providing for his or her current financial needs and personal
contingencies, and has no need for liquidity in the investment in the
Shares, understands that he or she may not be able to liquidate his or
her investment in the Company in an emergency, if at all, and can afford
a complete loss of the investment.
3.7. ACCREDITED INVESTOR OR PURCHASER REPRESENTATIVE. Investor (or acting
together a Purchaser Representative) is an Accredited Investor, as
defined by Rule 501 of Regulation D of the Securities Act.
C-3
<PAGE>
If Investor is a natural person, (i) Investor's individual net worth or
joint net worth with Investor's spouse at the time of the execution of
this Agreement is in excess of $1,000,000; or (ii) Investor had an
individual income in excess of $200,000 in each of the two (2) most
recent years or joint income with that person's spouse in excess of
$300,000 in each of those years and has a reasonable expectation of
reaching the same income level in the current year.
3.8. NO GENERAL SOLICITATION. Investor has received no general solicitation
or general advertisement in connection with the Exchange or an investment
in the Company. Investor has received no other representations or
warranties from the Company or any other person acting on behalf of the
Company, other than those contained in this Agreement.
3.9. ACCURACY OF INFORMATION. As of the date hereof and as of the Closing,
the representations and warranties of Investor contained herein and all
information provided by Investor to the Company concerning Investor, its
financial position and its knowledge of financial and business matters
including, but not limited to, the information set forth in the
Investment Qualification Questionnaire, is correct and complete, and if
there should be any changes in that information prior to an Investor
receiving the Shares, Investor will immediately provide the Company with
the correct information.
4. AGREEMENTS AND ACKNOWLEDGEMENTS OF EACH INVESTOR. Investor hereby agrees
and acknowledges to the Company as follows.
4.1. ACCEPTANCE OF SUBSCRIPTION. The Company shall have the right, in its
sole discretion, to terminate this Agreement prior to effecting the
subscription and exchange.
4.2. NO REGISTRATION. Investor understands that the Shares being acquired
by Investor have not been registered under the Securities Act, in
reliance on an exemption therefrom for transactions not involving any
public offering, that such Shares have not been approved or disapproved
by the Securities and Exchange Commission or by any other federal or
state agency, and that no such agency has passed on the accuracy or
adequacy of disclosures made to Investor by the Company. No federal or
state governmental agency has passed on or made any recommendation or
endorsement of the Shares or an investment in the Company.
4.3. LIMITATIONS ON DISPOSITION AND RESALE. Investor understands that the
Shares cannot be sold, transferred or otherwise disposed of unless the
Shares have been registered by the Company pursuant to the Securities Act
of 1933 and any applicable state securities laws, unless an exemption
therefrom is available. Investor understands that it may not be possible
for Investor to liquidate the investment in the Company; and Investor
agrees not to sell, transfer or otherwise dispose of the Shares unless
the Shares have been so registered or an exemption from the requirement
of registration is available under the Securities Act of 1933. Investor
recognizes that there will not be any public trading market for the
Shares and, as a result, Investor may be unable to sell or dispose of its
interest in the Company.
4.4. NEWLY FORMED ENTITY. Investor recognizes that the Company was only
recently formed and, accordingly, has no financial or operating history
and that the investment in the Company is extremely speculative and
involves a high degree of risk.
4.5. COMPLIANCE WITH AGREEMENT. Investor agrees to execute any and all
further documents necessary to become a stockholder of the Company.
Investor agrees to execute and deliver any and all further documents and
writings, and to perform such other actions, as may be or become
reasonably necessary or expedient to effect and carry out the terms of
this Agreement.
4.6. IRREVOCABLE SUBSCRIPTION AND CANCELLATION. Investor understands that
this subscription is irrevocable, except as otherwise provided in any
applicable federal or state law governing this Agreement and the
transactions contemplated herein.
C-4
<PAGE>
4.7. PURCHASER REPRESENTATIVE. If Investor used or will use the services of
a Purchaser Representative in connection with the Exchange, such
Purchaser Representative has disclosed or will disclose, by submitting to
the Company a Purchaser Representative Questionnaire in the form given
Investor by the Company, any material relationship which now exists
between each Purchaser Representative or his affiliates and the Company
and its affiliates, or which is mutually understood to be contemplated,
or which has existed at any time during the previous two (2) years, and
further setting forth any compensation received or to be received as a
result of such relationship.
5. ATTORNEY'S FEES. In the event of any litigation or other legal proceeding
involving the interpretation of this Agreement or enforcement of the rights
or obligations of the parties hereto, the prevailing party or parties shall
be entitled to recover reasonable attorney's fees and costs as determined by
a court or other adjudicator.
6. GOVERNING LAW. This Agreement is governed by and shall be construed in
accordance with the law of the State of Delaware, excluding any
conflict-of-laws rule or principle that might refer the governance or
construction of this Agreement to the law of another jurisdiction. If any
provision of this Agreement or the application thereof to any person or
circumstance is held invalid or unenforceable to any extent, the remainder
of this Agreement and the application of that provision to other persons or
circumstances is not affected thereby, and that provision shall be enforced
to the greater extent permitted by law.
7. ASSIGNMENT. Investor shall have neither the right nor the power to assign
or delegate any provision of this Agreement except with the prior written
consent of the Company. Except as provided in the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the
parties' respective successors, assigns, executors and administrators.
8. COUNTERPARTS. This Agreement may be executed in separate counterparts, each
of which shall be deemed an original and both of which shall constitute one
and the same document.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof and may be
amended only in a writing executed by the party to be bound thereby.
10. TERMINATION OF AGREEMENT. This Agreement may be terminated: (i) by the
mutual written consent of the parties hereto; (ii) by the Company if a
condition set forth in Section 1.3 hereof is not satisfied or otherwise
waived by the Company; or (iii) by either party if the Merger Agreement is
terminated for any reason whatsoever.
11. FURTHER ASSURANCES. Subject to the terms and conditions provided herein,
each party hereto agrees to use all commercially reasonable efforts to take,
or cause to be taken, all action, and to do, or cause to be done, all things
necessary, proper or advisable, whether under applicable laws and
regulations or otherwise, in order to consummate and make effective the
transactions contemplated by this Agreement.
[The remainder of this page is blank]
C-5
<PAGE>
IN WITNESS WHEREOF, the parties have hereby executed this Exchange and
Subscription Agreement as of the date set forth above.
INDIVIDUAL INVESTOR
Name of Subscriber (Print or Type)
Signature of Subscriber
Signature of Joint Subscriber
Residence Address
(Street Address)
(City and State) (Zip Code)
--------------------------------------
Telephone Number
Social Security Number or
Taxpayer Number of Subscriber
ACCEPTANCE
The foregoing subscription is hereby accepted, subject to the terms and
conditions hereof, as of the date set forth above.
ID RECAP, INC.
a Delaware corporation
By:
Name:
Title:
C-6
<PAGE>
IN WITNESS WHEREOF, the parties have hereby executed this Exchange and
Subscription Agreement as of the date set forth above.
ENTITY INVESTOR
Name of Subscriber (Print or Type)
By:
Signature
Its:
Title
Principal Place of Business of
Subscriber
(City and State) (Zip Code)
--------------------------------------
Telephone Number
Tax Identification Number of
Subscriber
ACCEPTANCE
The foregoing subscription is hereby accepted, subject to the terms and
conditions hereof, as of the date set forth above.
ID RECAP, INC.
a Delaware corporation
By:
Name:
Title:
C-7
<PAGE>
SCHEDULE 1
C-8
<PAGE>
SCHEDULE 3.2
C-9
<PAGE>
CONFIDENTIAL INVESTMENT QUALIFICATION QUESTIONNAIRE
ID RECAP, INC.
A DELAWARE CORPORATION
SPECIAL INSTRUCTIONS
In order to establish the availability under federal and state securities
laws of an exemption from registration or qualification requirements for the
proposed Exchange, you are required to represent and warrant, and by executing
and delivering this questionnaire will be deemed to have represented and
warranted, that the information stated herein is true, accurate and complete to
the best of your knowledge and belief, and may be relied on by the Company.
Further, by executing and delivering this questionnaire you agree to notify the
Company and supply corrective information promptly if, prior to the consummation
of your exchange of the Rollover Shares for the Shares, any such information
becomes inaccurate or incomplete. Your execution of this questionnaire does not
constitute any indication of your intent to subscribe for the Shares.
A subscriber who is a NATURAL PERSON must complete each Question EXCEPT for
2 and 5.
A subscriber that is an ENTITY other than a trust must complete each
Question EXCEPT for 3 and 5.
A subscriber that is a TRUST must complete each Question EXCEPT for 3.
GENERAL INFORMATION
1. ALL SUBSCRIBERS.
a. Name(s) of prospective investor(s):
b. Address:
c. Tel. No.: (___) ______
2. SUBSCRIBERS THAT ARE ENTITIES.
a. Type of entity:
Trust
Corporation
Partnership
Other:
b. State and date of legal formation:
c. Nature of Business:
d. Was the entity organized for the specific purpose of acquiring the
Shares in this Exchange?
Yes______ No______
e. Federal tax identification number: ____________
3. SUBSCRIBERS WHO ARE INDIVIDUALS.
a. State where registered to vote:
b. Social Security Number:
c. Please state the subscriber's education and degrees earned:
<TABLE>
<CAPTION>
DEGREE SCHOOL YEAR
- ------ ------ --------
<S> <C> <C>
</TABLE>
C-10
<PAGE>
d. Current occupation (if retired, describe last occupation):
Employer:
Nature of Business:
Position:
Business Address:
Tel. No.: (___) ______
4. ACCREDITATION. Does the subscriber satisfy one or more of the
following accredited investor requirements? Contact the Company if none of
the following is applicable.
Investor is:
A natural person whose net worth (or joint net worth with my spouse) is in
excess of $1,000,000 as of the date hereof.
A natural person whose income in the prior two years was, and whose income
in the current year is reasonably expected to be in excess of $200,000 or
joint income with my spouse in the prior two years was, and is reasonably
expected to be in the current year in excess of $300,000.
A director or executive officer of ID Recap, Inc.
A trust with total assets in excess of $5,000,000, not formed for the
specific purpose of investing in the Shares of ID Recap, Inc., whose
purchases are directed by a sophisticated person, who has such knowledge and
experience in financial and business matters that he or she is capable of
evaluating the merits and risks of an investment in the Shares of ID
Recap, Inc.
A "bank", "savings and loan association", or "insurance company" as defined
in the Securities Act of 1933.
A broker/dealer registered pursuant to Section 15 of the Securities Exchange
Act of 1934.
An investment company registered under, or a "business development company"
as defined in Section 2(a)(48) of the Investment Company Act of 1940.
A Small Business Investment Company licensed by the U.S. Small Business
Administration under the Small Business Investment Act of 1958.
A plan established and maintained by a state, its political subdivisions, or
any agency or instrumentality of a state or its political subdivisions, for
the benefit of its employees and having total assets in excess of
$5,000,000.
An "employee benefit plan" as defined in the Employee Retirement Income
Security Act of 1974 (a "Plan") which has total assets in excess of
$5,000,000.
A Plan whose investment decisions, including the decision to subscribe for
the Shares of ID Recap, Inc., are made solely by (i) a "plan fiduciary" as
defined in Section 3(21) of the Employee Retirement Income Security Act of
1974, which includes a bank, a savings and loan association, an insurance
company or a registered investment adviser, or (ii) an "accredited investor"
as defined under Rule 501(a) of the Securities Act of 1933.
C-11
<PAGE>
A private business development company as defined in Section 202(a)(22) of
the Investment Advisers Act of 1940.
Any organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business Trust, or partnership,
not formed for the specific purpose of investing in the Shares and having
total assets in excess of $5,000,000.
Any entity in which all of the equity owners meet one of the above
descriptions.
5. TRUSTS.
Does the trust meet the following tests:
a. Has total assets in excess of $5,000,000?
Yes______ No______
b. Was formed for the purpose of the investment in the Shares in this
Exchange?
Yes______ No______
c. Are the purchases by the Trust directed by a sophisticated investor
who, alone or with his or her subscriber representative, understands
the merits and risks of the investment in the Shares?
Yes______ No______
[The remainder of this page is blank]
C-12
<PAGE>
INDIVIDUAL(S) SIGN HERE:
(Signature)
(Print Name)
(Address)
Social Security #:____________
Spouse of Subscriber:
(Signature)
ORGANIZATIONS SIGN HERE:
(Print Name of Organization)
By:
(Signature)
(Print Name and Title)
(Address)
Federal ID#:
C-13
<PAGE>
CONFIDENTIAL PURCHASER REPRESENTATIVE QUESTIONNAIRE
ID RECAP, INC.
A DELAWARE CORPORATION
1. Has the subscriber relied on the advice of a Purchaser
Representative in connection with evaluating the merits and risks of the
Purchase of the Shares in the Exchange?
Yes______ No______
If yes, please give the name, address and telephone number of the person
who is acting as the Purchaser Representative.
Name:
Address:
Telephone number: (___) ______
2. How often does the subscriber invest in securities?
Often______ Occasionally______ Never______
3. Please list below the subscriber's most recent investments (up to
three):
<TABLE>
<CAPTION>
NAME OF INVESTMENT AMOUNT OF INVESTMENT
----------------------------------------- -----------------------------------------
<S> <C>
</TABLE>
4. Does the subscriber, either alone or together with its Purchaser
Representative identified above, have such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of an investment in the Shares in the Exchange?
Yes______ No______
5. Does the subscriber, either alone by reason of its business or
financial experience or together with its Purchaser Representative, have the
capacity to protect its own interests in connection with the contribution of
the Rollover Shares in exchange for the Shares in the Exchange?
