<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported)
SEPTEMBER 27, 1996
SAFEGUARD HEALTH ENTERPRISES, INC.
--------------------------------------------------------
(Exact Name of registrant as specified in its charter)
DELAWARE 0-12050 52-1528581
-------- ------- ----------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
505 NORTH EUCLID STREET, P. O. BOX 3210, ANAHEIM, CALIFORNIA 92803-3210
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 778-1005
--------------
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On September 27, 1996, Safeguard Health Enterprises, Inc. ("Enterprises" or
the "Company"), announced that it had completed the acquisition of all the
outstanding shares of both First American Dental Benefits, Inc., dba American
Dental Corporation ("First American"), a privately held managed dental care
company based in Dallas, Texas, and T.R.C. Agency, Inc., a Texas corporation
("T.R.C."), an affiliated marketing entity, for total consideration of
approximately $23.5 Million. (Exhibit "A" attached hereto).
Pursuant to the terms of the definitive Stock Purchase Agreement dated as
of August 9, 1996 (Exhibit "B" attached hereto), by and among the Company, First
American, James L. Davenport, D.D.S. ("Dr. Davenport"), Martin J. Rinker, D.D.S.
("Dr. Rinker"), and William N. Rees, Jr. ("Mr. Rees"), the beneficial and record
owners of all of the issued and outstanding capital stock of First American (the
"First American Shares"), Enterprises paid Eleven Million Nine Hundred Fifty
Thousand Dollars ($11,950,000) for all of the outstanding First American Shares.
The Company also paid Mr. Rees an aggregate of Fifty Thousand Dollars
($50,000) as consideration for Mr. Rees entering into a Non-Competition
Agreement by and between Mr. Rees and the Company. In addition, the Company
will pay Dr. Rinker and Dr. Davenport, the aggregate sum of Three Million Five
Hundred Seventy-Six Thousand Dollars ($3,576,000) payable over three (3) years
($1,192,000 per year) and subject to applicable withholding, as consideration
for a five (5) year Non-Competition Agreement among the Company, Dr. Davenport,
and Dr. Rinker.
Pursuant to the terms of the definitive First American Stock Purchase
Agreement, First American, Metroplex Dental Group/Irving, L.L.P. ("Metroplex"),
Dr. Davenport, and Dr. Rinker, entered into an Assignment and Assumption
Agreement dated September 26, 1996, (Exhibit "C" attached hereto) whereby
Metroplex assigned to First American, certain dental plan contracts. Metroplex
is affiliated through common ownership with First American, in that Metroplex
has historically received substantially all of its administrative services from
First American, and that certain Metroplex members have received services from
dental clinics operated by the owners of First American.
First American provides managed dental care services through a network of
approximately 490 dental care providers. First American provides managed dental
care services to approximately 175,000 members in the State of Texas, adding to
the Company's existing business in that state.
Pursuant to the terms of the definitive Stock Purchase Agreement dated
August 9, 1996 (Exhibit "D" attached hereto), by and among Enterprises, T.R.C.,
and Dr. Davenport and Dr. Rinker, the beneficial and record owners of all of the
issued and outstanding capital stock (the "T.R.C. Shares") of T.R.C.,
Enterprises paid Eight Million
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<PAGE>
Dollars ($8,000,000) for all of the outstanding T.R.C. Shares. T.R.C. is a
marketing entity affiliated with First American.
Enterprises financed the acquisition of all of the First American Shares,
the T.R.C. Shares, and the Non-Competition Agreements by and between Mr. Rees
and the Company, and by and among Dr. Davenport, Dr. Rinker, and the Company,
through a credit agreement with Bank of America National Trust and Savings
Association. (Exhibit "E" attached hereto).
The acquisition of First American and T.R.C. by Enterprises was subject to
the Texas Department of Insurance's ("Department") approval of the Company's
acquisition of First American. On September 25, 1996, the Commissioner of
Insurance of the State of Texas executed an Official Order approving the
acquisition of control of First American by Enterprises. (Exhibit "F" attached
hereto).
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
The following financial statements of First American for the six (6)
months ended June 30, 1996, and the years ended December 31, 1995, 1994, and
1993, and independent auditors' report, are filed as Exhibit "G" attached
hereto:
1. Balance sheets as of June 30, 1996, and December 31, 1995, 1994,
and 1993;
2. Statement of income for the six months ended June 30, 1996, and
for the years ended December 31, 1995, 1994, and 1993;
3. Statement of stockholders' equity for the period ended June 30,
1996, and for the years ended December 31, 1995, 1994, and 1993;
4. Statements of cash flows for six months ended June 30, 1996, and
years ended December 31, 1995, 1994, and 1993; and
5. Notes to financial statements for the six months ended June 30,
1996, and the years ended December 31, 1995, 1994, and 1993.
The following financial statements of Metroplex for the six (6) months
ended June 30, 1996, and the years ended December 31, 1995, 1994, and 1993, and
independent auditors' report, are filed as Exhibit "H" attached hereto:
1. Balance sheets as of June 30, 1996, and December 31, 1995, 1994,
and 1993;
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<PAGE>
2. Statements of income for the six months ended June 30, 1996, and
the years ended December 31, 1995, 1994, and 1993;
3. Statements of cash flows for the six months ended June 30, 1996,
and years ended December 31, 1995, 1994, and 1993;
4. Statements of owners' equity (deficit) for the six months ended
June 30, 1996, and the years ended December 31, 1995, 1994, and
1993; and
5. Notes to financial statements for the six months ended June 30,
1996, and the years ended December 31, 1995, 1994, and 1993.
The following financial statements of T.R.C. for the six (6) months ended
June 30, 1996, and the years ended December 31, 1995, 1994, and 1993, and
independent auditors' report, are filed as Exhibit "I" attached hereto:
1. Audited balance sheets as of June 30, 1996, and December 31,
1995, 1994, and 1993;
2. Statements of income for the six months ended June 30, 1996, and
the years ended December 31, 1995, 1994, and 1993;
3. Statements of stockholders' equity (deficit) for the six months
ended June 30, 1996, and the years ended December 31, 1995, 1994,
and 1993;
4. Statements of cash flow for the six months ended June 30, 1996,
and the years ended December 31, 1995, 1994, and 1993; and
5. Notes to financial statements for the six months ended June 30,
1996, and the years December 31, 1995, 1994, and 1993.
(b) PRO FORMA FINANCIAL INFORMATION
The following pro forma financial statements of Enterprises are filed as
Exhibit "J" and attached hereto:
1. Unaudited pro forma condensed consolidated financial statements
of Enterprises as of and for the six months ended June 30, 1996,
and the year ended December 31, 1995;
(i) Pro forma consolidated unaudited balance sheet as of
June 30, 1996;
(ii) Pro forma consolidated unaudited statement of
operations for the six months ended June 30, 1996;
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<PAGE>
(iii) Pro forma consolidated unaudited statement of
operations for the year ended December 31, 1995; and
(iv) Notes to pro forma consolidated unaudited financial
statements.
(c) EXHIBITS
1. Financial statements of First American Dental Benefits, Inc. for
the six months ended June 30, 1996, the years ended December 31,
1995, 1994, and 1993, and independent auditors' report (Exhibit
"G" attached hereto);
2. Financial statements of Metroplex Dental Plan for the six months
ended June 30, 1996, and the years ended December 31, 1995, 1994,
and 1993, and independent auditors' report (Exhibit "H" attached
hereto);
3. Financial statements of T.R.C. Agency, Inc., for the six months
ended June 30, 1996, and the years ended December 31, 1995, 1994,
and 1993, and independent auditors' report (Exhibit "I" attached
hereto); and
4. Unaudited pro forma condensed consolidated financial statements
of Safeguard Health Enterprises, Inc., for the six months ended
June 30, 1996, and the year ended December 31, 1995, and
independent auditors' report (Exhibit "J" attached hereto).
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
SAFEGUARD HEALTH ENTERPRISES, INC.
By: /S/ JOHN E. COX
-------------------------------------
JOHN E. COX
Executive Vice President and Chief
Operating Officer
DATE: October 9, 1996 By: /S/ RONALD I. BRENDZEL, J.D.
-------------------------------------
RONALD I. BRENDZEL, J.D.
Senior Vice President and Secretary
-6-
<PAGE>
EXHIBIT LIST
DOCUMENT EXHIBIT
- -------- -------
Press Release. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A
Stock Purchase Agreement dated as of August 9, 1996 between
First American and Enterprises [excluding schedules and exhibit](1). . . . B
Assignment and Assumption Agreement [excluding schedule](2). . . . . . . . C
Stock Purchase Agreement dated as of August 9, 1996 between
T.R.C. and Enterprises [excluding schedules and exhibit](1). . . . . . . . D
Credit Agreement with Bank of America. . . . . . . . . . . . . . . . . . . E
Official Order of the Commissioner of Insurance of the State of Texas. . . F
Financial Statements of First American Dental Benefits, Inc. . . . . . . . G
- Balance sheets as of June 30, 1996, and December 31, 1995, 1994, and
1993;
- Statement of income for the six months ended June 30, 1996, and for
the years ended December 31, 1995, 1994, and 1993;
- Statement of stockholders' equity for the period ended June 30, 1996,
and for the years ended December 31, 1995, 1994, and 1993;
- Statements of cash flows for six months ended June 30, 1996, and
years ended December 31, 1995, 1994, and 1993; and
- Notes to financial statements for the six months ended June 30, 1996,
and the years ended December 31, 1995, 1994, and 1993.
Financial Statements of Metroplex Dental Group/Irving, L.L.P.. . . . . . . H
- Balance sheets as of June 30, 1996, and December 31, 1995, 1994, and
1993;
- --------------------------
(1) ENTERPRISES AGREES TO FURNISH A SUPPLEMENTAL COPY OF THE SCHEDULES AND
EXHIBIT TO THE SECURITIES AND EXCHANGE COMMISSION UPON REQUEST.
(2) ENTERPRISES AGREES TO FURNISH A SUPPLEMENTAL COPY OF THE LIST OF CONTRACTS
ASSUMED BY FIRST AMERICAN TO THE SECURITIES AND EXCHANGE COMMISSION UPON
REQUEST.
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<PAGE>
DOCUMENT EXHIBIT
- -------- -------
- Statements of income for the six months ended June 30, 1996, and the
years ended December 31, 1995, 1994, and 1993;
- Statements of cash flows for the six months ended June 30, 1996, and
years ended December 31, 1995, 1994, and 1993;
- Statements of owners' equity (deficit) for the six months ended June
30, 1996, and the years ended December 31, 1995, 1994, and 1993; and
- Notes to financial statements for the six months ended June 30, 1996,
and the years ended December 31, 1995, 1994, and 1993.
Financial Statements of T.R.C. Agency, Inc.. . . . . . . . . . . . . . . . I
- Audited balance sheets as of June 30, 1996, and December 31, 1995,
1994, and 1993;
- Statements of income for the six months ended June 30, 1996, and the
years ended December 31, 1995, 1994, and 1993;
- Statements of stockholders' equity (deficit) for the six months ended
June 30, 1996, and the years ended December 31, 1995, 1994, and 1993;
- Statements of cash flow for the six months ended June 30, 1996, and
the years ended December 31, 1995, 1994, and 1993; and
- Notes to financial statements for the six months ended June 30, 1996,
and the years December 31, 1995, 1994, and 1993.
Unaudited pro forma condensed consolidated financial statements
of Safeguard Health Enterprises, Inc., for the six (6) months ended
June 30, 1996, and the year ended December 31, 1995, and
independent auditors' report . . . . . . . . . . . . . . . . . . . . . . . J
- Pro forma consolidated unaudited balance sheet as of June 30, 1996;
- Pro forma consolidated unaudited statement of operations for the six
months ended June 30, 1996;
- Pro forma consolidated unaudited statement of operations for the year
ended December 31, 1995; and
- Notes to pro forma consolidated unaudited financial statements.
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<PAGE>
CONTACTS: Thomas C. Tekulve
Chief Financial Officer
(714) 758-4381
Gary S. Maier/Roger S. Pondel
Pondel Parsons & Wilkinson
(310) 207-9300
FOR IMMEDIATE RELEASE
SAFEGUARD COMPLETES ACQUISITION
OF DENTAL MANAGED CARE COMPANY
ANAHEIM, CALIFORNIA--September 27, 1996 -- Safeguard Health Enterprises, Inc.
(Nasdaq-NMS:SFGD), Anaheim, California -- today announced it has completed the
acquisition of all the outstanding shares of First American Dental Benefits,
Inc., dba American Dental Corporation, a privately held managed care company
based in Dallas, Texas and an affiliated marketing entity, for a total value of
approximately $23.5 million, consisting of both cash and bank debt.
The acquisition adds approximately 175,000 members to Safeguard's existing
business. The combined Texas operations being acquired currently have
annualized revenues of approximately $12 million and have been profitable.
"This is the first acquisition made by Safeguard, but it won't be the
last." said Steven J. Baileys, D.D.S., chairman and chief executive officer of
Safeguard. "We are excited about the growth opportunities afforded by American
Dental. It will facilitate our reaching two major milestones - one million
members and the $100 million mark in revenues - and it provides an excellent
opportunity to offer Safeguard products to an expanded membership base."
<PAGE>
"Industry observers estimate the dental care industry to be currently over
$43 billion, with targets of $59 billion by the year 2000. This acquisition
clearly positions Safeguard to exploit the favorable demographics in our
strategic market," Baileys said.
"The acquisition complements our existing business in Texas. Importantly,
it is in keeping with our strategy of becoming the leader in each market we
serve. The marketing entity also being acquired provides Safeguard with key
contracts and expertise to assist in marketing the company's new and existing
products throughout the state of Texas," Baileys added.
The former owners have also entered into a non-competition agreement with
Safeguard which prohibits them from offering dental managed care services within
Texas.
Safeguard is a multifaceted specialized health care marketing company
providing benefits to members in 14 states, enrolled in various managed dental
and vision care programs, indemnity dental and vision programs, and life
insurance products. In addition, the company provides administrative and
preferred provider organization services and owns and operates 31 dental offices
located throughout California. Including this acquisition, Safeguard contracts
with more than 4,200 client organizations and provides benefits through nearly
14,000 contracting providers. The company's various products are sold through a
network of independent agents and a direct sales force.
# # #
<PAGE>
STOCK PURCHASE AGREEMENT
BY AND AMONG
SAFEGUARD HEALTH ENTERPRISES, INC.
(AS BUYER)
AND
FIRST AMERICAN DENTAL BENEFITS, INC.
(THE COMPANY)
AND
JAMES L. DAVENPORT, D.D.S.,
MARTIN J. RINKER, D.D.S.,
AND
WILLIAM N. REES, JR.
(AS SELLING SHAREHOLDERS)
DATED AS OF AUGUST 9, 1996
Stock Purchase Agreement
First American Dental
OA961970.201
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I TRANSFER OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Sale of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Purchase Price and Supplemental Consideration . . . . . . . . . . . . . . . . . 1
(a) Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
(b) Payment for Rees Non-Competition Agreement . . . . . . . . . . . . . . . . 1
(c) Payment for Non-Competition Agreement of Dr. Davenport and Dr. Rinker. . . 2
1.3 Payment of Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Shareholders to Deliver Title and Possession. . . . . . . . . . . . . . . . . . 3
1.5 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS . . . . . 3
2.1 Organization and Qualification. . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 Voting Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.4 Authority Relative to this Agreement. . . . . . . . . . . . . . . . . . . . . . 4
2.5 No Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.6 Absence of Certain Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.7 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.8 Absence of Undisclosed Liabilities. . . . . . . . . . . . . . . . . . . . . . . 6
2.9 Consents and Approvals; No Violation. . . . . . . . . . . . . . . . . . . . . . 6
2.10 Broker's Commissions or Finder's Fees. . . . . . . . . . . . . . . . . . . . . 7
2.11 Employment and Similar Agreements. . . . . . . . . . . . . . . . . . . . . . . 7
2.12 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.13 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.14 ERISA Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
2.15 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
2.16 Customers and Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
2.17 Customer List. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.18 Interests in Competitors . . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.19 Properties, Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.20 Real Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.21 Permits; Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . .11
2.22 Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
2.23 Environmental Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . .12
2.24 Banking Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
2.25 Minute Books and Stock Records.. . . . . . . . . . . . . . . . . . . . . . . .12
2.26 Consents of Non-Governmental Third Parties . . . . . . . . . . . . . . . . . .13
2.27 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
2.28 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
2.29 Trademarks; Tradenames . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
2.30 Transactions with Related Parties. . . . . . . . . . . . . . . . . . . . . . .13
2.31 Compliance with Insurance Laws . . . . . . . . . . . . . . . . . . . . . . . .13
2.32 Probable Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
2.33 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
</TABLE>
i
Stock Purchase Agreement
First American Dental
OA961970.201
<PAGE>
<TABLE>
<S> <C>
2.34 Representations and Warranties True. . . . . . . . . . . . . . . . . . . . . .14
ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER. . . . . . . . . . . . . . . . . . .15
3.1 Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
3.2 Authority Relative to this Agreement. . . . . . . . . . . . . . . . . . . . . .15
3.3 Consent and Approvals; No Violation . . . . . . . . . . . . . . . . . . . . . .15
3.4 Broker's Commissions or Finder's Fees . . . . . . . . . . . . . . . . . . . . .16
3.5 Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
3.6 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
ARTICLE IV CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO CLOSING . . . . . . . . . . . . .16
4.1 Ordinary Course . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
4.2 Dividends; Changes in Stock . . . . . . . . . . . . . . . . . . . . . . . . . .16
4.3 Issuance or Repurchase of Securities. . . . . . . . . . . . . . . . . . . . . .17
4.4 Governing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
4.5 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
4.6 No Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
4.7 No Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
4.8 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
4.9 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
4.10 Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
4.11 Additional Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
ARTICLE V ADDITIONAL COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.1 Noncompetition Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . .19
(a) Rees Non-Competition Agreement . . . . . . . . . . . . . . . . . . . . . .19
(b) Davenport and Rinker Non-Competition Agreements. . . . . . . . . . . . . .19
(c) Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.2 Earnest Money Escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
(a) Return to Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
(b) Forfeiture to Shareholders . . . . . . . . . . . . . . . . . . . . . . . .20
5.3 Confidential Information. . . . . . . . . . . . . . . . . . . . . . . . . . . .20
(a) Nondisclosure by Shareholders. . . . . . . . . . . . . . . . . . . . . . .20
(b) Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
(c) Nondisclosure by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . .21
(d) Return of Information. . . . . . . . . . . . . . . . . . . . . . . . . . .22
5.4 Governmental Filings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
5.5 Legal Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
5.6 Certain Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
5.7 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
5.8 Access to Information and Diligence Review. . . . . . . . . . . . . . . . . . .23
5.9 Additional Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
5.10 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
5.11 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
5.12 Further Conveyances, Assurances and Cooperation. . . . . . . . . . . . . . . .28
ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PARTIES. . . . . . . . . . . . . .28
6.1 Conditions to the Obligations of Buyer, the Company and the Shareholders. . . .28
(a) Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . . .28
(b) Legal Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
(c) Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
(d) Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
(e) Board and Shareholder Approval . . . . . . . . . . . . . . . . . . . . . .29
6.2 Further Conditions to the Obligations of Buyer. . . . . . . . . . . . . . . . .29
(a) Representations and Warranties . . . . . . . . . . . . . . . . . . . . . .29
(b) Performance of Obligations of Other Parties. . . . . . . . . . . . . . . .29
(c) No Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
(d) No Adverse Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
(e) Spousal Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
(f) Third-Party Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . .30
(g) Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
(h) Non-Competition Agreements . . . . . . . . . . . . . . . . . . . . . . . .30
(i) Financial Statements Audit . . . . . . . . . . . . . . . . . . . . . . . .30
(j) Financial Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
(k) Lease of Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
(l) Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
(m) American Dental Corporation . . . . . . . . . . . . . . . . . . . . . . .31
(n) Agreement Termination. . . . . . . . . . . . . . . . . . . . . . . . . . .31
(o) Employment Arrangements. . . . . . . . . . . . . . . . . . . . . . . . . .31
(p) Payment and Release of Liens . . . . . . . . . . . . . . . . . . . . . . .31
(q) Retention of Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . .31
6.3 Further Conditions to the Obligations of the Company and the Shareholders . . .31
(a) Representations and Warranties . . . . . . . . . . . . . . . . . . . . . .31
(b) Performance of Obligations of Other Parties. . . . . . . . . . . . . . . .31
(c) Third-Party Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . .32
ARTICLE VII TERMINATION, EXTENSION AND WAIVER. . . . . . . . . . . . . . . . . . . . . .32
7.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
(a) By Mutual Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
(b) By Any Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
(c) By Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
(d) By the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
7.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
7.3 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
ARTICLE VIII INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
8.1 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
(a) Indemnification by the Shareholders. . . . . . . . . . . . . . . . . . . .33
(b) Indemnification by Buyer . . . . . . . . . . . . . . . . . . . . . . . . .35
(c) Definition of Losses . . . . . . . . . . . . . . . . . . . . . . . . . . .35
8.2 Third Party Claims Notice and Opportunity to Settle . . . . . . . . . . . . . .36
8.3 Right to Offset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
8.4 Non-Third Party Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
8.5 Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
ARTICLE IX DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
9.1 Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
9.2 Arbitrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
9.3 Pre-Hearing Conference. . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
9.4 Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
9.5 Briefs and Hearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
9.6 Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
9.7 Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
</TABLE>
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<TABLE>
<S> <C>
ARTICLE X GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
10.1 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . .39
10.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
10.3 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
10.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
10.5 Integration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
10.6 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
10.7 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
10.8 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
10.9 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
10.10 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
10.11 Transfer Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
</TABLE>
iv
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STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of
August 9, 1996, by and among SAFEGUARD HEALTH ENTERPRISES, INC., a Delaware
corporation ("Buyer"), and FIRST AMERICAN DENTAL BENEFITS, INC., a Texas
corporation (the "Company"), and JAMES L. DAVENPORT, D.D.S. ("Dr. Davenport"),
MARTIN J. RINKER, D.D.S. ("Dr. Rinker"), and WILLIAM N. REES, JR. ("Mr. Rees"),
the beneficial and record owners of all of the outstanding capital stock of the
Company (each, a "Shareholder" and collectively, the "Shareholders").
RECITALS
WHEREAS, the Shareholders own all of the issued and outstanding shares
of capital stock (the "Shares") of the Company; and
WHEREAS, the Shareholders desire to sell to Buyer, and Buyer desires
to purchase from the Shareholders, the Shares of the Company on the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
ARTICLE I
TRANSFER OF SHARES
1.1 SALE OF SHARES. Subject to the terms and conditions set forth
herein, at the Closing (as defined herein), the Shareholders shall sell,
transfer and deliver to Buyer, and Buyer shall purchase and acquire from the
Shareholders, all of the Shares of the Company, free and clear of any claims,
liens, pledges, options, encumbrances, security interests, trusts or other
rights or interests of any person.
1.2 PURCHASE PRICE AND SUPPLEMENTAL CONSIDERATION.
(a) PURCHASE PRICE FOR SHARES. The aggregate purchase price to
be paid by Buyer for the Shares of the Company, in the manner provided in
SECTION 1.3, will equal Eleven Million Nine Hundred and Fifty Thousand
Dollars ($11,950,000) (the "Purchase Price").
(b) PAYMENT FOR REES NON-COMPETITION AGREEMENT. Buyer shall pay
Mr. Rees an aggregate of Fifty Thousand Dollars ($50,000) as consideration
for Mr. Rees entering into a Non-Competition Agreement by and between
Mr. Rees and Buyer
Stock Purchase Agreement
First American Dental
OA961970.201
<PAGE>
(the "Rees Non-Competition Agreement"). Such payment will be made at
Closing in the manner set forth in SECTION 1.3.
(c) PAYMENT FOR NON-COMPETITION AGREEMENT OF DR. DAVENPORT AND
DR. RINKER. Buyer hereby promises to pay to Dr. Rinker and Dr. Davenport
the aggregate sum of Three Million Five Hundred Seventy-Six Thousand
Dollars ($3,576,000) payable over three years (the "Payout Period")
($1,192,000 per year), subject to applicable withholding, as consideration
for the five-year Non-Competition Agreement to be entered among by Buyer,
Dr. Davenport and Dr. Rinker (the "Davenport and Rinker Non-Competition
Agreement"). These payments (the "Noncompete Payments") shall be allocated
equally to Dr. Davenport and Dr. Rinker. These payments shall bear
interest at a per annum rate equal to the base rate in effect from time to
time of NationsBank of Texas, N.A. compounded monthly (the "Prime Rate")
and principal shall be payable in arrears in equal monthly installments
plus accrued interest beginning on the last day of the first month
following the Closing.
1.3 PAYMENT OF PURCHASE PRICE. The Purchase Price shall be paid by
Buyer to Shareholders as follows:
(a) At the Closing, Buyer shall pay to Shareholders the sum of
Ten Million Nine Hundred and Fifty Thousand Dollars ($10,950,000) for the
Shares of the Company by a wire transfer(s) of immediately available funds
in accordance with the written directions of the Shareholders. The Five
Hundred Thousand Dollars ($500,000) in escrow (the "Earnest Money Escrow")
with Norwest Bank Texas, N.A. (the "Escrow Agent") pursuant to that Escrow
Agreement dated July 16, 1996 by and among Buyer, the Shareholders and the
Company and certain other parties, including any interest thereon not
previously withdrawn by Buyer, shall be released to Buyer at the Closing
and, if Buyer so elects, used to pay a portion of the consideration to be
paid at Closing.
(b) At the Closing, Buyer shall deliver to the Escrow Agent the
principal amount of One Million Dollars ($1,000,000) (the "Holdback") to be
held in escrow in accordance with the terms of an Escrow Agreement in form
and substance acceptable to the parties. The Holdback, plus accrued
interest thereon, less any offsets, paid claims or reserves for outstanding
or disputed claims, relating to this Agreement or any other agreements by
or among the Buyer and certain or all of the Shareholders, shall be paid to
the Shareholders on the second anniversary of the date hereof in proportion
to their respective ownership interests of common stock in the Company
immediately prior to the Closing Date (as defined herein). The Holdback,
less offsets, paid claims or reserve for outstanding claims, shall bear
interest at the Prime Rate. Any claims against the Holdback shall be made
in accordance with Section 8.3 and Article IX of this Agreement.
Notwithstanding the foregoing, the existence of the Holdback and any
offsets against the Holdback by Buyer will not relieve the Shareholders
from liability or limit their liability to Buyer for any breaches
hereunder.
(c) At the Closing, Buyer shall pay Mr. Rees the sum of Fifty
Thousand Dollars ($50,000) as consideration for Mr. Rees entering into the
Rees Non-
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Competition Agreement, such payment to be by delivery of a certified or
bank check or by wire transfer of immediately available funds in accordance
with the written directions of such Shareholder.
1.4 SHAREHOLDERS TO DELIVER TITLE AND POSSESSION. At the Closing,
the Shareholders shall deliver to Buyer endorsed share certificates or executed
stock powers and other good and sufficient instruments of transfer as Buyer may
reasonably require to vest effectively in Buyer good and valid title to the
Shares of the Company, free and clear of any claims, liens, pledges, options,
security interests, trusts, encumbrances or other rights or interests of any
person, in accordance with the terms hereof.
1.5 CLOSING. The consummation of the transactions contemplated by
this Agreement (the "Closing") shall take place on August 30, 1996, or on the
fifth (5th) business day following the date on which all conditions precedent to
the obligations of the parties hereunder have been satisfied or waived,
whichever is the later to occur (the "Closing Date"), at the offices of Gibson,
Dunn & Crutcher LLP, Jamboree Center, 4 Park Plaza, Suite 1700, Irvine,
California 92614 or at such other date, time and place as may be mutually agreed
upon in writing by the parties. All proceedings to take place at the Closing
shall take place simultaneously, and no delivery shall be considered to have
been made until all such proceedings have been completed.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY AND THE SHAREHOLDERS
The Company, Dr. Davenport and Dr. Rinker jointly and severally
represent and warrant (except with respect to the representations and warranties
set forth in Sections 2.2 and 2.3, the last sentence of Section 2.4, and the
second sentence of Section 2.13(f), which are made by each such Shareholder
severally and not jointly), and Mr. Rees severally represents and warrants to
the best of Mr. Rees' knowledge (except with respect to the representations and
warranties set forth in Section 2.2, the first clause of Section 2.3, the last
sentence of Section 2.4, and the second sentence of Section 2.13(f), which are
made by such Shareholder without giving effect to such best knowledge
qualification), to Buyer as follows:
2.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly organized, validly existing and in good standing in the State of Texas, is
duly qualified to do business as a foreign corporation and is in good standing
in each jurisdiction in which the character of its properties or the nature of
its business makes such qualification necessary, except in jurisdictions, if
any, where the failure to be so qualified (a) would not result in a Material
Adverse Change (as defined below) or (b) would not result in a breach of any of
the other representations, warranties or covenants set forth in this Agreement.
The Company has the requisite corporate power and authority to own, use or lease
its properties and to carry on its business as it is now being conducted and as
it is now proposed to be conducted. The Company has made available to Buyer a
complete and correct copy of its Articles of Incorporation and Bylaws, each as
amended to date, and such Articles of Incorporation and Bylaws as so delivered
are in full force and effect. The Company is not in default in any material
respect in the performance, observation or fulfillment of any provision of its
Articles of Incorporation or
3
<PAGE>
Bylaws. For purposes of this Agreement, a "Material Adverse Change" shall mean
any event, circumstance, condition, development or occurrence causing, resulting
in or having a material adverse effect on the financial condition, business,
properties, prospects or results of operations of the Company.
2.2 CAPITALIZATION. The authorized capital stock of the Company
consists solely of 900,000 shares of common stock, $0.01 par value, of which,
21,000 shares are issued and outstanding and 100,000 shares of Preferred Stock,
par value $10.00 per share, of which, 17,850 shares are issued and outstanding.
The Shares of the Company are owned beneficially and of record by the
Shareholders as set forth on SCHEDULE 2.2, free and clear of any claims, liens,
pledges, options, security interests, trusts, encumbrances or other rights or
interests of any person. No agreement or other document grants or imposes on
any of the Shares of the Company any right, preference, privilege or restriction
with respect to the transaction contemplated hereby (including, without
limitation, any rights of first refusal). All of the Shares of the Company have
been duly authorized and validly issued and are fully paid, nonassessable and
free of preemptive rights created by any agreement to which the Company is
bound. The Shares have been issued in full compliance with all federal and
state securities laws. There are no options, warrants or other rights,
commitments or agreements of any character that call for the issuance of shares
of capital stock or other securities of the Company or any securities,
instruments or rights convertible into or exchangeable for shares of capital
stock or other securities of the Company. The Shareholders have the absolute
and unrestricted right, power, authority and capacity to transfer the Shares of
the Company to Buyer and upon the Closing, without exception, Buyer will acquire
from the Shareholders legal and beneficial ownership of, good and valid title
to, and all rights to vote, the Shares of the Company, free from any charge,
lien, encumbrance or adverse claim of any kind whatsoever other than those that
may arise by virtue of any actions (other than the purchase of shares
contemplated hereby), taken by or on behalf of Buyer or its affiliates.
2.3 VOTING AGREEMENTS. Neither the Company nor any Shareholder is a
party to or subject to any proxy, agreement or understanding, nor is there, to
the knowledge of the Company and the Shareholders, any agreement or
understanding between any other persons, that affects or relates to the voting
or giving of written consents with respect to any security of the Company or the
voting by a director of the Company.
2.4 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has all
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby on the part of the Company have been duly and validly authorized by its
Board of Directors and the Shareholders, and no other corporate proceedings on
the part of the Company is necessary, as a matter of law or otherwise, to
authorize this Agreement or to consummate the transactions so contemplated.
This Agreement has been duly and validly executed and delivered by the Company
and the Shareholders and, assuming this Agreement constitutes a valid and
binding obligation of Buyer, this Agreement constitutes a valid and binding
agreement of such persons or entities, enforceable against them in accordance
with its terms, except (a) as such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights, and (b) as the remedy of specific
performance and injunctive and other forms of
4
<PAGE>
equitable relief may be subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
2.5 NO SUBSIDIARIES. The Company does not control, directly or
indirectly, nor does it have any direct or indirect equity participation or
other interest in, any corporation, partnership, trust or other business entity.
2.6 ABSENCE OF CERTAIN CHANGES. Except as set forth on SCHEDULE 2.6,
since May 31, 1996, the Company has conducted its business only in, and has not
engaged in any transaction other than according to, the ordinary and usual
course of its business and, since such date, there has not been (a) any Material
Adverse Change; (b) any declaration, setting aside or payment of any dividend or
other distribution with respect to the capital stock of the Company; (c) any
material change by the Company in accounting principles, practices or methods;
(d) any labor dispute or difficulty which is reasonably likely to result in any
Material Adverse Change, and to the knowledge of each of the Company and the
Shareholders, no such dispute or difficulty is now threatened; (e) any material
asset sold or disposed of (except inventory sold in the ordinary course of
business), any material asset mortgaged, pledged or subjected to any lien,
charge or other encumbrance; (f) any increase in excess of $5,000 in the
compensation payable or which could become payable by the Company to its
directors, officers, employees, agents, distributors, dealers or sales
representatives; (g) any amendment by the Company of any employee benefit plan;
(h) any issuance, transfer, sale or pledge by the Company of any shares of stock
or other securities or of any commitments, options, rights or privileges under
which the Company is or may become obligated to issue any shares of stock or
other securities; (i) any indebtedness incurred by the Company, except such as
may have been incurred in the ordinary course of business and consistent with
past practice; (j) any loan made or agreed to be made by the Company, nor has
the Company become liable or agreed to become liable as a guarantor with respect
to any loan; (k) any waiver or release by the Company of any right of material
value or any payment, direct or indirect, of any material debt, liability or
other obligation; (l) any change in or amendment to the Articles of
Incorporation or Bylaws of the Company; or (m) any other event or condition that
has or might reasonably result in a Material Adverse Change.
2.7 FINANCIAL STATEMENTS. The audited balance sheets of the Company
as of December 31, 1995 and the related statements of income and cash flow for
the twelve month periods then ended (collectively, the "1995 Financial
Statements") are attached hereto as SCHEDULE 2.7. The 1995 Financial Statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the period indicated (except as may be
noted therein) ("GAAP"), and present fairly the financial position of the
Company as of the end of such fiscal year and the results of operations and cash
flows for such fiscal year in conformity with GAAP. The interim audited
financial statements of the Company as of and for the six (6) months ended June
30, 1996 (also attached hereto as SCHEDULE 2.7) have been prepared in accordance
with GAAP consistent with the 1995 Financial Statements, and present fairly the
financial position of the Company as of the end of such period and the results
of operations and cash flows for such period in conformity with GAAP, except
that such interim financial statements may not contain all footnotes or other
textual disclosure required by GAAP and are subject to normal recurring year-end
audit adjustments. The interim financial statements for the six (6) months
ended June 30, 1996 are referred to herein as the "Interim Financial
5
<PAGE>
Statements" and the l995 Financial Statements and Interim Financial Statements
are collectively referred to herein as the "Financial Statements."
2.8 ABSENCE OF UNDISCLOSED LIABILITIES.
(a) Except to the extent reserved against or reflected in the
balance sheet of the Company included in the Interim Financial Statements,
the Company does not have any material liabilities or obligations
(contingent or otherwise) that are required by GAAP to be reflected
therein, and since that date the Company has not incurred any material
liabilities or obligations that, had they been incurred prior to June 30,
1996, would have been required by GAAP to have been reflected in such
balance sheets (except as may be noted therein), except such liabilities or
obligations incurred in the ordinary and usual course of business and
consistent with past practice.
(b) The Company will not be liable for prepayment or other
penalties in connection with the early retirement of any indebtedness for
borrowed money.
2.9 CONSENTS AND APPROVALS; NO VIOLATION. The execution and delivery
of this Agreement by the Company and the Shareholders, the consummation of the
transactions contemplated hereby and the performance by the Company and the
Shareholders of their obligations hereunder will not:
(a) conflict with any provision of the Articles of Incorporation
or Bylaws (or other similar charter documents) of the Company;
(b) require any consent, approval, authorization or permit of,
or filing with or notification to, any governmental or regulatory
authority, except (i) the Governmental Filings (as defined in SECTION 5.4)
(ii) compliance with any applicable requirements of the Securities Act of
1933; (iii) compliance with any applicable requirements of the Securities
Exchange Act of 1934; (iv) compliance with any applicable state securities
laws; (v) the approval of the Texas Department of Insurance; and (vi) where
the failure to obtain such consents, approvals, authorizations or permits
or the failure to make such filings or notifications would not result in a
Material Adverse Change;
(c) conflict with, result in the breach of or constitute a
default (or give rise to any right of termination, cancellation or
acceleration or guaranteed payments) under any of the terms, conditions or
provisions of any note, lease, mortgage, license, agreement or other
instrument or obligation to which the Company or any of the Shareholders is
a party or by which the Company or any of its Shareholders or any of its
assets may be bound, except for such defaults (or rights of termination,
cancellation or acceleration) as to which requisite waivers or consents
have been obtained or which, in the aggregate, would not result in a
Material Adverse Change;
(d) conflict with or violate the provisions of any order, writ,
injunction, judgment, decree, statute, rule or regulation applicable to the
Company or any of the Shareholders; or
6
<PAGE>
(e) result in the creation of any lien, charge or encumbrance
upon any shares of capital stock or assets of the Company under any
agreement or instrument to which the Company is a party or by which the
Company is bound.
2.10 BROKER'S COMMISSIONS OR FINDER'S FEES. The parties acknowledge
that the Company enlisted the services of Ed Reese ("Finder") to act for the
Company and the Shareholders in connection with the transactions provided for in
this Agreement. The Company and the Shareholders shall be solely responsible
for the payment of all finder's fees or other similar fees or commissions due to
Finder in connection with this Agreement.
2.11 EMPLOYMENT AND SIMILAR AGREEMENTS. Except as set forth on
SCHEDULE 2.11, (a) there are no employment, severance, bonus or indemnification
arrangements, agreements, understandings or plans between the Company and any
director, officer or employee thereof except those indemnification provisions
set forth in the Articles of Incorporation and Bylaws of the Company; (b) there
are no agreements of the type described in (a) above (i) the benefits of which
are contingent, or the terms of which are altered, upon the occurrence of a
transaction involving the Company of the nature of any of the transactions
contemplated by this Agreement, (ii) providing any term of employment or
compensation guaranty not terminable at any time upon notice of thirty (30) days
or less or (iii) providing severance benefits or other benefits (which are
conditioned upon a change in control) after the termination of employment of
such employee, regardless of the reason for such termination of employment;
(c) there are no agreements or plans, any of the benefits of which will be
materially increased, or the vesting of benefits of which will be materially
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement; (d) subject to
general principles related to wrongful termination of employees, there are no
officers or employees of the Company whose employment is not terminable at the
will of the Company; (e) the Company is not obligated to compensate any
consultants pursuant to any agreement or arrangement which is material to the
Company; and (f) the Company is not a party to, nor is it bound by, any
collective bargaining agreement or other labor agreement, nor is the Company
involved in any labor discussion with any unit or group seeking to become the
bargaining unit for any of its employees, nor has any such unit or group
notified the Company of an intention to commence any organizational activities
among the employees of the Company. True and complete copies of any agreements
disclosed in SCHEDULE 2.11 have been delivered or made available to Buyer.
2.12 LITIGATION. Except as set forth on SCHEDULE 2.12, there is no
claim, action or proceeding pending or, to the knowledge of the Company or the
Shareholders, threatened against or relating to the Company before any court or
other competent governmental or regulatory authority or body acting in an
adjudicative capacity. To the knowledge of the Company and the Shareholders,
there is no reasonable basis for a claim, action or proceeding against or
relating to the Company which, if adversely determined, could, individually or
in the aggregate, reasonably be expected to result in a Material Adverse Change
with respect to the Company. Neither the Company nor any of its respective
officers, directors or employees, has been permanently or temporarily enjoined
by any order, judgment or decree of any court or any other governmental or
regulatory authority from engaging in or continuing any conduct or practice in
connection with the business, assets or properties of the Company nor, to the
7
<PAGE>
knowledge of the Company or the Shareholders, is any officer, director or
employee of the Company under investigation by any governmental or regulatory
authority. Except as set forth on SCHEDULE 2.12, there is not in existence any
order, judgment or decree of any court or other tribunal or other agency
enjoining or requiring the Company to take any action of any kind with respect
to its business, assets or properties.
2.13 TAXES.
(a) DEFINITIONS. For purposes of this Agreement, the following
definitions shall apply:
(i) For purposes of this Section 2.13, the term "Company"
shall mean, collectively, the Company and any corporation, partnership or
other entity as to which the Company is liable for Taxes incurred by such
entity as a transferee, or pursuant to Treasury Regulations Sections
1.1502-6, or pursuant to any other provision of federal, state, local
or foreign law or regulations.
(ii) The term "Tax" or "Taxes" shall mean all taxes,
however, denominated, including any interest, penalties or other additions
to tax that may become payable in respect thereof, imposed by any federal,
state, local or foreign government or any agency or political subdivision
of any such government, which taxes shall include, without limiting the
generality of the foregoing, all income or profits taxes (including, but
not limited to, federal income taxes and state income taxes), real property
gains taxes, payroll and employee withholding taxes, unemployment insurance
taxes, social security taxes, sales and use taxes, ad valorem taxes,
occupation taxes, real and personal property taxes, stamp taxes,
environmental taxes, transfer taxes, workers' compensation and other
governmental charges, and other obligations of the same or of a similar
nature to any of the foregoing, which the Company is required to pay,
withhold or collect.
(iii) The term "Tax Returns" shall mean all reports,
estimates, declarations of estimated tax, information statements and
returns, including any and all schedules or attachments thereto, relating
to, or required to be filed in connection with, any Taxes, including
information returns or reports with respect to backup withholding and other
payments to third parties.
(b) TAX RETURNS FILED AND TAXES PAID. Except as disclosed on
SCHEDULE 2.13, all Tax Returns required to be filed by or on behalf of the
Company have been duly filed on a timely basis and such Tax Returns are
true, complete and correct. All Taxes shown to be payable on the Tax
Returns or on subsequent assessments with respect thereto have been paid in
full on a timely basis and no other Taxes are payable by the Company with
respect to items or periods covered by such Tax Returns (whether or not
shown on or reportable on such Tax Returns) or with respect to any period
prior to the date of this Agreement. The Company has withheld and paid
over all Taxes required to have been withheld and paid over, and complied
with all information reporting and backup withholding requirements,
including maintenance of required records with respect thereto, in
connection with amounts paid or owing to any employee, creditor,
independent
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contractor, or other third party. There are no liens on any of the assets
of the Company with respect to Taxes, other than liens for Taxes not yet
due and payable or for Taxes that the Company is contesting in good faith
through appropriate proceedings and for which appropriate reserves have
been established.
(c) TAX RETURNS FURNISHED. Buyer has been furnished by the
Company true and complete copies of (i) all relevant portions of income tax
examination or audit reports, statements of deficiencies, closing or other
agreements received by the Company or on behalf of the Company relating to
Taxes, and (ii) all federal and state income or franchise tax returns for
the Company for all periods ending on and after January 1, 1991. The
Company has never been a member of an affiliated group filing consolidated
returns. The Company does no business in nor derives income from any
state, local or foreign taxing jurisdiction other than those for which all
Tax Returns have been furnished to Buyer.
(d) TAX DEFICIENCIES: AUDITS, STATUTES OF LIMITATIONS. Except
as specified in SCHEDULE 2.13, the Tax Returns of the Company have never
been audited by a government or taxing authority, nor is any such audit in
process, pending or threatened; no deficiencies exist or have been asserted
or are expected to be asserted with respect to Taxes of the Company, and
the Company has not received notice nor expects to receive notice that it
has not filed a Tax Return or paid Taxes required to be filed or paid by
it; the Company is neither a party to any action or proceeding for
assessment or collection of Taxes, nor has such event been asserted or
threatened against the Company or any of its assets; and no waiver or
extension of any statute of limitations is in effect with respect to Taxes
or Tax Returns of the Company.
(e) TAX SHARING AGREEMENTS. The Company is not (nor has it ever
been) a party to any tax sharing agreement and has not assumed the
liability of any other person under contract.
(f) TAX ELECTIONS AND SPECIAL TAX STATUS. The Company is not
nor has it ever been a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code and Buyer is not
required to withhold tax on the purchase of the stock of Company by reason
of Section 1445 of the Code. No Shareholder is a "foreign person" (as that
term is defined in Section 1445 of the Code). The Company is not a
"consenting corporation" under Section 341(f) of the Code. The Company has
not entered into any compensatory agreements with respect to the
performance of services which payment thereunder would result in a
nondeductible expense pursuant to Section 280G of the Code or an excise tax
to the recipient of such payment pursuant to Section 4999 of the Code. The
Company has not agreed, nor is it required to make, any adjustment under
Code Section 481(a) by reason of a change in accounting method or
otherwise.
(g) TAX BASIS AND TAX ATTRIBUTES. The disclosure schedules and
other books and records of the Company furnished to Buyer contain accurate
and complete descriptions of the Company's basis in its assets, current and
accumulated earnings and
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profits, tax carryovers, and tax elections. The Company has no net
operating losses or other tax attributes presently subject to limitation
under Code Sections 382, 383, or 384.
2.14 ERISA PLANS. Set forth on SCHEDULE 2.14 is a true and complete
list of each employee pension benefit plan, program, agreement or arrangement
("Plan") maintained or contributed to by the Company which is subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), if any.
The Plans conform in all material respects to, and their administration is in
conformity in all material respects with, all applicable federal laws. There
are no threatened or pending claims by or on behalf of any Plan, by or on behalf
of any employees covered under any Plan, or otherwise involving any Plan, that
allege a breach of fiduciary duties or violation of other applicable state or
federal law, nor is there, to the knowledge of the Company and the Shareholders,
any basis for such a claim.
2.15 CONTRACTS. Set forth on SCHEDULE 2.15 is a true and complete
list of (a) each customer contract, whether written or oral, between each of the
Company and any party to whom the Company provides goods or services; and
(b) each contract, whether written or oral, between each of the Company and any
party to whom the Company is obligated to make any payments. The contracts and
agreements that are required to be identified in SCHEDULE 2.15 are hereinafter
referred to as the "Contracts." The Company has delivered to Buyer (i) with
respect to the provider and group contracts of the Company, a standard form of
each; and (ii) true and complete written summaries of each oral Contract. The
Company has made available to Buyer true and complete copies of each written
Contract. Except as set forth on SCHEDULE 2.15:
(i) Each of the Contracts is a valid, binding and enforceable
agreement of the Company and, to the knowledge of the Company and the
Shareholders, will, subject to the satisfaction of the conditions in
ARTICLE VI, continue to be valid, binding and enforceable immediately after
the Closing;
(ii) As of the date hereof, the Company and the Shareholders have
no reason to believe that the Company will not be able to fulfill in all
material respects all of its obligations under the Contracts that remain to
be performed after the date hereof;
(iii) To the knowledge of the Company and the Shareholders,
there has not occurred any material default (or event which upon provision
of notice or lapse of time or both would become such a default) under any
of the material Contracts on the part of the Company; and
(iv) The Contracts are all of the agreements, promissory notes,
contracts and instruments (except employment agreements, which are set
forth on SCHEDULE 2.11) that are material to the Company or its business.
2.16 CUSTOMERS AND SALES. Set forth on SCHEDULE 2.16 is a true and
complete list of the nineteen (19) largest customers of the Company, together
with summaries of the revenues received from such customers during the past
three (3) most recent calendar years. Except for the contract between the
Company and the Employees Retirement System of Texas effective May 1, 1992 (the
"ERS Contract"), none of such customers has given notice to the
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Company of an intention to cancel, fail to renew or otherwise terminate or
materially impair its business relationship with the Company and neither the
Company nor its Shareholders have any knowledge of any event that would
precipitate the impairment, cancellation or termination of, or the failure to
renew, or entitle any such customer to terminate, such business relationship.
2.17 CUSTOMER LIST. The Company has taken all reasonable security
measures to protect the secrecy, confidentiality and value of its customer
lists. Employees and any other person who, either alone or in concert with
others, have knowledge of or access to the customer list, have been put on
notice and, if appropriate, have entered into agreements that the customer list
is proprietary and not to be divulged or misused.
2.18 INTERESTS IN COMPETITORS. Except as identified in SCHEDULE 2.18,
to the knowledge of the Company and the Shareholders, none of the Shareholders,
nor any employees, spouses or children of them, has any direct or indirect
interest in any competitor, supplier or customer of the Company or in any person
or firm from whom or to whom the Company leases any real or personal property,
or in any other person with whom the Company is doing business.
2.19 PROPERTIES, LIENS. Except for statutory liens (including
mechanics and materialmen's liens) and liens for current taxes not yet
delinquent, the Company owns, free and clear of any liens, claims, charges,
options or other encumbrances, all of its tangible and intangible property, real
and personal, whether or not reflected in the Interim Financial Statements
(except property sold or disposed of in the ordinary course of business since
December 31, 1995) and all such property acquired since such date that is
necessary to conduct its business as it is now being conducted, and to the
knowledge of the Company and the Shareholders, there has not been any violation
of any law, regulation or ordinance relating to its properties or its business
that may reasonably be expected to result in a Material Adverse Change. All
plants, structures, equipment, furniture and automobiles owned or leased by the
Company and material to the operation of its business are in satisfactory
condition (ordinary wear and tear excepted) and repair for the requirements of
its business as now being conducted. There are no proceedings affecting any of
such properties pending or, to the knowledge of the Company or the Shareholders,
threatened which may reasonably be expected to curtail, materially and
adversely, the use of such property for the purpose for which it was acquired or
the purpose for which it is now used.
2.20 REAL PROPERTY. Set forth on SCHEDULE 2.20 is a complete list of
all real property owned and/or leased by the Company, as so designated therein
(the "Real Property"). Except as indicated in SCHEDULE 2.20, all leases,
easements and other real property interests held by the Company are valid and
subsisting and there does not exist any default thereunder or event that with
notice or lapse of time, or both, would constitute a default under any of such
leases.
2.21 PERMITS; COMPLIANCE WITH LAWS. Except as shown in SCHEDULE 2.21,
the Company has all necessary franchises, authorizations, approvals, orders,
consents, licenses, certificates, permits, registrations, qualifications or
other rights and privileges, including without limitation certificates of
authority from the Texas Department of Insurance ("Certificates of Authority")
(collectively "Permits"), necessary to permit it to own its properties and to
conduct its business as the same are presently conducted and all such Permits
are in full force and effect and valid. Except as shown in SCHEDULE 2.21, no
Permit is subject to termination as a result of the
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execution of this Agreement or consummation of the transaction contemplated
hereby. Except as shown in such Schedule, the Company is in compliance with all
applicable statutes, ordinances, orders, rules and regulations promulgated by
any federal, state, municipal or other governmental authority which apply to the
conduct of its business. Except as disclosed on SCHEDULE 2.21, since
January 1, 1992, the Company has not ever entered into or been subject to any
judgment, consent decree, compliance order or administrative order with respect
to any environmental or health and safety law or received any request for
information, notice, demand letter, administrative or demand letter,
administrative inquiry or formal or informal complaint or claim with respect to
any environmental or health and safety matter or the enforcement of any such
law.
2.22 INSURANCE POLICIES. Set forth on SCHEDULE 2.22 is a true and
correct list of all insurance policies of any nature whatsoever maintained by
the Company. Such policies are in full force and effect through the Closing
Date and, except as otherwise set forth on SCHEDULE 2.22, such policies, or
other policies covering the same risks, have been in full force and effect,
without gaps, continuously for the past five (5) years. Except as disclosed on
SCHEDULE 2.22, there are no claims pending under any of such policies. Copies
of all such policies have been made available to Buyer for its inspection.
2.23 ENVIRONMENTAL LIABILITY. The business of the Company has been
and is now operated in material compliance with all federal, state and local
environmental protection, occupational, health and safety or similar laws,
ordinances, restrictions, licenses, rules, regulations and permit conditions,
including, but not limited to, the Federal Water Pollution Control Act, Resource
Conservation & Recovery Act, Clean Air Act, Comprehensive Environmental
Response, Compensation and Liability Act, Emergency Planning and Community Right
to Know, and Occupational Safety and Health Act, each as amended ("Environmental
Laws").
2.24 BANKING FACILITIES. Set forth on SCHEDULE 2.24 is a true and
complete list of:
(a) Each bank, savings and loan or other institution in which
the Company has a deposit, custodial, trust or similar account or safety
deposit or lock box account and the numbers and types of the accounts or
safety deposit boxes maintained by the Company at such financial
institutions; and
(b) The names of all persons authorized to draw on each such
account or to have access to any such safety deposit or lock box facility,
together with a description of the authority (and conditions thereof, if
any) of each such person with respect thereto.
2.25 MINUTE BOOKS AND STOCK RECORDS. The Company has delivered or
made available to Buyer true, correct and complete copies of (a) the minute
books of the Company containing all records required to be set forth of all
proceedings, consents, actions, and meetings of the shareholders and Board of
Directors of the Company, including minutes of meetings for committees of the
Board; and (b) all stock record books of the Company setting forth all transfers
of capital stock.
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2.26 CONSENTS OF NON-GOVERNMENTAL THIRD PARTIES. No material consent,
waiver or approval of any non-governmental third party is necessary for the
consummation by the Company or the Shareholders of the transactions contemplated
hereby.
2.27 ACCOUNTS RECEIVABLE. All accounts receivable of the Company
shown on the Interim Financial Statements and all accounts receivable of the
Company created after June 30, 1996 up to the date hereof arose from valid
transactions in the ordinary course of business and such accounts receivable are
(except to the extent of the reserves thereon) collectible in the ordinary
course of business.
2.28 INVENTORY. The inventory of the Company consists of supplies
that are merchantable and fit for the purpose for which they were procured, and
none are damaged or defective in any manner. No inventory of the Company has
been pledged as collateral.
2.29 TRADEMARKS; TRADENAMES. Except for the name of the Company and
the name "American Dental Corporation", there are no trademarks, trade names,
service marks or copyrights owned by the Company. The Company has not
infringed, nor is it now infringing, on any trade name, trademark, service mark,
or copyright belonging to any other person, firm or business. Except as set
forth in the Contracts, the Company is not a party to any license, agreement or
arrangement, with respect to any trademarks, servicemarks, trade names, or
applications for them, or any copyrights. The Company has the right to sell or
assign to Buyer the name "American Dental Corporation." The Shareholders hereby
grant to Buyer the exclusive right in perpetuity to use the name of the Company
and the name "American Dental Corporation" and all derivations thereof. The
Shareholders and the Company covenant that they have not granted and will not
grant to any other person, firm or corporation the right to use, and will not
after the Closing use, such names as part of the corporate or firm name of any
other firm, entity, corporation or business. Notwithstanding the foregoing, the
use of the name "American Dental Network, Inc." shall remain the exclusive
property of American Dental Network, Inc. and Dr. Davenport and Dr. Rinker to be
used in connection with their national PPO business.
2.30 TRANSACTIONS WITH RELATED PARTIES. Except as set forth in
SCHEDULE 2.30 hereto, there are no loans, leases or other continuing
transactions between the Company and any present or former stockholder, director
or officer of the Company, or any member of such officer's, director's or
stockholder's immediate family, or any business organization controlled by such
officer, director or stockholder or his or her immediate family. Except as set
forth in SCHEDULE 2.30, no stockholder, director or officer of the Company, or
any of the respective spouses or immediate family members, owns directly or
indirectly on an individual or joint basis any material interest in, or serves
as an officer or director or in another similar capacity of, any competitor or
supplier of the Company.
2.31 COMPLIANCE WITH INSURANCE LAWS. Without limiting the
representations and warranties contained elsewhere in this Agreement, except as
set forth in SCHEDULE 2.31:
(a) The Company has since January 1, 1992, made all reports
required under applicable insurance statutes. SCHEDULE 2.31 sets forth the
licenses held by the Company under all applicable insurance or other
similar laws. Other than the licenses
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listed in SCHEDULE 2.31, the Company is not required to hold any other
license, permit or authorization under the insurance laws of any state
other than the State of Texas to conduct its business as presently
conducted. The Company has all other necessary Permits of and from all
insurance regulatory authorities to conduct its business as presently
conducted.
(b) The dental plan products offered and sold by the Company
have been and are offered and sold in compliance with the requirements of
all relevant laws and regulations, in each case, and the Company has not
received any notification from any insurance regulatory authority to the
effect that any additional Permit is needed to be obtained by it. Except
as disclosed on SCHEDULE 2.31, the Company has not since January 1, 1992,
ever, entered into or been subject to any judgment, consent decree,
compliance order or administrative order other than any issued in the
ordinary course of business with respect to any insurance or other similar
law or, other than in the ordinary course of business, received any request
for information, notice, demand letter, administrative inquiry or formal or
informal complaint or claim with respect to any insurance or other similar
law or the enforcement of any such law.
(c) Since January 1, 1992, the Company has not failed to comply
with any applicable statute, ordinance, order, rule or regulation, or
failed to obtain any Permit in the State of Texas, or, to the best
knowledge of the Company, in any jurisdiction other than the State of Texas
in which the Company is conducting or has prior to the date hereof
conducted any activities including without limitation activities relating
to the offer and sale of dental care products, plans or services, the
recruitment of dentists or dental offices in connection with the offer and
sale of such products, plans or services, the marketing of any such
products plans or services to potential purchasers thereof or subscribers
thereto, lobbying efforts or similar activities, or any joint venture with
any other party relating to the foregoing, except in each case where the
failure to comply or obtain any Permit (individually or in the aggregate)
could not reasonably be expected to result in a Material Adverse Change.
2.32 PROBABLE SUCCESS. No Shareholder makes any representations or
warranties to Buyer regarding the probable success or profitability of the
business of the Company, provided that the foregoing statement shall not limit
or modify any representation, warranty, covenant, or agreement of the Company or
the Shareholders in this Agreement or in any certificate, instrument, or
document delivered pursuant hereto or in connection herewith.
2.33 FULL DISCLOSURE. None of the representations and warranties made
by the Company or the Shareholders, or made in any certificate or memorandum
furnished or to be furnished by any of them or on their behalf, contains or will
contain any untrue statement of a material fact, or omits to state any material
fact necessary to make the statements made, in the light of the circumstances
under which they were made, not misleading.
2.34 REPRESENTATIONS AND WARRANTIES TRUE. All representations and
warranties of the Company and the Shareholders set forth in this Agreement and
in any written statements delivered to Buyer by the Company or any Shareholder
will also be true and correct as
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of the Closing Date as if made on that date (except to the extent such
representations or warranties speak to a particular date).
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF BUYER
Buyer represents and warrants to the Company and the Shareholders as
follows:
3.1 ORGANIZATION. Buyer is a corporation duly organized, validly
existing and in good standing in the State of Delaware, is duly qualified to do
business as a foreign corporation and is in good standing in the State of
California. Buyer has the requisite corporate power to own, use or lease its
properties and to carry on its business as it is now being conducted. Buyer has
made available to the Company a complete and correct copy of its Certificate of
Incorporation and Bylaws, each as amended to date, and Buyer's Certificate of
Incorporation and Bylaws as so delivered are in full force and effect. Buyer is
not in default in any material respect in the performance, observation or
fulfillment of any provision of its Certificate of Incorporation or Bylaws.
3.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Buyer has all requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby on
the part of Buyer have been duly and validly authorized by the Board of
Directors of Buyer, and no other corporate proceedings on the part of Buyer are
necessary, as a matter of law or otherwise, to authorize this agreement or to
consummate the transactions so contemplated. This Agreement has been duly and
validly executed and delivered by Buyer and, assuming this Agreement constitutes
a valid and binding obligation of the Company and the Shareholders, this
Agreement constitutes a valid and binding agreement of Buyer, enforceable
against it in accordance with its terms, except (a) as such enforcement may be
subject to bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights, and (b) as the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought.