Yes______ No______
6. Is the subscriber (or the trust beneficiary for which it is the
fiduciary) able to bear the economic risk of the Investment, including a
complete loss of the investment in the Shares?
Yes______ No______
7. Does the subscriber have any other investments or contingent
liabilities which could cause the need for sudden cash requirements in
excess of cash readily available to the subscriber?
Yes______ No______
If Yes, explain:
C-14
<PAGE>
8. Does the subscriber have a net worth or joint net worth with his or
her spouse which is at least five times as great as the fair market value of
the Shares subscribed for in the Exchange?
Yes______ No______
9. If 25% or more of the subscriber's total assets are represented by
investments in the subscriber's own company or real estate, are all
liabilities associated with them included as personal liabilities?
Yes______ No______
If No, what is the dollar amount of each such liability?
10. Has the subscriber ever been subject to bankruptcy, reorganization
or debt restructuring?
Yes______ No______
If Yes, provide details:
11. Is the subscriber involved in any litigation which, if an adverse
decision occurred, would adversely affect the subscriber's financial
condition?
Yes______ No______
If Yes, provide details:
12. Does the subscriber confirm that neither the subscriber nor the
subscriber's broker nor Purchaser Representative became aware of or was
introduced to the Company by means of any general advertisement?
Yes______ No______
13. Does the subscriber confirm that the foregoing statements are
complete and accurate to the best of its knowledge and belief, and that it
undertakes to notify the Company regarding any material change in the
information set forth above prior to the Closing of the Exchange?
Yes______ No______
[The remainder of this page is blank]
C-15
<PAGE>
INDIVIDUAL(S) SIGN HERE:
(Signature)
(Print Name)
(Address)
Social Security #:____________
Spouse of Subscriber:
(Signature)
ORGANIZATIONS SIGN HERE:
(Print Name of Organization)
By:
(Signature)
(Print Name and Title)
(Address)
Federal ID#:
C-16
<PAGE>
APPENDIX D
VOTING AGREEMENT
VOTING AGREEMENT, dated as of October , 1999 (this "Agreement"), by and
between ID Recap, Inc., a Delaware corporation ("Recap"), and (the
"Stockholder").
WHEREAS, InterDent, Inc., a Delaware corporation (the "Company"), and Recap
are entering into an Agreement and Plan of Merger, dated as of this date, as may
be modified or amended from time to time in a manner not adverse to the
Stockholder (the "Merger Agreement"), which provides, among other things, for
the merger of Recap with and into the Company with the Company as the surviving
corporation (the "Merger");
WHEREAS, in connection with the Merger Agreement, Recap has requested that
the Stockholder make certain agreements with respect to certain shares of
capital stock of the Company (the "Shares") beneficially owned by the
Stockholder, upon the terms and subject to the conditions of this Agreement;
WHEREAS, in connection with the Merger Agreement, Recap and certain
stockholders are entering into an Exchange and Subscription Agreement (the
"Exchange Agreement"), which provides, among other things, for such stockholders
to exchange their shares of capital stock of the Company for shares of capital
stock of Recap prior to the Merger; and
WHEREAS, the Stockholder is willing to make certain agreements with respect
to the Subject Shares (as defined below).
NOW, THEREFORE, in consideration of the promises and the mutual covenants
and agreements set forth in this Agreement, the parties agree as follows:
1. VOTING AGREEMENTS. For so long as this Agreement is in effect, at any
meeting of Stockholders of the Company, and in any action by consent of the
Stockholders of the Company, the Stockholder shall vote, or, if applicable, give
consents with respect to, all of the Subject Shares that are held by the
Stockholder on the record date applicable to the meeting or consent (i) in favor
of the Merger Agreement and the Merger contemplated by the Merger Agreement;
(ii) against any competing Acquisition Proposal (as defined in the Merger
Agreement) or other proposal inconsistent with the Merger Agreement or which may
delay or adversely affect the likelihood of the completion of the Merger;
(iii) against any change in a majority of the persons who constitute the board
of directors of the Company inconsistent with the Merger Agreement or the
Merger; (iv) against any change in the capitalization of the Company or any
amendment of the Company's Certificate of Incorporation or Bylaws inconsistent
with the Merger Agreement or the Merger; and (v) in favor of any other matter
necessary for consummation of the transactions contemplated by the Merger
Agreement which is considered at any such meeting or in any such consent. Such
Stockholder shall not enter into any agreement or understanding with any person
the effect of which would be inconsistent with or violate the provisions of
agreements contained in this Section 1. The Stockholder shall use best efforts
to cast the Stockholder's vote or give the Stockholder's consent in accordance
with the procedures communicated to the Stockholder by the Company relating
thereto so that the vote or consent shall be duly counted for purposes of
determining that a quorum is present and for purposes of recording the results
of that vote or consent.
2. SUBJECT SHARES. The term "Subject Shares" shall mean the Shares set
forth on SCHEDULE A hereto, together with any shares of capital stock of the
Company acquired by the Stockholder after the date hereof over which the
Stockholder has the power to vote or power to direct the voting.
3. COVENANTS. For so long as this Agreement is in effect, except as
otherwise contemplated by the Merger Agreement or the Exchange Agreement, the
Stockholder agrees not to (i) sell, transfer, pledge, assign, hypothecate,
encumber, tender or otherwise dispose of, or enter into any contract with
respect to the sale, transfer, pledge, assignment, hypothecation, encumbrance,
tender or other disposition of (each
D-1
<PAGE>
such disposition or contract, a "Transfer"), any Subject Shares or Shares the
Stockholder then has or will have the right to acquire pursuant to options,
warrants, convertible securities or other such rights to purchase Shares granted
to the Stockholder by the Company; (ii) grant any powers of attorney, consents,
or proxies with respect to any shares that then constitute Subject Shares,
deposit any of the Subject Shares into a voting trust, enter into a voting or
option agreement with respect to any of the Subject Shares inconsistent with the
Merger Agreement or this Agreement, or otherwise restrict or take any action
adversely affecting the ability of the Stockholder freely to exercise all voting
rights with respect to the Subject Shares; (iii) subject to Section 8, directly
or indirectly, solicit, initiate, encourage or otherwise facilitate any
inquiries or the making of any proposal or offer with respect to an Acquisition
Proposal (as defined in the Merger Agreement) or engage in any negotiation
concerning, or provide any confidential information or data to, or have any
discussions with any person relating to an Acquisition Proposal; and the
Stockholder shall notify Recap immediately if any such inquiries or proposals
are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with the
Stockholder; or (iv) permit, cause, or take any action, or fail to take any
action, which would make any representation, warranty, covenant, or other
undertaking of the Stockholder in this Agreement untrue or incorrect or prevent,
burden or materially delay the consummation of the transactions contemplated by
this Agreement; PROVIDED, HOWEVER, that nothing in the foregoing provisions of
this Section 3 shall prohibit the Stockholder from effecting any transfer of
Subject Shares pursuant to any bona fide charitable gift or by will or
applicable laws of descent and distribution, or for estate planning purposes, if
the transferee agrees in writing to be bound by the provisions of this
Agreement. As used in this Agreement, "person" shall have the meaning specified
in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as
amended.
4. WAIVER OF DISSENTERS' RIGHTS. The Stockholder hereby waives any rights
to dissent from the Merger.
5. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER. The Stockholder
represents and warrants to Recap that:
(a) CAPACITY; NO VIOLATIONS. The Stockholder has the legal capacity to
enter into this Agreement and to consummate the transactions contemplated by
this Agreement. This Agreement has been duly executed and delivered by the
Stockholder and constitutes a valid and binding agreement of the Stockholder
enforceable against the Stockholder in accordance with its terms except as
such enforceability may be limited by applicable bankruptcy, insolvency and
similar laws affecting creditors' rights generally and general principles of
equity (whether considered in a proceeding in equity or at law). The
execution, delivery and performance by the Stockholder of this Agreement
will not (i) conflict with, require a consent, waiver or approval under, or
result in a breach or default under, any of the terms of any contract,
commitment or other obligation to which the Stockholder is a party or by
which the Stockholder is bound, (ii) violate any order, writ, injunction,
decree or statute, or any law, rule or regulation applicable to the
Stockholder or the Subject Shares; or (iii) result in the creation of, or
impose any obligation on the Stockholder to create, any Lien upon the
Subject Shares that would prevent the Stockholder from voting the Subject
Shares. In this Agreement, "Lien" shall mean any lien, pledge, security
interest, claim, third party right or other encumbrance.
(b) SUBJECT SHARES. The Stockholder has the power to vote or direct the
voting of the Subject Shares. The Subject Shares are the only shares of any
class of capital stock of the Company which the Stockholder has the right,
power or authority (sole or shared) to sell or vote, and, other than
options, warrants or other convertible securities of the Company held by the
Stockholder as of this date and set forth on SCHEDULE B hereto, the
Stockholder does not have any right to acquire, nor is it the beneficial
owner of, any other shares of any class of capital stock of the Company or
any securities convertible into or exchangeable or exercisable for any
shares of any class of capital stock of the Company. The Stockholder is not
a party to any contracts (including proxies, voting trusts or voting
agreements) that
D-2
<PAGE>
would prevent the Stockholder from voting the Subject Shares or conflicts
with the provisions of this Agreement.
(c) TITLE TO SHARES. Except as set forth on SCHEDULE 5(C), the
Stockholder is the sole record and beneficial owner of the Subject Shares,
free and clear of any pledge, lien, security interest, mortgage, charge,
claim, equity, option, proxy, voting restriction, voting trust or agreement,
understanding, arrangement, right of first refusal, limitation on
disposition, adverse claim of ownership or use or encumbrance of any kind,
other than restrictions imposed by the securities laws or pursuant to this
Agreement or the Merger Agreement.
(d) NO FINDER'S FEES. Except as disclosed in the Merger Agreement, no
broker, investment banker, financial advisor, or other person is entitled to
any broker's, finder's, financial advisor's, or other similar fee or
commission in connection with the transactions contemplated hereby based
upon arrangements made by or on behalf of the Stockholder the payment of
which could become the obligation of the Company or Recap. The Stockholder,
on behalf of itself and its affiliates, hereby acknowledges that it is not
entitled to receive any broker's, finder's, financial advisor's, or other
similar fee or commission in connection with the transactions contemplated
hereby or by the Merger Agreement.
6. EXPENSES. Each party to this Agreement shall pay its own expenses
incurred in connection with this Agreement.
7. SPECIFIC PERFORMANCE. The Stockholder acknowledges and agrees that if
Stockholder fails to perform any of Stockholder's obligations under this
Agreement, immediate and irreparable harm or injury would be caused to Recap for
which money damages would not be an adequate remedy. Accordingly, the
Stockholder agrees that Recap shall have the right, in addition to any other
rights it may have, to specific performance of this Agreement. If Recap should
institute an action or proceeding seeking specific enforcement of the provisions
of this Agreement, the Stockholder hereby waives the claim or defense that Recap
has an adequate remedy at law and hereby agrees not to assert in that action or
proceeding the claim or defense that a remedy at law exists. The Stockholder
further agrees to waive any requirements for the securing or posting of any bond
in connection with obtaining any equitable relief.
8. STOCKHOLDER CAPACITY. If the Stockholder is or becomes during the term
hereof a director or officer of the Company, the Stockholder shall not be deemed
to have made any agreement or understanding herein in his or her capacity as
such director or officer. The Stockholder signs solely in Stockholder's capacity
as the beneficial owner of the Stockholder's Subject Shares and nothing herein
shall limit or affect any actions taken by the Stockholder in any capacity as an
officer or director of the Company to the extent specifically permitted by the
Merger Agreement. Nothing in this Agreement shall be deemed to constitute a
transfer of the beneficial ownership of the Subject Shares by the Stockholder.
9. NOTICES. All notices and other communications given or made pursuant to
this Agreement shall be in writing and shall be deemed to have been duly given
or made as of the date of receipt and shall be delivered personally or mailed by
registered or certified mail (postage prepaid, return receipt requested), sent
by overnight courier or sent by telecopy, to the applicable party at the
following addresses or telecopy numbers (or at any other address or telecopy
number for a party as shall be specified by like notice):
<TABLE>
<S> <C>
If to Recap, to: ID Recap, Inc.
c/o Leonard Green & Partners, L.P.
11111 Santa Monica Boulevard, Suite 2000
Los Angeles, California 90025
Attention: John Baumer
Telephone: (310) 954-0444
Facsimile: (310) 954-0404
</TABLE>
D-3
<PAGE>
<TABLE>
<S> <C>
With a copy to: Irell & Manella LLP
333 South Hope Street, Suite 3300
Los Angeles, California 90071-3042
Attention: Ed Kaufman, Esq.
Telephone: (213) 229-0500
Facsimile: (213) 229-0515
If to the Stockholder: at the address and telephone number
set forth on the signature page
With a copy to: McDermott Will & Emery
13101 Von Karman Avenue, Suite 1100
Irvine, California 92612
Attention: Richard Babcock, Esq.
Telephone: (949) 757-7111
Facsimile: (949) 851-9348
</TABLE>
10. PARTIES IN INTEREST. This Agreement shall inure to the benefit of and
be binding upon the parties and their respective successors and assigns;
provided, however, that any successor in interest or assignee shall agree to be
bound by the provisions of this Agreement. Nothing in this Agreement, express or
implied, is intended to confer upon any Person other than Recap, the Stockholder
or their successors or assigns, any rights or remedies under, or by reason, of
this Agreement.
11. ENTIRE AGREEMENT; AMENDMENTS. Other than the Merger Agreement, the
Exchange Agreement and the transactions contemplated therein, this Agreement
contains the entire agreement between the Stockholder and Recap with respect to
the subject matter of this Agreement and supersedes all prior and
contemporaneous agreements and understandings, oral or written, with respect to
these transactions. This Agreement may not be changed, amended or modified
orally, but may be changed only by an agreement in writing signed by the party
against whom any waiver, change, amendment, modification or discharge may be
sought.
12. ASSIGNMENT. No party to this Agreement may assign any of its rights or
obligations under this Agreement without the prior written consent of the other
party to this Agreement, except that (a) Recap may assign its rights and
obligations under this Agreement to GEI (as defined in the Merger Agreement) or
any of GEI's or Recap's direct or indirect wholly owned subsidiaries or
affiliates, and (b) the Stockholder may transfer the Subject Shares to the
extent permitted by Section 3 of this Agreement.
13. HEADINGS. The section headings in this Agreement are for convenience
only and shall not affect the construction of this Agreement.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when executed, shall be deemed to be an original
and all of which together shall constitute one and the same document.
15. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to any
choice or conflict of law provision or rule (whether of the State of Delaware or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
16. TERMINATION. This Agreement shall terminate automatically and without
further action on behalf of any party at the earlier of (i) the Effective Time
(as defined in the Merger Agreement) and (ii) the date the Merger Agreement is
terminated pursuant to and in accordance with its terms.
[Signature page follows]
D-4
<PAGE>
IN WITNESS WHEREOF, Recap and the Stockholder have caused this Agreement to
be duly executed and delivered on the day and year first above written.
<TABLE>
<S> <C> <C>
ID RECAP, INC.
By
------------------------------------------
Name:
Title:
---------------------------------------------
[Stockholder Name:]
---------------------------------------------
Address
---------------------------------------------
---------------------------------------------
Telephone Number
---------------------------------------------
Facsimile Number
</TABLE>
D-5
<PAGE>
SCHEDULE A
SHARES OWNED
D-6
<PAGE>
SCHEDULE B
OPTION, WARRANT AND OTHER RIGHTS TO PURCHASE SHARES
D-7
<PAGE>
SCHEDULE 5.2(C)
TITLE TO SHARES
D-8
<PAGE>
APPENDIX E
DELAWARE CODE ANNOTATED
SECTION 262. APPRAISAL RIGHTS
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
8 DEL.
SECTION 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word stockholder means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words stock and share
mean and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
depository receipt mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to section 251 (other than a merger effected pursuant to
section 251(g) of this title), section 252, section 254, section 257,
section 258, section 263 or section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to section
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
E-1
<PAGE>
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares
of any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially
all of the assets of the corporation. If the certificate of incorporation
contains such a provision, the procedures of this section, including those
set forth in subsections (d) and (e) of this section, shall apply as nearly
as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking
of the vote on the merger or consolidation, a written demand for
appraisal of such stockholder's shares. Such demand will be sufficient if
it reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of such
stockholder's shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such
action must do so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or consolidation, the
surviving or resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this subsection and has not
voted in favor of or consented to the merger or consolidation of the date
that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to section
228 or section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten
days thereafter, shall notify each of the holders of any class or series
of stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that appraisal
rights are available for any or all shares of such class or series of
stock of such constituent corporation, and shall include in such notice a
copy of this section; provided that, if the notice is given on or after
the effective date or the merger or consolidation, such notice shall be
given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after
the effective date of the merger or consolidation, shall, also notify
such stockholders of the effective date of the merger or consolidation.
Any stockholder entitled to appraisal rights may, within 20 days after
the date of mailing of such
E-2
<PAGE>
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such
constituent corporation shall send a second notice before the effective
date of the merger or consolidation notifying each of the holders of any
class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent
more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal
rights and who has demanded appraisal of such holder's shares in
accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given shall, in
the absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the effective
date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior
to the effective date, the record date shall be the close of business on
the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw such stockholder's demand for appraisal and
to accept the terms offered upon the merger or consolidation. Within 120
days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and
(d) hereof, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a
statement setting forth the aggregate number of shares not voted in favor of
the merger or consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such shares. Such
written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified mail
to the surviving or resulting corporation and to the stockholders shown on
the list at the addresses therein stated. Such notice shall also be given by
1 or more publications at least 1 week before the day of the hearing, in a
newspaper of general circulation published in the City of Wilmington,
Delaware or such publication as the Court deems advisable. The forms of the
notices by mail and by publication shall be approved by the Court, and the
costs thereof shall be borne by the surviving or resulting corporation.
E-3
<PAGE>
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by
any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings
and may proceed to trial upon the appraisal prior to the final determination
of the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation pursuant
to subsection (f) of this section and who has submitted such stockholder's
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that
such stockholder's is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as
the Court may direct. Payment shall be so made to each such stockholder, in
the case of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this
State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the
stock (except dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the merger or
consolidation); provided, however, that if no petition for an appraisal
shall be filed within the time provided in subsection (e) of this section,
or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of such stockholder's demand for an
appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of
the corporation, then the right of such stockholder to an appraisal shall
cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of
the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
E-4
<PAGE>
APPENDIX F
------------------------
CERTIFICATE OF INCORPORATION
OF
INTERDENT, INC.
[TO BE FILED]
---------------------
F-1
<PAGE>
------------------------
ID RECAP, INC.
BYLAWS
---------------------
F-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C>
ARTICLE I OFFICES..................................................... F-5
Section 1. Registered Office........................................... F-5
Section 2. Other Offices............................................... F-5
ARTICLE II MEETINGS OF STOCKHOLDERS.................................... F-5
Section 1. Place of Meetings........................................... F-5
Section 2. Annual Meetings............................................. F-5
Section 3. Special Meetings............................................ F-5
Section 4. Notice of Meetings.......................................... F-5
Section 5. Quorum; Adjournment......................................... F-5
Section 6. Proxies and Voting.......................................... F-6
Section 7. Stock List.................................................. F-6
Section 8. Organization................................................ F-6
Section 9. Conduct of Business......................................... F-6
Section 10. Actions by Stockholders..................................... F-7
ARTICLE III BOARD OF DIRECTORS.......................................... F-7
Section 1. Duties and Powers........................................... F-7
Section 2. Number and Term of Office................................... F-7
Section 3. Vacancies................................................... F-7
Section 4. Meetings.................................................... F-7
Section 5. Quorum...................................................... F-8
Section 6. Actions of Board Without a Meeting.......................... F-8
Section 7. Meetings by Means of Conference Telephone................... F-8
Section 8. Committees.................................................. F-8
Section 9. Compensation................................................ F-8
Section 10. Removal..................................................... F-8
ARTICLE IV OFFICERS.................................................... F-8
Section 1. General..................................................... F-8
Section 2. Election; Term of Office.................................... F-9
Section 3. Chairman of the Board....................................... F-9
Section 4. President................................................... F-9
Section 5. Vice President.............................................. F-9
Section 6. Secretary................................................... F-9
Section 7. Assistant Secretaries....................................... F-9
Section 8. Treasurer................................................... F-10
Section 9. Assistant Treasurers........................................ F-10
Section 10. Other Officers.............................................. F-10
ARTICLE V STOCK....................................................... F-10
Section 1. Form of Certificates........................................ F-10
Section 2. Signatures.................................................. F-10
Section 3. Lost Certificates........................................... F-10
Section 4. Transfers................................................... F-10
Section 5. Record Date................................................. F-11
Section 6. Beneficial Owners........................................... F-11
Section 7. Voting Securities Owned by the Corporation.................. F-11
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C>
ARTICLE VI NOTICES..................................................... F-11
Section 1. Notices..................................................... F-11
Section 2. Waiver of Notice............................................ F-11
ARTICLE VII GENERAL PROVISIONS.......................................... F-11
Section 1. Dividends................................................... F-11
Section 2. Disbursements............................................... F-12
Section 3. Corporation Seal............................................ F-12
ARTICLE VIII DIRECTORS' LIABILITY AND INDEMNIFICATION.................... F-12
Section 1. Directors' Liability........................................ F-12
Section 2. Right to Indemnification.................................... F-12
Section 3. Right of Claimant to Bring Suit............................. F-13
Section 4. Non-Exclusivity of Rights................................... F-13
Section 5. Insurance and Trust Fund.................................... F-13
Section 6. Indemnification of Officers, Employees and Agents of the
Corporation................................................. F-13
Section 7. Amendment................................................... F-13
ARTICLE IX AMENDMENTS.................................................. F-14
</TABLE>
F-4
<PAGE>
BYLAWS
OF
ID RECAP, INC.
(HEREINAFTER CALLED THE "CORPORATION")
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE. The registered office of the Corporation
shall be in the City of Dover, County of Kent, State of Delaware.
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 from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such place,
either within or without the State of Delaware, as shall be designated from time
to time by the Board of Directors and stated in the notice of the meeting or in
a duly executed waiver of notice thereof.
Section 2. ANNUAL MEETINGS. The Annual Meetings of Stockholders shall be
held on such date and at such time as shall be designated from time to time by
the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect by a plurality vote a Board of Directors,
and transact such other business as may properly be brought before the meeting.
Section 3. SPECIAL MEETINGS. Special meetings of the stockholders may be
called by the Board of Directors, the Chairman of the Board, the President, or
by the holders of shares entitled to cast not less than ten percent (10%) of the
votes at the meeting. Upon request in writing to the Chairman of the Board, the
President, any Vice President or the Secretary by any person (other than the
board) entitled to call a special meeting of stockholders, the officer forthwith
shall cause notice to be given to the stockholders entitled to vote that a
meeting will be held at a time requested by the person or persons calling the
meeting, not less than thirty-five (35) nor more than sixty (60) days after the
receipt of the request. If the notice is not given within twenty (20) days after
receipt of the request, the persons entitled to call the meeting may give the
notice.
Section 4. NOTICE OF MEETINGS. Written notice of the place, date, and time
of all meetings of the stockholders shall be given not less than ten (10) nor
more than sixty (60) days before the date on which the meeting is to be held, to
each stockholder entitled to vote at such meeting, except as otherwise provided
herein or as required from time to time by the Delaware General Corporation Law
or the Certificate of Incorporation. The Board of Directors may postpone,
reschedule or cancel any previously scheduled special meeting.
Section 5. QUORUM; ADJOURNMENT. At any meeting of the stockholders, the
holders of a majority of all of the shares of the stock entitled to vote at the
meeting, present in person or by proxy, shall constitute a quorum for all
purposes, unless or except to the extent that the presence of a larger number
may be required by law or the Certificate of Incorporation. Where a separate
vote by a class or classes is required, a majority of the outstanding shares of
such class or classes, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and the affirmative vote of the majority of shares of such class or
classes present in person or represented by proxy at the meeting shall be the
act of such class. If a quorum shall fail to attend any meeting, the chairman of
F-5
<PAGE>
the meeting or the holders of a majority of the shares of stock entitled to vote
who are present, in person or by proxy, may adjourn the meeting to another
place, date, or time without notice other than announcement at the meeting,
until a quorum shall be present or represented.
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 6. PROXIES AND VOTING. At any meeting of the stockholders, every
stockholder entitled to vote may vote in person or by proxy duly authorized and
filed in accordance with the procedure established for the meeting.
Each stockholder shall have one vote for every share of stock entitled to
vote which is registered in his name on the record date for the meeting, except
as otherwise provided herein or required by law or the Certificate of
Incorporation.
All voting, including on the election of directors but excepting where
otherwise provided herein or required by law or the Certificate of
Incorporation, may be by a voice vote; provided, however, that upon demand
therefor by a stockholder entitled to vote or such stockholder's proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or the Certificate of Incorporation or
herein, all other matters shall be determined by a majority of the votes cast.
Section 7. STOCK LIST. A complete list of stockholders entitled to vote at
any meeting of stockholders, arranged in alphabetical order for each class of
stock and showing the address of each such stockholder and the number of shares
registered in such stockholder's name, shall be open to the examination of any
such 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 stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
Section 8. ORGANIZATION. Such person as the Board of Directors may have
designated or, in the absence of such a person, the Chairman of the Board or, in
his or her absence, the Chief Executive Officer of the Corporation or, in his or
her absence, such person as may be chosen by the holders of a majority of the
shares entitled to vote who are present, in person or by proxy, shall call to
order any meeting of the stockholders and act as chairman of the meeting. In the
absence of the Secretary of the Corporation, the secretary of the meeting shall
be such person as the chairman of the meeting appoints.
Section 9. CONDUCT OF BUSINESS. The chairman of any meeting of
stockholders shall determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and the conduct of
discussion as seem to him or her in order. The chairman shall have the power to
adjourn the
F-6
<PAGE>
meeting to another place, date and time. The date and time of the opening and
closing of the polls for each matter upon which the stockholders will vote at
the meeting shall be announced at the meeting.
Section 10. ACTIONS BY STOCKHOLDERS. Unless otherwise provided in the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders of the Corporation, or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
ARTICLE III
BOARD OF DIRECTORS
Section 1. DUTIES AND POWERS. The business of the Corporation shall be
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by 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 AND TERM OF OFFICE. The Board of Directors shall consist
of one (1) or more members. The number of directors shall be fixed and may be
changed from time to time by resolution duly adopted by the Board of Directors
or the stockholders, except as otherwise provided by law or the Certificate of
Incorporation. Except as provided in the Certificate of Incorporation or in
Section 3 of this Article, directors shall be elected by the holders of record
of a plurality of the votes cast at Annual Meetings of Stockholders, and each
director so elected shall hold office until the next Annual Meeting and until
his or her successor is duly elected and qualified, or until his or her earlier
resignation or removal. Any director may resign at any time upon written notice
to the Corporation. Directors need not be stockholders.