3.3 CONSENT AND APPROVALS; NO VIOLATION. The execution and delivery
of this Agreement by Buyer, the consummation of the transactions contemplated
hereby and the performance by Buyer of its obligations hereunder, will not:
(a) conflict with any provision of the Certificate of
Incorporation or Bylaws of Buyer;
(b) require any consent, approval, authorization or permit of,
or filing with or notification to, any governmental or regulatory
authority, except (i) the filing of the Governmental Filings (as defined in
SECTION 5.4) and (ii) where the failure to obtain such consents, approvals,
authorizations or permits or the failure to make such filings or
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notifications would not have a material adverse effect on the financial
condition, business, properties or results of operations of Buyer; or
(c) conflict with or violate the provisions of any order, writ,
injunction, judgment, decree, statute, rule or regulation applicable to
Buyer, in such a manner as to result in a material adverse effect on the
financial condition, business, properties or results of operations of
Buyer.
3.4 BROKER'S COMMISSIONS OR FINDER'S FEES. No person or entity has
acted for Buyer in connection with the transactions provided for in this
Agreement in any way that would entitle such person to, and no person or entity
is entitled to, receive from Buyer any broker's commissions or finder's fees (or
other similar fees or commissions) in connection with this Agreement.
3.5 INVESTMENT INTENT. Buyer is acquiring the Shares for its own
account for investment and not with a view to, or for sale or other disposition
in connection with, any distribution of all or any part thereof, except in
compliance with applicable federal and state securities laws.
3.6 LEGAL PROCEEDINGS. There are no legal proceedings pending or, to
the best knowledge of Buyer, threatened seeking to restrain, prohibit, or obtain
damages or other relief in connection with this Agreement or the transactions
contemplated hereby.
ARTICLE IV
CONDUCT OF BUSINESS
BY THE COMPANY PRIOR TO CLOSING
From the date of this Agreement and until the Closing Date or the
earlier termination of this Agreement, the Company and Shareholders agree
(except as expressly contemplated by this Agreement or to the extent that Buyer
shall otherwise consent in writing) as follows:
4.1 ORDINARY COURSE. The Company shall carry on its business in the
usual, regular and ordinary course, in substantially the same manner as
heretofore conducted, and shall use all reasonable efforts consistent with past
practice and policies to preserve intact its present business organization, keep
available the services of its present officers and key employees (other than
employees terminated for cause) and preserve its relationships with customers,
suppliers, lessors, lessees and others having business dealings with it to the
end that its goodwill and ongoing business shall be unimpaired at the Closing
Date. The Company will not adopt any method of accounting that is inconsistent
with generally accepted accounting principles.
4.2 DIVIDENDS; CHANGES IN STOCK. The Company shall not (a) declare
or pay any dividends on or make other distributions in respect of any Shares, or
(b) split, combine or reclassify any Shares or issue or authorize the issuance
of any other securities in respect of, in lieu of or in substitution for any
Shares.
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4.3 ISSUANCE OR REPURCHASE OF SECURITIES. Except as otherwise
expressly contemplated by this Agreement, the Company shall not issue, pledge,
deliver, sell, or repurchase any shares of its capital stock of any class, or
any options, warrants or other rights exercisable for or securities convertible
into or exchangeable for, any such shares.
4.4 GOVERNING DOCUMENTS. The Company shall not adopt any amendment
to its Articles of Incorporation or Bylaws.
4.5 NO SOLICITATION.
(a) Until the closing of the transaction contemplated hereby or
until this Agreement is terminated, neither the Company nor any Shareholder
shall directly or indirectly, nor shall any such party authorize or permit
any director, officer, employee, stockholder, investment banker, finder,
attorney, accountant or other agent or representative to, solicit or
encourage submission of any proposal or offer, or participate or cooperate
in any discussions or negotiations, or enter into any letter of intent,
agreement in principle or other agreement, oral or written, concerning any
merger, sale of substantial assets, business combination, joint venture,
sale or purchase of shares of capital stock or similar transaction
involving the Company (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal"). Notwithstanding the foregoing,
in the event this Agreement is terminated, Mr. Rees shall be entitled to
sell his interest in the Company.
(b) The Company and the Shareholders shall promptly notify Buyer
in writing if any such Acquisition Proposal is made, and shall in any such
notice, set forth in reasonable detail the identity of the third party, the
terms and conditions of any such Proposal and any other information
requested of it by the third party or in connection therewith.
(c) If (i) Section 4.5(a) of this Agreement is breached, and
(ii) on or before July 31, 1997, either the Company and/or the Shareholders
consummate an Acquisition Proposal, then the Company and its Shareholders
shall pay Buyer a break-up fee in the aggregate amount of Five Hundred
Thousand Dollars ($500,000) and reimburse Buyer for any and all reasonable
expenses incurred by it in connection with the transactions contemplated
hereby. The Company and each of the Shareholders shall be jointly and
severally liable for the payment of any such fee.
4.6 NO ACQUISITIONS. The Company shall not acquire or agree to
acquire by merging or consolidating with, or by purchasing a substantial portion
of the assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquire or agree to acquire any capital or other assets which are
material, individually or in the aggregate, to the Company.
4.7 NO DISPOSITIONS. Except for the sale of inventory in the
ordinary course of business and other than pursuant to the requirements of
existing Contracts, the Company shall not
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sell, lease or otherwise dispose of any assets which are material, individually
or in the aggregate, to the Company.
4.8 INDEBTEDNESS.
(a) The Company shall not incur, become subject to, or agree to
incur or become subject to, any obligation or liability (absolute or
contingent), except current liabilities incurred, and obligations under
contracts entered into, in the ordinary course of business consistent with
prior practice, and provided specifically that the Company shall not enter
into any material lease or extension of any material lease with respect to
any real or personal property or issue or sell, or guaranty the repayment
of; any debt securities.
(b) The Company shall not pay or be liable for prepayment or
other penalties in connection with the early retirement of any of the
Company's indebtedness for borrowed money.
4.9 EMPLOYEES. Except as expressly contemplated by this Agreement,
the Company shall not make any change in the compensation payable, or to become
payable, to any of its officers, directors, employees, agents or consultants,
enter into or amend any employment, severance, termination or other agreement;
make any loans to any of its officers, directors, employees agents or
consultants; or make any change in its existing borrowing or lending
arrangements for or on behalf of any of such persons, whether contingent on
consummation of the transactions contemplated by this Agreement or otherwise.
4.10 BENEFIT PLANS. The Company shall not (a) pay, agree to pay or
make any accrual or arrangement for payment of any pension, retirement allowance
or other employee benefit pursuant to any existing plan, agreement or
arrangement to any officer, director or employee except in the ordinary course
of business and consistent with past practice or as permitted by this Agreement;
(b) pay or agree to pay or make any accrual or arrangement for payment to any
employees of the Company of any amount relating to unused vacation days;
(c) commit itself to adopt or pay, grant, issue or accrue salary or benefits
pursuant to any additional pension, profit-sharing, bonus, extra compensation,
incentive, deferred compensation, stock purchase, stock option, stock
appreciation right, group insurance, severance pay, retirement or other employee
benefit plan, agreement or arrangement, or any employment or consulting
agreement with or for the benefit of any director, officer, employee, agent or
consultant, whether past or present; or (d) amend in any material respect any
such existing plan, agreement or arrangement.
4.11 ADDITIONAL MATTERS. The Company shall not:
(a) enter into, amend or terminate any agreements, commitments
or contracts which, individually or in the aggregate, are material to the
financial condition or results of operations of the Company;
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(b) discharge or satisfy any lien or encumbrance or payment of
any obligation or liability (absolute or contingent) other than current
liabilities in the ordinary course of business;
(c) cancel or agree to cancel any material debts or claims,
except in each case in the ordinary course of business;
(d) waive any rights of substantial value;
(e) otherwise make any material change in the conduct of the
business or operations of the Company;
(f) settle any tax assessment, litigation or other claims,
relinquish any material contract right or make any equity investments in
third parties; or
(g) agree in writing or otherwise to take any of the foregoing
actions or any action which would constitute a Material Adverse Change or
make any of the representations and warranties of the Company set forth in
this Agreement untrue or incorrect in any material respect.
ARTICLE V
ADDITIONAL COVENANTS
5.1 NON-COMPETITION AGREEMENTS.
(a) REES NON-COMPETITION AGREEMENT. Simultaneously with the
Closing, Buyer and Mr. Rees shall enter into the Rees Non-Competition
Agreement, such Agreement to be for a term of five (5) years.
(b) DAVENPORT AND RINKER NON-COMPETITION AGREEMENT.
Simultaneously with the Closing, Buyer and Dr. Davenport and Dr. Rinker
shall enter into the Davenport and Rinker Non-Competition Agreement.
(c) DEFAULT. In the event of a default by Buyer for nonpayment
under the Davenport and Rinker Non-Competition Agreement contemplated by
Section 5.1(b) hereof, uncured for a period of ten (10) days after notice
is given in accordance with the provisions of SECTION 10.2 hereof, such
Non-Competition Agreement shall automatically terminate and be of no
further force or effect and all remaining Noncompete Payments thereunder
shall automatically accelerate and be due and payable in full without any
further notice of any kind whatsoever (unless the nonpayment occurs due to
a violation by the Shareholder(s) under the following sentences). In the
event of a violation by Dr. Rinker or Dr. Davenport of the provisions of
such Non-Competition Agreement during the Payout Period, any amounts due
the violating Shareholder under the Davenport and Rinker Non-Competition
Agreement would be forfeited by such Shareholder. In the event of a
violation of such Non-Competition Agreement after the Payout Period but
prior to the end of the five year non-compete period, the violating
Shareholder or Shareholders would pay Buyer One Million Dollars
($1,000,000) in the aggregate as liquidated
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damages. Any disputed violation or default shall be determined by a final
arbitration award in accordance with the provisions of Section IX hereof
(Dispute Resolution).
5.2 EARNEST MONEY ESCROW. The Shareholders acknowledge that the
Earnest Money Escrow amount is $500,000.
(a) RETURN TO BUYER. The Earnest Money Escrow shall be returned to
Buyer, if prior to the Closing, the proposed transaction is abandoned by mutual
consent of the parties hereto, or this Agreement shall have been terminated in
accordance with its terms, or the Shareholders shall terminate negotiations and
withdraw from the proposed acquisition for any reason whatsoever other than
because of a reason specified in Section 5.2 (b) below or Buyer shall terminate
negotiations and withdraw from the proposed transaction because of (i) a failure
by the Shareholders to perform in any material respect any of their obligations
under this Agreement without a prior breach by Buyer, (ii) the failure by the
Shareholders to negotiate in good faith with Buyer regarding the proposed
acquisition, (iii) the discovery by Buyer that the Shareholders have made a
material misrepresentation of fact regarding the Company, or its business,
assets, properties, liabilities, or financial condition; (iv) the occurrence or
threatened occurrence of a material adverse change after the date hereof in the
business, assets, properties, liabilities, or financial condition of the
Company, (v) the issuance by a court or governmental agency of competent
jurisdiction of an injunction, writ, or temporary restraining order or any other
order of any nature directing that the proposed acquisition not be consummated
or the institution or threatened institution of any action, suit, or proceeding
by or before any court or governmental body in which it is or may be sought to
prohibit, substantially delay, or rescind the acquisition contemplated hereby,
or to limit in any way Buyer's right to control the Company or any aspect of its
business, or to obtain award of damages in connection with the proposed
acquisition, or (vi) notice to any of the parties hereto from a federal or state
governmental authority or agency that governmental permits or licenses
materially necessary to the continuing operation of the Company (and which
cannot be obtained by direct application in a reasonable period of time after
the Closing Date for consummation of the proposed acquisition), cannot be
transferred to Buyer by the Company.
(b) FORFEITURE TO SHAREHOLDERS. The $500,000 Earnest Money Escrow
shall be forfeited to the Shareholders as liquidated damages, if prior to the
Closing, the Shareholders shall terminate negotiations and withdraw from the
proposed acquisition because of (i) a material breach or default as described in
Section 7.1(d) (other than a breach of default arising as a result of a material
breach or default as described in Section 7.1(c)); (ii) the failure by Buyer to
negotiate in good faith with the Shareholders regarding the proposed
acquisition; or (iii) the termination of the acquisition contemplated hereby due
to the failure of Buyer to obtain financing or the failure of Buyer's Board of
Directors to approve a definitive agreement reached by the officers of the Buyer
after negotiations in good faith by the parties.
5.3 CONFIDENTIAL INFORMATION.
(a) NONDISCLOSURE BY SHAREHOLDERS. The Shareholders recognize
and acknowledge that they have in the past, currently have, and in the
future may possibly have, access to certain confidential information of the
Company, such as customer lists,
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specific information relating to the special needs of particular customers
(including knowledge of what products they are using and are likely to use
in the future), sales and financial records and related data (including
pricing information), information and specifications relating to products
proposed by the Company, knowledge of the Company's sales and marketing
techniques, and information regarding vendors and suppliers of the Company.
Each of the Shareholders agrees that from and after the Closing Date it
will not use such confidential information or disclose such confidential
information to any person or entity for any purpose or reason whatsoever,
except to authorized representatives of Buyer, unless such information
becomes known to the public generally through no fault of the Company or
the Shareholders, or unless the Shareholders are required by law to
disclose such information. If any Shareholder is requested to provide such
information pursuant to requirements of applicable law, he shall notify
Buyer as promptly as possible and shall allow Buyer the opportunity to
oppose such request. In the event of a breach or threatened breach by the
Company or a Shareholder of the provisions of this Section, Buyer shall be
entitled to an injunction restraining the Company or Shareholder from
disclosing, in whole or in part, such confidential information. Nothing
herein shall be construed as prohibiting Buyer from pursuing any other
available remedy for such breach or threatened breach, including the
recovery of damages.
(b) REMEDIES. The Shareholders acknowledge and agree that,
because the legal remedies of Buyer may be inadequate in the event of a
breach of any of the covenants set forth in this Section, Buyer may, in its
discretion and in addition to obtaining any other remedy or relief
available to it (including, without limitation, damages at law), enforce
the provisions of this Section by injunction and other equitable relief.
(c) NONDISCLOSURE BY BUYER. Buyer agrees that, unless and until
the Closing has been consummated, all Confidential Information (as defined
below) shall be kept confidential by Buyer as required by this subsection
(c); provided, however, that (i) any of such Confidential Information may
be disclosed to such directors, officers, employees, and authorized
representatives of Buyer (collectively, for purposes of this Section,
"Buyer Representatives") as need to know such information for the purpose
of evaluating the transactions contemplated hereby (it being understood
that such Buyer Representatives shall be informed by Buyer of the
confidential nature of such information and shall be required to treat such
information confidentially), (ii) any disclosure of Confidential
Information may be made to the extent to which the Company and the
Shareholders consent in writing, (iii) Confidential Information may be
disclosed by Buyer or any Buyer Representative, to the extent that, in the
opinion of counsel, Buyer or such Buyer Representative is legally compelled
to do so, provided that, prior to making such disclosure and if there is
time to do so, Buyer or such Buyer Representative, as the case may be,
advises and consults with the Company and the Shareholders regarding such
disclosure and provided further that Buyer or such Buyer Representative, as
the case may be, discloses only that portion of the Confidential
Information as is legally required, and (iv) any of such Confidential
Information may be disclosed to any banks or financial institutions or
other prospective investors who agree in writing to comply with the
provisions of this Section. Buyer agrees that none of the Confidential
Information will be used for any purpose other than in connection with the
transactions contemplated hereby.
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The term "Confidential Information", as used herein, means all information
obtained by or on behalf of Buyer from the Shareholders or the Company
pursuant to this Section and all similar information obtained from the
Company or the Shareholders by or on behalf of Buyer prior to the date of
this Agreement, other than information which (i) was or becomes generally
available to the public other than as a result of disclosure by Buyer or
any Buyer Representative, (ii) was or becomes available to Buyer on a
nonconfidential basis prior to disclosure to Buyer by the Shareholders or
the Company or their respective representatives, or (iii) was or becomes
available to Buyer from a source other than the Shareholders or the Company
and their respective representatives, provided that such source is not
known by Buyer to be bound by a confidentiality agreement with the
Shareholders or the Company. The agreement contained in this Section
5.3(c) shall terminate upon the Closing.
(d) RETURN OF INFORMATION. If this Agreement is terminated,
Buyer shall promptly return or destroy, and shall use its reasonable best
efforts to cause all Buyer Representatives to promptly return or destroy,
all Confidential Information to the Company without retaining any copies
thereof, provided that such portion of the Confidential Information as
consists of notes, compilations, analyses, reports, or other documents
prepared by Buyer or Buyer Representatives shall be destroyed.
5.4 GOVERNMENTAL FILINGS. Each of Buyer, the Company and the
Shareholders agrees to make as promptly as practicable all filings necessary
under any applicable federal, state, local and foreign laws and to obtain any
required regulatory approvals, clearances or expirations of waiting periods in
connection with the transactions contemplated by this Agreement (all such
filings required to be made as provided herein are referred to herein
collectively as the "Governmental Filings"). Each party shall use its best
efforts, and cause its counsel to use their best efforts, to cooperate with the
other parties in preparing their respective Governmental Filings and in
obtaining all required regulatory approvals, clearances and expirations of
waiting periods.
5.5 LEGAL CONDITIONS. Each of Buyer, the Company and the
Shareholders will take all reasonable actions necessary to comply promptly with
all legal requirements which may be imposed on such party with respect to the
consummation of the transactions contemplated by this Agreement and will
promptly cooperate with and furnish information to such other party or parties
in connection with any such requirements as may be imposed upon such other party
or parties in connection with the consummation of the transactions contemplated
by this Agreement.
5.6 CERTAIN DEFAULTS. The Company will give prompt notice to Buyer
of (a) any notice of default received by it subsequent to the date of this
Agreement and prior to the Closing Date under any material instrument or
material agreement to which it is a party or by which it is bound, which default
would, if not remedied, result in a Material Adverse Change or which would
render materially incomplete or untrue any representation made herein, and
(b) any suit, action or proceeding instituted or, to the knowledge of it,
threatened against or affecting it subsequent to the date of this Agreement and
prior to the Closing Date which, if adversely determined, would result in a
Material Adverse Change or which would render materially incorrect any
representation made herein.
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5.7 EXPENSES. Except as provided in Section 10.10 hereof or as
otherwise contemplated herein, whether or not the transactions contemplated by
this Agreement are consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such expense.
5.8 ACCESS TO INFORMATION AND DILIGENCE REVIEW. Between the date of
this Agreement and the Closing Date at Buyer's expense the Company shall
(i) give Buyer and its authorized representatives reasonable access during
normal business hours to all plants, offices, warehouses and other facilities
and to all contracts, internal reports, data processing files and records,
federal, state, local and foreign tax returns and records, commitments, books,
records and affairs of the Company, whether located on the premises of the
office facilities for the Company or at another location, including, without
limitation, the relationship of the Company to its related employee leasing
company; (ii) permit Buyer to make such inspections as it may require,
(iii) cause its officers to furnish to Buyer such financial, operating,
technical and product data and other information with respect to the business
and properties of the Company as Buyer from time to time may request, including
without limitation financial statements and schedules, and (iv) assist and
cooperate with Buyer in the development of integration plans for implementation
by Buyer following the Closing Date; provided, however, that no investigation
pursuant to this Section shall affect or be deemed to modify any representation
or warranty made by the Company or the Shareholders herein and provided further
that the Company shall have the right to have a representative present at all
times.
5.9 ADDITIONAL ACTIONS. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all reasonable action and to do, or cause to be
done, all things reasonably necessary, proper or advisable under applicable laws
and regulations to consummate and make effective the transactions contemplated
by this Agreement as promptly as reasonably practicable. The Company and the
Shareholders shall give prompt notice to Buyer of any material breach of any of
their respective covenants hereunder or the occurrence of any event that is
reasonably likely to cause any of their respective representations and
warranties hereunder to become incomplete or untrue in any material respect.
5.10 TAX MATTERS.
(a) PREPARATION OF TAX RETURNS DUE PRIOR TO CLOSING AND PAYMENT
OF TAXES. Shareholders shall cause the Company to, and the Company shall,
prepare (on a Consistent Basis as that term is defined in
Section 5.10(b)(ii) hereof) and timely file all Tax Returns and amendments
thereto having a due date (not including extensions) on or before the
Closing Date, and all such Tax Returns shall be true, complete and
accurate. Any Tax Return having a due date which has been extended to a
date following the Closing Date, including but not limited to federal and
state income and franchise tax returns for the 1995 calendar year if the
due date therefor has been so extended, shall be subject to the foregoing
covenant. All Taxes shown to be payable on such Tax Returns shall be paid
in full prior to the Closing Date and no other Taxes shall be payable by
the Company with respect to items or periods covered by such Tax Returns.
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(b) PREPARATION OF 1996 TAX RETURNS DUE FOLLOWING CLOSING AND
PAYMENT OF TAXES.
(i) SHORT PERIOD RETURNS. As used herein the term "Short Period
Return" means a Tax Return of the Company that (A) is filed with respect to
a less-than-twelve-month period (herein a "Short Period") commencing on
January 1, 1996, and ending on or before the Closing Date, (B) pursuant to
applicable tax laws and regulations, the Company is either required to file
or may file at the election of the Company and (C) has a due date (not
including extensions) following the Closing Date. The parties agree that
if any such election to file a Short Period Return is available, the party
or parties eligible to make such election shall do so.
(ii) PREPARATION OF SHORT PERIOD RETURNS FOLLOWING CLOSING DATE
AND PAYMENT OF TAXES. Prior to the due date (including extensions) for
each Short Period Return, Buyer shall cause to be prepared and shall submit
to Shareholders for their review (as described below) such Short Period
Return. Each Short Period Return shall be prepared so as to report the
Company's income, losses, gains, profits, deductions, credits and other tax
items (collectively "Tax Items") consistently with the manner in which
equivalent or comparable Tax Items have been reported by the Company in Tax
Returns filed with respect to prior years but taking into account any
changes to such items heretofore given effect pursuant to amendments to
such prior year Tax Returns or pursuant to adjustments related to such
prior year Tax Returns resulting from tax audits, tax examinations or other
administrative or judicial tax proceedings (collectively "Tax Proceedings")
which are final and complete prior to the preparation of such Short Period
Return (herein such prior year consistency requirement shall be referred to
as preparing and filing 1996 Tax Returns on a "Consistent Basis"). Unless
applicable tax laws or regulations require another method for allocating
1996 Tax Items between and among the Short Period and the period following
the Closing Date, the Short Period Returns shall be prepared based on a
closing of the Company's books as of the Closing Date, with Tax Items
attributable to operations, activities, transactions, income, sales,
services, accruals and other similar events taking place or otherwise
effective on or before the Closing Date being reported and taken into
account in the Short Period and those taking place or otherwise effective
following the Closing Date being reported and taken into account in the
period following the Closing Date (herein a "Closing of the Books"). Each
Short Period Return shall be submitted by Buyer to Shareholders on or
before the date that is 60 days prior to the due date (including
extensions) for the filing of such Short Period Return. Within 30 days
following receipt of such Short Period Return, Shareholders shall notify
Buyer as to whether Shareholders agree that such Short Period Return has
been properly prepared on a Consistent Basis. If the Shareholders approve
such Short Period Return, or fail to provide any notice to Buyer within
such 30-day review period, Buyer shall file the Short Period Return as
furnished to Shareholders. If within such 30-day review period Shareholders
shall notify Buyer that they do not agree that such Short Period Return has
been properly prepared on a Consistent Basis, the parties shall attempt in
good faith to resolve the Shareholders' objections, and if they are unable
to resolve such objections the matter shall be resolved pursuant to the
dispute resolution provisions of Article IX hereof. Upon resolution of
such dispute, and in all events prior to the due date
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thereof (including extensions), Buyer shall cause such Short Period Return
to be filed. Buyer shall cause Company to pay and discharge on a timely
basis all Taxes shown to be payable by the Company as reflected on such
Short Period Returns as prepared on a Consistent Basis. As used herein the
term "1996 SPR Buyer Taxes" shall mean the amount of Tax liability
reflected on a Short Period Return prepared on a Consistent Basis and as
otherwise required hereunder. Any refunds of such 1996 SPR Buyer Taxes,
whether pursuant to amended returns or any Tax Proceeding, shall be paid to
and for the benefit of Company. Any Additional 1996 SPR Taxes (as defined
herein) shall be paid by Shareholders promptly upon demand therefor by
Buyer. As used herein the term "Additional 1996 SPR Taxes" shall mean any
additional Taxes (including interest, penalties and other additions to tax)
in excess of the 1996 SPR Buyer Taxes reflected on a Short Period Return
which as a result of any Tax Proceeding are imposed upon or against or
otherwise become payable by the Company with respect to a Short Period.
(iii) FULL YEAR RETURN. As used herein the term "Full Year
Return" means a Tax Return of the Company that (A) pertains to a particular
Tax (herein a "FY Tax") with respect to the 1996 year for which the Company
is liable but which, under applicable tax laws and regulations, may not be
reported and accounted for by the Company on a Short Period Return, and
(B) reports and accounts for the Company's liability for such FY Tax on an
aggregate basis covering both the 1996 period ending on the Closing Date
(herein the "Pre-Closing Period") and the 1996 period following the Closing
Date (herein the "Post-Closing Date).
(iv) PREPARATION OF FULL YEAR RETURNS AND PAYMENT OF TAXES.
Prior to the due date (including extensions) for any Full Year Return,
Buyer shall cause the Company to prepare and timely file each Full Year
Return on which all Tax Items attributable to the Pre-Closing Period shall
be reported and accounted for on a Consistent Basis, and Buyer shall cause
the Company to pay and discharge on a timely basis all Taxes shown to be
payable by the Company on such Full Year Return. As used herein the term
"1996 PCP Buyer Taxes" shall mean the amount of FY Tax liability that is
attributable to a Pre-Closing Period as calculated and determined as if
such Pre-Closing Period constituted a Short Period as to which the FY Tax
liability were determined on a Short Period Return prepared on a Consistent
Basis. Any refunds of such 1996 PCP Buyer Taxes, whether pursuant to
amended returns or any Tax Proceeding, shall be paid to and for the benefit
of Company. Any Additional 1996 PCP Taxes (as defined herein) shall be
paid by Shareholders promptly upon demand therefor by Buyer. As used
herein the term "Additional 1996 PCP Taxes" shall mean any additional Taxes
(including interest, penalties and other additions to tax) which as a
result of any Tax Proceeding are imposed upon or against or otherwise
become payable by the Company with respect to a Pre-Closing Period in
excess of the 1996 PCP Buyer Taxes with respect to such Pre-Closing Period.
The foregoing is intended to implement the parties' agreement that the
Shareholders shall be responsible for the payment of any Taxes attributable
to the Company's activities and operations during the Pre-Closing Period to
the extent that such Taxes (inclusive of interest, penalties and other
additions) exceed the amount of Tax liability with respect to a Pre-Closing
Period as reported and accounted for on a Consistent Basis. The parties
further agree that the Shareholders shall have no liability
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hereunder with respect to Taxes attributable to the Company's activities
and operations in any Post-Closing Period. For such purposes, if the
Company is a partner in a partnership which has a tax year that does not
end as of the Closing Date, any Tax liability attributable to such
partnership's activities shall be allocated among the Pre-Closing Period
and the Post-Closing Period on a fair and reasonable basis consistent with
the allocation principles underlying this Section 5.10(b).
(v) Following the Closing Date, Buyer shall allow Shareholders
and their representatives to have access, at reasonable times and places as
requested by Shareholders or their representatives, to the Company's books
and records reflecting its business operations and Tax Items through to the
Closing Date. It is intended that such reasonable access shall be made
available in sufficient time to allow Shareholders and their
representatives to review the Short Period Returns pursuant to the
provisions of the Sections 5.10(b)(ii).
(c) TRANSFER TAXES. As used herein the term "Transfer Taxes"
shall mean any Taxes imposed on or with respect to the sale of stock as
contemplated by this Agreement. The Shareholders shall pay all such
Transfer Taxes.
(d) ACCESS TO RECORDS FOLLOWING CLOSING. Shareholders agree
that so long as any books, records and files retained by Shareholders
relating to the business of Company, to the extent they relate to the
operations of Company prior to the Closing Date, remain in existence and
available, Buyer (at its expense) shall have the right upon prior notice to
inspect and to make copies of the same at any time during business hours
for any proper purpose. Shareholders shall use reasonable efforts not to
destroy or allow the destruction of any such books, records and files
without first offering in writing to deliver them to Buyer.
(e) REFUNDS. Buyer agrees to pay to the Shareholders, in
proportion to their respective ownership interests in the Company, any
refund received after the Closing Date by Buyer or the Company, in respect
of any Taxes for which the Shareholders are liable under
SECTION 8.1(a)(iii) hereof, but only to the extent such has not been
reflected as a receivable on the Financial Statements. The Company shall
be entitled to any refund in respect of any Taxes for which the
Shareholders are not liable under SECTION 8.1(a)(iii) hereof, and if the
Shareholders shall receive any such refund they shall pay the same to the
Company or to Buyer on behalf of the Company. The parties shall cooperate
in order to take all necessary steps to claim any such refund. Any such
refund received by a party or its affiliate for the account of the other
party shall be turned over to such other party within 10 days after such
refund is received.
(f) COOPERATION. Within 10 days of receipt, each party will
provide, or cause to be provided, to the other party copies of all
correspondence received from any taxing authority by such party or any of
its affiliates in connection with the liability of the Company for Taxes
for any period for which such other party is or may be liable under
SECTION 8.1(a)(iii) or otherwise. The parties will, at their own expense,
provide each other with such cooperation and information as they may
reasonably request of each other in
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preparing or filing any return, amended return or claim for refund, in
determining a liability or a right of refund or in conducting any audit or
other Tax Proceeding, including cooperating with respect to reasonable
requests from the other party for extending statutes of limitation
applicable to any Tax Proceeding, in respect of Taxes for any period for
which such other party is or may be liable under SECTION 8.1(a)(iii) OR
OTHERWISE.
(g) SURVIVAL. Notwithstanding any other provision of this
Agreement, the covenants set forth in this Section shall survive until the
expiration of the respective statute of limitations applicable to the
period to which the Taxes relate.
5.11 CONSENTS AND APPROVALS.
(a) DEPARTMENT OF INSURANCE APPROVAL. Not later than five (5)
business days after the date hereof, Buyer shall file its completed
application for transfer of control of the Company with the Department of
Insurance of the State of Texas, together with all documents and
information of or concerning itself or any of its affiliates as may be
required to be filed in connection therewith under such form or applicable
statutes and regulations, shall thereafter promptly provide such additional
information such Department shall request from time to time, and otherwise
shall prosecute such application diligently and use commercially reasonable
efforts to obtain such approval as promptly as practicable. The Company
and the Shareholders will use commercially reasonable efforts to cause all
conditions to the obligations of Buyer set forth in this Section 5.11 (a)
to be satisfied.