Section 3. VACANCIES. 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, although less than a quorum, or by a
sole remaining director or by the stockholders entitled to vote at any Annual or
Special Meeting held in accordance with Article II, and the directors so chosen
shall hold office until the next Annual or Special Meeting duly called for that
purpose and until their successors are duly elected and qualified, or until
their earlier resignation or removal.
Section 4. MEETINGS. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. 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 be given the newly-elected directors in order
legally to constitute the meeting, provided a quorum shall be present. Regular
meetings of the Board of Directors may be held without notice at such time and
at such place as may from time to time be determined by the Board of Directors.
Special meetings of the Board of Directors may be called by the Chairman of the
Board, the President or a majority of the directors then in office. Notice
thereof stating the place, date and hour of the meeting shall be given to each
director either by mail not less than forty-eight (48) hours before the date of
the meeting, by telephone, facsimile or telegram on twenty-four (24) hours'
notice, or on such shorter notice as the person or persons calling such meeting
may deem necessary or appropriate in the circumstances. Meetings may be held at
any time without notice if all the directors are present or if all those not
present waive such notice in accordance with Section 2 of Article VI of these
Bylaws.
F-7
<PAGE>
Section 5. QUORUM. Except as may be otherwise specifically provided by
law, the Certificate of Incorporation or these Bylaws, 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. 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 6. ACTIONS OF BOARD WITHOUT A MEETING. Unless otherwise provided
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 of
Directors 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 7. MEETINGS BY MEANS OF CONFERENCE TELEPHONE. Unless otherwise
provided by the Certificate of Incorporation or these Bylaws, members of the
Board of Directors of the Corporation, or any committee designated by the Board
of Directors, may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 7 shall constitute
presence in person at such meeting.
Section 8. COMMITTEES. The Board of Directors may designate one or more
committees, each committee to consist of one 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 any such committee. Any committee, to the extent
allowed by law and provided in the Bylaw or resolution establishing such
committee, 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. Each committee shall keep regular minutes and report to the
Board of Directors when required.
Section 9. 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 10. REMOVAL. Unless otherwise restricted by the Certificate of
Incorporation or Bylaws, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
OFFICERS
Section 1. GENERAL. The officers of the Corporation shall be appointed by
the Board of Directors and shall consist of a Chairman of the Board or a
President, or both, a Secretary and a Treasurer (or a position with the duties
and responsibilities of a Treasurer). The Board of Directors may also appoint
one or more vice presidents, assistant secretaries or assistant treasurers, and
such other officers as the Board of Directors, in its discretion, shall deem
necessary or appropriate from time to time. Any number of offices may be held by
the same person, unless the Certificate of Incorporation or these Bylaws
otherwise provide.
F-8
<PAGE>
Section 2. ELECTION; TERM OF OFFICE. The Board of Directors at its first
meeting held after each Annual Meeting of Stockholders shall elect a Chairman of
the Board or a President, or both, a Secretary and a Treasurer (or a position
with the duties and responsibilities of a Treasurer), and may also elect at that
meeting or any other meeting, such other officers and agents as it shall deem
necessary or appropriate. Each officer of the Corporation shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors together with the powers and duties customarily exercised by
such officer; and each officer of the Corporation shall hold office until such
officer's successor is elected and qualified or until such officer's earlier
resignation or removal. Any officer may resign at any time upon written notice
to the Corporation. The Board of Directors may at any time, with or without
cause, by the affirmative vote of a majority of directors then in office, remove
any officer.
Section 3. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there
shall be such an officer, shall be the chief executive officer of the
Corporation. The Chairman of the Board shall preside at all meetings of the
stockholders and the Board of Directors and shall have such other duties and
powers as may be prescribed by the Board of Directors from time to time.
Section 4. PRESIDENT. The President shall be the chief operating officer
of the Corporation, 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 President shall have and exercise such
further powers and duties as may be specifically delegated to or vested in the
President from time to time by these Bylaws or the Board of Directors. In the
absence of the Chairman of the Board or in the event of his inability or refusal
to act, or if the Board has not designated a Chairman, the President shall
perform the duties of the Chairman of the Board, and when so acting, shall have
all of the powers and be subject to all of the restrictions upon the Chairman of
the Board.
Section 5. VICE PRESIDENT. In the absence of the President or in the event
of his inability or refusal to act, the Vice President (or in the event there be
more than one vice president, the vice presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. The vice presidents shall perform such other duties and have such
other powers as the Board of Directors or the President may from time to time
prescribe.
Section 6. SECRETARY. The Secretary shall attend all meetings of the Board
of Directors and all meetings of stockholders and record all the proceedings
thereat in a book or books to be kept for that purpose; the Secretary shall also
perform like duties for the standing committees when required. The Secretary
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 by the Board of Directors or the President. If the
Secretary shall be unable or shall refuse to cause to be given notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
if there be no Assistant Secretary, then either the Board of Directors or the
President may choose another officer to cause such notice to be given. The
Secretary shall have custody of the seal of the Corporation and the Secretary or
any Assistant Secretary, if there be one, shall have authority to affix the same
to any instrument requiring it and when so affixed, it may be attested by the
signature of the Secretary or by the signature of any 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 his or her signature.
The Secretary shall see that all books, reports, statements, certificates and
other documents and records required by law to be kept or filed are properly
kept or filed, as the case may be.
Section 7. ASSISTANT SECRETARIES. Except as may be otherwise provided in
these Bylaws, Assistant Secretaries, if there be any, shall perform such duties
and have such powers as from time to time may be assigned to them by the Board
of Directors, the President, or the Secretary, and shall have the authority to
perform all functions of the Secretary, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Secretary.
F-9
<PAGE>
Section 8. TREASURER. The Treasurer shall be the Chief Financial Officer,
shall have the custody of the corporate funds and securities, shall keep
complete and accurate accounts of all receipts and disbursements of the
Corporation, and shall deposit all monies and other valuable effects of the
Corporation in its name and to its credit in such banks and other depositories
as may be designated from time to time by the Board of Directors. The Treasurer
shall disburse the funds of the Corporation, taking proper vouchers and receipts
for such disbursements, and shall render to the Board of Directors, at its
regular meetings, or when the Board of Directors so requires, an account of all
his or her transactions as Treasurer and of the financial condition of the
Corporation. The Treasurer shall, when and if required by the Board of
Directors, give and file with the Corporation a bond, in such form and amount
and with such surety or sureties as shall be satisfactory to the Board of
Directors, for the faithful performance of his or her duties as Treasurer. The
Treasurer shall have such other powers and perform such other duties as the
Board of Directors or the President shall from time to time prescribe.
Section 9. ASSISTANT TREASURERS. Except as may be otherwise provided in
these Bylaws, Assistant Treasurers, if there be any, shall perform such duties
and have such powers as from time to time may be assigned to them by the Board
of Directors, the President, or the Treasurer, and shall have the authority to
perform all functions of the Treasurer, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Treasurer.
Section 10. OTHER OFFICERS. Such other officers as the Board of Directors
may choose shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such other
officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
Section 1. FORM OF CERTIFICATES. Every holder of stock in the Corporation
shall be entitled to have a certificate signed, in the name of the Corporation
(i) by the Chairman of the Board or the President or a Vice President and
(ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the Corporation, certifying the number of shares owned by
such holder in the Corporation.
Section 2. SIGNATURES. Any or all the signatures on the certificate may be
a 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 such
person were such officer, transfer agent or registrar at the date of issue.
Section 3. LOST CERTIFICATES. The Board of Directors may direct a new
certificate to be issued in place of any certificate 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, 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 such owner's legal representative, to advertise the same in such
manner as the Board of Directors 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 4. TRANSFERS. Stock of the Corporation shall be transferable in
the manner prescribed by law and in these Bylaws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by such person's attorney lawfully constituted in writing and upon the
surrender of the certificate therefor, which shall be cancelled before a new
certificate shall be issued.
F-10
<PAGE>
Section 5. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, 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) days 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 6. BENEFICIAL OWNERS. 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
law.
Section 7. VOTING SECURITIES OWNED BY THE CORPORATION. Powers of attorney,
proxies, waivers of notice of meeting, consents and other instruments relating
to securities owned by the Corporation may be executed in the name of and on
behalf of the Corporation by the Chairman of the Board, the President, any Vice
President or the Secretary and any such officer may, in the name of and on
behalf of the Corporation, take all such action as any such officer may deem
advisable to vote in person or by proxy at any meeting of security holders of
any corporation in which the Corporation may own securities and at any such
meeting shall possess and may exercise any and all rights and power incident to
the ownership of such securities and which, as the owner thereof, the
Corporation might have exercised and possessed if present. The Board of
Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
ARTICLE VI
NOTICES
Section 1. NOTICES. Whenever written notice is required by law, the
Certificate of Incorporation or these Bylaws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at such
person's 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. Written notice may also
be given personally or by telegram, facsimile transmission, telex or cable and
such notice shall be deemed to be given at the time of receipt thereof if given
personally or at the time of transmission thereof if given by telegram,
facsimile transmission, telex or cable.
Section 2. WAIVER OF NOTICE. Whenever any notice is required by law, the
Certificate of Incorporation or these Bylaws to be given to any director, member
or a committee or stockholder, a waiver thereof in writing, signed by the person
or persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to notice.
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 or by any
Committee of the Board of Directors having such authority at any meeting
F-11
<PAGE>
thereof, and may be paid in cash, in property, in shares of the capital stock or
in any combination thereof. Before payment of any 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 its absolute discretion,
deems 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 any proper purpose, and the Board of Directors may modify or abolish any
such reserve.
Section 2. DISBURSEMENTS. All notes, checks, drafts and orders for the
payment of money issued by the Corporation shall be signed in the name of the
Corporation by such officers or such other persons as the Board of Directors may
from time to time designate.
Section 3. CORPORATION SEAL. The corporate seal, if the Corporation shall
have a corporate seal, shall have 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.
ARTICLE VIII
DIRECTORS' LIABILITY AND INDEMNIFICATION
Section 1. DIRECTORS' LIABILITY. 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 to the extent provided by
applicable law 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 an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate 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. Any repeal or modification of this provision
shall not adversely affect any right or protection of a director of the
Corporation existing at the time of such repeal or modification.
This Section 1 is also contained in Article SEVENTH of the Corporation's
Certificate of Incorporation, and accordingly, may be altered, amended or
repealed only to the extent and at the time such Certificate Article is altered,
amended or repealed.
Section 2. RIGHT TO INDEMNIFICATION. Each person who was or is made a
party to or is threatened to be made a party to or is involuntarily involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "Proceeding"), by reason of the fact that he or she is or was a
director of the Corporation, or is or was serving (during his or her tenure as
director) at the request of the Corporation as a director of another corporation
or of a partnership, joint venture, trust or other enterprise, whether the basis
of such Proceeding is an alleged action or inaction in an official capacity as a
director or in any other capacity while serving as a director, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law (or other applicable law), as
the same exists or may hereafter be amended, against all expense, liability and
loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection with such Proceeding. Such director shall
have the right to be paid by the Corporation for expenses incurred in defending
any such Proceeding in advance of its final disposition; provided, however,
that, if the Delaware General Corporation Law (or other applicable law)
requires, the payment of such expenses in advance of the final disposition of
any such Proceeding shall be made only upon receipt by the Corporation of an
undertaking by or on behalf of such director to repay all amounts so advanced if
it should be determined ultimately that he or she is not entitled to be
indemnified under this Article or otherwise.
F-12
<PAGE>
Section 3. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section 2 of
this Article is not paid in full by the Corporation within ninety (90) days
after a written claim has been received by the Corporation, the claimant may at
any time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim, together with interest thereon, and, if successful in whole
or in part, the claimant shall also be entitled to be paid the expense of
prosecuting such claim, including reasonable attorneys' fees incurred in
connection therewith. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
Proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Corporation) that the claimant has
not met the standards of conduct which make it permissible under the Delaware
General Corporation Law (or other applicable law) for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation (or
of its full Board of Directors, its directors who are not parties to the
Proceeding with respect to which indemnification is claimed, its stockholders,
or independent legal counsel) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the Delaware General Corporation Law (or other applicable law), nor
an actual determination by any such person or persons that such claimant has not
met such applicable standard of conduct, shall be a defense to such action or
create a presumption that the claimant has not met the applicable standard of
conduct.
Section 4. NON-EXCLUSIVITY OF RIGHTS. The rights conferred by this
Article shall not be exclusive of any other right which any director may have or
hereafter acquire under the Delaware General Corporation Law or any other
statute, or any provision contained in the Corporation's Certificate of
Incorporation or Bylaws, or any agreement, or pursuant to a vote of stockholders
or disinterested directors, or otherwise.
Section 5. INSURANCE AND TRUST FUND. In furtherance and not in limitation
of the powers conferred by statute:
(1) the Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or is 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 any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of law; and
(2) the Corporation may create a trust fund, grant a security interest
and/or use other means (including, without limitation, letters of credit, surety
bonds and/or other similar arrangements), as well as enter into contracts
providing indemnification to the fullest extent permitted by law and including
as part thereof provisions with respect to any or all of the foregoing, to
ensure the payment of such amount as may become necessary to effect
indemnification as provided therein, or elsewhere.
Section 6. INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS OF THE
CORPORATION. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification, including the right to
be paid by the Corporation the expenses incurred in defending any Proceeding in
advance of its final disposition, to any officer, employee or agent of the
Corporation to the fullest extent of the provisions of this Article VIII or
otherwise with respect to the indemnification and advancement of expenses of
directors of the Corporation.
Section 7. AMENDMENT. Any repeal or modification of this Article VIII
shall not change the rights of a director to indemnification with respect to any
action or omission occurring prior to such repeal or modification.
F-13
<PAGE>
ARTICLE IX
AMENDMENTS
Except as otherwise specifically stated within an Article to be altered,
amended or repealed, these Bylaws may be altered, amended or repealed and new
Bylaws may be adopted at any meeting of the Board of Directors or of the
stockholders, provided notice of the proposed change was given in the notice of
the meeting.
The undersigned, as the Incorporator of ID Recap, Inc., hereby adopts the
foregoing Bylaws as the Bylaws of said corporation.
Dated as of October 12, 1999
---------------------------------------------
Denise R. Wymore, Incorporator
The undersigned, constituting the Board of Directors of ID Recap, Inc.,
hereby adopt the foregoing Bylaws as the Bylaws of said corporation.
Dated as of October 12, 1999.
---------------------------------------------
John Danhakl, Director
---------------------------------------------
John Baumer, Director
THIS IS TO CERTIFY:
That I am the duly elected, qualified and acting of Secretary ID Recap, Inc.
and that the foregoing Bylaws were adopted as the Bylaws of said corporation as
of the 12th day of October, 1999, by the Board of Directors of said corporation.
Dated as of October 12, 1999.
---------------------------------------------
Jim Gillette, Secretary
F-14
<PAGE>
APPENDIX G
MEMBERS OF THE AFFILIATE GROUP
C.B. CAPITAL INVESTORS, L.P.
CB Capital Investors, L.P. ("CBCI, L.P.") is a Delaware limited partnership
whose principal business office is located at 380 Madison Avenue, 12th Floor,
New York, New York 10017. The general partner of CBCI, L.P. is CB Capital
Investors, Inc., a Delaware corporation ("CBCI"), whose principal business
office is located at the same address as CBCI, L.P. CBCI is a wholly owned
subsidiary of The Chase Manhattan Bank, a New York corporation, which is a
wholly owned subsidiary of The Chase Manhattan Corporation, a Delaware
corporation, both of whose principal business offices are located at 270 Park
Avenue, 5th Floor, New York, New York 10017. The limited partner of CBCI, L.P.
is Chase Capital Partners, a New York general partnership ("CCP"), whose
principal business office is located at the same address as CBCI, L.P. CCP is
also the investment manager of CBCI and a Limited Partner of CBCI, L.P.
CBCI, L.P. and CBCI are engaged in the venture capital and leveraged buyout
business. The directors of CBCI are Jeffrey C. Walker and Donald J. Hofmann. The
executive officers of CBCI are Jeffrey C. Walker, Chief Executive Officer;
Donald J. Hofmann, President; Mitchell J. Blutt, M.D., Secretary and Robert C.
Carroll, Assistant Secretary. Each of the individual general partners of CCP are
also officers of CBCI. Eric Green, who is member of the Board of Directors of
InterDent, Inc., is as a principal of CCP. The address for each of the directors
and executive officers of CBCI, each of whom is a U.S. citizen, is c/o Chase
Capital Partners, 380 Madison Avenue, 12(th) Floor, New York, New York 10017.
CCP is also engaged in the venture capital and leveraged buyout business.
Set forth below are the names of each general partner of CCP who is a natural
person. Each such general partner is a U.S. citizen, whose principal occupation
is general partner of CCP and whose principal business office address (except
for Mr. Soghikian) is c/o Chase Capital Partners, 380 Madison Avenue, 12th
Floor, New York, New York 10017.
- John R. Baron
- Christopher C. Behrens
- Mitchell J. Blutt, M.D.
- Arnold L. Chavkin
- Michael R. Hannon
- Donald J. Hofmann
- Stephen P. Murray
- John M.B. O'Connor
- Brian J. Richmand
- Shahan D. Soghikian
- Jeffrey C. Walker
- Damion E. Wicker, M.D.
Mr. Soghikian's principal business office address is c/o Chase Capital
Partners, 50 California Street, Suite 2940, San Francisco, CA 94111.
Jeffrey C. Walker is the managing general partner of CCP. The remaining
general partners of CCP are Chase Capital Corporation, a New York corporation
("Chase Capital"), CCP Principals, L.P., a Delaware limited partnership
("Principals") and CCP European Principals, L.P., a Delaware limited partnership
G-1
<PAGE>
("European Principals"), each of whose principal business office is located at
the same address as CBCI, L.P. Chase Capital is a wholly owned subsidiary of The
Chase Manhattan Corporation, a Delaware corporation, whose principal business
office is located at the same address as CBCI, L.P. The general partner of each
of Principals and European Principals is Chase Capital.
Set forth below is the name, business address, principal occupation and
employment of each executive officer of Chase Capital, each of whom is a U.S.
citizen.
<TABLE>
<CAPTION>
NAME TITLE
- ---- -----
<S> <C>
William B. Harrison, Jr.*............ Chairman & Chief Executive Officer
Jeffrey C. Walker**.................. President
Mitchell J. Blutt, M.D.**............ Executive Vice President
Gregory Meridith*.................... Vice President & Secretary
Robert C. Carroll*................... Assistant Secretary
Anthony J. Horan*.................... Assistant Secretary
Denis G. Connors*.................... Assistant Secretary
William B. Harrison, Jr.*............ Director
Jeffrey C. Walker**.................. Director
</TABLE>
- ------------------------
* Principal occupation is employee and/or officer of The Chase Manhattan
Corporation. Business address is c/o The Chase Manhattan Corporation, 270 Park
Avenue, New York, New York 10017.
** Principal occupation is employee of The Chase Manhattan Corporation
and/or general partner of Chase Capital Partners. Business address is c/o CCP,
380 Madison Avenue, 12(th) Floor, New York, NY 10017.
The Chase Manhattan Corporation ("Chase") is a Delaware corporation engaged
(primarily through subsidiaries) in the commercial banking business with its
principal office located at 270 Park Avenue, New York, New York 10017.
Set forth below is the name, business address, principal occupation and
employment of each executive officer of Chase, each of whom is a U.S. citizen.
<TABLE>
<CAPTION>
NAME TITLE
- ---- -----
<S> <C>
William B. Harrison, Jr*............. Chairman of the Board, President and
Chief Executive Officer
Thomas G. Labrecque*................. President
Donald L. Boudreau*.................. Vice Chairman of the Board
James B. Lee, Jr.*................... Vice Chairman of the Board
Denis J. O'Leary*.................... Vice Chairman of the Board
Marc J. Shapiro*..................... Vice Chairman of the Board
Joseph G. Sponholz*.................. Vice Chairman of the Board
John J. Farrell*..................... Director, Human Resources John
Frederick W. Hill*................... Director, Corporate Marketing and
Communication
William H. McDavid*.................. General Counsel
</TABLE>
- ------------------------
* Principal occupation is executive officer and/or employee of The Chase
Manhattan Bank. Business address is c/o The Chase Manhattan Bank, 270 Park
Avenue, New York, New York 10017.
G-2
<PAGE>
Set forth below is the name, business address, principal occupation and
employment of each director of Chase, each of whom is a U.S. citizen.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Hans W. Becherer..................... Chairman of the Board
Chief Executive Officer
Deere & Company
8601 John Deere Road
Moline, IL 61265
Frank A. Bennack, Jr................. President and Chief Executive Officer
The Hearst Corporation
959 Eighth Avenue
New York, NY 10019
Susan V. Berresford.................. President
The Ford Foundation
320 East 43rd Street
New York, NY 10017
M. Anthony Burns..................... Chairman, President and Chief
Executive Officer
Ryder System, Inc.
2800 N.W. 82nd Avenue
Miami, FL 33166
H. Laurance Fuller................... Co-Chairman of the Board and Chief
Executive Officer
Amoco Corporation
200 East Randolph Drive
Chicago, IL 60601
William H. Gray, III................. Chairman of the Board,
President and Chief Executive Officer
The College Fund/UNCF
9860 Willow Oaks Corporate Drive
P.O. Box 10444
Fairfax, VA 22031
William B. Harrison, Jr.............. President and Chief Executive Officer
The Chase Manhattan Corporation
270 Park Avenue, 8th Floor
New York, NY 10017-2070
Harold S. Hook....................... Retired Chairman of the Board
and Chief Executive Officer
American General Corporation
2929 Allen Parkway
Houston, TX 77019
</TABLE>
G-3
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Helene L. Kaplan..................... Of Counsel
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue--Room 29-72
New York, NY 10022
Thomas G. Labrecque.................. Retired President and
Chief Operating Officer
The Chase Manhattan Corporation
270 Park Avenue, 8th Floor
New York, NY 10017-2070
Henry B. Schacht..................... Director and Senior Advisor
E.M. Warburg,
Pincus & Co., LLC
466 Lexington Avenue
10th Floor
New York, New York 10017
Andrew C. Sigler..................... Retired Chairman of the Board and
Chief Executive Officer
Champion International Corporation
1 Champion Plaza
Stamford, CT 06921
John R. Stafford..................... Chairman
President
Chief Executive Officer
American Home Products Corporation
Five Giralda Farms
Madison, NJ 07940
Marina N. Whitman.................... Professor of Business Administration
and Public Policy
The University of Michigan
School of Public Policy
411 Lorch Hall, 611 Tappan Street
Ann Arbor, MI 48109-1220
</TABLE>
SPROUT CAPITAL VII, L.P. AND RELATED ENTITIES
The Sprout Group includes the following persons and entities: (1) Sprout
Capital VII, L.P., a Delaware Limited Partnership ("Sprout VII"); (2) Sprout CEO
Fund, L.P., a Delaware Limited Partnership ("Sprout CEO"), (3) DLJ First ESC,
LLC, a Delaware Limited Liability Company, ("DLJFESC") (4) DLJ Growth Associates
II, L.P., a Delaware Limited Partnership ("Growth LP"); (5) DLJ Growth
Associates (II), Inc., a Delaware Corporation ("Growth Inc."); (6) Sprout Growth
II, L.P., a Delaware Limited Partnership ("Sprout II" and together with Sprout
VII, DLJFESC and Sprout CEO the "Sprout Funds")); (7) DLJ Associates VII, L.P.,
a Delaware Limited Partnership ("DLJ VII"); (8) DLJ Capital Associates
VII, Inc., a Delaware Corporation ("DLJCA VII"); (9) The Kroon 1994 Limited
Partnership, a Connecticut Limited Partnership ("Kroon"); (10) Patrick J.
Boroian; (11) Philippe O. Chambon; (12) Robert E. Curry; (13) Robert Finzi;
(14) Keith B. Geeslin; (15) The JHT 1994 Limited Partnership, a Connecticut
Limited Partnership ("JHT"); (16) Kathleen D. LaPorte; (17) Scott F. Meadow;
(18) Arthur S. Zuckerman; (19) Janet A. Hickey; (20) Hal Tague; (21) Richard E.
Kroon; (22) Mary Jane Kroon;
G-4
<PAGE>
(23) DLJ Capital Corporation, a Delaware Corporation ("DLJCC"); (24) Donaldson,
Lufkin & Jenrette, Inc., a Delaware Corporation ("DLJ"); (25) The Equitable
Companies Incorporated, a Delaware corporation ("EQ"); (26) AXA, a societe
anonyme organized under the laws of France ("AXA"); (27) Finaxa, a societe
anonyme organized under the laws of France; (28) AXA Assurances I.A.R.D.
Mutuelle, a mutual insurance company organized under the laws of France;
(29) AXA Assurances Vie Mutuelle, a mutual insurance company organized under the
laws of France; (30) AXA Courtage Assurance Mutuelle (formerly known as Uni
Europe Assurance Mutuelle), a mutual insurance company organized under the laws
of France; (31) AXA Conseil Vie Assurance Mutuelle (formerly known as Alpha
Assurances Vie Mutuelle), a mutual insurance company organized under the laws of
France, and (32) Claude Bebear, Patrice Garnier and Henri de Clermont-Tonnerre,
trustees (the "AXA Voting Trustees") of a voting trust (the "AXA Voting Trust")
established pursuant to a Voting Trust Agreement by and among AXA and the AXA
Voting Trustees dated as of May 12, 1992, and as amended, January 22, 1997.
Growth LP, Growth Inc., DLJ VII, DLJCA VII, DLJCC and DLJ are collectively
referred to as the "DLJ Entities".
Kroon, Patrick J. Boroian, Philippe O. Chambon, Robert E. Curry,
Robert Finzi, Keith B. Geeslin, JHT, Kathleen D. LaPorte, Scott F. Meadow,
Arthur S. Zuckerman, Janet A. Hickey, Hal Tague, Richard E. Kroon, Mary Jane
Kroon and Alex Rosen are collectively referred to as the "General Partners".
Sprout VII is a Delaware limited partnership which makes investments for
long term appreciation. DLJCC is the managing general partner of Sprout VII.
DLJCC makes all of the investment decisions on behalf of Sprout VII. DLJ VII is
a Delaware limited partnership which serves as a general partner of Sprout VII.
DLJCA VII is a general partner of DLJ VII. DLJCA VII is a Delaware corporation
formed to serve as a general partner of DLJ VII. DLJCA VII is a wholly owned
subsidiary of DLJCC.
Sprout CEO is a Delaware limited partnership which makes investments for
long term appreciation. DLJCC is the managing general partner of Sprout CEO.
DLJCC makes all of the investment decisions on behalf of Sprout CEO.
DLJFESC is a Delaware limited liability company which makes investments for
long term appreciation. DLJ LBO Plans Management Company is a Delaware
corporation and the manager of DLJFESC and makes all of the investment decisions
on behalf of DLJFESC.
Sprout II is a Delaware limited partnership which makes investments for long
term appreciation. DLJCC is the managing general partner of Sprout II and makes
all of the investment decisions on behalf of Sprout II.