(b) OTHER CONSENTS AND APPROVALS. The Company and the
Shareholders will obtain or cause to be obtained prior to the Closing Date
the consents and approvals described in SCHEDULE 5.11(b)(i) attached hereto
and will furnish to Buyer executed copies of those consents. The Buyer
will obtain or cause to be obtained prior to the Closing Date the consents
and approvals described in SCHEDULE 5.11(b)(ii) attached hereto and will
furnish to the Shareholders executed copies of those consents. The parties
will cooperate in all respects with each other with a view toward obtaining
timely satisfaction of conditions to the Closing contained in this Section
and in this Agreement, it being understood that all fees and expenses
associated with obtaining required consents and approvals shall be paid in
accordance with Section 5.7 hereof.
(c) INFORMATION. The parties shall, unless prohibited by
law, (i) furnish to other party copies of all filings and such necessary
information as may be requested by either in connection with any party's
preparation of any required filings or submissions to any governmental
agency, and (ii) will keep the other party informed of the status of any
inquiries made of the Company or the Shareholders by any federal, state or
local governmental agency or authority with respect to this Agreement or
the transaction contemplated hereby. The parties shall furnish to the
other, if applicable, a list of any materials that it is prohibited by law
from providing to the other, together with a reference to the source of the
prohibition and, if permitted, a brief summary of the content of such
materials and the parties thereto.
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5.12 FURTHER CONVEYANCES, ASSURANCES AND COOPERATION. After the
Closing, the Shareholders will, without further consideration of any nature from
Buyer, other than reimbursement of expenses reasonably incurred at the request
of Buyer, execute and deliver, or cause to be executed and delivered, to Buyer,
such additional documentation and instruments as Buyer may reasonably request,
to (i) sell, transfer and assign to and fully vest in Buyer ownership of the
Shares (ii) allow Buyer to operate the business of the Company, (iii) obtain any
consent or approval which was not obtained on or prior to the Closing,
(iv) comply with any Tax investigation, audit or inquiry, (v) allow Buyer to use
the name of the Company and the name "American Dental Corporation" for business
in all states of the United States, whether through a consent to use of name or
otherwise, or (vi) otherwise provide information, books, records, evidence,
testimony and other reasonable assistance to Buyer in connection with its
ownership of the business of the Company.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS
OF THE PARTIES
6.1 CONDITIONS TO THE OBLIGATIONS OF BUYER, THE COMPANY AND THE
SHAREHOLDERS. The respective obligations of Buyer, the Company and the
Shareholders set forth in this Agreement shall be subject to the satisfaction on
or prior to the Closing Date of the following conditions, unless waived by each
such party:
(a) GOVERNMENTAL APPROVALS. All material authorizations,
consents, orders or approvals of, or declarations or filings with, or
expiration of waiting periods imposed by, any federal, state, local or
foreign governmental or regulatory authority (including, without
limitation, the Texas Department of Insurance) necessary for the
consummation of the transactions contemplated by this Agreement shall have
been filed, occurred or been obtained, including any and all necessary
permits, licenses and certificates.
(b) LEGAL ACTION. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the
consummation of the transactions contemplated by this Agreement shall have
been issued by any federal, state or foreign court or other governmental or
regulatory authority and remain in effect, and no litigation seeking the
issuance of such an order or injunction, or seeking substantial damages
against Buyer or the Company if the transactions contemplated by this
Agreement are consummated, shall be pending which, in the good faith
judgment of the Boards of Directors of Buyer or the Company (acting upon
advice of their respective counsel) has a reasonable probability of
resulting in such order, injunction or substantial damages. In the event
any such order or injunction shall have been issued, each party agrees to
use its reasonable efforts to have any such injunction lifted.
(c) STATUTES. No federal, state, local or foreign statute, rule
or regulation shall have been enacted which would make the consummation of
the transactions contemplated by this Agreement illegal.
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(d) FINANCING. Buyer shall have obtained financing in a form
and amount reasonably satisfactory to enable Buyer to fulfill its
obligations under this Agreement.
(e) BOARD AND SHAREHOLDER APPROVAL. The Board of Directors and
the Shareholders of the Company shall have approved the form of the
definitive purchase agreement and all related agreements and documents and
the Shareholders shall provide Buyer with a copy of such resolutions at the
Closing.
6.2 FURTHER CONDITIONS TO THE OBLIGATIONS OF BUYER. The obligations
of Buyer set forth in this Agreement are subject to the satisfaction on or prior
to the Closing Date of the following conditions, unless waived by Buyer:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company and the Shareholders set forth in this Agreement
shall be true and correct in all material respects as of the date of this
Agreement and as of the Closing Date as though made at and as of the
Closing Date (except to the extent such representations or warranties speak
to a particular date), and Buyer shall have received a certificate signed
by the Shareholders and authorized officers of the Company to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF OTHER PARTIES. The Company
and the Shareholders shall have performed in all material respects all
obligations required to be performed by them under this Agreement prior to
the Closing Date and Buyer shall have received a certificate signed by the
Shareholders and authorized officers of the Company to such effect.
(c) NO LITIGATION. Since the date hereof, there shall not have
been instituted and be continuing or threatened against the Company any
claim, action or proceeding the result of which could reasonably be
expected to result in a Material Adverse Change.
(d) NO ADVERSE CHANGE. No Material Adverse Change shall have
occurred in the business, operations or prospects of the Company.
"Material Adverse Change" shall include, without limitation, (i) the loss
of any of the 10 leading revenue clients of the Company (including the
failure of any such client to consent to the change of control contemplated
by these transactions), with the exception of the ERS Contract; (ii) a
decrease in revenues exceeding 10% as determined by comparing the average
revenues for the two months ended May 31, 1996 and June 30, 1996 against
the average for the two months ended July 31, 1996 and August 30, 1996;
(iii) a decrease in provider payments exceeding 10% as determined by
comparing the average revenues for the two months ended May 31, 1996 and
June 30, 1996 against the average for the two months ended July 31, 1996
and August 30, 1996; (iv) a drop in total membership to less than 170,000
members as of the Closing Date; or (v) any adverse change in legislation or
regulations applicable to the business of the Company, if such change could
reasonably be foreseen to
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have a material adverse effect on the financial condition, operations or
prospects of the Company.
(e) SPOUSAL CONSENT. A spousal consent to the transactions
contemplated by this Agreement, substantially in the form of EXHIBIT A
hereto, shall have been executed and delivered by the spouse of each
Shareholder, if applicable.
(f) THIRD-PARTY APPROVALS. Any and all consents required from
third parties relating to contracts, licenses, leases and other agreements
and instruments material to the financial condition or results of
operations of the Company shall have been obtained.
(g) RESIGNATIONS. The Company shall have delivered to Buyer all
resignations of the officers and directors of the Company requested by
Buyer, effective as of the Closing Date.
(h) NON-COMPETITION AGREEMENTS. Each Shareholder shall have
executed and delivered to Buyer a Non-Competition Agreement in form and
substance satisfactory to Buyer and the Shareholders.
(i) FINANCIAL STATEMENTS AUDIT. At the Company's expense, the
Company shall cause its certified independent accountants (the "Company's
Accountant") to conduct and complete an independent audit of the Interim
Financial Statements (the "Audit") pursuant to generally accepted
accounting principles. The Company shall have delivered to Buyer an
unqualified opinion of the Company's Accountant, in a form and substance
reasonably satisfactory to Buyer, certifying the Audit.
(j) FINANCIAL RESULTS. The results of operations (net income)
of the Company determined in accordance with generally accepted accounting
principles for the period January 1, 1996 through the Closing shall be no
worse than break even.
(k) LEASE OF EMPLOYEES. Buyer shall have entered into an
amendment to the agreement of the Company dated March 6, 1996 (or a new
agreement) with American Staff Resources Corp. ("ASR"), the employee
leasing service for the Company, with respect to those employees set forth
on SCHEDULE 6.2(k) hereto, at rates, for at least two (2) years from the
Closing, no less favorable than that currently provided to the Company (2%
of compensation plus service costs set forth in the contract), subject to
ordinary and customary rate increases provided to all other customers of
ASR. Buyer shall have the right to terminate any leased employees, without
any further obligation with respect to such terminated employee, upon
thirty (30) days written notice to ASR. The current annual compensation
rates of the employees to be leased by Buyer are set forth on SCHEDULE
6.2(k) hereto.
(l) OPINION OF COUNSEL. Buyer shall have received an opinion
dated the Closing Date of Stieber Campbell PC, counsel to the Company, in
form and substance acceptable to Buyer.
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(m) "AMERICAN DENTAL CORPORATION". The Shareholders agree to,
at Buyer's option, either change the name of "American Dental Corporation"
or to transfer ownership, whether through the issuance of shares or
otherwise, of such entity to Buyer.
(n) AGREEMENT TERMINATION. The Shareholders shall cause (i) the
commission agreements by and among the Company and Dr. Davenport and Dr.
Rinker; and (ii) the contract with H&E Data Processing Inc. dated August 1,
1989, to be terminated and to be of no further force and effect on or prior
to the Closing Date with no further obligation of the Company to make
payments thereunder.
(o) EMPLOYMENT ARRANGEMENTS. Other than payment to employees in
the ordinary course of business, there will be no obligation on the part of
the Company for any amounts due for salary or accrued vacation to any
terminating employees of the Company or for salary or accrued vacation to
Drs. Davenport and Rinker after the Closing Date.
(p) PAYMENT AND RELEASE OF LIENS. All amounts owing under any
bank loans, lines of credit or other indebtedness, including the line of
credit with Comerica Bank, shall be paid off in full as of the Closing Date
and the Shareholders shall provide Buyer either evidence that such lien has
been terminated or shall deliver to Buyer a termination statement signed by
Comerica on the Closing Date terminating the lien on the property of the
Company.
(q) RETENTION OF REVENUES. The Shareholders shall cause all
premiums received in the month of August to be retained in the Company
against payment of the related capitation and commissions due for such
contracts.
6.3 FURTHER CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE
SHAREHOLDERS. The obligations of the Company and the Shareholders set forth in
this Agreement are subject to the satisfaction on or prior to the Closing Date
of the following conditions, unless waived by the Company and the Shareholders:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Buyer set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and as of the
Closing Date as though made at and as of the Closing Date (except to the
extent such representations or warranties speak to a particular date), and
the Company and the Shareholders shall have received a certificate signed
by authorized officers of Buyer to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF OTHER PARTIES. Buyer shall
have performed in all material respects all obligations required to be
performed by it under this Agreement prior to the Closing Date, and the
Company and the Shareholders shall have received a certificate signed by
authorized officers of Buyer to such effect.
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(c) THIRD-PARTY APPROVALS. Any and all consents required by
Buyer from third parties in order to consummate the transactions
contemplated hereby shall have been obtained.
ARTICLE VII
TERMINATION, EXTENSION AND WAIVER
7.1 TERMINATION This Agreement may be terminated at any time prior
to the Closing Date as follows:
(a) BY MUTUAL CONSENT By mutual consent of the Company and
Buyer.
(b) BY ANY PARTY By any party to this Agreement if:
(i) the transactions contemplated by this Agreement
shall not have been consummated on or before September 30, 1996;
provided that the failure of the transactions to be consummated by
such date is not caused by any breach of this Agreement by the party
seeking such termination;
(ii) a court of competent jurisdiction or other
governmental or regulatory authority shall have issued an order,
decree or ruling or taken any other action, in each case permanently
restraining, enjoining or otherwise prohibiting the consummation of
the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and not
appealable;
(iii) any statute, rule or regulation is enacted,
promulgated or deemed applicable to the transactions contemplated by
this Agreement by any competent governmental or regulatory authority
which makes the consummation of the transactions illegal; or
(iv) the Department of Insurance of the State of Texas
disapproves in writing the application for transfer of control of the
Company and the Department has not withdrawn such disapproval within
20 days after the date on which the Company and/or Buyer receive
notice of such written disapproval.
(c) BY BUYER. By Buyer if a material default under or a
material breach of this Agreement by the Company or the Shareholders, as
the case may be, shall have occurred and be continuing ten (10) business
days after receipt of notice thereof from Buyer.
(d) BY THE COMPANY. By the Company if a material default under
or a material breach of this Agreement by Buyer shall have occurred and be
continuing ten (10) business days after receipt of notice thereof from the
Company.
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Any action taken to terminate this Agreement pursuant to this Section
shall become effective when notice of such termination is delivered by the
terminating party to the other party in accordance with the provisions of
SECTION 10.2 below.
7.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement pursuant to Section 7.1 by the Shareholders of the Company, on the one
hand, or Buyer, on the other, written notice thereof shall be given promptly to
the other party specifying the provision hereof pursuant to which such
termination is made, and this Agreement shall become void and have no effect,
except that the agreements contained in this Section and in Sections 2.10
(Broker's Commissions or Finder's Fees), 4.5 (No Solicitation), 5.2 (Earnest
Money Escrow), 5.3 (Confidentiality), 5.7 (Expenses), Article IX (Arbitration),
or 10.10 (Attorney's Fees), shall survive the termination hereof for a period of
one year, unless a specific claim in writing with respect to these matters shall
have been made before such date. Nothing contained in this Section shall
relieve any party from liability for damages actually incurred as a result of
any breach of this Agreement.
7.3 EXTENSION; WAIVER. At any time prior to the Closing Date, to the
extent legally allowed, any party hereto (a) may extend the time for the
performance of any of the obligations owed to such party by the other parties
hereto, (b) may waive any inaccuracies in the representations and warranties
made to such party contained herein or in any document delivered pursuant
hereto, and/or (c) may waive compliance with any of the agreements or conditions
for the benefit of such party contained herein. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid if set forth in an
instrument in writing signed on behalf of such party and shall be effective only
to the extent set forth in such instrument. No extension or waiver of any
single condition, covenant, agreement, representation, warranty, breach, default
or other matter hereunder shall be deemed an extension or waiver of such or any
other condition, covenant, agreement, representation, warranty, breach, default
or other matter theretofore or thereafter occurring. The rights, remedies,
powers and privileges herein provided are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by law. The failure of any
party to insist upon a strict performance of any of the terms or provisions of
this Agreement, or to exercise any option, right or remedy herein contained,
shall not be construed as a waiver or as a relinquishment for the future of such
term, provision, option, right or remedy, but the same shall continue and remain
in full force and effect.
ARTICLE VIII
INDEMNIFICATION
8.1 INDEMNIFICATION.
(a) INDEMNIFICATION BY THE SHAREHOLDERS. Dr. Davenport and Dr.
Rinker shall jointly and severally (except with respect to any
representations or warranties made by such Shareholders severally (and not
jointly) in which case the indemnity provided herein shall be several and
not joint), and Mr. Rees shall severally (it being understood and agreed
that Mr. Rees's several obligation to indemnify hereunder is in proportion
to his pre-Closing ownership interest in the Company), indemnify and hold
harmless Buyer and its affiliates from and against any and all Losses (as
defined in SECTION
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8.1(c)) incurred by any of such indemnified parties in any way relating
to, arising out of or resulting from:
(i) The breach of any of the representations or
warranties made by the Company or the Shareholders in this Agreement;
(ii) The breach or the failure of performance by the
Company or the Shareholders of any of the covenants, promises or
agreements that any of them is to perform under this Agreement;
(iii) Taxes (including interest, penalties and other
additions to tax that may become payable in respect thereof) which are
(i) Transfer Taxes (as defined in Section 5.10(c)) imposed on
Shareholders that Buyer or the Company pays (in whole or in part) or
result in liens or encumbrances on any assets of Buyer or the Company,
and/or (ii) imposed on the Company in respect of its income, business,
property or operations or for which the Company may otherwise be
liable for or with respect to any period ending prior to or on the
Closing Date, including but not limited to any Additional 1996 SPR
Taxes for which the Shareholders are liable in accordance with the
provisions of Section 5.10(b)(ii) hereof and any Additional 1996 PCP
Taxes for which the Shareholders are liable in accordance with the
provisions of Section 5.10(b)(iv) hereof, except in all cases to the
extent such Taxes are adequately reserved for in the Financial
Statements;
(iv) The death of or injury to any person or damage to
property that occurred prior to the Closing and arose out of or in
connection with the business or operations of the Company;
(v) All employment-related claims and causes of action,
and all other claims and causes of action, that have arisen or arise
out of or in connection with the business or operations of the Company
conducted prior to the Closing; and
(vi) The existence prior to the Closing Date of any
hazardous or toxic substances, wastes or materials, defined as such or
governed by any applicable Environmental Law ("Hazardous Materials")
upon, about or beneath any property of the Company or migrating or
threatening to migrate from any of such properties, or the existence
of a violation of any Environmental Law pertaining to such properties
or the operations of the Company (including, but not limited to,
violations of laws dealing with the generation, transport, treatment,
storage or disposal of hazardous or other regulated material),
regardless of whether the existence of such Hazardous Materials or the
violation of Environmental Law arose prior to the present ownership or
operation of such properties by the Company or was disclosed to Buyer
by the Company, the Shareholders or otherwise.
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(b) INDEMNIFICATION BY BUYER. Buyer shall indemnify and hold
harmless the Shareholders and their affiliates from and against any and all
Losses incurred by such indemnified parties in any way relating to, arising
out of or resulting from:
(i) The breach of any of the representations or
warranties made by Buyer in this Agreement;
(ii) The breach or the failure of performance by Buyer of
any of the covenants, promises or agreements that it is to perform
under this Agreement;
(iii) Taxes (including interest, penalties and other
additions to tax that may become payable in respect thereof) which (A)
constitute 1996 SPR Buyer Taxes or 1996 PCP Buyer Taxes for which the
Shareholders are not liable in accordance with the provisions of
Sections 5.10(b) hereof, and/or (B) are imposed on the Shareholders in
respect of the Company's income, business, property or operations or
for which the Company may otherwise be liable for or with respect to
any period following the Closing Date, including such Taxes with
respect to the 1996 Post-Closing Period for which the Shareholders are
not liable in accordance with the provisions of Section 5.10(b)(iv)
hereof;
(iv) The death of or injury to any person or damage to
property that occurred after the Closing and arose out of or in
connection with the business or operations of the Company;
(v) All employment-related claims and causes of action,
and all other claims and causes of action, that have arisen or arise
out of or in connection with the business or operations of the Company
conducted after the Closing; and
(vi) The existence after the Closing Date of any
Hazardous Materials upon, about or beneath any property of the Company
or migrating or threatening to migrate from any of such properties, or
the existence of a violation of any Environmental Law pertaining to
such properties or the operations of the Company (including, but not
limited to, violations of laws dealing with the generation, transport,
treatment, storage or disposal of hazardous or other regulated
material), unless the existence of such Hazardous Materials or the
violation of Environmental Law arose prior to the ownership or
operation of the Company by the Buyer.
(c) DEFINITION OF LOSSES. For purposes of this Article,
"Losses" shall mean any and all liabilities, obligations, losses, damages,
claims, deficiencies, penalties, taxes, levies, actions, judgments,
settlements, suits, costs, legal fees, accountants' fees, disbursements or
expenses. Losses shall exclude any amount which any party actually
receives under any insurance policy which provides coverage for the
liability in question.
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8.2 THIRD PARTY CLAIMS, NOTICE AND OPPORTUNITY TO SETTLE.
(a) Within 30 days after the receipt by the party entitled to
indemnity hereunder (the "Indemnified Party") of any claim or demand
(including but not limited to, notice of any action, suit or proceeding) by
any third party (a "Third Party Claim") against an Indemnified Party which
gives rise to a right to indemnification for a Loss hereunder (or, in the
case of the receipt of any notice of any examination, claim, adjustment or
other proceeding with respect to Taxes for any period for which the
Shareholders are liable under SECTION 8.1(a)(iii) or for which Buyer is
liable under SECTION 8.1(b)(iii) ("Tax Proceeding"), promptly after the
receipt of such notice), the Indemnified Party shall give each party who
may be obligated to provide indemnity hereunder (the "Indemnifying Party")
written notice of such claim or demand; provided, however, that the failure
to give such notice shall not relieve the Indemnifying Party of its
obligations hereunder except to the extent that such failure is materially
prejudicial to the Indemnifying Party.
(b) The Indemnifying Party shall have the right (without
prejudice to the right of any Indemnified Party to participate at its own
expense through counsel of its own choosing), to defend against such claim
or demand (for purposes of this Section, any Tax proceeding shall be
considered a "claim or demand") at its expense and through counsel of its
own choosing (the choice of such counsel to be subject to the reasonable
consent of the affected Indemnified Parties) and to control such defense if
it gives written notice of its intention to do so within 15 days of the
receipt of the notice referred to in SECTION 8.2(a). If the Indemnifying
Party shall decline to assume the defense of such claim or demand, the
affected Indemnified Parties shall have the right to assume control of such
defense at the expense of the Indemnifying Party. The Indemnified Parties
shall cooperate fully in the defense of such claim or demand and shall make
available to the Indemnifying Party or its counsel all pertinent
information under their control relating thereto. The Indemnifying Party
agrees to cooperate with the Indemnified Parties in order to enable their
counsel to participate in the defense and to deliver to the Indemnified
Parties copies of all pleadings and other information within the
Indemnifying Party's knowledge or possession reasonably requested by the
Indemnified Parties that is relevant to the defense of any such claim or
demand. The Indemnified Parties and their counsel shall maintain
confidentiality with respect to all such information consistent with the
conduct of a defense hereunder.
(c) The Indemnifying Party shall have the right to elect to
settle (i) any such claim or demand other than a Tax Proceeding, for
monetary damages only and including an unconditional release, or (ii) any
Tax Proceeding, subject to the consent of the affected Indemnified Party,
provided, however, with respect to any Permissible Settlement (as defined
herein), if the affected Indemnified Parties fail to give such consent
within 20 days of being requested to do so, the affected Indemnified
Parties shall, at their expense, assume the defense of such claim or demand
and regardless of the outcome of such matter, the Indemnifying Party's
liability hereunder shall be limited to the amount of any such proposed
settlement. As used herein the term "Permissible Settlement" shall mean a
settlement as to which there is no reasonable likelihood that it will
result in the imposition on such affected Indemnified Parties of Taxes for
a taxable period for which
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the Indemnifying Party is not obligated hereunder to indemnify such
affected Indemnified Parties.
(d) In the event the Indemnifying Party assumes the defense of a
claim or demand, the Indemnified Parties shall have the right to assume
control of the defense of any claim or demand from the Indemnifying Party
at any time and to elect to settle such claim or demand; provided, however,
the Indemnifying Party shall have no indemnification obligations with
respect to such claim, demand or settlement except for the costs and
expenses of such Indemnifying Party incurred prior to the assumption of the
defense of the claim or demand by the Indemnified Parties.
8.3 RIGHT TO OFFSET. Buyer shall have the right to offset all or any
part of its Losses under this Agreement by notifying the Shareholders in writing
that Buyer is reducing the amount owed to the Shareholders under the Holdback;
provided, however, that the Shareholders shall have thirty (30) days following
receipt of such notification to rectify the cause of any such loss to Buyer
before Buyer shall be entitled to exercise its right of offset or recoupment
hereunder. Buyer shall offset its Losses against the Holdback until the
Holdback is exhausted, at which time the Shareholders shall be personally liable
as provided in this Agreement for any remaining and future Losses, whether
undisputed or established in accordance with Article IX hereof. Notwithstanding
the foregoing, the existence of the Holdback and any offsets thereunder shall
not relieve the Shareholders from liability or limit their liability to Buyer
for any breaches hereunder.
8.4 NON-THIRD PARTY CLAIMS. In the event any Indemnified Party
should have a claim against any Indemnifying Party hereunder which does not
involve a Third Party Claim, the Indemnified Party shall transmit to the
Indemnifying Party a written notice (the "Indemnity Notice") describing in
reasonable detail the nature of the claim, an estimate of the amount of damages
attributable to such claim and the basis of the Indemnified Party's request for
indemnification under this Agreement. If the Indemnifying Party does not notify
the Indemnified Party within 30 days from the Indemnifying Party's receipt of
the Indemnity Notice that the Indemnifying Party disputes such claim, the claim
specified by the Indemnified Party in the Indemnity Notice shall be deemed a
liability of the Indemnifying Party hereunder; provided, however, that, if Buyer
asserts a claim that is not a Third Party Claim and the Indemnifying Party does
not dispute such claim in a timely manner in accordance with this Section 8.4,
Buyer shall have offset and recoup its Losses as provided in SECTION 8.3.
8.5 PAYMENTS. Any timely, disputed non-Third Party Claim shall be
submitted to arbitration in accordance with the provisions of Article IX hereof.
Payments of all amounts owing by an Indemnifying Party pursuant to this Article
relating to a Third Party Claim shall be made within 30 days after the latest of
(a) the settlement of such Third Party Claim, (b) the expiration of the period
for appeal of a final adjudication of such Third Party Claim or (c) the
expiration of the period for appeal of a final adjudication of the Indemnifying
Party's liability to the Indemnified Party under this Agreement. Subject to
SECTION 8.3, payments of all amounts owing by an Indemnifying Party pursuant to
SECTION 8.4 shall be made within 30 days after the later of (i) the expiration
of the 30-day Indemnity Notice period or (ii) the expiration of the period
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for appeal of a final adjudication of the Indemnifying Party's liability to the
Indemnified Party under this Agreement.
ARTICLE IX
DISPUTE RESOLUTION
All disputes arising under this Agreement shall be resolved by
submission to binding arbitration at the Dallas office of JAMS/Endispute
("JAMS") in accordance with its rules and procedures regarding commercial
disputes, except to the extent such rules or procedures vary from the following
provisions:
9.1 NOTICE. The party desiring to initiate arbitration can do so by
sending written notice of an intention to arbitrate by registered or certified
mail to the other parties and to JAMS. The notice must contain a description of
the dispute, the amount of money involved, and the remedies sought.
9.2 ARBITRATOR. The parties shall attempt to agree on a retired
judge from the JAMS panel to act as the arbitrator hereunder. If the parties
are unable to agree, JAMS shall provide a list of three available judges to each
party and each party may strike one. The remaining judge shall serve as the
arbitrator. The parties agree the arbitration must be initiated within one year
after the claimed breach occurred and that the failure to initiate arbitration
within the one year period constitutes an absolute bar to the institution of any
arbitration or any judicial proceeding on any dispute set forth in the notice of
intent to arbitrate.
9.3 PRE-HEARING CONFERENCE. Once an arbitrator is assigned to hear
the matter, the arbitrator shall schedule a pre-hearing conference to reach
agreement on procedural matters, arrange for the exchange of information, obtain
stipulations, and attempt to narrow the issues.
9.4 DISCOVERY. It is the parties' objective to expedite the
arbitration proceedings by placing the following limitations on discovery:
(a) on a date to be determined at the pre-hearing conference, each party may
serve one demand for production of documents and one set of twenty
interrogatories (without subparts) upon the other parties (the response to the
document demand, the documents to be produced, and the responses to the
interrogatories shall be exchanged thirty days later); (b) each party may depose
two witnesses. Each deposition must be concluded within eight hours and all
depositions must be taken within sixty days of the pre-hearing conference. Any
party deposing an opponent's expert must pay the expert's fee for attending the
deposition. All discovery disputes shall be decided in the sole discretion of
the arbitrator.
9.5 BRIEFS AND HEARING. The parties must file briefs with the
arbitrator at least three days before the arbitration hearing, specifying the
facts each intends to prove and analyzing the applicable law. The parties have
the right to representation by legal counsel throughout the arbitration
proceedings. The presentation of evidence at the arbitration hearing shall be
governed by the Texas Evidence Code. Within reasonable limitations, both sides
at the hearing may call and examine witnesses for relevant testimony, introduce
relevant exhibits or other documents, cross-
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examine or impeach witnesses who shall have testified orally on any matter
relevant to the issues, and otherwise rebut evidence, as long as these rights
are exercised in an efficient and expeditious manner in the sole discretion of
the arbitrator. Oral evidence given at the arbitration hearing shall be given
under oath. Any party desiring a stenographic record may secure a court
reporter to attend the arbitration proceedings. The party requesting the court
reporter must notify the other parties and the arbitrator of the arrangement in
advance of the hearing, and must pay for the cost incurred.
9.6 DECISION. The arbitrator's decision shall be based on the
evidence introduced at the hearing, including all logical and reasonable
inferences therefrom. The arbitrator may grant any remedy or relief which is
just and equitable. The award must be made in writing and signed by the
arbitrator. It shall contain a concise statement of the reasons in support
of the decision. The award must be mailed promptly to the parties, but no
later than thirty days from the closing of the hearing. The award can be
judicially enforced (confirmed, corrected or vacated) pursuant to Tex. Civ.
Prac. & Rem. Code Ann. Section 171 ET SEQ. The award is final and binding
and there is no direct appeal from the award on the grounds of error in the
application of the law.
9.7 COSTS. Each party to the arbitration must pay its own witness
fees. Each party must pay its pro-rata share of the arbitrator's fees. The
arbitrator must award to the prevailing party attorneys' fees and costs actually
and reasonably incurred.
ARTICLE X
GENERAL PROVISIONS
10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties contained herein shall survive the Closing and will expire on the
fifth anniversary of the Closing Date (the "Survival Date"); unless prior to the
Survival Date, a claim specifying a breach of any of the representations or
warranties described above is submitted in writing to the indemnifying party and
identified as a claim for indemnification pursuant to this Agreement. From and
after the Survival Date, no party hereto nor any shareholder, director, officer,
employee, or affiliate of such party shall have any indemnity obligation
pursuant to Article VIII, except with respect to matters as to which notice has
been received in accordance with this Section 10.1. Notwithstanding the
foregoing, any representations and warranties made relating to antitrust matters
shall not terminate.
10.2 NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed given upon facsimile transmission (with written
or facsimile confirmation of receipt), or delivery by a reputable overnight
commercial delivery service (delivery, postage or freight charges prepaid), or
on the fourth day following deposit in the United States mail (if sent by
registered or certified mail, return receipt requested, delivery, postage or
freight charges prepaid), addressed to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice):
39
<PAGE>
If to Buyer: Safeguard Health Enterprises, Inc.
505 N. Euclid Street
Anaheim, California 92801
Attn: Ronald I. Brendzel, Esq.
Phone: (714) 758-4329
Fax: (714) 758-4383
With a copy to: Gibson, Dunn & Crutcher LLP
4 Park Plaza, Suite 1800
Irvine, CA 92614
Attn: Walter L. Schindler, Esq.
Phone: (714) 451-3800
Fax: (714) 451-4220
If to the Company: First American Dental Benefits, Inc.
14800 Landmark Boulevard, 7th Floor
Dallas, Texas 75240
Attn: James L. Davenport, D.D.S.
Phone: (214) 661-5848
Fax: (214) 392-0237
With a copy to: Stieber Campbell PC
2828 Routh Street, Suite 760
Dallas, TX 75201
Attn: Drew A. Campbell, Esq.
Phone: (214) 979-0902
Fax: (214) 979-0907
If to the Shareholders: James L. Davenport, D.D.S.
Martin J. Rinker, D.D.S.
William N. Rees, Jr.
c/o First American Dental Benefits, Inc.
Phone: (214) 661-5848
Fax: (214) 392-0237
10.3 INTERPRETATION. The table of contents and headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
10.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be an original and all of which together shall
be one and the same instrument.
10.5 INTEGRATION. This Agreement and the Exhibits, Schedules,
documents, instruments and other agreements among the parties hereto that are
referred to herein or any other agreements dated of even date herewith to which
Buyer, Dr. Davenport and Dr. Rinker, among
40
<PAGE>
others, are parties, constitute the entire agreement of the parties with respect
to the subject matter set forth herein or therein and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof or thereof.
10.6 GOVERNING LAW. This Agreement and the rights of the parties
hereunder will be interpreted in accordance with the laws of the State of Texas,
and all rights and remedies will be governed by such laws without regard to
principles of conflict of laws.
10.7 AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
10.8 ASSIGNMENT. No party hereto shall assign or transfer or
permit the assignment or transfer of this Agreement without the prior written
consent of the other parties, except that the Buyer may assign its rights and
obligations hereunder to any wholly-owned subsidiary.
10.9 SEVERABILITY. If any paragraph, section, sentence, clause or
phrase contained in this Agreement will become illegal, null or void or against
public policy, for any reason, or will be held by any court of competent
jurisdiction to be incapable of being construed or limited in a manner to make
it enforceable, or is otherwise held by such court to be illegal, null or void
or against public policy, the remaining paragraphs, sections, sentences, clauses
or phrases contained in this Agreement will not be affected thereby.
10.10 FEES. If any party to this Agreement shall bring any
arbitration or any other action, suit, counterclaim or appeal for any relief
against any other party, declaratory or otherwise, to enforce the terms hereof
or to declare rights hereunder (collectively, an "Action"), the prevailing party
shall be entitled to recover as part of any such Action its reasonable
attorneys' fees and costs, including any fees and costs incurred in bringing and
prosecuting such Action and/or enforcing any order, judgment, ruling or award
granted as part of such Action. "Prevailing party" within the meaning of this
section includes, without limitation, a party who agrees to dismiss an Action
upon the other party's payment of all or a portion of the sums allegedly due or
performance of the covenants allegedly breached, or who obtains substantially
the relief sought.
10.11 TRANSFER TAXES. The Shareholders shall bear all transfer,
sales, use, income or other taxes, if any, payable in connection with the
transfer of Stock contemplated by this Agreement or as a result of the
transactions contemplated hereby, and shall be responsible for the payment of
any individual taxes levied against them personally as a result of selling their
Shares to Buyer.
41
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
<TABLE>
<CAPTION>
<S> <C>
Company: Buyer:
FIRST AMERICAN DENTAL BENEFITS, INC., SAFEGUARD HEALTH ENTERPRISES, INC.,
a Texas corporation a Delaware corporation
By: By: /s/ John E. Cox
----------------------------------- --------------------------------
James L. Davenport, D.D.S. John E. Cox
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Operating Officer
By: By: /s/ Steven J. Baileys
--------------------------------- --------------------------------
Gary P. Downey Steven J. Baileys, D.D.S.
President Chairman of the Board, President
and Chief Executive Officer
</TABLE>
Shareholders:
- -------------------------------
JAMES L. DAVENPORT, D.D.S.
- -------------------------------
MARTIN J. RINKER, D.D.S.
- ------------------------------
WILLIAM N. REES, JR.
OA961970.201/-1+
43
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
<TABLE>
<CAPTION>
<S> <C>
Company: Buyer:
FIRST AMERICAN DENTAL BENEFITS, INC., SAFEGUARD HEALTH ENTERPRISES, INC.,
a Texas corporation a Delaware corporation
By: /s/ James L. Davenport By:
----------------------------------- --------------------------------
James L. Davenport, D.D.S. John E. Cox
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Operating Officer
By: /s/ Gary P. Downey By:
--------------------------------- --------------------------------
Gary P. Downey Steven J. Baileys, D.D.S.
President Chairman of the Board, President
and Chief Executive Officer
</TABLE>
Shareholders:
/s/ James L. Davenport
- -------------------------------
JAMES L. DAVENPORT, D.D.S.
/s/ Martin J. Rinker
- -------------------------------
MARTIN J. RINKER, D.D.S.
/s/ William N. Rees
- ------------------------------
WILLIAM N. REES, JR.
Stock Purchase Agreement
First American Dental
<PAGE>
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is entered into this 26th day of
September, 1996, by and among First American Dental Benefits, Inc., a Texas
corporation ("AMERICAN DENTAL"), D & R Dental Services Group (for itself and on
behalf of Metroplex Dental Group/Irving L.L.P. and its affiliates)
("METROPLEX"), James L. Davenport, D.D.S. ("DR. DAVENPORT") and Martin J.
Rinker, D.D.S. ("DR. RINKER").
WHEREAS, Safeguard Health Enterprises, Inc., a Delaware corporation
("SAFEGUARD"), American Dental, Dr. Davenport, Dr. Rinker, and William N. Rees,
Jr., have entered into a Stock Purchase Agreement, dated as of August 9, 1996
("STOCK PURCHASE AGREEMENT"; capitalized terms not otherwise defined herein
shall have the meanings ascribed to them in the Stock Purchase Agreement),
pursuant to which, among other things, Safeguard has agreed to purchase the
stock of American Dental;
WHEREAS, Safeguard, American Dental, Dr. Davenport, Dr. Rinker, William N.
Rees, Jr. and T.R.C. Agency, Inc. have entered into a letter agreement dated as
of August 9, 1996 (the "LETTER AGREEMENT") which amends certain provisions of
the Stock Purchase Agreement;
WHEREAS, pursuant to Section 6.2 of the Stock Purchase Agreement, American
Dental, Metroplex, Dr. Davenport and Dr. Rinker are required to execute and
deliver this Assignment and Assumption Agreement whereby Metroplex assigns to
American Dental and American Dental assumes from Metroplex the Contracts (as
defined below) and any and all obligations associated with the Contracts that
arise out of the ownership of the Contracts after the closing (other than as
provided herein);
NOW, THEREFORE, in consideration of the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Metroplex hereby assigns to American Dental all its right, title and
interest in and to the contracts (the "CONTRACTS") set forth on Exhibit A
hereto.
2. American Dental hereby undertakes and agrees from and after the
Closing, subject to the limitations contained herein, to assume and to pay,
perform and discharge when due the liabilities (the "LIABILITIES") arising out
of American Dental's ownership of the Contracts after the Closing. American
Dental shall discharge in a timely manner or make adequate provision for all of
such Liabilities, PROVIDED that American Dental shall have no responsibility or
liability for any Liabilities for which the related revenues attributable to
such Contracts have not been retained for the payment of the corresponding
capitation and commission payments due thereafter; and PROVIDED further, the
ability to contest in good faith, any such claim of liability asserted in
respect thereof.
<PAGE>
3. Except for the Liabilities assumed in paragraph 2. above, American
Dental shall not assume by this Assignment and Assumption Agreement or by virtue
of the transactions contemplated by the Stock Purchase Agreement, and shall have
no liability for any liabilities arising prior to the Closing Date with respect
to the Contracts or the business of Metroplex, or for commissions or capitation
owing in connection with the Contracts for which the related revenues have not
been retained for payment against such liability (collectively, the "EXCLUDED
LIABILITIES"). Metroplex shall pay, perform and discharge, when due, all of the
Excluded Liabilities.
4. No persons other than American Dental, Metroplex, Dr. Davenport and
Dr. Rinker, their successors and assigns shall have any rights under this
Assignment and Assumption Agreement of the provisions contained herein.
5. This Assignment and Assumption Agreement may be executed in any number
of counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
6. This Assignment and Assumption Agreement shall be governed by and
construed in accordance with the laws of the State of Texas applicable to a
contract executed and performed in such State without giving effect to the
applicable conflicts of laws principles thereof.
7. The terms of the Stock Purchase Agreement and Letter Agreement shall
be incorporated by reference in their entirety into this Assignment and
Assumption Agreement, as if such terms were expressly set forth herein. In the
event of any conflict between the provisions of this Agreement and the Stock
Purchase Agreement or Letter Agreement with respect to the matters contained
herein, the terms of this Agreement shall control.
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Assignment and Assumption
Agreement to be entered into as of the date first written above.
D AND R DENTAL SERVICES GROUP
(METROPLEX DENTAL GROUP/IRVING L.L.P.)
By: American Dental Benefits Group, Inc.
Title: Sole General Partner
By: JAMES L. DAVENPORT, D.D.S
----------------------------------
Name: James L. Davenport, D.D.S.
Title: President and Secretary
FIRST AMERICAN DENTAL BENEFITS, INC.
By: JAMES L. DAVENPORT, D.D.S
---------------------------------------
Name: James L. Davenport, D.D.S.
Title: Chairman of the Board and Chief Executive
Officer
By: Martin J. Rinker,D.D.S.
---------------------------------------
Name: MARTIN J. RINKER, D.D.S.
Title: Vice President and Secretary/Treasurer
By: JAMES L. DAVENPORT, D.D.S.
-----------------------------------
JAMES L. DAVENPORT, D.D.S.
By: MARTIN J. RINKER,D.D.S.
-----------------------------------
MARTIN J. RINKER, D.D.S.
3
<PAGE>
EXECUTION COPY
STOCK PURCHASE AGREEMENT
BY AND AMONG
SAFEGUARD HEALTH ENTERPRISES, INC.
(AS BUYER)
AND
T.R.C. AGENCY, INC.
(THE COMPANY)
AND
JAMES L. DAVENPORT, D.D.S.,
AND
MARTIN J. RINKER, D.D.S.,
(AS SELLING SHAREHOLDERS)
DATED AS OF AUGUST 9, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I TRANSFER OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 Sale of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 Purchase Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.3 Payment of Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.4 Shareholders to Deliver Title and Possession. . . . . . . . . . . . . . . . . . .2
1.5 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS . . . . . .2
2.1 Organization and Qualification. . . . . . . . . . . . . . . . . . . . . . . . . .2
2.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.3 Voting Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.4 Authority Relative to this Agreement. . . . . . . . . . . . . . . . . . . . . . .3
2.5 No Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.6 Absence of Certain Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.7 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.8 Absence of Undisclosed Liabilities. . . . . . . . . . . . . . . . . . . . . . . .4
2.9 Consents and Approvals; No Violation. . . . . . . . . . . . . . . . . . . . . . .5
2.10 Broker's Commissions or Finder's Fees. . . . . . . . . . . . . . . . . . . . . .5
2.11 Employment and Similar Agreements. . . . . . . . . . . . . . . . . . . . . . . .6
2.12 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
2.13 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
2.14 ERISA Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
2.15 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
2.16 Commission Arrangements and Sales. . . . . . . . . . . . . . . . . . . . . . . .10
2.17 Customer List. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
2.18 Interests in Competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
2.19 Properties, Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
2.20 Real Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
2.21 Permits; Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . . .11
2.22 Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.23 Environmental Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.24 Banking Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.25 Minute Books and Stock Records.. . . . . . . . . . . . . . . . . . . . . . . . .12
2.26 Consents of Non-Governmental Third Parties . . . . . . . . . . . . . . . . . . .12
2.27 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
2.28 Trademarks; Tradenames . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
2.29 Probable Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
2.30 Transactions with Related Parties. . . . . . . . . . . . . . . . . . . . . . . .12
2.31 Compliance with Insurance Laws . . . . . . . . . . . . . . . . . . . . . . . . .13
2.32 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
2.33 Representations and Warranties True. . . . . . . . . . . . . . . . . . . . . . .13
</TABLE>
i
Stock Purchase Agreement
TRC Agency
OA962220.090
<PAGE>
<TABLE>
<S> <C>
ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER. . . . . . . . . . . . . . . . . . . .14
3.1 Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
3.2 Authority Relative to this Agreement. . . . . . . . . . . . . . . . . . . . . . .14
3.3 Consent and Approvals; No Violation . . . . . . . . . . . . . . . . . . . . . . .14
3.4 Broker's Commissions or Finder's Fees . . . . . . . . . . . . . . . . . . . . . .15
3.5 Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
3.6 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
ARTICLE IV CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO CLOSING . . . . . . . . . . . . . .15
4.1 Ordinary Course . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
4.2 Dividends; Changes in Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .15
4.3 Issuance or Repurchase of Securities. . . . . . . . . . . . . . . . . . . . . . .15
4.4 Governing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
4.5 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
4.6 No Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
4.7 No Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
4.8 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
4.9 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
4.10 Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
4.11 Additional Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
ARTICLE V ADDITIONAL COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
5.1 Confidential Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
(a) Nondisclosure by Shareholders. . . . . . . . . . . . . . . . . . . . . . . .18
(b) Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
(c) Nondisclosure by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . .19
(d) Return of Information. . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.2 Governmental Filings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.3 Legal Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
5.4 Certain Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
5.5 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
5.6 Access to Information and Diligence Review. . . . . . . . . . . . . . . . . . . .20
5.7 Additional Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
5.8 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
5.9 Further Conveyances, Assurances and Cooperation . . . . . . . . . . . . . . . . .24
ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PARTIES. . . . . . . . . . . . . . .25
6.1 Conditions to the Obligations of Buyer, the Company and the Shareholders. . . . .25
(a) Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . .25
(b) Legal Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
(c) Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
(d) Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
(e) Satisfaction of American Dental Conditions . . . . . . . . . . . . . . . . .25
6.2 Further Conditions to the Obligations of Buyer. . . . . . . . . . . . . . . . . .26
(a) Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . .26
(b) Performance of Obligations of Other Parties. . . . . . . . . . . . . . . . .26
(c) No Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
(d) No Adverse Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
(e) Spousal Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
(f) Third-Party Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . .26
(g) Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
(h) Board and Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . .26
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
(i) Financial Statements Audit . . . . . . . . . . . . . . . . . . . . . . . . .26
(j) Financial Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
(k) Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
(l) Agreement Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . .27
(m) Employment Arrangements. . . . . . . . . . . . . . . . . . . . . . . . . . .27
(n) Payment and Release of Liens . . . . . . . . . . . . . . . . . . . . . . . .27
6.3 Further Conditions to the Obligations of the Company and the Shareholders . . . .27
(a) Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . .27
(b) Performance of Obligations of Other Parties. . . . . . . . . . . . . . . . .28
(c) Third-Party Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . .28
ARTICLE VII TERMINATION, EXTENSION AND WAIVER. . . . . . . . . . . . . . . . . . . . . . .28
7.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
(a) By Mutual Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
(b) By Any Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
(c) By Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
(d) By the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
7.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
7.3 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
ARTICLE VIII INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
8.1 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
(a) Indemnification by the Shareholders. . . . . . . . . . . . . . . . . . . . .29
(b) Indemnification by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . .30
(c) Definition of Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
8.2 Third Party Claims Notice and Opportunity to Settle . . . . . . . . . . . . . . .31
8.3 Right to Offset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
8.4 Non-Third Party Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
8.5 Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
ARTICLE IX DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
9.1 Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
9.2 Arbitrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
9.3 Pre-Hearing Conference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
9.4 Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
9.5 Briefs and Hearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
9.6 Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
9.7 Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
ARTICLE X GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
10.1 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . .35
10.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
10.3 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
10.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
10.5 Integration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
10.6 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
10.7 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
10.8 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
10.9 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
10.10 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
10.11 Transfer Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
</TABLE>
iii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of
August 9, 1996, by and among SAFEGUARD HEALTH ENTERPRISES, INC., a Delaware
corporation ("Buyer"), and T.R.C. AGENCY, INC., a Texas corporation (the
"Company"), and JAMES L. DAVENPORT, D.D.S. ("Dr. Davenport") and MARTIN J.
RINKER, D.D.S. ("Dr. Rinker"), the beneficial and record owners of all of the
outstanding capital stock of the Company (each, a "Shareholder" and
collectively, the "Shareholders").
RECITALS
WHEREAS, the Shareholders own all of the issued and outstanding shares
of capital stock (the "Shares") of the Company;
WHEREAS, the Shareholders desire to sell to Buyer, and Buyer desires
to purchase from the Shareholders, the Shares of the Company on the terms and
conditions set forth herein;
WHEREAS, the Shareholders are also party to that certain Stock
Purchase Agreement (the "American Stock Purchase Agreement") by and among First
American Dental Benefits, Inc. ("American Dental"), the Shareholders, William N.
Rees, Jr. and Buyer dated August 9, 1996; and
WHEREAS, the sale of the Company and American Dental are to occur
simultaneously, with each as a condition precedent to the other.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
ARTICLE I
TRANSFER OF SHARES
1.1 SALE OF SHARES. Subject to the terms and conditions set forth
herein, at the Closing (as defined herein), the Shareholders shall sell,
transfer and deliver to Buyer, and Buyer shall purchase and acquire from the
Shareholders, all of the Shares of the Company, free and clear of any claims,
liens, pledges, options, encumbrances, security interests, trusts or other
rights or interests of any person.
1.2 PURCHASE PRICE. The aggregate purchase price to be paid by Buyer
for the Shares of the Company, in the manner provided in SECTION 1.3, will equal
Eight Million Dollars ($8,000,000) (the "Purchase Price").
Stock Purchase Agreement
TRC Agency
OA962220.090
<PAGE>
1.3 PAYMENT OF PURCHASE PRICE. The Purchase Price shall be paid by
Buyer to Shareholders in equal amounts at the Closing.
1.4 SHAREHOLDERS TO DELIVER TITLE AND POSSESSION. At the Closing,
the Shareholders shall deliver to Buyer endorsed share certificates or executed
stock powers and other good and sufficient instruments of transfer as Buyer may
reasonably require to vest effectively in Buyer good and valid title to the
Shares of the Company, free and clear of any claims, liens, pledges, options,
security interests, trusts, encumbrances or other rights or interests of any
person, in accordance with the terms hereof.
1.5 CLOSING. The consummation of the transactions contemplated by
this Agreement (the "Closing") shall take place on August 30, 1996, or on the
fifth (5th) business day following the date on which all conditions precedent to
the obligations of the parties hereunder and under the American Stock Purchase
Agreement have been satisfied or waived, whichever is the later to occur (the
"Closing Date"), at the offices of Gibson, Dunn & Crutcher LLP, Jamboree Center,
4 Park Plaza, Suite 1700, Irvine, California 92614 or at such other date, time
and place as may be mutually agreed upon in writing by the parties. All
proceedings to take place at the Closing shall take place simultaneously, and no
delivery shall be considered to have been made until all such proceedings have
been completed.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY AND THE SHAREHOLDERS
The Company, Dr. Davenport and Dr. Rinker jointly and severally
represent and warrant (except with respect to the representations and warranties
set forth in Sections 2.2 and 2.3, the last sentence of Section 2.4, and the
second sentence of Section 2.13(f), which are made by each such Shareholder
severally and not jointly) to Buyer as follows:
2.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly organized, validly existing and in good standing in the State of Texas, is
duly qualified to do business as a foreign corporation and is in good standing
in each jurisdiction in which the character of its properties or the nature of
its business makes such qualification necessary, except in jurisdictions, if
any, where the failure to be so qualified (a) would not result in a Material
Adverse Change (as defined below) or (b) would not result in a breach of any of
the other representations, warranties or covenants set forth in this Agreement.
The Company has the requisite corporate power and authority to own, use or lease
its properties and to carry on its business as it is now being conducted and as
it is now proposed to be conducted. The Company has made available to Buyer a
complete and correct copy of its Articles of Incorporation and Bylaws, each as
amended to date, and such Articles of Incorporation and Bylaws as so delivered
are in full force and effect. The Company is not in default in any material
respect in the performance, observation or fulfillment of any provision of its
Articles of Incorporation or Bylaws. For purposes of this Agreement, a
"Material Adverse Change" shall mean any event, circumstance, condition,
development or occurrence causing, resulting in or having a material adverse
effect on the financial condition, business, properties, prospects or results of
operations of the Company.
2
<PAGE>
2.2 CAPITALIZATION. The authorized capital stock of the Company
consists solely of 100,000 shares of common stock, $1.00 par value, of which,
1,000 shares are issued and outstanding. The Shares of the Company are owned
beneficially and of record by the Shareholders as set forth on SCHEDULE 2.2,
free and clear of any claims, liens, pledges, options, security interests,
trusts, encumbrances or other rights or interests of any person. No agreement
or other document grants or imposes on any of the Shares of the Company any
right, preference, privilege or restriction with respect to the transaction
contemplated hereby (including, without limitation, any rights of first
refusal). All of the Shares of the Company have been duly authorized and
validly issued and are fully paid, nonassessable and free of preemptive rights
created by any agreement to which the Company is bound. The Shares have been
issued in full compliance with all federal and state securities laws. There are
no options, warrants or other rights, commitments or agreements of any character
that call for the issuance of shares of capital stock or other securities of the
Company or any securities, instruments or rights convertible into or
exchangeable for shares of capital stock or other securities of the Company.
The Shareholders have the absolute and unrestricted right, power, authority and
capacity to transfer the Shares of the Company to Buyer and upon the Closing,
without exception, Buyer will acquire from the Shareholders legal and beneficial
ownership of, good and valid title to, and all rights to vote, the Shares of the
Company, free from any charge, lien, encumbrance or adverse claim of any kind
whatsoever other than those that may arise by virtue of any actions (other than
the purchase of shares contemplated hereby), taken by or on behalf of Buyer or
its affiliates.
2.3 VOTING AGREEMENTS. Neither the Company nor any Shareholder is a
party to or subject to any proxy, agreement or understanding, nor is there, to
the knowledge of the Company and the Shareholders, any agreement or
understanding between any other persons, that affects or relates to the voting
or giving of written consents with respect to any security of the Company or the
voting by a director of the Company.
2.4 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has all
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby on the part of the Company have been duly and validly authorized by its
Board of Directors and the Shareholders, and no other corporate proceedings on
the part of the Company is necessary, as a matter of law or otherwise, to
authorize this Agreement or to consummate the transactions so contemplated.
This Agreement has been duly and validly executed and delivered by the Company
and the Shareholders and, assuming this Agreement constitutes a valid and
binding obligation of Buyer, this Agreement constitutes a valid and binding
agreement of such persons or entities, enforceable against them in accordance
with its terms, except (a) as such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights, and (b) as the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
2.5 NO SUBSIDIARIES. The Company does not control, directly or
indirectly, nor does it have any direct or indirect equity participation or
other interest in, any corporation, partnership, trust or other business entity.
3
<PAGE>
2.6 ABSENCE OF CERTAIN CHANGES. Since May 31, 1996, the Company has
conducted its business only in, and has not engaged in any transaction other
than according to, the ordinary and usual course of its business and, since such
date, there has not been (a) any Material Adverse Change; (b) any declaration,
setting aside or payment of any dividend or other distribution with respect to
the capital stock of the Company; (c) any material change by the Company in
accounting principles, practices or methods; (d) any labor dispute or difficulty
which is reasonably likely to result in any Material Adverse Change, and to the
knowledge of each of the Company and the Shareholders, no such dispute or
difficulty is now threatened; (e) any material asset sold or disposed of (except
inventory sold in the ordinary course of business), any material asset
mortgaged, pledged or subjected to any lien, charge or other encumbrance;
(f) any increase in excess of $5,000 in the compensation payable or which could
become payable by the Company to its directors, officers, employees, agents,
distributors, dealers or sales representatives; (g) any amendment by the Company
of any employee benefit plan; (h) any issuance, transfer, sale or pledge by the
Company of any shares of stock or other securities or of any commitments,
options, rights or privileges under which the Company is or may become obligated
to issue any shares of stock or other securities; (i) any indebtedness incurred
by the Company, except such as may have been incurred in the ordinary course of
business and consistent with past practice; (j) any loan made or agreed to be
made by the Company, nor has the Company become liable or agreed to become
liable as a guarantor with respect to any loan; (k) any waiver or release by the
Company of any right of material value or any payment, direct or indirect, of
any material debt, liability or other obligation; (l) any change in or amendment
to the Articles of Incorporation or Bylaws of the Company; or (m) any other
event or condition that has or might reasonably result in a Material Adverse
Change.
2.7 FINANCIAL STATEMENTS. The audited balance sheets of the Company
as of December 31, 1995 and the related statements of income and cash flow for
the twelve month periods then ended (collectively, the "1995 Financial
Statements") are attached hereto as SCHEDULE 2.7. The 1995 Financial Statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the period indicated (except as may be
noted therein) ("GAAP"), and present fairly the financial position of the
Company as of the end of such fiscal year and the results of operations and cash
flows for such fiscal year in conformity with GAAP. The interim audited
financial statements of the Company as of and for the six (6) months ended June
30, 1996 (also attached hereto as SCHEDULE 2.7) have been prepared in accordance
with GAAP consistent with the 1995 Financial Statements, and present fairly the
financial position of the Company as of the end of such period and the results
of operations and cash flows for such period in conformity with GAAP, except
that such interim financial statements may not contain all footnotes or other
textual disclosure required by GAAP and are subject to normal recurring year-end
audit adjustments. The interim financial statements for the six (6) months
ended June 30, 1996 are referred to herein as the "Interim Financial Statements"
and the l995 Financial Statements and Interim Financial Statements are
collectively referred to herein as the "Financial Statements."
2.8 ABSENCE OF UNDISCLOSED LIABILITIES.
(a) Except to the extent reserved against or reflected in the
balance sheet of the Company included in the Interim Financial Statements,
the Company does not
4
<PAGE>
have any material liabilities or obligations (contingent or otherwise) that
are required by GAAP to be reflected therein, and since that date the
Company has not incurred any material liabilities or obligations that, had
they been incurred prior to June 30, 1996, would have been required by GAAP
to have been reflected in such balance sheets (except as may be noted
therein), except such liabilities or obligations incurred in the ordinary
and usual course of business and consistent with past practice.
(b) The Company will not be liable for prepayment or other
penalties in connection with the early retirement of any indebtedness for
borrowed money.
2.9 CONSENTS AND APPROVALS; NO VIOLATION. The execution and delivery
of this Agreement by the Company and the Shareholders, the consummation of the
transactions contemplated hereby and the performance by the Company and the
Shareholders of their obligations hereunder will not:
(a) conflict with any provision of the Articles of Incorporation
or Bylaws (or other similar charter documents) of the Company;
(b) require any consent, approval, authorization or permit of,
or filing with or notification to, any governmental or regulatory
authority, except (i) the Governmental Filings (as defined in SECTION 5.2)
(ii) compliance with any applicable requirements of the Securities Act of
1933; (iii) compliance with any applicable requirements of the Securities
Exchange Act of 1934; (iv) compliance with any applicable state securities
laws; and (v) where the failure to obtain such consents, approvals,
authorizations or permits or the failure to make such filings or
notifications would not result in a Material Adverse Change;
(c) conflict with, result in the breach of or constitute a
default (or give rise to any right of termination, cancellation or
acceleration or guaranteed payments) under any of the terms, conditions or
provisions of any note, lease, mortgage, license, agreement or other
instrument or obligation to which the Company or any of the Shareholders is
a party or by which the Company or any of its Shareholders or any of its
assets may be bound, except for such defaults (or rights of termination,
cancellation or acceleration) as to which requisite waivers or consents
have been obtained or which, in the aggregate, would not result in a
Material Adverse Change;
(d) conflict with or violate the provisions of any order, writ,
injunction, judgment, decree, statute, rule or regulation applicable to the
Company or any of the Shareholders; or
(e) result in the creation of any lien, charge or encumbrance
upon any shares of capital stock or assets of the Company under any
agreement or instrument to which the Company is a party or by which the
Company is bound.
2.10 BROKER'S COMMISSIONS OR FINDER'S FEES. The parties acknowledge
that the Company enlisted the services of Ed Reese ("Finder") to act for the
Company and the
5
<PAGE>
Shareholders in connection with the transactions provided for in this Agreement.
The Company and the Shareholders shall be solely responsible for the payment of
all finder's fees or other similar fees or commissions due to Finder in
connection with this Agreement.
2.11 EMPLOYMENT AND SIMILAR AGREEMENTS. There are (a) no employment,
severance, bonus or indemnification arrangements, agreements, understandings or
plans between the Company and any director, officer or employee thereof except
those indemnification provisions set forth in the Articles of Incorporation and
Bylaws of the Company; (b) no agreements of the type described in (a) above
(i) providing benefits which are contingent, or the terms of which are altered,
upon the occurrence of a transaction involving the Company of the nature of any
of the transactions contemplated by this Agreement, (ii) providing any term of
employment or compensation guaranty not terminable at any time upon notice of
thirty (30) days or less or (iii) providing severance benefits or other benefits
(which are conditioned upon a change in control) after the termination of
employment of such employee, regardless of the reason for such termination of
employment; (c) no agreements or plans, any of the benefits of which will be
materially increased, or the vesting of benefits of which will be materially
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement; (d) subject to
general principles related to wrongful termination of employees, no officers or
employees of the Company whose employment is not terminable at the will of the
Company.
The Company (a) is not obligated to compensate any consultants
pursuant to any agreement or arrangement which is material to the Company;
(b) is not a party to, nor is it bound by, any collective bargaining agreement
or other labor agreement; (c) is not involved in any labor discussion with any
unit or group seeking to become the bargaining unit for any of its employees;
and (d) has not been notified by any such unit or group of an intention to
commence any organizational activities among the employees of the Company.