Growth Inc. is a Delaware corporation and a general partner of Growth LP.
Growth-Inc. is a wholly owned subsidiary of DLJCC.
Kroon is a Connecticut limited partnership which makes investments for long
term appreciation. Kroon is one of the general partners of Growth LP and DLJ
VII.
Patrick J. Boroian is a general partner of Growth LP and DLJ VII and is a
citizen of the United States. He is employed by Sprout Group and his principal
occupation is venture capital investing.
Philippe O. Chambon is a general partner of Growth LP and DLJ VII and is a
citizen of France. He is employed by Sprout Group and his principal occupation
is venture capital investing.
Robert E. Curry is a general partner of Growth LP and DLJ VII and is a
citizen of the United States. He is employed by Sprout Group and his principal
occupation is venture capital investing.
Robert Finzi is a general partner of Growth LP and DLJ VII and is a citizen
of the United States. He is employed by Sprout Group and his principal
occupation is venture capital investing.
G-5
<PAGE>
Keith B. Geeslin is a general partner of Growth LP and DLJ VII and is a
citizen of the United States. He is employed by Sprout Group and his principal
occupation is venture capital investing.
JHT is a Connecticut limited partnership which makes investments for long
term appreciation. JHT is a general partner of Growth LP and DLJ VII.
Kathleen D. LaPorte is a general partner of Growth LP and DLJ VII and is a
citizen of the United States. She is employed by Sprout Group and her principal
occupation is venture capital investing.
Scott F. Meadow is a general partner of Growth LP and DLJ VII and is a
citizen of the United States. He is employed by Sprout Group and his principal
occupation is venture capital investing.
Arthur S. Zuckerman is a general partner of Growth LP and DLJ VII and is a
citizen of the United States. He is employed by Sprout Group and his principal
occupation is venture capital investing.
Alex Rosen is a general partner of DLJ VII and is a citizen of the United
States. He is employed by Sprout Group and his principal occupation is venture
capital investing.
Janet A. Hickey is a general partner of JHT and is a citizen of the United
States. She is employed by Sprout Group and her principal occupation is venture
capital investing.
Hal Tague is a general partner of JHT and a citizen of the United States. He
is employed as President of Overbrook Management Corp. and his principal
occupation is investment management and administration.
Richard E. Kroon is a general partner of Kroon and a citizen of the United
States. He is employed by Sprout Group and his principal occupation is venture
capital investing.
Mary Jane Kroon is a general partner of Kroon and a citizen of the United
States. She is not employed.
DLJCC is a Delaware corporation formed to make investments in industrial and
other companies to participate in the management of venture capital pools. DLJCC
is a wholly owned subsidiary of DLJ.
DLJ is a publicly held Delaware corporation. DLJ directly owns all of the
capital stock of DLJCC. DLJ, acting on its own behalf or through its
subsidiaries, is a registered broker/dealer and registered investment adviser
engaged in investment banking, institutional trading and research, investment
management and financial and correspondent brokerage services.
AXA Financial is a Delaware corporation and is a holding company. As of
June 30, 1999, AXA Financial owned, directly or indirectly, 70.5% of DLJ.
AXA is a societe anonyme organized under the laws of France and a holding
company for an international group of insurance and related financial services
companies. As of October 1, 1999, approximately 58% of the outstanding common
stock of AXA Financial was beneficially owned by AXA. For insurance regulatory
purposes, to insure that certain indirect minority shareholders of AXA will not
be able to exercise control over AXA Financial and certain of its insurance
subsidiaries, the voting shares of AXA Financial capital stock beneficially
owned by AXA and its subsidiaries have been deposited into the AXA Voting Trust.
As of June 30, 1999, AXA directly owned 1.5% of DLJ.
Finaxa is a societe anonyme organized under the laws of France and is a
holding company. As of October 1, 1999, Finaxa controlled directly and
indirectly approximately 20.3% of the issued ordinary shares (representing
approximately 32.1% of the voting power) of AXA.
Each of AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, AXA
Courtage Assurance Mutuelle, and AXA Conseil Vie Assurance Mutuelle
(collectively, the "Mutuelles AXA") is a mutual insurance company organized
under the laws of France. Each of the Mutuelles AXA is owned by its policy
holders. As of October 1, 1999, the Mutuelles AXA, as a group, control
approximately 61.7% of the
G-6
<PAGE>
issued shares (representing approximately 72.3% of the voting power) of Finaxa
and 22.7% of the shares of Finaxa (representing 13.7% of the voting power) were
owned by Paribas, a French bank. As of October 1, 1999, the Mutuelles AXA, in
addition to their indirect beneficial ownership of AXA's ordinary shares through
Finaxa, directly beneficially owned approximately 3.1% of the ordinary shares
(representing approximately 4.9% of the voting power of AXA. Acting as a group,
the Mutuelles AXA control AXA and Finaxa.
Claude Bebear, Patrice Garnier and Henri de Clermont-Tonnerre, the AXA
Voting Trustees, exercise all voting rights with respect to the shares of AXA
Financial capital stock beneficially owned by AXA and its subsidiaries that have
been deposited in the AXA Voting Trust.
The address of the principal business and office of each of the DLJ Entities
and the Sprout Funds is 277 Park Avenue, New York, New York 10172. The address
of the principal business and principal office of AXA Financial is 1290 Avenue
of the Americas, New York, New York 10104.
The address of the principal business and principal office of each of the
General Partners is:
- Patrick J. Boroian--c/o Sprout Group, 277 Park Ave., New York, NY 10172
- Philippe O. Chambon--c/o Sprout Group, 3000 Sand Hill Rd., Building 3,
Ste. 170 Menlo Park, CA 94025
- Robert E. Curry--c/o Sprout Group, 3000 Sand Hill Rd., Building 3, Ste.
170, Menlo Park, CA 94025
- Robert Finzi--c/o Sprout Group, 3000 Sand Hill Rd., Building 3, Ste. 170,
Menlo Park, CA 94025
- Keith B. Geeslin--c/o Sprout Group, 3000 Sand Hill Rd., Building 3, Ste.
170, Menlo Park, CA 94025
- Alex Rosen--c/o Sprout Group, 3000 Sand Hill Rd. Building 3, Ste. 170,
Menlo Park, CA 94025
- Kathleen D. LaPorte--c/o Sprout Group, 3000 Sand Hill Rd., Building 3,
Ste. 170, Menlo Park, CA 94025
- Scott F. Meadow--520 Lake Cook Road, Suite 450, Deerfield, IL 60015
- Arthur S. Zuckerman--c/o Sprout Group, 277 Park Ave., New York, NY 10172
- Janet A. Hickey--c/o Sprout Group, 277 Park Ave., New York, NY 10172
- Hal Tague--Overbrook Management Corp., 521 Fifth Avenue, New York, NY
10121
- Richard E. Kroon--c/o Sprout Group, 277 Park Ave., New York, NY 10172
- Mary Jane Kroon--c/o Richard E. Kroon, Sprout Group, 277 Park Ave., New
York, NY 10172
- The Kroon 1994 Limited Partnership--c/o Richard E. Kroon, Sprout Group,
277 Park Ave., New York, NY 10172
- The JHT 1994 Limited Partnership--c/o Janet Hickey, Sprout Group, 277 Park
Ave., New York, NY 10172
The address of the principal business and principal office of each of AXA
and the AXA Voting Trustees is 9 Place Vendome, 75001 Paris, France. The address
of the principal business and principal office of Finaxa is 23, avenue Matignon,
75008 Paris, France; of each of AXA Assurances I.A.R.D. Mutuelle and AXA
Assurances Vie Mutuelle is 21, rue de Chateaudun, 75009 Paris, France; of AXA
Courtage Assurance Mutuelle is 26, rue Louis-le-Grande, 75002 Paris, France; and
of AXA Conseil Vie Assurance Mutuelle is Tour Franklin, 100/101 Terrasse
Boieldieu, Cedex 11, 92042 Paris La Defense, France.
G-7
<PAGE>
The name, business address, citizenship, present principal occupation or
employment and the name and business address of any corporation or organization
in which each such employment is conducted, of each executive officer or member,
as applicable, of the Board of Directors, the Supervisory Board or the Conseil
d'Administration (French analogue of a Board of Directors) of Growth Inc., DLJCA
VII, DLJCC, DLJ, AXA Financial, AXA, Finaxa and the Mutuelles AXA are set forth
below.
The names of the directors and the names and titles of the executive
officers of Growth Inc. and their business addresses and principal occupations
are set forth below. If no address is given, the director's or executive
officer's business address is that of Growth Inc. at 277 Park Avenue, New York,
New York 10172. Unless otherwise indicated, each occupation set forth opposite
an individual's name refers to Growth Inc. and each individual is a United
States citizen.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Richard E. Kroon*.................... President
Anthony F. Daddino*.................. Vice President, Growth, Inc.
Chief Financial Officer
Executive Vice President
DLJ
Arthur Zuckerman..................... Vice President
Marjorie S. White*................... Secretary, Growth, Inc.
Vice President and Secretary
DLJ
Charles J. Hendrickson............... Treasurer, Senior Vice President
and Treasurer
DLJ
</TABLE>
- ------------------------
* Director
The names of the directors and the names and titles of the executive
officers of DLJCA VII and their business addresses and principal occupations are
set forth below. If no address is given, the director's or executive officer's
business address is that of DLJCA VII at 277 Park Avenue, New York, New York
10172. Unless otherwise indicated, each occupation set forth opposite an
individual's name refers to DLJCA VII and each individual is a United States
citizen.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Richard E. Kroon*.................... President and Chief Executive Officer
Marjorie S. White*................... Secretary, DLJCA VII
Vice President and Secretary
DLJ
Charles J. Hendrickson............... Treasurer, DLJCA VII
Treasurer
DLJ
</TABLE>
- ------------------------
* Director
The names of the directors and the names and titles of the executive
officers of DLJCC and their business addresses and principal occupations are set
forth below. Each director's or executive officer's business address is that of
DLJCC at 277 Park Avenue, New York, New York 10172. Unless otherwise
G-8
<PAGE>
indicated, each occupation set forth opposite an individual's name refers to
DLJCC and each individual is a United States citizen.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Richard E. Kroon*.................... President and Chief Executive Officer
Anthony F. Daddino*.................. Vice President, DLJCC
Executive Vice President
Chief Financial Officer
DLJ
Marjorie S. White*................... Secretary, DLJCC
Vice President and Secretary
DLJ
Charles J. Hendrickson............... Treasurer, DLJCC
Treasurer
DLJ
</TABLE>
- ------------------------
* Director
The names of the directors and the names and titles of the executive
officers of DLJ and their business addresses and principal occupations are set
forth below. If no address is given, the director's or executive officer's
business address is that of DLJ at 277 Park Avenue, New York, New York 10172.
Unless
G-9
<PAGE>
otherwise indicated, each occupation set forth opposite an individual's name
refers to DLJ and each individual is a United States citizen.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
John S. Chalsty*..................... Chairman of the Board
Joe L. Roby*......................... President and Chief Executive Officer
Henri de Castries*(1)................ Senior Executive Vice President
Financial Services and Life Insurance
Activities in the United States,
United
Kingdom, Benelux, Northern and
Eastern Europe
AXA
23 avenue Matignon
75008 Paris, France
Denis Duverne*(1).................... Senior Vice President--International
Life
AXA
23, avenue Matignon
75008 Paris, France
Louis Harris......................... Chairman and Chief Executive Officer,
LH Research (research)
152 East 38th Street
New York, New York 10016-2605
Michael Hegarty*..................... Vice Chairman and Chief Operating
Officer
The Equitable Life Assurance Society
of the United States
1290 Avenue of the Americas
New York, NY 10104
Henri G. Hottinguer*(2).............. Chairman of Financier Hottinguer
(banking)
43, rue Tatbout
75009 Paris, France
W. Edwin Jarmain*(3)................. President
Jarmain Group Inc. (private
investment holding company)
Suite 2525, Box 36
121 King Street, West
Toronto, Ontario
M5H 3T9 Canada
Francis Jungers*..................... Retired
19880 NW Nestucca Drive
Portland, Oregon 97229
Anthony F. Daddino*.................. Executive Vice President and Chief
Financial Officer
</TABLE>
G-10
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Edward D. Miller*.................... President and Chief Executive Officer
AXA
President and Chief Executive Officer
AXA Financial
Chairman and Chief Executive Officer
The Equitable Life Assurance
Society of the United States
1290 Avenue of the Americas
New York, New York 10104
W. J. Sanders, III*.................. Chairman and Chief Executive Officer
Advanced Micro Devices, Inc.