2.12 LITIGATION. Except as set forth on SCHEDULE 2.12, there is no
claim, action or proceeding pending or, to the knowledge of the Company or the
Shareholders, threatened against or relating to the Company before any court or
other competent governmental or regulatory authority or body acting in an
adjudicative capacity. To the knowledge of the Company and the Shareholders,
there is no reasonable basis for a claim, action or proceeding against or
relating to the Company which, if adversely determined, could, individually or
in the aggregate, reasonably be expected to result in a Material Adverse Change
with respect to the Company. Neither the Company nor any of its respective
officers, directors or employees, has been permanently or temporarily enjoined
by any order, judgment or decree of any court or any other governmental or
regulatory authority from engaging in or continuing any conduct or practice in
connection with the business, assets or properties of the Company nor, to the
knowledge of the Company or the Shareholders, is any officer, director or
employee of the Company under investigation by any governmental or regulatory
authority. Except as set forth on SCHEDULE 2.12, there is not in existence any
order, judgment or decree of any court or other tribunal or other agency
enjoining or requiring the Company to take any action of any kind with respect
to its business, assets or properties.
6
<PAGE>
2.13 TAXES.
(a) DEFINITIONS. For purposes of this Agreement, the following
definitions shall apply:
(i) For purposes of this Section 2.13, the term "Company"
shall mean, collectively, the Company and any corporation, partnership or
other entity as to which the Company is liable for Taxes incurred by such
entity as a transferee, or pursuant to Treasury Regulations
Sections 1.1502-6, or pursuant to any other provision of federal, state,
local or foreign law or regulations.
(ii) The term "Tax" or "Taxes" shall mean all taxes,
however, denominated, including any interest, penalties or other additions
to tax that may become payable in respect thereof, imposed by any federal,
state, local or foreign government or any agency or political subdivision
of any such government, which taxes shall include, without limiting the
generality of the foregoing, all income or profits taxes (including, but
not limited to, federal income taxes and state income taxes), real property
gains taxes, payroll and employee withholding taxes, unemployment insurance
taxes, social security taxes, sales and use taxes, ad valorem taxes,
occupation taxes, real and personal property taxes, stamp taxes,
environmental taxes, transfer taxes, workers' compensation and other
governmental charges, and other obligations of the same or of a similar
nature to any of the foregoing, which the Company is required to pay,
withhold or collect.
(iii) The term "Tax Returns" shall mean all reports,
estimates, declarations of estimated tax, information statements and
returns, including any and all schedules or attachments thereto, relating
to, or required to be filed in connection with, any Taxes, including
information returns or reports with respect to backup withholding and other
payments to third parties.
(b) TAX RETURNS FILED AND TAXES PAID. Except as disclosed on
SCHEDULE 2.13, all Tax Returns required to be filed by or on behalf of the
Company have been duly filed on a timely basis and such Tax Returns are
true, complete and correct. All Taxes shown to be payable on the Tax
Returns or on subsequent assessments with respect thereto have been paid in
full on a timely basis and no other Taxes are payable by the Company with
respect to items or periods covered by such Tax Returns (whether or not
shown on or reportable on such Tax Returns) or with respect to any period
prior to the date of this Agreement. The Company has withheld and paid
over all Taxes required to have been withheld and paid over, and complied
with all information reporting and backup withholding requirements,
including maintenance of required records with respect thereto, in
connection with amounts paid or owing to any employee, creditor,
independent contractor, or other third party. There are no liens on any of
the assets of the Company with respect to Taxes, other than liens for Taxes
not yet due and payable or for Taxes that the Company is contesting in good
faith through appropriate proceedings and for which appropriate reserves
have been established.
7
<PAGE>
(c) TAX RETURNS FURNISHED. Buyer has been furnished by the
Company true and complete copies of (i) all relevant portions of income tax
examination or audit reports, statements of deficiencies, closing or other
agreements received by the Company or on behalf of the Company relating to
Taxes, and (ii) all federal and state income or franchise tax returns for
the Company for all periods ending on and after January 1, 1991. The
Company has never been a member of an affiliated group filing consolidated
returns. The Company does no business in nor derives income from any
state, local or foreign taxing jurisdiction other than those for which all
Tax Returns have been furnished to Buyer.
(d) TAX DEFICIENCIES: AUDITS, STATUTES OF LIMITATIONS. Except
as specified in SCHEDULE 2.13, the Tax Returns of the Company have never
been audited by a government or taxing authority, nor is any such audit in
process, pending or threatened; no deficiencies exist or have been asserted
or are expected to be asserted with respect to Taxes of the Company, and
the Company has not received notice nor expects to receive notice that it
has not filed a Tax Return or paid Taxes required to be filed or paid by
it; the Company is neither a party to any action or proceeding for
assessment or collection of Taxes, nor has such event been asserted or
threatened against the Company or any of its assets; and no waiver or
extension of any statute of limitations is in effect with respect to Taxes
or Tax Returns of the Company.
(e) TAX SHARING AGREEMENTS. The Company is not (nor has it ever
been) a party to any tax sharing agreement and has not assumed the Tax
liability of any other person under contract.
(f) TAX ELECTIONS AND SPECIAL TAX STATUS.
(i) S CORPORATION DEFINED. As used herein the term "S
corporation" means, with respect to any specified period, a corporation
(A) that has in effect throughout such period a valid election under
Section 1362(a) of the Internal Revenue Code of 1986, as amended (the
"Code") to be an S corporation which is, and whose shareholders are,
subject to the tax treatment provided for under the provisions of
Sections 1361 ET SEQ. of the Code, and (B) that remains qualified
throughout such period to be, and is treated throughout such period as, an
S corporation which is, and whose shareholders are, subject to the tax
treatment provided for under Sections 1361 ET SEQ. of the Code.
(ii) S CORPORATION STATUS. The taxable year of the Company
for federal and state income tax purposes is the calendar year ending each
December 31. For the Company's taxable years prior to the 1994 year, for
federal tax purposes the Company was not an S corporation. For the 1994
and 1995 taxable years, and for the 1996 period through to the date of this
Agreement, the Company was and is an S corporation. For all periods with
respect to which the Company has been an S corporation, for federal tax
purposes the Company's Tax Returns have been prepared and filed on a basis
consistent with its status as an S corporation.
8
<PAGE>
(iii) OTHER MATTERS. The Company is not nor has it ever
been a United States real property holding corporation within the meaning
of Section 897(c)(2) of the Code and Buyer is not required to withhold tax
on the purchase of the stock of Company by reason of Section 1445 of the
Code. No Shareholder is a "foreign person" (as that term is defined in
Section 1445 of the Code). The Company is not a "consenting corporation"
under Section 341(f) of the Code. The Company has not entered into any
compensatory agreements with respect to the performance of services which
payment thereunder would result in a nondeductible expense pursuant to
Section 280G of the Code or an excise tax to the recipient of such payment
pursuant to Section 4999 of the Code. The Company has not agreed, nor is
it required to make, any adjustment under Code Section 481(a) by reason of
a change in accounting method or otherwise.
(g) TAX BASIS AND TAX ATTRIBUTES. The disclosure schedules and
other books and records of the Company furnished to Buyer contain accurate
and complete descriptions of the Company's basis in its assets, current and
accumulated earnings and profits, tax carryovers, and tax elections. The
Company has no net operating losses or other tax attributes presently
subject to limitation under Code Sections 382, 383, or 384.
2.14 ERISA PLANS. There are no employee pension benefit plans,
programs, agreements or arrangements ("Plans") maintained or contributed to by
the Company which are subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA").
2.15 CONTRACTS. Set forth on SCHEDULE 2.15 is a true and complete
list of (a) each customer contract, whether written or oral, between each of the
Company and any party to whom the Company provides goods or services; and
(b) each contract, whether written or oral, between each of the Company and any
party to whom the Company is obligated to make any payments. The contracts and
agreements that are required to be identified in SCHEDULE 2.15 are hereinafter
referred to as the "Contracts." The Company has delivered to Buyer (i) with
respect to the agency contracts of the Company, a standard form of such
contract; and (ii) true and complete written summaries of each oral Contract.
The Company has made available to Buyer true and complete copies of each written
Contract. Except as set forth on SCHEDULE 2.15:
(i) Each of the Contracts is a valid, binding and enforceable
agreement of the Company and, to the knowledge of the Company and the
Shareholders, will, subject to the satisfaction of the conditions in
ARTICLE VI, continue to be valid, binding and enforceable immediately after
the Closing;
(ii) As of the date hereof, the Company and the Shareholders have
no reason to believe that the Company will not be able to fulfill in all
material respects all of its obligations under the Contracts that remain to
be performed after the date hereof;
(iii) To the knowledge of the Company and the Shareholders,
there has not occurred any material default (or event which upon provision
of notice or lapse of time or both would become such a default) under any
of the material Contracts on the part of the Company; and
9
<PAGE>
(iv) The Contracts are all of the agreements, promissory notes,
contracts and instruments (except employment agreements, which are set
forth on SCHEDULE 2.11) that are material to the Company or its business.
2.16 COMMISSION ARRANGEMENTS AND SALES. Set forth on SCHEDULE 2.16
(such Schedule to be delivered at Closing) is a true and complete list of all of
the agents receiving commissions from the Company, together with summaries of
the commissions paid such agent during the past two (2) most recent calendar
years and through the Closing Date. None of such agents has given notice to the
Company of an intention to terminate or materially impair its business
relationship with the Company and neither the Company nor its Shareholders have
any knowledge of any event that would precipitate the impairment, cancellation
or termination of, or the failure to renew, or entitle any such agent to
terminate, such business relationship. The Company has paid all commissions due
to such agents other than commissions which become due and payable after the
Closing Date and for which the related revenues have been retained in American
Dental for their payment.
2.17 CUSTOMER LIST. The Company has taken all reasonable security
measures to protect the secrecy, confidentiality and value of its customer
lists. Employees and any other person who, either alone or in concert with
others, have knowledge of or access to the customer list, have been put on
notice and, if appropriate, have entered into agreements that the customer list
is proprietary and not to be divulged or misused.
2.18 INTERESTS IN COMPETITORS. Except as identified in SCHEDULE 2.18,
to the knowledge of the Company and the Shareholders, none of the Shareholders,
nor any employees, spouses or children of them, has any direct or indirect
interest in any competitor, supplier or customer of the Company or in any person
or firm from whom or to whom the Company leases any real or personal property,
or in any other person with whom the Company is doing business.
2.19 PROPERTIES, LIENS. Except for statutory liens (including
mechanics and materialmen's liens) and liens for current taxes not yet
delinquent, the Company owns, free and clear of any liens, claims, charges,
options or other encumbrances, all of its tangible and intangible property, real
and personal, whether or not reflected in the Interim Financial Statements
(except property sold or disposed of in the ordinary course of business since
December 31, 1995) and all such property acquired since such date that is
necessary to conduct its business as it is now being conducted, and to the
knowledge of the Company and the Shareholders, there has not been any violation
of any law, regulation or ordinance relating to its properties or its business
that may reasonably be expected to result in a Material Adverse Change. All
plants, structures, equipment, furniture and automobiles owned or leased by the
Company and material to the operation of its business are in satisfactory
condition (ordinary wear and tear excepted) and repair for the requirements of
its business as now being conducted. There are no proceedings affecting any of
such properties pending or, to the knowledge of the Company or the Shareholders,
threatened which may reasonably be expected to curtail, materially and
adversely, the use of such property for the purpose for which it was acquired or
the purpose for which it is now used.
2.20 REAL PROPERTY. There is no real property owned and/or leased by
the Company.
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2.21 PERMITS; COMPLIANCE WITH LAWS. The Company has all necessary
franchises, authorizations, approvals, orders, consents, licenses, certificates,
permits, registrations, qualifications or other rights and privileges, including
without limitation certificates of authority from the Texas Department of
Insurance ("Certificates of Authority") (collectively "Permits"), necessary to
permit it to own its properties and to conduct its business as the same are
presently conducted and all such Permits are in full force and effect and valid.
No Permit is subject to termination as a result of the execution of this
Agreement or consummation of the transaction contemplated hereby. The Company
is in compliance with all applicable statutes, ordinances, orders, rules and
regulations promulgated by any federal, state, municipal or other governmental
authority which apply to the conduct of its business. Since January 1, 1992,
the Company has not ever entered into or been subject to any judgment, consent
decree, compliance order or administrative order with respect to any
environmental or health and safety law or received any request for information,
notice, demand letter, administrative or demand letter, administrative inquiry
or formal or informal complaint or claim with respect to any environmental or
health and safety matter or the enforcement of any such law.
2.22 INSURANCE POLICIES. Set forth on SCHEDULE 2.22 is a true and
correct list of all insurance policies of any nature whatsoever maintained by
the Company. Such policies are in full force and effect through the Closing
Date and, except as otherwise set forth on SCHEDULE 2.22, such policies, or
other policies covering the same risks, have been in full force and effect,
without gaps, continuously for the past five (5) years. Except as disclosed on
SCHEDULE 2.22, there are no claims pending under any of such policies. Copies
of all such policies have been made available to Buyer for its inspection.
2.23 ENVIRONMENTAL LIABILITY. The business of the Company has been
and is now operated in material compliance with all federal, state and local
environmental protection, occupational, health and safety or similar laws,
ordinances, restrictions, licenses, rules, regulations and permit conditions,
including, but not limited to, the Federal Water Pollution Control Act, Resource
Conservation & Recovery Act, Clean Air Act, Comprehensive Environmental
Response, Compensation and Liability Act, Emergency Planning and Community Right
to Know, and Occupational Safety and Health Act, each as amended ("Environmental
Laws").
2.24 BANKING FACILITIES. Set forth on SCHEDULE 2.24 is a true and
complete list of:
(a) Each bank, savings and loan or other institution in which
the Company has a deposit, custodial, trust or similar account or safety
deposit or lock box account and the numbers and types of the accounts or
safety deposit boxes maintained by the Company at such financial
institutions; and
(b) The names of all persons authorized to draw on each such
account or to have access to any such safety deposit or lock box facility,
together with a description of the authority (and conditions thereof, if
any) of each such person with respect thereto.
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All of such bank accounts, bonds or other accounts required of an
insurance agency in Texas are adequate and in compliance with Texas law.
2.25 MINUTE BOOKS AND STOCK RECORDS. The Company has delivered or
made available to Buyer true, correct and complete copies of (a) the minute
books of the Company containing all records required to be set forth of all
proceedings, consents, actions, and meetings of the shareholders and Board of
Directors of the Company, including minutes of meetings for committees of the
Board; and (b) all stock record books of the Company setting forth all transfers
of capital stock.
2.26 CONSENTS OF NON-GOVERNMENTAL THIRD PARTIES. No material consent,
waiver or approval of any non-governmental third party is necessary for the
consummation by the Company or the Shareholders of the transactions contemplated
hereby.
2.27 ACCOUNTS RECEIVABLE. All accounts receivable of the Company
shown on the Interim Financial Statements and all accounts receivable of the
Company created after June 30, 1996 up to the date hereof arose from valid
transactions in the ordinary course of business and such accounts receivable are
(except to the extent of the reserves thereon) collectible in the ordinary
course of business.
2.28 TRADEMARKS; TRADENAMES. Except for the name of the Company and
the name "American Dental Group Agency, Inc.", the dba of the Company, there are
no trademarks, trade names, service marks or copyrights owned by the Company.
The Company has not infringed, nor is it now infringing, on any trade name,
trademark, service mark, or copyright belonging to any other person, firm or
business. Except as set forth in the Contracts, the Company is not a party to
any license, agreement or arrangement, with respect to any trademarks,
servicemarks, trade names, or applications for them, or any copyrights. The
Shareholders covenant that they have not granted and will not grant to any other
person, firm or corporation the right to use the Company's name or dba, and will
not after the Closing use, such names as part of the corporate or firm name of
any other firm, entity, corporation or business. Notwithstanding the foregoing,
the use of the name "American Dental Network, Inc." shall remain the exclusive
property of American Dental Network, Inc. and Dr. Davenport and Dr. Rinker to be
used in connection with their national PPO business.
2.29 PROBABLE SUCCESS. No Shareholder makes any representations or
warranties to Buyer regarding the probable success or profitability of the
business of the Company, provided that the foregoing statement shall not limit
or modify any representation, warranty, covenant, or agreement of the Company or
the Shareholders in this Agreement or in any certificate, instrument, or
document delivered pursuant hereto or in connection herewith.
2.30 TRANSACTIONS WITH RELATED PARTIES. Except as set forth in
SCHEDULE 2.30 hereto, there are no loans, leases or other continuing
transactions between the Company and any present or former stockholder, director
or officer of the Company, or any member of such officer's, director's or
stockholder's immediate family, or any business organization controlled by such
officer, director or stockholder or his or her immediate family. Except as set
forth in SCHEDULE 2.30, no stockholder, director or officer of the Company, or
any of the respective
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spouses or immediate family members, owns directly or indirectly on an
individual or joint basis any material interest in, or serves as an officer or
director or in another similar capacity of, any competitor or supplier of the
Company.
2.31 COMPLIANCE WITH INSURANCE LAWS. Without limiting the
representations and warranties contained elsewhere in this Agreement, except as
set forth in SCHEDULE 2.31:
(a) The Company has since January 1, 1992, made all reports
required under applicable insurance statutes. SCHEDULE 2.31 sets forth the
licenses held by the Company under all applicable insurance or other
similar laws. Other than the licenses listed in SCHEDULE 2.31, the Company
is not required to hold any other license, permit or authorization under
the insurance laws of any state other than the State of Texas to conduct
its business as presently conducted. The Company has all other necessary
Permits of and from all insurance regulatory authorities to conduct its
business as presently conducted.
(b) To the best of the Shareholders' knowledge, the dental plan
products offered and sold by the agents of the Company have been and are
offered and sold in compliance with the requirements of all relevant laws
and regulations, in each case. The Company has not received any
notification from any insurance regulatory authority to the effect that any
additional Permit is needed to be obtained by it. The Company has not
since January 1, 1992, ever, entered into or been subject to any judgment,
consent decree, compliance order or administrative order other than any
issued in the ordinary course of business with respect to any insurance or
other similar law or, other than in the ordinary course of business,
received any request for information, notice, demand letter, administrative
inquiry or formal or informal complaint or claim with respect to any
insurance or other similar law or the enforcement of any such law.
(c) Since January 1, 1992, the Company has not failed to comply
with any applicable statute, ordinance, order, rule or regulation, or
failed to obtain any Permit in the State of Texas, or, to the best
knowledge of the Shareholders, in any jurisdiction other than the State of
Texas in which the Company is conducting or has prior to the date hereof
conducted any activities.
2.32 FULL DISCLOSURE. None of the representations and warranties made
by the Company or the Shareholders, or made in any certificate or memorandum
furnished or to be furnished by any of them or on their behalf, contains or will
contain any untrue statement of a material fact, or omits to state any material
fact necessary to make the statements made, in the light of the circumstances
under which they were made, not misleading.
2.33 REPRESENTATIONS AND WARRANTIES TRUE. All representations and
warranties of the Company and the Shareholders set forth in this Agreement and
in any written statements delivered to Buyer by the Company or any Shareholder
will also be true and correct as of the Closing Date as if made on that date
(except to the extent such representations or warranties speak to a particular
date).
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF BUYER
Buyer represents and warrants to the Company and the Shareholders as
follows:
3.1 ORGANIZATION. Buyer is a corporation duly organized, validly
existing and in good standing in the State of Delaware, is duly qualified to do
business as a foreign corporation and is in good standing in the State of
California. Buyer has the requisite corporate power to own, use or lease its
properties and to carry on its business as it is now being conducted. Buyer has
made available to the Company a complete and correct copy of its Certificate of
Incorporation and Bylaws, each as amended to date, and Buyer's Certificate of
Incorporation and Bylaws as so delivered are in full force and effect. Buyer is
not in default in any material respect in the performance, observation or
fulfillment of any provision of its Certificate of Incorporation or Bylaws.
3.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Buyer has all requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby on
the part of Buyer have been duly and validly authorized by the Board of
Directors of Buyer, and no other corporate proceedings on the part of Buyer are
necessary, as a matter of law or otherwise, to authorize this agreement or to
consummate the transactions so contemplated. This Agreement has been duly and
validly executed and delivered by Buyer and, assuming this Agreement constitutes
a valid and binding obligation of the Company and the Shareholders, this
Agreement constitutes a valid and binding agreement of Buyer, enforceable
against it in accordance with its terms, except (a) as such enforcement may be
subject to bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights, and (b) as the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought.
3.3 CONSENT AND APPROVALS; NO VIOLATION. The execution and delivery
of this Agreement by Buyer, the consummation of the transactions contemplated
hereby and the performance by Buyer of its obligations hereunder, will not:
(a) conflict with any provision of the Certificate of
Incorporation or Bylaws of Buyer;
(b) require any consent, approval, authorization or permit of,
or filing with or notification to, any governmental or regulatory
authority, except (i) the filing of the Governmental Filings (as defined in
SECTION 5.2) and (ii) where the failure to obtain such consents, approvals,
authorizations or permits or the failure to make such filings or
notifications would not have a material adverse effect on the financial
condition, business, properties or results of operations of Buyer; or
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(c) conflict with or violate the provisions of any order, writ,
injunction, judgment, decree, statute, rule or regulation applicable to
Buyer, in such a manner as to result in a material adverse effect on the
financial condition, business, properties or results of operations of
Buyer.
3.4 BROKER'S COMMISSIONS OR FINDER'S FEES. No person or entity has
acted for Buyer in connection with the transactions provided for in this
Agreement in any way that would entitle such person to, and no person or entity
is entitled to, receive from Buyer any broker's commissions or finder's fees (or
other similar fees or commissions) in connection with this Agreement.
3.5 INVESTMENT INTENT. Buyer is acquiring the Shares for its own
account for investment and not with a view to, or for sale or other disposition
in connection with, any distribution of all or any part thereof, except in
compliance with applicable federal and state securities laws.
3.6 LEGAL PROCEEDINGS. There are no legal proceedings pending or, to
the best knowledge of Buyer, threatened seeking to restrain, prohibit, or obtain
damages or other relief in connection with this Agreement or the transactions
contemplated hereby.
ARTICLE IV
CONDUCT OF BUSINESS
BY THE COMPANY PRIOR TO CLOSING
From the date of this Agreement and until the Closing Date or the
earlier termination of this Agreement, the Company and Shareholders agree
(except as expressly contemplated by this Agreement or to the extent that Buyer
shall otherwise consent in writing) as follows:
4.1 ORDINARY COURSE. The Company shall carry on its business in the
usual, regular and ordinary course, in substantially the same manner as
heretofore conducted, and shall use all reasonable efforts consistent with past
practice and policies to preserve intact its present business organization, keep
available the services of its present agents and preserve its relationships with
customers and others having business dealings with it to the end that its
goodwill and ongoing business shall be unimpaired at the Closing Date. The
Company will not adopt any method of accounting that is inconsistent with
generally accepted accounting principles.
4.2 DIVIDENDS; CHANGES IN STOCK. The Company shall not (a) declare
or pay any dividends on or make other distributions in respect of any Shares, or
(b) split, combine or reclassify any Shares or issue or authorize the issuance
of any other securities in respect of, in lieu of or in substitution for any
Shares.
4.3 ISSUANCE OR REPURCHASE OF SECURITIES. Except as otherwise
expressly contemplated by this Agreement, the Company shall not issue, pledge,
deliver, sell, or repurchase any shares of its capital stock of any class, or
any options, warrants or other rights exercisable for or securities convertible
into or exchangeable for, any such shares.
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4.4 GOVERNING DOCUMENTS. The Company shall not adopt any amendment
to its Articles of Incorporation or Bylaws.
4.5 NO SOLICITATION.
(a) Until the closing of the transaction contemplated hereby or
until this Agreement is terminated, neither the Company nor any Shareholder
shall directly or indirectly, nor shall any such party authorize or permit
any director, officer, employee, stockholder, investment banker, finder,
attorney, accountant or other agent or representative to, solicit or
encourage submission of any proposal or offer, or participate or cooperate
in any discussions or negotiations, or enter into any letter of intent,
agreement in principle or other agreement, oral or written, concerning any
merger, sale of substantial assets, business combination, joint venture,
sale or purchase of shares of capital stock or similar transaction
involving the Company (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal").
(b) The Company and the Shareholders shall promptly notify Buyer
in writing if any such Acquisition Proposal is made, and shall in any such
notice, set forth in reasonable detail the identity of the third party, the
terms and conditions of any such Proposal and any other information
requested of it by the third party or in connection therewith.
(c) If (i) Section 4.5(a) of this Agreement is breached, and
(ii) on or before July 31, 1997, either the Company and/or the Shareholders
consummate an Acquisition Proposal, then the Company and its Shareholders
shall pay Buyer a break-up fee in the aggregate amount of Five Hundred
Thousand Dollars ($500,000), less any amounts paid under the American Stock
Purchase Agreement for a breach of the analogous Section in such Agreement,
and reimburse Buyer for any and all reasonable expenses incurred by it in
connection with the transactions contemplated hereby. The Company and each
of the Shareholders shall be jointly and severally liable for the payment
of any such fee.
4.6 NO ACQUISITIONS. The Company shall not acquire or agree to
acquire by merging or consolidating with, or by purchasing a substantial portion
of the assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquire or agree to acquire any capital or other assets which are
material, individually or in the aggregate, to the Company.
4.7 NO DISPOSITIONS. Except for the sale of inventory in the
ordinary course of business and other than pursuant to the requirements of
existing Contracts, the Company shall not sell, lease or otherwise dispose of
any assets which are material, individually or in the aggregate, to the Company.
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4.8 INDEBTEDNESS.
(a) The Company shall not incur, become subject to, or agree to
incur or become subject to, any obligation or liability (absolute or
contingent), except current liabilities incurred, and obligations under
contracts entered into, in the ordinary course of business consistent with
prior practice, and provided specifically that the Company shall not enter
into any material lease or extension of any material lease with respect to
any real or personal property or issue or sell, or guaranty the repayment
of; any debt securities.
(b) The Company shall not pay or be liable for prepayment or
other penalties in connection with the early retirement of any of the
Company's indebtedness for borrowed money.
4.9 EMPLOYEES. Except as expressly contemplated by this Agreement,
the Company shall not make any change in the compensation payable, or to become
payable, to any of its officers, directors, employees, agents or consultants,
enter into or amend any employment, severance, termination or other agreement;
make any loans to any of its officers, directors, employees agents or
consultants; or make any change in its existing borrowing or lending
arrangements for or on behalf of any of such persons, whether contingent on
consummation of the transactions contemplated by this Agreement or otherwise.
4.10 BENEFIT PLANS. The Company shall not (a) pay, agree to pay or
make any accrual or arrangement for payment of any pension, retirement allowance
or other employee benefit pursuant to any existing plan, agreement or
arrangement to any officer, director or employee except in the ordinary course
of business and consistent with past practice or as permitted by this Agreement;
(b) pay or agree to pay or make any accrual or arrangement for payment to any
employees of the Company of any amount relating to unused vacation days;
(c) commit itself to adopt or pay, grant, issue or accrue salary or benefits
pursuant to any additional pension, profit-sharing, bonus, extra compensation,
incentive, deferred compensation, stock purchase, stock option, stock
appreciation right, group insurance, severance pay, retirement or other employee
benefit plan, agreement or arrangement, or any employment or consulting
agreement with or for the benefit of any director, officer, employee, agent or
consultant, whether past or present; or (d) amend in any material respect any
such existing plan, agreement or arrangement.
4.11 ADDITIONAL MATTERS. The Company shall not:
(a) enter into, amend or terminate any agreements, commitments
or contracts which, individually or in the aggregate, are material to the
financial condition or results of operations of the Company;
(b) discharge or satisfy any lien or encumbrance or payment of
any obligation or liability (absolute or contingent) other than current
liabilities in the ordinary course of business;
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(c) cancel or agree to cancel any material debts or claims,
except in each case in the ordinary course of business;
(d) waive any rights of substantial value;
(e) otherwise make any material change in the conduct of the
business or operations of the Company;
(f) settle any tax assessment, litigation or other claims,
relinquish any material contract right or make any equity investments in
third parties; or
(g) agree in writing or otherwise to take any of the foregoing
actions or any action which would constitute a Material Adverse Change or
make any of the representations and warranties of the Company set forth in
this Agreement untrue or incorrect in any material respect.
ARTICLE V
ADDITIONAL COVENANTS
5.1 CONFIDENTIAL INFORMATION.
(a) NONDISCLOSURE BY SHAREHOLDERS. The Shareholders recognize
and acknowledge that they have in the past, currently have, and in the
future may possibly have, access to certain confidential information of the
Company, such as customer lists, specific information relating to the
special needs of particular customers (including knowledge of what products
they are using and are likely to use in the future), sales and financial
records and related data (including pricing information), information and
specifications relating to products proposed by the Company, knowledge of
the Company's sales and marketing techniques, and information regarding
vendors and suppliers of the Company. Each of the Shareholders agrees that
from and after the Closing Date it will not use such confidential
information or disclose such confidential information to any person or
entity for any purpose or reason whatsoever, except to authorized
representatives of Buyer, unless such information becomes known to the
public generally through no fault of the Company or the Shareholders, or
unless the Shareholders are required by law to disclose such information.
If any Shareholder is requested to provide such information pursuant to
requirements of applicable law, he shall notify Buyer as promptly as
possible and shall allow Buyer the opportunity to oppose such request. In
the event of a breach or threatened breach by the Company or a Shareholder
of the provisions of this Section, Buyer shall be entitled to an injunction
restraining the Company or Shareholder from disclosing, in whole or in
part, such confidential information. Nothing herein shall be construed as
prohibiting Buyer from pursuing any other available remedy for such breach
or threatened breach, including the recovery of damages.
(b) REMEDIES. The Shareholders acknowledge and agree that,
because the legal remedies of Buyer may be inadequate in the event of a
breach of any of the covenants set forth in this Section, Buyer may, in its
discretion and in addition to obtaining
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any other remedy or relief available to it (including, without limitation,
damages at law), enforce the provisions of this Section by injunction and
other equitable relief.
(c) NONDISCLOSURE BY BUYER. Buyer agrees that, unless and until
the Closing has been consummated, all Confidential Information (as defined
below) shall be kept confidential by Buyer as required by this subsection
(c); provided, however, that (i) any of such Confidential Information may
be disclosed to such directors, officers, employees, and authorized
representatives of Buyer (collectively, for purposes of this Section,
"Buyer Representatives") as need to know such information for the purpose
of evaluating the transactions contemplated hereby (it being understood
that such Buyer Representatives shall be informed by Buyer of the
confidential nature of such information and shall be required to treat such
information confidentially), (ii) any disclosure of Confidential
Information may be made to the extent to which the Company and the
Shareholders consent in writing, (iii) Confidential Information may be
disclosed by Buyer or any Buyer Representative, to the extent that, in the
opinion of counsel, Buyer or such Buyer Representative is legally compelled
to do so, provided that, prior to making such disclosure and if there is
time to do so, Buyer or such Buyer Representative, as the case may be,
advises and consults with the Company and the Shareholders regarding such
disclosure and provided further that Buyer or such Buyer Representative, as
the case may be, discloses only that portion of the Confidential
Information as is legally required, and (iv) any of such Confidential
Information may be disclosed to any banks or financial institutions or
other prospective investors who agree in writing to comply with the
provisions of this Section. Buyer agrees that none of the Confidential
Information will be used for any purpose other than in connection with the
transactions contemplated hereby. The term "Confidential Information", as
used herein, means all information obtained by or on behalf of Buyer from
the Shareholders or the Company pursuant to this Section and all similar
information obtained from the Company or the Shareholders by or on behalf
of Buyer prior to the date of this Agreement, other than information which
(i) was or becomes generally available to the public other than as a result
of disclosure by Buyer or any Buyer Representative, (ii) was or becomes
available to Buyer on a nonconfidential basis prior to disclosure to Buyer
by the Shareholders or the Company or their respective representatives, or
(iii) was or becomes available to Buyer from a source other than the
Shareholders or the Company and their respective representatives, provided
that such source is not known by Buyer to be bound by a confidentiality
agreement with the Shareholders or the Company. The agreement contained in
this Section 5.1(c) shall terminate upon the Closing.
(d) RETURN OF INFORMATION. If this Agreement is terminated,
Buyer shall promptly return or destroy, and shall use its reasonable best
efforts to cause all Buyer Representatives to promptly return or destroy,
all Confidential Information relating to the Company without retaining any
copies thereof, provided that such portion of the Confidential Information
as consists of notes, compilations, analyses, reports, or other documents
prepared by Buyer or Buyer Representatives shall be destroyed.
5.2 GOVERNMENTAL FILINGS. Each of Buyer, the Company and the
Shareholders agrees to make as promptly as practicable all filings necessary
under any applicable
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federal, state, local and foreign laws and to obtain any required regulatory
approvals, clearances or expirations of waiting periods in connection with the
transactions contemplated by this Agreement (all such filings required to be
made as provided herein are referred to herein collectively as the "Governmental
Filings"). Each party shall use its good faith best efforts, and cause its
counsel to use their good faith best efforts, to cooperate with the other
parties in preparing their respective Governmental Filings and in obtaining all
required regulatory approvals, clearances and expirations of waiting periods.
5.3 LEGAL CONDITIONS. Each of Buyer, the Company and the
Shareholders will take all reasonable actions necessary to comply promptly with
all legal requirements which may be imposed on such party with respect to the
consummation of the transactions contemplated by this Agreement and will
promptly cooperate with and furnish information to such other party or parties
in connection with any such requirements as may be imposed upon such other party
or parties in connection with the consummation of the transactions contemplated
by this Agreement.
5.4 CERTAIN DEFAULTS. The Company will give prompt notice to Buyer
of (a) any notice of default received by it subsequent to the date of this
Agreement and prior to the Closing Date under any material instrument or
material agreement to which it is a party or by which it is bound, which default
would, if not remedied, result in a Material Adverse Change or which would
render materially incomplete or untrue any representation made herein, and
(b) any suit, action or proceeding instituted or, to the knowledge of it,
threatened against or affecting it subsequent to the date of this Agreement and
prior to the Closing Date which, if adversely determined, would result in a
Material Adverse Change or which would render materially incorrect any
representation made herein.
5.5 EXPENSES. Except as provided in Section 10.10 hereof or as
otherwise contemplated herein, whether or not the transactions contemplated by
this Agreement are consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such expense.
5.6 ACCESS TO INFORMATION AND DILIGENCE REVIEW. Between the date of
this Agreement and the Closing Date at Buyer's expense the Company shall
(i) give Buyer and its authorized representatives reasonable access during
normal business hours to all plants, offices, warehouses and other facilities
and to all contracts, internal reports, data processing files and records,
federal, state, local and foreign tax returns and records, commitments, books,
records and affairs of the Company, whether located on the premises of the
office facilities for the Company or at another location, including, without
limitation, the relationship of the Company to its related employee leasing
company; (ii) permit Buyer to make such inspections as it may require,
(iii) cause its officers to furnish to Buyer such financial, operating,
technical and product data and other information with respect to the business
and properties of the Company as Buyer from time to time may request, including
without limitation financial statements and schedules, and (iv) assist and
cooperate with Buyer in the development of integration plans for implementation
by Buyer following the Closing Date; provided, however, that no investigation
pursuant to this Section shall affect or be deemed to modify any representation
or warranty made by the Company or the Shareholders herein and provided further
that the Company shall have the right to have a representative present at all
times.
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5.7 ADDITIONAL ACTIONS. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use all reasonable good faith
efforts to take, or cause to be taken, all reasonable action and to do, or cause
to be done, all things reasonably necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement as promptly as reasonably
practicable. The Company and the Shareholders shall give prompt notice to Buyer
of any material breach of any of their respective covenants hereunder or the
occurrence of any event that is reasonably likely to cause any of their
respective representations and warranties hereunder to become incomplete or
untrue in any material respect.
5.8 TAX MATTERS.
(a) PREPARATION OF TAX RETURNS DUE PRIOR TO CLOSING AND PAYMENT
OF TAXES. The Shareholders and the Company shall take all actions required
to maintain, and shall refrain from taking any actions that would
terminate, the Company's qualification as an S corporation for federal tax
purposes for the period through and including the day immediately preceding
the Closing Date. The Shareholders shall cause the Company to, and the
Company shall, prepare (on a Consistent Basis as that term is defined in
Section 5.8(b)(ii) hereof) and timely file all Tax Returns and amendments
thereto having a due date (not including extensions) on or before the
Closing Date, and all such Tax Returns shall be true, complete and
accurate. Any Tax Return having a due date which has been extended to a
date following the Closing Date, including but not limited to federal and
state income and franchise tax returns for the 1995 calendar year if the
due date therefor has been so extended, shall be subject to the foregoing
covenant. All Taxes shown to be payable by the Company on such Tax Returns
shall be paid in full by the Shareholders prior to the Closing Date and no
Taxes shall be payable by the Company with respect to items or periods
covered by such Tax Returns (whether or not shown on or reportable on such
Tax Returns).
(b) PREPARATION OF 1996 FEDERAL INCOME AND TEXAS FRANCHISE TAX
RETURNS DUE FOLLOWING CLOSING AND PAYMENT OF TAXES.
(i) SHORT PERIOD S CORPORATION RETURN. The parties
acknowledge and agree that Code Section 1362(e)(6)(D) shall be effective as
of the Closing Date and that the Company shall be required to file a short
period return as an S corporation for the period commencing January 1,
1996, and ending on the day immediately preceding the Closing Date (herein
the "Short Period S Return"). Prior to the due date (including extensions)
for such Short Period S Return, Shareholders shall cause to be prepared and
shall submit to Buyer such Short Period S Return. Such Short Period S
Return (A) shall be true, accurate and complete and shall be prepared so as
to report the Company's income, losses, gains, profits, deductions, credits
and other tax items (collectively "Tax Items") consistently with the manner
in which equivalent or comparable Tax Items have been reported by the
Company in Tax Returns filed with respect to prior years but taking into
account any changes to such items heretofore given effect pursuant to
amendments to such prior year Tax Returns or pursuant to adjustments
related to such prior year Tax Returns resulting from tax audits, tax
examinations or other administrative
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or judicial tax proceedings (collectively "Tax Proceedings") which are
final and complete prior to the preparation of such Short Period S Return
(herein such prior year consistency requirement shall be referred to as
preparing and filing 1996 Tax Returns on a "Consistent Basis"), and
(B) shall be prepared based on a closing of the Company's books as of the
Closing Date based on the Company's normal tax accounting methods and in
accordance with the requirements of Code Section 1362(e)(6)(D). Such Short
Period S Return shall be submitted by Shareholders to Buyer on or before
the date that is 60 days prior to the due date (including extensions) for
the filing of such Short Period S Return. On or before the date that is
30 days prior to such due date (including extensions), Buyer shall notify
Shareholders as to whether Buyer agrees that such Short Period S Return has
been properly prepared on a Consistent Basis in accordance with this
Section 5.8(b)(i). If Buyer approves such Short Period S Return, or fails
to provide any notice of objections prior to the expiration of such review
period, the Short Period S Return shall be filed as furnished to Buyer. If
during such review period Buyer shall notify Shareholders that Buyer does
not agree that such Short Period S Return has been properly prepared in
accordance with this Section 5.8(b)(i), the parties shall attempt in good
faith to resolve the Buyer's objections, and if they are unable to resolve
such objections the matter shall be resolved pursuant to the dispute
resolution provisions of Article IX hereof. Upon resolution of such
dispute, and in all events prior to the due date thereof (including
extensions), Buyer shall cause such Short Period S Return to be filed. If
Shareholders shall fail to timely submit to Buyer any such Short Period S
Return prepared in accordance with this Section 5.8(b)(i), Buyer shall
cause such Short Period S Return to be prepared in accordance with this
Section 5.8(b)(i) and timely filed, and any expense incurred by Buyer in
preparing and filing such Short Period S Return shall be paid by
Shareholders. The Shareholders shall pay and discharge on a timely basis
all Taxes shown to be payable by the Company as reflected on such Short
Period S Return and no Taxes shall be payable by the Company with respect
to items or periods covered by such Short Period S Return. Any refunds of
such Taxes, whether pursuant to amended returns or any Tax Proceeding,
shall be paid to and for the benefit of Shareholders. Any additional Taxes
(including interest, penalties and other additions to tax) in excess of the
Taxes reflected on the Short Period S Return which at any time are imposed
upon or against or otherwise become payable by the Company with respect to
the short period, whether as a result of a Tax Proceeding or otherwise,
shall be paid by Shareholders promptly upon demand therefor by Buyer.
(ii) TEXAS FRANCHISE TAX RETURN. For purposes of the Texas
corporate franchise tax, the parties acknowledge and agree that the Company
will be required, with respect to the 1996 year, to file a full year return
(herein the "Full Year Return") reporting and accounting for such Texas
franchise tax on an aggregate basis covering both the 1996 period ending on
the Closing Date (the "Pre-Closing Period") and the 1996 period following
the Closing Date (the "Post-Closing Period"). Prior to the due date
(including extensions) for such Full Year Return, Buyer shall cause the
Company to prepare and timely file such Full Year Return on which all Tax
Items attributable to the Pre-Closing Period shall be reported and
accounted for on a Consistent Basis. Prior to the due date for the payment
of the Taxes shown to be payable by the Company on such Full
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Year Return, the Shareholders shall pay to Buyer the portion of such Taxes
attributable to the Pre-Closing Period. Such portion shall be the amount
of such Taxes as calculated and determined as if the Pre-Closing Period
constituted a short period as to which a short period return were prepared
and filed in accordance with the provisions of Section 5.8(b)(i). Any
refunds of such Taxes, whether pursuant to amended returns or any Tax
Proceeding, shall be paid to and for the benefit of Shareholders. Any
additional Taxes (including interest, penalties and other additions to tax)
attributable to the Pre-Closing Period (as determined in the same manner)
which as a result of any Tax Proceeding or otherwise are imposed upon or
against or otherwise become payable by the Company with respect to the Pre-
Closing Period shall be paid by the Shareholders promptly upon demand
therefor by Buyer.
(iii) On or before the date which is 90 days following
the Closing Date, Buyer shall cause the Company to make available to
Shareholders and their representatives such information pertaining to the
Company as is reasonably required to prepare the Short Period S Return in
accordance with the provisions of Section 5.8(b)(i).
(c) OTHER TAX RETURNS AND TAXES. Prior to the due date
(including extensions) for any other Tax Returns which the Company is
required to file with respect to the 1996 year, Buyer shall cause such Tax
Returns to be prepared and filed. Prior to the due date for the payment of
any Taxes shown to be payable by the Company on any such Tax Returns,
Shareholders shall pay to Buyer the portion of such Taxes attributable to
the Pre-Closing Period. Such portion shall be the amount of such Taxes as
calculated and determined as if the Pre-Closing Period constituted a short
period as to which a short period return were prepared and filed in
accordance with the provisions of Section 5.8(b)(i). Any additional Taxes
(including interest, penalties and other additions to tax) attributable to
the Pre-Closing Period (as determined in the same manner) which as a result
of any Tax Proceeding or otherwise are imposed upon or against or otherwise
become payable by the Company shall be paid by the Shareholders promptly
upon demand therefor by Buyer. The foregoing is intended to implement the
parties' agreement that the Shareholders shall be responsible for the
payment of any Taxes attributable to the Company's activities and
operations during the Pre-Closing Period. The parties further agree that
the Shareholders shall have no liability hereunder with respect to Taxes
attributable to the Company's activities and operations in any Post-Closing
Period. For such purposes, if the Company is a partner in a partnership as
of the Closing Date which has a tax year that does not end as of the
Closing Date, any Tax liability attributable to such partnership's
activities shall be allocated among the Pre-Closing Period and the Post-
Closing Period on a fair and reasonable basis consistent with the
allocation principles underlying this Section 5.8. Notwithstanding the
foregoing, the Shareholders shall not be liable for any Pre-Closing Period
Taxes that are imposed upon the Company with respect to the Pre-Closing
Period solely and directly as a result of changes in the Company's business
and operations following the Closing Date.
(d) TRANSFER TAXES. As used herein the term "Transfer Taxes"
shall mean any Taxes imposed on or with respect to the sale of stock as
contemplated by this Agreement. The Shareholders shall pay all such
Transfer Taxes.
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(e) ACCESS TO RECORDS FOLLOWING CLOSING. Shareholders agree
that so long as any books, records and files retained by Shareholders
relating to the business of Company, to the extent they relate to the
operations of Company prior to the Closing Date, remain in existence and
available, Buyer (at its expense) shall have the right upon prior notice to
inspect and to make copies of the same at any time during business hours
for any proper purpose. Shareholders shall use reasonable efforts not to
destroy or allow the destruction of any such books, records and files
without first offering in writing to deliver them to Buyer.
(f) REFUNDS. Buyer agrees to pay to the Shareholders, in
proportion to their respective ownership interests in the Company, any
refund received after the Closing Date by Buyer or the Company, in respect
of any Taxes for which the Shareholders are liable under
SECTION 8.1(a)(II) hereof, but only to the extent such has not been
reflected as a receivable on the Financial Statements. The Company shall
be entitled to any refund in respect of any Taxes for which the
Shareholders are not liable under SECTION 8.1(a)(II) hereof, and if the
Shareholders shall receive any such refund they shall pay the same to the
Company or to Buyer on behalf of the Company. The parties shall cooperate
in order to take all necessary steps to claim any such refund. Any such
refund received by a party or its affiliate for the account of the other
party shall be turned over to such other party within 10 days after such
refund is received.
(g) COOPERATION. Within 10 days of receipt, each party will
provide, or cause to be provided, to the other party copies of all
correspondence received from any taxing authority by such party or any of
its affiliates in connection with the liability of the Company for Taxes
for any period for which such other party is or may be liable under
SECTIONS 8.1(a)(II) or 8.1(b)(II) or otherwise. The parties will, at
their own expense, provide each other with such cooperation and information
as they may reasonably request of each other in preparing or filing any
return, amended return or claim for refund, in determining a liability or a
right of refund or in conducting any audit or other Tax Proceeding,
including cooperating with respect to reasonable requests from the other
party for extending statutes of limitation applicable to any Tax
Proceeding, in respect of Taxes for any period for which such other party
is or may be liable under SECTIONS 8.1(a)(II) or 8.1(b)(II) or otherwise.
(h) SURVIVAL. Notwithstanding any other provision of this
Agreement, the covenants set forth in this Section shall survive until the
expiration of the respective statute of limitations applicable to the
period to which the Taxes relate.
5.9 FURTHER CONVEYANCES, ASSURANCES AND COOPERATION. After the
Closing, the Shareholders will, without further consideration of any nature from
Buyer, other than reimbursement of expenses reasonably incurred at the request
of Buyer, execute and deliver, or cause to be executed and delivered, to Buyer,
such additional documentation and instruments as Buyer may reasonably request,
to (i) sell, transfer and assign to and fully vest in Buyer ownership of the
Shares (ii) allow Buyer to operate the business of the Company, (iii) obtain any
consent or approval which was not obtained on or prior to the Closing,
(iv) comply with any Tax investigation, audit or inquiry, (v) allow Buyer to use
the name of the Company and the name
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"American Dental Group Agency, Inc." for business in all states of the United
States, whether through a consent to use of name or otherwise, or (vi) otherwise
provide information, books, records, evidence, testimony and other reasonable
assistance to Buyer in connection with its ownership of the business of the
Company.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS
OF THE PARTIES
6.1 CONDITIONS TO THE OBLIGATIONS OF BUYER, THE COMPANY AND THE
SHAREHOLDERS. The respective obligations of Buyer, the Company and the
Shareholders set forth in this Agreement shall be subject to the satisfaction on
or prior to the Closing Date of the following conditions, unless waived by each
such party:
(a) GOVERNMENTAL APPROVALS. All material authorizations,
consents, orders or approvals of, or declarations or filings with, or
expiration of waiting periods imposed by, any federal, state, local or
foreign governmental or regulatory authority (including, without
limitation, the Texas Department of Insurance) necessary for the
consummation of the transactions contemplated by this Agreement shall have
been filed, occurred or been obtained, including any and all necessary
permits, licenses and certificates.
(b) LEGAL ACTION. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the
consummation of the transactions contemplated by this Agreement shall have
been issued by any federal, state or foreign court or other governmental or
regulatory authority and remain in effect, and no litigation seeking the
issuance of such an order or injunction, or seeking substantial damages
against Buyer or the Company if the transactions contemplated by this
Agreement are consummated, shall be pending which, in the good faith
judgment of the Boards of Directors of Buyer or the Company (acting upon
advice of their respective counsel) has a reasonable probability of
resulting in such order, injunction or substantial damages. In the event
any such order or injunction shall have been issued, each party agrees to
use its reasonable efforts to have any such injunction lifted.
(c) STATUTES. No federal, state, local or foreign statute, rule
or regulation shall have been enacted which would make the consummation of
the transactions contemplated by this Agreement illegal.
(d) FINANCING. Buyer shall have obtained financing in a form
and amount reasonably satisfactory to enable Buyer to fulfill its
obligations under this Agreement.
(e) SATISFACTION OF AMERICAN DENTAL CONDITIONS. All conditions
precedent to the Closing set forth in the American Stock Purchase Agreement
shall have been satisfied in full or waived.
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6.2 FURTHER CONDITIONS TO THE OBLIGATIONS OF BUYER. The obligations
of Buyer set forth in this Agreement are subject to the satisfaction on or prior
to the Closing Date of the following conditions, unless waived by Buyer:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company and the Shareholders set forth in this Agreement
shall be true and correct in all material respects as of the date of this
Agreement and as of the Closing Date as though made at and as of the
Closing Date (except to the extent such representations or warranties speak
to a particular date), and Buyer shall have received a certificate signed
by the Shareholders and authorized officers of the Company to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF OTHER PARTIES. The Company
and the Shareholders shall have performed in all material respects all
obligations required to be performed by them under this Agreement prior to
the Closing Date and Buyer shall have received a certificate signed by the
Shareholders and authorized officers of the Company to such effect.
(c) NO LITIGATION. Since the date hereof, there shall not have
been instituted and be continuing or threatened against the Company any
claim, action or proceeding the result of which could reasonably be
expected to result in a Material Adverse Change.
(d) NO ADVERSE CHANGE. No Material Adverse Change shall have
occurred in the business, operations or prospects of the Company.
(e) SPOUSAL CONSENT. A spousal consent to the transactions
contemplated by this Agreement, substantially in the form of EXHIBIT A
hereto, shall have been executed and delivered by the spouse of each
Shareholder, if applicable.
(f) THIRD-PARTY APPROVALS. Any and all consents required from
third parties relating to contracts, licenses, leases and other agreements
and instruments material to the financial condition or results of
operations of the Company shall have been obtained.
(g) RESIGNATIONS. The Company shall have delivered to Buyer all
resignations of the officers and directors of the Company requested by
Buyer, effective as of the Closing Date.
(h) BOARD AND SHAREHOLDER APPROVAL. The Board of Directors and
the Shareholders of the Company shall have approved the form of the
definitive purchase agreement and all related agreements and documents and
the Shareholders shall provide Buyer with a copy of such resolutions at the
Closing.
(i) FINANCIAL STATEMENTS AUDIT. At the Company's expense, the
Company shall cause its certified independent accountants (the "Company's
Accountant")
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to conduct and complete an independent audit of the Interim Financial
Statements (the "Audit") pursuant to generally accepted accounting
principles. The Company shall have delivered to Buyer an unqualified
opinion of the Company's Accountant, in a form and substance reasonably
satisfactory to Buyer, certifying the Audit.
(j) FINANCIAL RESULTS. The results of operations (net income)
less commissions or distributions of the Company determined in accordance
with generally accepted accounting principles for the period January 1,
1996 through the Closing shall be greater than or equal to zero.
(k) OPINION OF COUNSEL. Buyer shall have received an opinion
dated the Closing Date of Stieber Campbell PC, counsel to the Company, in
form and substance acceptable to Buyer.
(l) AGREEMENT TERMINATION. The Shareholders shall cause any
commission agreements by and among the Company and Dr. Davenport and Dr.
Rinker to be terminated and to be of no further force and effect on or
prior to the Closing Date with no further obligation of the Company to make
payments thereunder. To the extent that the Company has any contracts or
agreements with affiliates of American Dental or the Company or family
members of the Shareholders, such arrangements shall be terminated as of or
prior to the Closing Date.
(m) EMPLOYMENT ARRANGEMENTS. Other than payment to employees in
the ordinary course of business, there will be no obligation on the part of
the Company for any amounts due for salary or accrued vacation to any
terminating employees of the Company or for salary or accrued vacation to
Dr. Davenport and Dr. Rinker after the Closing Date.
(n) PAYMENT AND RELEASE OF LIENS. All amounts owing under any
bank loans, lines of credit or other indebtedness shall be paid off in full
as of the Closing Date and the Shareholders shall provide Buyer either
evidence that such lien has been terminated or shall deliver to Buyer a
termination statement signed by the lien holder on the Closing Date
terminating the lien on the property of the Company.
6.3 FURTHER CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE
SHAREHOLDERS. The obligations of the Company and the Shareholders set forth in
this Agreement are subject to the satisfaction on or prior to the Closing Date
of the following conditions, unless waived by the Company and the Shareholders:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Buyer set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and as of the
Closing Date as though made at and as of the Closing Date (except to the
extent such representations or warranties speak to a particular date), and
the Company and the Shareholders shall have received a certificate signed
by authorized officers of Buyer to such effect.
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(b) PERFORMANCE OF OBLIGATIONS OF OTHER PARTIES. Buyer shall
have performed in all material respects all obligations required to be
performed by it under this Agreement prior to the Closing Date, and the
Company and the Shareholders shall have received a certificate signed by
authorized officers of Buyer to such effect.
(c) THIRD-PARTY APPROVALS. Any and all consents required by
Buyer from third parties in order to consummate the transactions
contemplated hereby shall have been obtained.
ARTICLE VII
TERMINATION, EXTENSION AND WAIVER
7.1 TERMINATION This Agreement may be terminated at any time prior
to the Closing Date as follows:
(a) BY MUTUAL CONSENT By mutual consent of the Company and
Buyer.
(b) BY ANY PARTY By any party to this Agreement if:
(i) the transactions contemplated by this Agreement shall
not have been consummated on or before September 30, 1996; provided
that the failure of the transactions to be consummated by such date is
not caused by any breach of this Agreement by the party seeking such
termination;
(ii) a court of competent jurisdiction or other governmental
or regulatory authority shall have issued an order, decree or ruling
or taken any other action, in each case permanently restraining,
enjoining or otherwise prohibiting the consummation of the
transactions contemplated by this Agreement and such order, decree,
ruling or other action shall have become final and not appealable;
(iii) any statute, rule or regulation is enacted,
promulgated or deemed applicable to the transactions contemplated by
this Agreement by any competent governmental or regulatory authority
which makes the consummation of the transactions illegal; or
(iv) the American Stock Purchase Agreement terminates in
accordance with its terms, including due to the failure of the
Department of Insurance of the State of Texas to approve in writing
the application for transfer of control of American Dental without
withdrawing such disapproval within 20 days after the date on which
the Company and/or Buyer receive notice of such written disapproval.
(c) BY BUYER. By Buyer if a material default under or a
material breach of this Agreement by the Company or the Shareholders, as
the case may be, shall have occurred and be continuing ten (10) business
days after receipt of notice thereof from Buyer.
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(d) BY THE COMPANY. By the Company if a material default under
or a material breach of this Agreement by Buyer shall have occurred and be
continuing ten (10) business days after receipt of notice thereof from the
Company.
Any action taken to terminate this Agreement pursuant to this Section
shall become effective when notice of such termination is delivered by the
terminating party to the other party in accordance with the provisions of
SECTION 10.2 below.
7.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement pursuant to Section 7.1 by the Shareholders of the Company, on the one
hand, or Buyer, on the other, written notice thereof shall be given promptly to
the other party specifying the provision hereof pursuant to which such
termination is made, and this Agreement shall become void and have no effect,
except that the agreements contained in this Section and in Sections 2.10
(Broker's Commissions or Finder's Fees), 4.5 (No Solicitation), 5.1
(Confidentiality), 5.5 (Expenses), Article IX (Arbitration), or 10.10
(Attorney's Fees), shall survive the termination hereof for a period of one
year, unless a specific claim in writing with respect to these matters shall
have been made before such date. Nothing contained in this Section shall
relieve any party from liability for damages actually incurred as a result of
any breach of this Agreement.
7.3 EXTENSION; WAIVER. At any time prior to the Closing Date, to the
extent legally allowed, any party hereto (a) may extend the time for the
performance of any of the obligations owed to such party by the other parties
hereto, (b) may waive any inaccuracies in the representations and warranties
made to such party contained herein or in any document delivered pursuant
hereto, and/or (c) may waive compliance with any of the agreements or conditions
for the benefit of such party contained herein. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid if set forth in an
instrument in writing signed on behalf of such party and shall be effective only
to the extent set forth in such instrument. No extension or waiver of any
single condition, covenant, agreement, representation, warranty, breach, default
or other matter hereunder shall be deemed an extension or waiver of such or any
other condition, covenant, agreement, representation, warranty, breach, default
or other matter theretofore or thereafter occurring. The rights, remedies,
powers and privileges herein provided are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by law. The failure of any
party to insist upon a strict performance of any of the terms or provisions of
this Agreement, or to exercise any option, right or remedy herein contained,
shall not be construed as a waiver or as a relinquishment for the future of such
term, provision, option, right or remedy, but the same shall continue and remain
in full force and effect.
ARTICLE VIII
INDEMNIFICATION
8.1 INDEMNIFICATION.
(a) INDEMNIFICATION BY THE SHAREHOLDERS. Dr. Davenport and Dr.
Rinker shall jointly and severally (except with respect to any
representations or warranties made by such Shareholders severally (and not
jointly) in which case the indemnity provided herein shall be several and
not joint) indemnify and hold harmless Buyer and its
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affiliates from and against any and all Losses (as defined in SECTION
8.1(C)) incurred by any of such indemnified parties in any way relating to,
arising out of or resulting from:
(i) The breach of any of the representations or warranties
made by the Company or the Shareholders in this Agreement;
(ii) The breach or the failure of performance by the Company
or the Shareholders of any of the covenants, promises or agreements that
any of them is to perform under this Agreement;
(iii) Taxes (including interest, penalties and other
additions to tax that may become payable in respect thereof) which are
(i) Transfer Taxes (as defined in Section 5.8(c)) imposed on Shareholders
that Buyer or the Company pays (in whole or in part) or result in liens or
encumbrances on any assets of Buyer or the Company, and/or (ii) imposed on
the Company in respect of its income, business, property or operations or
for which the Company may otherwise be liable for or with respect to any
period ending prior to or on the Closing Date, including but not limited to
any Taxes for which the Shareholders are liable in accordance with the
provisions of Section 5.8;
(iv) The death of or injury to any person or damage to
property that occurred prior to the Closing and arose out of or in
connection with the business or operations of the Company prior to the
Closing;
(v) All employment-related claims and causes of action, and
all other claims and causes of action, that have arisen or arise out of or
in connection with the business or operations of the Company conducted
prior to the Closing; and
(vi) The existence prior to the Closing Date of any
hazardous or toxic substances, wastes or materials, defined as such or
governed by any applicable Environmental Law ("Hazardous Materials") upon,
about or beneath any property of the Company or migrating or threatening to
migrate from any of such properties, or the existence of a violation of any
Environmental Law pertaining to such properties or the operations of the
Company (including, but not limited to, violations of laws dealing with the
generation, transport, treatment, storage or disposal of hazardous or other
regulated material), regardless of whether the existence of such Hazardous
Materials or the violation of Environmental Law arose prior to the present
ownership or operation of such properties by the Company or was disclosed
to Buyer by the Company, the Shareholders or otherwise.