901 Thompson Place
Sunnyvale, CA 94086
Stanley B. Tulin*.................... Executive Vice President and Chief
Financial Officer
AXA Financial
1290 Avenue of the Americas
New York, NY 10104
John C. West*........................ Chairman, Siebels Bruce Group, Inc.
c/o Bothea, Jordan & Griffin
23B Shelter Cove
Hilton Head Island, SC 29928
Hamilton E. James*................... Chairman, DLJ's Banking Group
Richard S. Pechter*.................. Chairman, DLJ's Financial Services
Group
David DeLucia........................ Head, DLJ's Fixed Income Division
Stuart M. Robbins*................... Managing Director, DLJ's Global
Institutional Equities Group
Jane Mack Gould*..................... Senior Vice President and Portfolio
Manager, Alliance
</TABLE>
- ------------------------
* Director
(1) Citizen of the Republic of France
(2) Citizen of Switzerland
(3) Citizen of Canada
The names of the directors and the names and titles of the executive
officers of AXA Financial and their business addresses and principal occupations
are set forth below. If no address is given, the director's or executive
officer's business address is that of AXA Financial at 1290 Avenue of the
Americas, New
G-11
<PAGE>
York, New York 10104. Unless otherwise indicated, each occupation set forth
opposite an individual's name refers to AXA Financial and each individual is a
United States citizen.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Claude Bebear*(1).................... Chairman of the Executive Board
AXA
23, avenue Matignon
75008 Paris, France
John S. Chalsty*..................... Chairman of the Board
DLJ
277 Park Avenue
New York, NY 10172
Francoise Colloc'h*(1)............... Senior Executive Vice President,
Group Human Resources and
Communications
AXA
23, avenue Matignon
75008 Paris, France
Henri de Castries*(1)................ Chairman of the Board;
AXA Financial
Senior Executive Vice President
Financial Services and Life Insurance
Activities in the United States,
United
Kingdom, Benelux, Northern and
Eastern Europe
AXA
23, avenue Matignon
75008 Paris, France
Joseph L. Dionne*.................... Chairman (Retired)
The McGraw-Hill Companies
(publishing)
1221 Avenue of the Americas
New York, NY 10020
Jean-Rene Fourtou.................... Vice President, Director General
25 quai Paul Doumer
92408 Courbevoie Cedex
France
Jacques Friedmann*(1)................ Chairman of the Supervisory Board
AXA
9, Place Vendome
75001 Paris
France
Robert E. Garber..................... Executive Vice President and General
Counsel; Executive Vice President and
Chief Legal Officer
The Equitable Life Assurance Society
of the United States
</TABLE>
G-12
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Donald J. Greene, Esq.*.............. Of Counsel,
LeBoeuf, Lamb, Greene & MacRae,
L.L.P. (law firm)
125 West 55th Street
New York, NY 10019
Anthony J. Hamilton*(2).............. Group Chairman and Chief Executive
Officer
Fox-Pitt, Kelton Group Limited
(investment banking firm)
35 Wilson Street
London, England EC2M 2SJ
John T. Hartley*..................... Retired Chairman and Chief Executive
Officer, currently Director
Harris Corporation
(manufacturer of electronic,
telephone and copying systems)
1025 Nasa Boulevard
Melbourne, FL 32919
Michael Hegarty...................... Senior Vice Chairman of the Board
and Chief Operating Officer
AXA Financial
President and Chief Operating Officer
The Equitable Life Assurance Society
of the United States
John H. F. Haskell, Jr. *............ Senior Advisor
Warburg Dillon Read, Inc. (formerly
Dillon, Read & Co., Inc.) (investment
banking firm)
535 Madison Avenue
New York, NY 10022
Nina Henderson*...................... Corporate Vice President
Bestfoods Grocery (formerly CPC
Specialty Markets Group of CPC
International, Inc.) (food
manufacturer) 700 Sylvan Avenue
Englewood, NJ 07632
W. Edwin Jarmain*(3)................. President
Jarmain Group Inc. (private
investment holding company)
121 King Street West
Suite 2525
Toronto, Ontario M5H 3T9
Canada
</TABLE>
G-13
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Edward D. Miller*.................... President and Chief Executive Officer
AXA Financial
Chairman and Chief Executive Officer
The Equitable Life Assurance
Society of the United States
1290 Avenue of the Americas
New York, New York 10104
Peter D. Noris....................... Executive Vice President and
Chief Investment Officer
Equitable Life Assurance Society
of the United States
Didier Pineau-Valencienne*(1)........ Vice Chairman
Credit Suisse First Boston
(investment banking firm)
64, rue de Miromesnil
75008 Paris, France
George J. Sella, Jr. *............... Retired Chairman, President and
Chief Executive Officer
American Cyanamid Company
(manufacturer of pharmaceutical
products and agricultural products)
P.O. Box 397
Newton, NJ 07860
Jose Suquet.......................... Executive Vice President
Senior Executive Vice President, and
Chief Distribution Officer
The Equitable Life Assurance Society
of the United States
Peter J. Tobin*...................... Dean, College of Business
Administration (education)
St. John's University
8000 Utopia Parkway
Bent Hall
Jamaica, NY 11439
Stanley B. Tulin..................... Vice Chairman of the Board and
Chief Financial Officer
The Equitable Life Assurance Society
of the United States
Vice Chairman and
Chief Financial Officer
AXA Financial
Dave H. Williams*.................... Chairman of the Board
and Chief Executive Officer
Alliance Capital Management Corp.
(investment adviser)
1345 Avenue of the Americas
New York, NY 10105
</TABLE>
G-14
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Gregory G. Wilcox.................... Executive Vice President
1290 Avenue of the Americas
New York, New York, 10104
</TABLE>
- ------------------------
* Director
(1) Citizen of the Republic of France
(2) Citizen of United Kingdom
(3) Citizen of Canada
The names and titles of the Members of the Executive Committee and
Supervisory Board of AXA and their business addresses and principal occupations
are set forth below. If no address is given, the Member's business address is
23, avenue Matignon, 75008 Paris, France. Unless otherwise indicated, each
occupation set forth opposite an individual's name refers to AXA and each
individual is a citizen of the Republic of France.
MEMBERS OF THE EXECUTIVE BOARD:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT AND BUSINESS
NAME OR RESIDENCE ADDRESS
- ---- --------------------
<S> <C>
Claude Bebear........................ Chairman of the Executive Board
Gerard de La Martiniere.............. Senior Executive Vice president, Chief
Financial Officer
Michel Pinault....................... Senior Executive Vice President, Executive
Board Secretary
</TABLE>
MEMBERS OF THE SUPERVISORY BOARD:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT AND BUSINESS
NAME OR RESIDENCE ADDRESS
- ---- --------------------
<S> <C>
Jacques Friedman..................... Chairman of the Supervisory Board
9, Place Vendome
75008 Paris, France
Antoine Bernheim..................... Chairman, Assicurazioni Generali S.p.A.
(insurance)
Lazard Freres et Cie
121, boulevard Haussman
75008 Paris, France
Jacques Calvet....................... Former Chairman of the Executive Board, Peugeot
S.A. (auto manufacturer)
75, rue de Tilsitt
75116 Paris, France
Henri de Clermont-Tonnerre........... Chairman of the Supervisory Board, Qualiz SCA
(transportation)
ERSA
90, rue de Miromesnil
75008 Paris, France
</TABLE>
G-15
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT AND BUSINESS
NAME OR RESIDENCE ADDRESS
- ---- --------------------
<S> <C>
David Dautresme...................... General Partner, Lazard Freres et Cie
(investment banking)
Lazard Freres et Cie
121, boulevard Haussman
75008 Paris, France
Guy Dejouany......................... Honorary Chairman, Compagnie Generale des Eaux
(industry and services)
Vivendi
General des Eaux
52, rue d'Anjou
75008 Paris, France
Paul Desmarais (7)................... Chairman and Chief Executive Officer, Power
Corporation (industry and services)
Power Corporation of Canada
751, Square Victoria
Montreal Quebec
H3Y 3JY Canada
Jean-Rene Fourtou.................... Chairman and Chief Executive Officer,
Rhone-Poulenc S.A. (industry)
Rhone-Oulenc S.A.
25, quai Paul Doumer
93408 Courbevoie Cedex
France
Michel Francois-Poncet............... Chairman of the Supervisory Board, Compagnie
Financiere de Paribas (financial services and
banking)
3, Rue d'Antin
75002 Paris, France
Patrice Garnier...................... Retired
Anthony J. Hamilton (1).............. Group Chairman and Chief Executive of Fox-Pitt,
Kelton Group Limited (finance)
Fox-Pitt, Kelton Group Limited
35 Wilson Street
London, England EC2M 2SJ
Henri Hottinguer (6)................. Vice Chairman, Financier Hottinguer (banking)
Financiere Hottinguer
43, rue Taitbout
75009 Paris, France
Richard H. Jenrette (2).............. Senior Advisor, Donaldson Lufkin & Jenrette,
Inc. (investment banking)
c/o Donaldson, Lufkin & Jenrette, Inc.
277 Park Avenue
New York, New York 10172
</TABLE>
G-16
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT AND BUSINESS
NAME OR RESIDENCE ADDRESS
- ---- --------------------
<S> <C>
Henri Lachman........................ Vice Chairman and Chief Executive Officer,
Schneider S.A. (electrical equipment)
Schneider S.A.
64-70 Av. Jean-Baptiste Clemnet
92646 Boulogne Cedex, France
Gerard Mestrallet.................... Chairman and Chief Executive Officer, Suez
Lyonnaise des Eaux (finance)
Suez-Lyonnaise des Eaux
1, rue d'Astorg
75008 Paris, France
Friedel Neuber....................... Chairman of the Executive Board, WestDeutsche
Landesbank (banking)
Westdeutsche Landesbank
Girozentrale
Herzogstrasse 15
D40127 Dusseldorf, Germany
Alfred von Oppenheim (4)............. Chairman, Bank Oppenheim (banking)
Sal Oppenheim Jr. & Cie
Unter Sachsenrausen 4
50667 Koln, Germany
Michel Pebereau...................... Chairman and Chief Executive Officer, Banque
Nationale de Paris (banking)
B.N.P.
16, Boulevard des Italiens
75009 Paris, France
Didier Pineau-Valencienne............ Vice Chairman Credit Suisse First Boston
(investment banking)
64, rue Mironmesnit
75008 Paris, France
Bruno Roger.......................... General Partner, Lazard Freres & die
(investment banking)
Lazard Reres et Cie
121, Boulevard Haussman
75008 Paris, France
Simone Rozes......................... First Honorary President, Cour de Cassation
(government)
2, rue Villaret de Joyeuse
75017 Paris, France
</TABLE>
G-17
<PAGE>
EXECUTIVE OFFICERS:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT AND BUSINESS
NAME OR RESIDENCE ADDRESS
- ---- --------------------
<S> <C>
Claude Bebear........................ Chairman of the Executive Board
AXA
23, avenue Matignon
75008 Paris, France
Jean-Luc Bertozzi.................... Executive Officer of AXA Assurances of I.A.R.D.
Mutuelle and AXA Assurances Vie Mutuelle
Tour AXA
1, place des Saisons
92083 Paris La Defense, France
Donald Brydon (1).................... Senior Executive Vice President; Chief
Executive, AXA Investment Managers Europe
AXA Investment Managers
60 Gracechurch Street
London EC3V OHR
U.K.
John Chalsty (2)..................... Senior Executive Vice President; Chairman of
Donaldson, Jufkin & Jenrette, Inc.
Donaldson, Lufkin & Jenrette, Inc.
277 Park Avenue
New York, NY 10172
Henri de Castries.................... Senior Executive Vice President, Financial
Services and Insurance Activities in the United
States, United Kingdom, Benelux, Northern and
Eastern Europe
AXA
23, avenue Matignon
75008 Paris, France
Francoise Collach.................... Senior Executive Vice President, Group Human
Resources and Communications
AXA
23, avenue Matigon
75008 Paris, France
Jacques Deparis...................... Executive Officer of AXA Courtage and AXA
Collectives
AXA Courtage
26, rue Louis le Grand
75002 Paris, France
</TABLE>
G-18
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT AND BUSINESS
NAME OR RESIDENCE ADDRESS
- ---- --------------------
<S> <C>
Michael Hegarty...................... Vice Chairman and Chief Operating Officer of
AXA Financial, Inc. and President and Chief
Operating Officer of The Equitable Life
Assurance Society of the Unites States
AXA Financial, Inc.
1290 Avenue of the Americas
New York, NY 10104
Tony Killen.......................... Senior Executive Vice President; Managing
Director of National Mutual Holdings
National Mutual Holdings
447 Collins Street
Melbourne Victoria 3000
Australia
Claas Kleybodlt (4).................. Senior Executive Vice President; Chairman of
the Executive Board AXA Colonia Konzern AB
AXA Colonia Konzern
Gereondriesch 9-11
50670 Koln, Germany
Gerard de La Martiniere.............. Senior Executive Vice President and Chief
Financial Officer
AXA
23 avenue Matignon
75008 Paris, France
Edward Miller (2).................... President and Chief Executive Officer of AXA
Financial, Inc.; Chairman and Chief Executive
Officer of The Equitable Life Assurance Society
of the United States
AXA Fianical, Inc.
1290 Avenue of the Americas
New York, NY 10104
Jean-Marie Nessi..................... Chairman and Chief Executive Officer of AXA
Reassurance
AXA Reassurance
39, rue de colisee
75008 Paris, France
Francois Pierson..................... Executive Officer of AXA Conseil I.A.R.D. and
AXA Conseil Vie
AXA Conseil
21, rue de Chateaudun
75009 Paris, France
</TABLE>
G-19
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT AND BUSINESS
NAME OR RESIDENCE ADDRESS
- ---- --------------------
<S> <C>
Michel Pinault....................... Senior Executive Vice President and Secretary
of the Executive Board
AXA
23, avenue Matignon
75008 Paris, France
Claude Tendil........................ Senior Executive Vice President; Chairman and
Chief Executive Officer--French Insurance
activities, international risks, transborder
insurance projects
AXA
23, avenue Matignon
75008 Paris, France
Dave H. Williams (2)................. Senior Executive Vice-President; Chairman of
Alliance Capital Management Corporation
Alliance Capital
1345 Avenue of the Americas
New York, NY 10105
Mark Wood (1)(3)..................... Senior Executive Vice President; Managing
Director of Sun Life & Provincial Holdings
(insurance)
SLPH
107 Cheapside
London EC2V 6DU
U.K.
</TABLE>
- ------------------------
(1) Citizen of the United Kingdon
(2) Citizen of the United States of America
(3) Citizen of Belgium
(4) Citizen of Germany
(5) Citizen of Australia
(6) Citizen of Switzerland
(7) Citizen of Canada
The names of the members of Conseil d'Administration and the names and
titles of the executive officers of Finaxa and their business addresses and
principal occupations are set forth below. If no address is given, the member's
or executive officer's business address is that of Finaxa at 23, avenue
Matignon, 75008 Paris, France. Unless otherwise indicated, each occupation set
forth opposite an individual's name refers to Finaxa and each individual is a
citizen of the Republic of France.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Claude Bebear*....................... Chairman and Chief Executive Officer
Finaxa
Chairman of the Executive Board
AXA
</TABLE>
G-20
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Henri de Castrias.................... Senior Executive Vice President,
Financial Services and Insurance
Activities in the United States,
United Kingdom, Benelux, Northern
and Eastern Europe
Henri de Clermont-Tonnerre*.......... Chairman of the Supervisory Board
Qualis SCA (transportation)
ERSA
90, rue de Miromejni
75008 Paris, France
Jean-Rene Fourtou*................... Chairman and Chief Executive Officer
Rhone-Poulenc S.A. (industry)
25, quai Paul Doumer
92408 Courbevoie Cedex
France
Patrice Garnier*..................... Retired
Latreaumont
76360 Baretin, France
Henri Hottinguer*(1)................. Vice Chairman
Financier Hottinguer (banking)
43, rue Taitbout
75009 Paris, France
Paul Hottinguer*(1).................. Chairman
Financier Hottinguer (banking)
43, rue Taitbout
75009 Paris, France
Henri Lachmann*...................... Vice Chairman and Chief Executive
Officer,
Schneider S.A. (electrical equipment)
64-70, Av Jean-Baptiste Clement
92646 Boulogne Cedex, France
Andre Levy-Lang*..................... Chairman of Executive Board, Paribas
(banking)
3, rue d'Antin
75002 Paris, France
Christian Manset*.................... Member of the Executive Board
Paribas
3, rue d'Antin
75002 Paris, France
Georges Rousseau*.................... Retired
Le Hameau de Verguetot
76430 Oudalle, France
Emilo Ybarra*(2)..................... Chairman
Banco Bilbao Vizcaya (banking)
BBV
Paseo de la Castillone, 81
28046 Madrid, Spain
</TABLE>
G-21
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Gerard de la Martiniere.............. Chief Executive Officer; Senior
Executive Vice President and Chief
Financial Officer of AXA
</TABLE>
- ------------------------
* Member, Conseil d'Administration
(1) Citizen of Switzerland
(2) Citizen of Spain
The names of the members of Conseil d'Administration and the names and
titles of the executive officers of AXA Assurances I.A.R.D. Mutuelle and their
business addresses and principal occupations are set forth below. If no address
is given, the member's or executive officer's business address is that of AXA
Assurances I.A.R.D. Mutuelle at 21, rue de Chateaudun, 75009 Paris, France.
Unless otherwise indicated, each occupation set forth opposite an individual's
name refers to AXA Assurances I.A.R.D. Mutuelle and each individual is a citizen
of the Republic of France.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Claude Bebear*....................... Chairman; Chairman of the
Executive Board
AXA
23, avenue Matignon
75008 Paris, France
Jean-Luc Bertozzi.................... Executive Officer of AXA Assurances
I.A.R.D. and AXA Assurances
Vie 1, place de Saisons
92083 Paris La Defense, France
Jean-Pierre Chaffin*................. Chairman, Federation de la
Metallurgie (industry)
5, rue la Bruyere
75009 Paris, France
Gerard Coutelle*..................... Retired
7, rue Gounot
75007 Paris, France
Henri de Castries*................... Senior Executive Vice President
Financial Services and Life Insurance
Activities in the United States,
United Kingdom, Benelux, Northern and
Eastern Europe AXA
23, avenue Matignon,
75008 Paris, France
Jean-Rene Fourtou*................... Chairman and Chief Executive Officer
Rhone-Poulenc S.A. (industry)
25, quai Paul Doumer
92408 Courbevoie Cedex
France
</TABLE>
G-22
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Henri Lachmann*...................... Vice President, Vice Chairman
and Chief Executive Officer
Schneider, S.A. (electric equipment)
64-70, Av Jean-Baptiste Clement
92646 Boulogne, France
Francois Richer*..................... Retired
82, Avenue de Wagram
75017 Paris France
Georges Rousseau*.................... Retired
Lehameau de Verguetot
76430 Oudalles, Frances
Claude Tendil*....................... Senior Executive Vice President
of AXA, Chairman and Chief Executive
Officer French Insurance Activities,
international risks, transborder
insurance projects
AXA
23, avenue Matigon
75008 Paris, France
Henri de Clermont-Tonnerre........... Chariman of the Supervisory Board,
Qualis SCA (transportation)
ERSA
90, rue de Miromesnil
75008 Paris, France
Jean de Ribes*....................... Manager
Fortuny Fortune Conseil
5, avenue Percier
75008 Paris, France
</TABLE>
- ------------------------
* Member, Conseil d'Administration
The names of the Members of Conseil d'Administration and the names and
titles of the executive officers of AXA Assurances Vie Mutuelle and their
business addresses and principal occupations are set forth below. If no address
is given, the Member's or executive officer's business address is that of AXA
Assurances Vie Mutuelle at 21, rue de Chateaudun, 75009 Paris, France. Unless
otherwise indicated, each occupation set forth opposite an individual's name
refers to AXA Assurances Vie Mutuelle and each individual is a citizen of the
Republic of France.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Claude Bebear*....................... Chairman
Chairman of the Executive Board
AXA
23, avenue Matignon
75008 Paris, France
</TABLE>
G-23
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Jean-Luc Bertozzi.................... Executive Officer I.A.R.D.
AXA Assurances and AXA
Assurances Vie
Tour AXA
1, place des Sectors
92083 Paris La Defense, France
Jean-Pierre Chaffin*................. Chairman
Representing ASSE Federation
de la Metallurgie CFE-CGC
5, rue La Brayere
75009 Paris, France
Henri de Castries*................... Senior Executive Vice President
Financial Services and Insurance
Activities in the United States,
United Kingdom, Benelux, Northern
and Eastern Europe
Henri de Clermont-Tonnerre*.......... Chairman of the Supervisory Board
Qualis SCA (transportation)
90, rue de Miromesnil
75008 Paris, France
Gerard Coutelle*..................... Retired
Jean-Rene Fourtou*................... Chairman and Chief Executive Officer
Rhone-Poulenc S.A. (industry)
25, quai Paul Doumer
92408 Courbevoie Cedex
France
Henri Lachmann*...................... Vice Chairman, Vice Chairman and
Chief Executive Officer
Schneider S. A. (electrical
equipment)
64-70, Av Jean-Baptiste Clement
92646 Boulogne Cedex, France
Francois Richer*..................... Retired
Georges Rousseau*.................... Retired
Le Hameu de Verguetot
76430 Oudalle, France
Claude Tendil*....................... Senior Executive Vice President of
AXA,
Chairman and Chief Executive Officer
French Insurance Activities,
international risks, transborder
insurance projects AXA
23, avenue Matigon
75008 Paris, France
</TABLE>
G-24
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Jean de Ribes*....................... Manager
Fortuny Fortune Conseil
5, Avenue Percier
75008 Paris, France
</TABLE>
- ------------------------
* Member, Conseil d'Administration
The names of the Members of Conseil d'Administration and the names and
titles of the executive officers of AXA Courtage Assurance Mutuelle and their
business addresses and principal occupations are set forth below. If no address
is given, the Member's or executive officer's business address is that of AXA
Courtage Assurance Mutuelle at 26, rue de Louis-le-Grand, 75002 Paris, France.
Unless otherwise indicated, each occupation set forth opposite an individual's
name refers to AXA Courtage Assurance Mutuelle and each individual is a citizen
of the Republic of France.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Claude Bebear*....................... Chairman
AXA Courtage Assurance Mutuelle
Chairman of the Executive Board
AXA
23, avenue Matignon
75008 Paris, France
Francis Cordier*..................... Retired
Gerard Coutelle*..................... Retired
7, rue Gounot
75007 Paris, France
Henri de Castries*................... Senior Executive Vice President,
Financial Services and Insurance
Activities in the United States,
United Kingdom, Benelux, Northern
and Eastern Europe
AXA
23, avenue Matignon
75008 Paris, France
Jean-Rene Fourtou*................... Chairman and Chief Executive Officer
Rhone-Poulenc S.A. (industry)
25, quai Paul Doumer
92408 Courbevoie Cedex
France
Patrice Garnier*..................... Retired
Latreaumont
76360 Baretin, France
Henri Lachmann*...................... Vice Chairman and Chief Executive
Officer,
Schneider S.A. (electrical equipment)
64-70, Av Jean-Baptiste Clement
92646 Boulogne Cedex, France
</TABLE>
G-25
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Jean de Ribes*....................... Manager
Fortunay Fortune Conseil
5 Avenue Percier
75008 Paris, France
Georges Rousseau*.................... Retired
Le Hameau de Vegautot
76430 Oudalle
Claude Tendil*....................... Senior Executive Vice President of
AXA,
Chairman and Chief Executive Officer,
French Insurance Activities,
international risks, transborder
insurance projects
AXA
23, Avenue Matigon
75008 Paris, France
Jean-Pierre Chaffin*................. Chairman, Federation de la
Metallurgie (industry)
5, rue la Bruyere
75009 Paris, France
Jacques Deparis*..................... Executive Officer of AXA Courtage and
AXA Collectives
AXA Courtage
26, rue Louis le Grand
75002 Paris, France
</TABLE>
- ------------------------
* Member, Conseil d'Administration
The names of the Members of Conseil d'Administration and the names and
titles of the executive officers of AXA Conseil Vie Assurance Mutuelle and their
business addresses and principal occupations are set forth below. If no address
is given, the Member's or executive officer's business address is that of AXA
Conseil Vie Assurance Mutuelle at Tour Franklin, 100/101 Terrasse Boieldieu,
Cedex 11, 92042 Paris La Defense, France. Unless otherwise indicated, each
occupation set forth opposite an individual's name refers to AXA Conseil Vie
Assurance Mutuelle and each individual is a citizen of the Republic of France.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Claude Bebear*....................... Chairman
AXA Conseil Vie Assurance Mutuelle
Chairman of the Executive Board
AXA
23, avenue Matignon
75008 Paris, France
Bernard Cornille*.................... Retired
</TABLE>
G-26
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS OR RESIDENCE ADDRESS
- ---- ---------------------------------
<S> <C>
Henri de Castries*................... Senior Executive Vice President,
Financial Services and Life Insurance
Activities in the United States,
United
Kingdom, Benelux, Northern and
Eastern Europe
23, avenue Matignon
75008 Paris, France
Henri de Clermont-Tonnerre*.......... Chairman of the Supervisory Board,
Qualis ERSA SCA (transportation)
90 rue de Miromesnil
75008 Paris, France
Francis Cordier*..................... Retired
Jean de Ribes*....................... Manager, Fortuny Fortune
Conseil
5 avenue Percier
75008 Paris, France
Jean-Rene Fourtou*................... Chairman and Chief Executive Officer,
Rhone- Rhone-Poulenc S.A.
Poulenc S.A. (manufacturer of
chemicals
and agricultural products)
25, Quai Paul Doumer
92408 Courbevoie Cedex, France
Patrice Garnier*..................... Retired
Henri Lachmann*...................... Vice Chairman; Chairman and Chief
Executive Officer, Schneider S.A.
(electric equipment)
64-70, Av. Jean-Baptiste Clement
92646 Boulogne Cedex, France
Francois Richer*..................... Retired
Claude Tendil*....................... Senior Executive Vice President, AXA;
Chairman and Chief Executive Officer,
French insurance activities,
international
risks, transborder insurance projects
23, avenue Matignon
92083 Paris La Defense, France
Francis Vaudour*..................... Retired
Francois Pierson*.................... Executive Officer, AXA Conseil Vie
and AXA
AXA Conseil
Conseil I.A.R.D.
21, rue de Chateaudun
75009 Paris, France
</TABLE>
- ------------------------
* Member, Conseil d'Administration
(1) Formerly known as Alpha Assurance Vie Mutuelle
G-27
<PAGE>
SRM 1993 CHILDREN'S TRUST
SRM 1993 Children's Trust is an irrevocable trust created by Dr. Steven R.
Matzkin in 1993. Theodore L. Koenig is the sole trustee of the SRM 1993
Children's Trust and has sole voting and investment control with respect to
shares of capital stock of InterDent, Inc. held by the trust. The children of
Dr. Steven R. Matzkin are the beneficiaries of the trust.
MICHAEL T. FIORE
Mr. Fiore has served as Co-Chairman of the Board and Chief Executive Officer
of InterDent, Inc. since March 1999. From November 1997 until March 1999,
Mr. Fiore was the Co-Chairman of the Board, Chief Executive Officer and
President of Gentle Dental Service Corporation, a publicly held corporation and
predecessor-in-interest to InterDent, Inc. Mr. Fiore was the Chief Executive
Officer, President and a director of GMS Dental Group, Inc. from April 1997 to
October 1997, when GMS Dental Group, Inc. was merged into Gentle Dental Service
Corporation. From 1986 to March 1996, Mr. Fiore served in various management
positions at Salick Health Care, Inc., a provider of diagnostic and therapeutic
services to patients with catastrophic illness, principally in the areas of
cancer and kidney failure, including serving as a director, Executive Vice
President and Chief Operating Officer, and as President of its principal
subsidiary, Comprehensive Cancer Centers, Inc.
G-28