(b) INDEMNIFICATION BY BUYER. Buyer shall indemnify and hold
harmless the Shareholders and their affiliates from and against any and all
Losses incurred by such indemnified parties in any way relating to, arising
out of or resulting from:
(i) The breach of any of the representations or warranties
made by Buyer in this Agreement;
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(ii) The breach or the failure of performance by Buyer of
any of the covenants, promises or agreements that it is to perform under
this Agreement;
(iii) Taxes (including interest, penalties and other
additions to tax that may become payable in respect thereof) which are
imposed on the Shareholders in respect of the Company's income, business,
property or operations or for which the Company may otherwise be liable for
or with respect to any period following the Closing Date;
(iv) The death of or injury to any person or damage to
property that occurred after the Closing and arose out of or in connection
with the business or operations of the Company after the Closing;
(v) All employment-related claims and causes of action, and
all other claims and causes of action, that have arisen or arise out of or
in connection with the business or operations of the Company conducted
after the Closing; and
(vi) The existence after the Closing Date of any Hazardous
Materials upon, about or beneath any property of the Company or migrating
or threatening to migrate from any of such properties, or the existence of
a violation of any Environmental Law pertaining to such properties or the
operations of the Company (including, but not limited to, violations of
laws dealing with the generation, transport, treatment, storage or disposal
of hazardous or other regulated material), unless the existence of such
Hazardous Materials or the violation of Environmental Law arose prior to
the ownership or operation of the Company by the Buyer.
(c) DEFINITION OF LOSSES. For purposes of this Article,
"Losses" shall mean any and all liabilities, obligations, losses, damages,
claims, deficiencies, penalties, taxes, levies, actions, judgments,
settlements, suits, costs, legal fees, accountants' fees, disbursements or
expenses. Losses shall exclude any amount which any party actually
receives under any insurance policy which provides coverage for the
liability in question.
8.2 THIRD PARTY CLAIMS, NOTICE AND OPPORTUNITY TO SETTLE.
(a) Within 30 days after the receipt by the party entitled to
indemnity hereunder (the "Indemnified Party") of any claim or demand
(including but not limited to, notice of any action, suit or proceeding) by
any third party (a "Third Party Claim") against an Indemnified Party which
gives rise to a right to indemnification for a Loss hereunder (or, in the
case of the receipt of any notice of any examination, claim, adjustment or
other proceeding with respect to Taxes for any period for which the
Shareholders are liable under SECTION 8.1(a)(iii) or for which Buyer is
liable under SECTION 8.1(b)(iii) ("Tax Proceeding"), promptly after the
receipt of such notice), the Indemnified Party shall give each party who
may be obligated to provide indemnity hereunder (the "Indemnifying Party")
written notice of such claim or demand; provided, however, that the failure
to give such notice shall not relieve the Indemnifying Party of its
obligations hereunder except to the extent that such failure is materially
prejudicial to the Indemnifying Party.
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<PAGE>
(b) The Indemnifying Party shall have the right (without
prejudice to the right of any Indemnified Party to participate at its own
expense through counsel of its own choosing), to defend against such claim
or demand (for purposes of this Section, any Tax proceeding shall be
considered a "claim or demand") at its expense and through counsel of its
own choosing (the choice of such counsel to be subject to the reasonable
consent of the affected Indemnified Parties) and to control such defense if
it gives written notice of its intention to do so within 15 days of the
receipt of the notice referred to in SECTION 8.2(a). If the Indemnifying
Party shall decline to assume the defense of such claim or demand, the
affected Indemnified Parties shall have the right to assume control of such
defense at the expense of the Indemnifying Party. The Indemnified Parties
shall cooperate fully in the defense of such claim or demand and shall make
available to the Indemnifying Party or its counsel all pertinent
information under their control relating thereto. The Indemnifying Party
agrees to cooperate with the Indemnified Parties in order to enable their
counsel to participate in the defense and to deliver to the Indemnified
Parties copies of all pleadings and other information within the
Indemnifying Party's knowledge or possession reasonably requested by the
Indemnified Parties that is relevant to the defense of any such claim or
demand. The Indemnified Parties and their counsel shall maintain
confidentiality with respect to all such information consistent with the
conduct of a defense hereunder.
(c) The Indemnifying Party shall have the right to elect to
settle (i) any such claim or demand other than a Tax Proceeding, for
monetary damages only and including an unconditional release, or (ii) any
Tax Proceeding, subject to the consent of the affected Indemnified Party,
provided, however, with respect to any Permissible Settlement (as defined
herein), if the affected Indemnified Parties fail to give such consent
within 20 days of being requested to do so, the affected Indemnified
Parties shall, at their expense, assume the defense of such claim or demand
and regardless of the outcome of such matter, the Indemnifying Party's
liability hereunder shall be limited to the amount of any such proposed
settlement. As used herein the term "Permissible Settlement" shall mean a
settlement as to which there is no reasonable likelihood that it will
result in the imposition on such affected Indemnified Parties of Taxes for
a taxable period for which the Indemnifying Party is not obligated
hereunder to indemnify such affected Indemnified Parties.
(d) In the event the Indemnifying Party assumes the defense of a
claim or demand, the Indemnified Parties shall have the right to assume
control of the defense of any claim or demand from the Indemnifying Party
at any time and to elect to settle such claim or demand; provided, however,
the Indemnifying Party shall have no indemnification obligations with
respect to such claim, demand or settlement except for the costs and
expenses of such Indemnifying Party incurred prior to the assumption of the
defense of the claim or demand by the Indemnified Parties.
8.3 RIGHT TO OFFSET. Buyer shall have the right to offset all or any
part of its Losses under this Agreement against that portion of the Holdback
under the American Stock Purchase Agreement allocable to the Shareholders
($900,000) by notifying the Shareholders in writing that Buyer is reducing the
amount owed to the Shareholders; provided, however, that the
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<PAGE>
Shareholders shall have thirty (30) days following receipt of such notification
to rectify the cause of any such loss to Buyer before Buyer shall be entitled to
exercise its right of offset or recoupment hereunder. Buyer shall offset its
Losses against the Holdback until the Shareholders' allocable portion of the
Holdback is exhausted, at which time the Shareholders shall be personally liable
as provided in this Agreement for any remaining and future Losses, whether
undisputed or established in accordance with Article IX hereof. Notwithstanding
the foregoing, the existence of the Holdback and any offsets thereunder shall
not relieve the Shareholders from liability or limit their liability to Buyer
for any breaches hereunder.
8.4 NON-THIRD PARTY CLAIMS. In the event any Indemnified Party
should have a claim against any Indemnifying Party hereunder which does not
involve a Third Party Claim, the Indemnified Party shall transmit to the
Indemnifying Party a written notice (the "Indemnity Notice") describing in
reasonable detail the nature of the claim, an estimate of the amount of damages
attributable to such claim and the basis of the Indemnified Party's request for
indemnification under this Agreement. If the Indemnifying Party does not notify
the Indemnified Party within 30 days from the Indemnifying Party's receipt of
the Indemnity Notice that the Indemnifying Party disputes such claim, the claim
specified by the Indemnified Party in the Indemnity Notice shall be deemed a
liability of the Indemnifying Party hereunder; provided, however, that, if Buyer
asserts a claim that is not a Third Party Claim and the Indemnifying Party does
not dispute such claim in a timely manner in accordance with this Section 8.4,
Buyer shall have offset and recoup its Losses as provided in SECTION 8.3.
8.5 PAYMENTS. Any timely, disputed non-Third Party Claim shall be
submitted to arbitration in accordance with the provisions of Article IX hereof.
Payments of all amounts owing by an Indemnifying Party pursuant to this Article
relating to a Third Party Claim shall be made within 30 days after the latest of
(a) the settlement of such Third Party Claim, (b) the expiration of the period
for appeal of a final adjudication of such Third Party Claim or (c) the
expiration of the period for appeal of a final adjudication of the Indemnifying
Party's liability to the Indemnified Party under this Agreement. Subject to
SECTION 8.3, payments of all amounts owing by an Indemnifying Party pursuant to
SECTION 8.4 shall be made within 30 days after the later of (i) the expiration
of the 30-day Indemnity Notice period or (ii) the expiration of the period for
appeal of a final adjudication of the Indemnifying Party's liability to the
Indemnified Party under this Agreement.
ARTICLE IX
DISPUTE RESOLUTION
All disputes arising under this Agreement shall be resolved by
submission to binding arbitration at the Dallas office of JAMS/Endispute
("JAMS") in accordance with its rules and procedures regarding commercial
disputes, except to the extent such rules or procedures vary from the following
provisions:
9.1 NOTICE. The party desiring to initiate arbitration can do so by
sending written notice of an intention to arbitrate by registered or certified
mail to the other parties and to JAMS. The notice must contain a description of
the dispute, the amount of money involved, and the remedies sought.
33
<PAGE>
9.2 ARBITRATOR. The parties shall attempt to agree on a retired
judge from the JAMS panel to act as the arbitrator hereunder. If the parties
are unable to agree, JAMS shall provide a list of three available judges to each
party and each party may strike one. The remaining judge shall serve as the
arbitrator. The parties agree the arbitration must be initiated within one year
after the claimed breach occurred and that the failure to initiate arbitration
within the one year period constitutes an absolute bar to the institution of any
arbitration or any judicial proceeding on any dispute set forth in the notice of
intent to arbitrate.
9.3 PRE-HEARING CONFERENCE. Once an arbitrator is assigned to hear
the matter, the arbitrator shall schedule a pre-hearing conference to reach
agreement on procedural matters, arrange for the exchange of information, obtain
stipulations, and attempt to narrow the issues.
9.4 DISCOVERY. It is the parties' objective to expedite the
arbitration proceedings by placing the following limitations on discovery:
(a) on a date to be determined at the pre-hearing conference, each party may
serve one demand for production of documents and one set of twenty
interrogatories (without subparts) upon the other parties (the response to the
document demand, the documents to be produced, and the responses to the
interrogatories shall be exchanged thirty days later); (b) each party may depose
two witnesses. Each deposition must be concluded within eight hours and all
depositions must be taken within sixty days of the pre-hearing conference. Any
party deposing an opponent's expert must pay the expert's fee for attending the
deposition. All discovery disputes shall be decided in the sole discretion of
the arbitrator.
9.5 BRIEFS AND HEARING. The parties must file briefs with the
arbitrator at least three days before the arbitration hearing, specifying the
facts each intends to prove and analyzing the applicable law. The parties have
the right to representation by legal counsel throughout the arbitration
proceedings. The presentation of evidence at the arbitration hearing shall be
governed by the Texas Evidence Code. Within reasonable limitations, both sides
at the hearing may call and examine witnesses for relevant testimony, introduce
relevant exhibits or other documents, cross-examine or impeach witnesses who
shall have testified orally on any matter relevant to the issues, and otherwise
rebut evidence, as long as these rights are exercised in an efficient and
expeditious manner in the sole discretion of the arbitrator. Oral evidence
given at the arbitration hearing shall be given under oath. Any party desiring
a stenographic record may secure a court reporter to attend the arbitration
proceedings. The party requesting the court reporter must notify the other
parties and the arbitrator of the arrangement in advance of the hearing, and
must pay for the cost incurred.
9.6 DECISION. The arbitrator's decision shall be based on the
evidence introduced at the hearing, including all logical and reasonable
inferences therefrom. The arbitrator may grant any remedy or relief which is
just and equitable. The award must be made in writing and signed by the
arbitrator. It shall contain a concise statement of the reasons in support of
the decision. The award must be mailed promptly to the parties, but no later
than thirty days from the closing of the hearing. The award can be judicially
enforced (confirmed, corrected or vacated) pursuant to Tex. Civ. Prac. & Rem.
Code Ann. Section 171 ET SEQ. The award is final and
34
<PAGE>
binding and there is no direct appeal from the award on the grounds of error in
the application of the law.
9.7 COSTS. Each party to the arbitration must pay its own witness
fees. Each party must pay its pro-rata share of the arbitrator's fees. The
arbitrator must award to the prevailing party attorneys' fees and costs actually
and reasonably incurred.
ARTICLE X
GENERAL PROVISIONS
10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties contained herein shall survive the Closing and will expire on the
fifth anniversary of the Closing Date (the "Survival Date"); unless prior to the
Survival Date, a claim specifying a breach of any of the representations or
warranties described above is submitted in writing to the indemnifying party and
identified as a claim for indemnification pursuant to this Agreement. From and
after the Survival Date, no party hereto nor any shareholder, director, officer,
employee, or affiliate of such party shall have any indemnity obligation
pursuant to Article VIII, except with respect to matters as to which notice has
been received in accordance with this Section 10.1. Notwithstanding the
foregoing, any representations and warranties made relating to antitrust matters
shall not terminate.
10.2 NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed given upon facsimile transmission (with written
or facsimile confirmation of receipt), or delivery by a reputable overnight
commercial delivery service (delivery, postage or freight charges prepaid), or
on the fourth day following deposit in the United States mail (if sent by
registered or certified mail, return receipt requested, delivery, postage or
freight charges prepaid), addressed to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice):
If to Buyer: Safeguard Health Enterprises, Inc.
505 N. Euclid Street
Anaheim, California 92801
Attn: Ronald I. Brendzel, Esq.
Phone: (714) 758-4329
Fax: (714) 758-4383
With a copy to: Gibson, Dunn & Crutcher LLP
4 Park Plaza, Suite 1800
Irvine, CA 92614
Attn: Walter L. Schindler, Esq.
Phone: (714) 451-3800
Fax: (714) 451-4220
If to the Company: T.R.C. Agency, Inc.
14800 Landmark Boulevard, 7th Floor
Dallas, Texas 75240
35
<PAGE>
Attn: James L. Davenport, D.D.S.
Phone: (214) 661-5848
Fax: (214) 392-0237
With a copy to: Stieber Campbell PC
2828 Routh Street, Suite 760
Dallas, TX 75201
Attn: Drew A. Campbell, Esq.
Phone: (214) 979-0902
Fax: (214) 979-0907
If to the Shareholders: James L. Davenport, D.D.S.
Martin J. Rinker, D.D.S.
c/o First American Dental Benefits, Inc.
Phone: (214) 661-5848
Fax: (214) 392-0237
10.3 INTERPRETATION. The table of contents and headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
10.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be an original and all of which together shall
be one and the same instrument.
10.5 INTEGRATION. This Agreement and the Exhibits, Schedules,
documents, instruments and other agreements among the parties hereto that are
referred to herein or any other agreements dated of even date herewith to which
Buyer, Dr. Davenport and Dr. Rinker, among others, are parties, constitute the
entire agreement of the parties with respect to the subject matter set forth
herein or therein and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof or
thereof.
10.6 GOVERNING LAW. This Agreement and the rights of the parties
hereunder will be interpreted in accordance with the laws of the State of Texas,
and all rights and remedies will be governed by such laws without regard to
principles of conflict of laws.
10.7 AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
10.8 ASSIGNMENT. No party hereto shall assign or transfer or permit
the assignment or transfer of this Agreement without the prior written consent
of the other parties, except that the Buyer may assign its rights and
obligations hereunder to any wholly-owned subsidiary and its rights hereunder to
any employee of Buyer.
10.9 SEVERABILITY. If any paragraph, section, sentence, clause or
phrase contained in this Agreement will become illegal, null or void or against
public policy, for any reason, or will be held by any court of competent
jurisdiction to be incapable of being construed
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<PAGE>
or limited in a manner to make it enforceable, or is otherwise held by such
court to be illegal, null or void or against public policy, the remaining
paragraphs, sections, sentences, clauses or phrases contained in this Agreement
will not be affected thereby.
10.10 FEES. If any party to this Agreement shall bring any
arbitration or any other action, suit, counterclaim or appeal for any relief
against any other party, declaratory or otherwise, to enforce the terms hereof
or to declare rights hereunder (collectively, an "Action"), the prevailing party
shall be entitled to recover as part of any such Action its reasonable
attorneys' fees and costs, including any fees and costs incurred in bringing and
prosecuting such Action and/or enforcing any order, judgment, ruling or award
granted as part of such Action. "Prevailing party" within the meaning of this
section includes, without limitation, a party who agrees to dismiss an Action
upon the other party's payment of all or a portion of the sums allegedly due or
performance of the covenants allegedly breached, or who obtains substantially
the relief sought.
10.11 TRANSFER TAXES. The Shareholders shall bear all transfer,
sales, use, income or other taxes, if any, payable in connection with the
transfer of Stock contemplated by this Agreement or as a result of the
transactions contemplated hereby, and shall be responsible for the payment of
any individual taxes levied against them personally as a result of selling their
Shares to Buyer.
37
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
<TABLE>
<CAPTION>
<S> <C>
Company: Buyer:
T.R.C. AGENCY, INC., a Texas SAFEGUARD HEALTH ENTERPRISES,
corporation INC., a Delaware corporation
By: /s/ James L. Davenport By:
--------------------------------- -------------------------------
James L. Davenport, D.D.S. John E. Cox
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Operating Officer
By: /s/ Martin J. Rinker By:
--------------------------------- --------------------------------
Martin J. Rinker, D.D.S. Steven J. Baileys, D.D.S.
Vice President Chairman of the Board, President
and Chief Executive Officer
</TABLE>
Shareholders:
/s/ James L. Davenport
- -------------------------------------
JAMES L. DAVENPORT, D.D.S.
/s/ Martin J. Rinker
- -------------------------------------
MARTIN J. RINKER, D.D.S.
38
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
<TABLE>
<CAPTION>
<S> <C>
Company: Buyer:
T.R.C. AGENCY, INC., a Texas SAFEGUARD HEALTH ENTERPRISES,
corporation INC., a Delaware corporation
By: By: /s/ John E. Cox
--------------------------------- -------------------------------
James L. Davenport, D.D.S. John E. Cox
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Operating Officer
By: By: /s/ Steven J. Baileys
--------------------------------- --------------------------------
Martin J. Rinker, D.D.S. Steven J. Baileys, D.D.S.
Vice President Chairman of the Board, President
and Chief Executive Officer
</TABLE>
Shareholders:
- -------------------------------------
JAMES L. DAVENPORT, D.D.S.
- -------------------------------------
MARTIN J. RINKER, D.D.S.
<PAGE>
INDEX TO
SCHEDULES AND EXHIBITS
Exhibit A Spousal Consent
Schedule 2.2 Shareholder Interests in the Company
Schedule 2.7 Financial Statements
Schedule 2.12 Litigation
Schedule 2.13 Taxes
Schedule 2.15 Contracts
Schedule 2.16 Commission Arrangements and Sales
Schedule 2.18 Interests in Competitors
Schedule 2.22 Insurance Policies
Schedule 2.24 Banking Facilities
Schedule 2.30 Transactions with Related Parties
Schedule 2.31 Compliance with Insurance Laws
Stock Purchase Agreement
TRC Agency
<PAGE>
CREDIT AGREEMENT
DATED AS OF SEPTEMBER 25, 1996
SAFEGUARD HEALTH ENTERPRISES, INC.,
A DELAWARE CORPORATION
AND
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
<PAGE>
TABLE OF CONTENTS
Page
----
1. DEFINITIONS AND FINANCIAL REQUIREMENTS . . . . . . . . . . . . . . . . 1
1.1 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 FINANCIAL REQUIREMENTS . . . . . . . . . . . . . . . . . . . . 6
1.3 OTHER INTERPRETIVE PROVISIONS. . . . . . . . . . . . . . . . . 6
2. CREDIT FACILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1 REVOLVING ACQUISITION FACILITY . . . . . . . . . . . . . . . . 7
2.2 REVOLVING WORKING CAPITAL FACILITY . . . . . . . . . . . . . . 9
2.3 RATES OF INTEREST. . . . . . . . . . . . . . . . . . . . . . . 9
2.4 INTEREST RATE PROTECTION . . . . . . . . . . . . . . . . . . . 11
2.5 MANDATORY PAYMENT. . . . . . . . . . . . . . . . . . . . . . . 11
3. TAXES, YIELD PROTECTION AND ILLEGALITY . . . . . . . . . . . . . . . . 11
3.1 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.2 ILLEGALITY . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.3 INCREASED COSTS AND REDUCTION OF RETURN. . . . . . . . . . . . 12
3.4 FUNDING LOSSES . . . . . . . . . . . . . . . . . . . . . . . . 12
3.5 INABILITY TO DETERMINE RATES . . . . . . . . . . . . . . . . . 13
3.6 SURVIVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4. FEES AND EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.1 FACILITY FEE . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.2 COMMITMENT FEE . . . . . . . . . . . . . . . . . . . . . . . . 13
4.3 EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5. COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.1 PROPERTY PLEDGED . . . . . . . . . . . . . . . . . . . . . . . 13
5.2 STOCK PLEDGE . . . . . . . . . . . . . . . . . . . . . . . . . 14
6. EXTENSIONS OF CREDIT, PAYMENTS AND INTEREST CALCULATIONS . . . . . . . 14
6.1 PROCEDURE FOR BORROWING. . . . . . . . . . . . . . . . . . . . 14
6.2 REQUEST FOR BORROWING. . . . . . . . . . . . . . . . . . . . . 14
6.3 CONVERSION AND CONTINUATION ELECTIONS. . . . . . . . . . . . . 15
6.4 DISBURSEMENTS AND PAYMENTS . . . . . . . . . . . . . . . . . . 15
6.5 BRANCH ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . . . 15
6.6 EVIDENCE OF INDEBTEDNESS . . . . . . . . . . . . . . . . . . . 15
6.7 DIRECT DEBIT (PRE-BILLING) . . . . . . . . . . . . . . . . . . 16
6.8 DIRECT DEBIT (REVOLVING WORKING CAPITAL FACILITY). . . . . . . 16
6.9 INTEREST CALCULATION . . . . . . . . . . . . . . . . . . . . . 16
6.10 LATE PAYMENTS; COMPOUNDING . . . . . . . . . . . . . . . . . . 17
6.11 DEFAULT RATE . . . . . . . . . . . . . . . . . . . . . . . . . 17
7. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF BANK. . . . . . . . . . 17
7.2 ADDITIONAL CONDITIONS TO EXTENSION OF CREDIT FOR THE AMERICAN
ACQUISITION
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AND THE TRC ACQUISITION. . . . . . . . . . . . . . . . . . . . 20
7.3 CONDITIONS TO EACH EXTENSION OF CREDIT FOR THE PERMITTED
ACQUISITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.4 CONDITION TO EACH EXTENSION OF CREDIT UNDER REVOLVING WORKING
CAPITAL FACILITY . . . . . . . . . . . . . . . . . . . . . . . 20
8. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . 20
8.1 ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.2 NO CONFLICTS . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.3 ENFORCEABILITY . . . . . . . . . . . . . . . . . . . . . . . . 21
8.4 GOOD STANDING. . . . . . . . . . . . . . . . . . . . . . . . . 21
8.5 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . 21
8.6 TITLE TO PROPERTIES. . . . . . . . . . . . . . . . . . . . . . 21
8.7 PERMITS, FRANCHISES. . . . . . . . . . . . . . . . . . . . . . 21
8.8 PERFECTED SECURITY INTEREST IN COLLATERAL. . . . . . . . . . . 21
8.9 LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.10 NO EVENT OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . 22
8.11 OTHER OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . 22
8.12 INFORMATION SUBMITTED. . . . . . . . . . . . . . . . . . . . . 22
8.13 NO MATERIAL ADVERSE CHANGE . . . . . . . . . . . . . . . . . . 22
8.14 ERISA PLAN COMPLIANCE. . . . . . . . . . . . . . . . . . . . . 22
8.15 LOCATION OF BORROWER . . . . . . . . . . . . . . . . . . . . . 23
9. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . 23
9.1 NOTICE OF CERTAIN EVENTS . . . . . . . . . . . . . . . . . . . 23
9.2 FINANCIAL AND OTHER INFORMATION. . . . . . . . . . . . . . . . 23
9.3 BOOKS, RECORDS, AUDITS AND INSPECTIONS . . . . . . . . . . . . 25
9.4 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.5 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . 25
9.6 ADDITIONAL ACTS. . . . . . . . . . . . . . . . . . . . . . . . 25
9.7 MINIMUM LIQUIDITY. . . . . . . . . . . . . . . . . . . . . . . 25
9.8 MAXIMUM TOTAL LIABILITIES TO TANGIBLE NET WORTH. . . . . . . . 26
9.9 MINIMUM FIXED CHARGE COVERAGE RATIO. . . . . . . . . . . . . . 26
9.10 OUT-OF-DEBT REQUIREMENT. . . . . . . . . . . . . . . . . . . . 27
9.11 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . 27
9.12 EXISTENCE AND PROPERTIES . . . . . . . . . . . . . . . . . . . 27
9.13 CHANGE IN NAME, STRUCTURE OR LOCATION. . . . . . . . . . . . . 27
10. NEGATIVE COVENANTS.. . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.1 OTHER INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . 28
10.2 LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.3 CAPITAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 29
10.4 ACQUISITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.5 DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.6 LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.7 LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.8 CHANGE OF CONTROL. . . . . . . . . . . . . . . . . . . . . . . 29
10.9 SALES AND LEASEBACKS . . . . . . . . . . . . . . . . . . . . . 29
10.10 LIQUIDATIONS AND MERGERS . . . . . . . . . . . . . . . . . . . 29
10.11 SALE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 29
10.12 BUSINESS ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . 29
ii
<PAGE>
11. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
12. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
12.1 SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . 32
12.2 CONSENTS AND WAIVERS . . . . . . . . . . . . . . . . . . . . . 32
12.3 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . 32
12.4 ADMINISTRATION COSTS . . . . . . . . . . . . . . . . . . . . . 32
12.5 ATTORNEYS' FEES. . . . . . . . . . . . . . . . . . . . . . . . 32
12.6 INTEGRATION. . . . . . . . . . . . . . . . . . . . . . . . . . 32
12.7 PARTICIPATION. . . . . . . . . . . . . . . . . . . . . . . . . 32
12.8 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . 33
12.9 HAZARDOUS WASTE INDEMNIFICATION. . . . . . . . . . . . . . . . 33
12.10 ARBITRATION; REFERENCE PROCEEDING. . . . . . . . . . . . . . . 33
12.11 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
12.12 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . 34
12.13 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . 34
EXHIBITS
EXHIBIT A - COMPLIANCE CERTIFICATE
iii
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CREDIT AGREEMENT
This Credit Agreement ("Agreement") is entered into as of September 25,
1996, between Bank of America National Trust and Savings Association ("Bank")
and Safeguard Health Enterprises, Inc., a Delaware corporation ("Borrower").
1. DEFINITIONS AND FINANCIAL REQUIREMENTS.
1.1 DEFINITIONS. In addition to the terms defined elsewhere in this
Agreement, the following terms have the meanings indicated for the purposes
hereof:
"Acquisitions" means the American Acquisition, the Permitted Acquisitions
and the TRC Acquisition.
"Agreement" means this Credit Agreement.
"American" means First American Dental Benefits, Inc., a Texas corporation,
dba American Dental Corporation.
"American Acquisition" means the acquisition by Borrower of all of the
issued and outstanding capital stock of American.
"Availability Period" means the period commencing on the date of this
Agreement and ending on the Maturity Date.
"Banking Day" means with respect to advances bearing interest rates at the
LIBOR Rate, a day, excluding Saturdays and Sundays, on which Bank is open for
business in California and is dealing in offshore dollars in the London
inter-bank market. With respect to all other amounts payable under this
Agreement, a "Banking Day" means a day other than a Saturday or a Sunday on
which Bank is open for business in California.
"Borrowing Date" means any date on which an advance is made under Sections
2.1 and 2.2 of this Agreement.
"Capital Adequacy Regulation" means any guideline, request or directive of
any central bank or other governmental authority, or any other law, rule or
regulation, whether or not having the force of law, in each case, regarding
capital adequacy of a bank or of any organization controlling a bank.
"Cash Flow" means, for any fiscal period, net income, plus tax expense,
plus depreciation, plus non-cash amortization, plus amortization expense arising
from any covenants not to compete, plus interest expense, less extraordinary
income/gains, minus gains (or plus losses) on fixed asset sales, minus cash
taxes payable, minus cash paid for stock repurchases, and minus non-financed and
non-acquisition capital expenditures.
"Closing Date" means the date on which all of the conditions precedent set
forth in Sections 7.1 and 7.2 are satisfied or waived by Bank.
"Collateral" means the personal property described in the Collateral
Agreements.
"Collateral Agreements" means the security agreement(s) and/or pledge
agreement(s)
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required under Section 5 of this Agreement.
"Compliance Certificate" means a certificate substantially in the form of
Exhibit A.
"Consideration" means cash paid, funded debt incurred, the market value of
any shares of the capital stock of Borrower issued to a seller, assumed
liabilities, excluding normal payables and accruals, and the present value of
amounts paid by Borrower in connection with any covenants not to compete, if
any, discounted at Reference Rate, in connection with a Permitted Acquisition.
"Credit Limit" means the amount of Thirty Million Dollars ($30,000,000),
which represents the total of the Revolving Acquisition Credit Limit and the
Revolving Working Capital Credit Limit.
"Default" means any event or circumstance which, with the giving of notice,
the lapse of time, or both, would (if not cured or otherwise remedied during
such time) constitute an Event of Default.
"EBITA" means net income plus interest expense, plus taxes, plus
amortization, plus losses and minus gains on the sale of fixed assets and minus
extraordinary income and gains computed for Borrower on a consolidated basis.
"EBITDA" means net income plus interest expense, plus taxes, plus
depreciation plus amortization, plus losses and minus gains on the sale of fixed
assets and minus extraordinary income and gains computed for Borrower on a
consolidated basis.
"Equity Prepayment" means the reduction in the commitment of the Bank under
the Revolving Acquisition Facility described in Section 2.1(b)(ii)(2) of this
Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"ERISA Plan" means any employee pension benefit plan maintained or
contributed to by Borrower and insured by the Pension Benefit Guaranty
Corporation under Title IV of ERISA.
"Event of Default" means any of the events or circumstances specified in
Section 11 of this Agreement.
"Fixed Charges" means the sum of gross interest expense, plus payments in
connection with any covenants not to compete obtained in connection with a
Permitted Acquisition, plus scheduled principal payments on all indebtedness
including, but not limited to, payments under capital leases and the amounts as
stated under Sections 2.1(b)(ii)(1) and 9.9(a) of this Agreement.
"GAAP" means generally accepted accounting principals set forth from time
to time in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the U.S. accounting
profession), which are applicable to the circumstances as of the date of
determination.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any
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entity exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"LIBOR Rate" means, for LIBOR Rate Interest Periods, the interest rate
determined by the following formula, rounded upward to the nearest 1/100 of one
percent. (All amounts in the calculation will be determined by Bank as of the
first day of the LIBOR Rate Interest Period.)
LIBOR Rate = London Rate
---------------------------
(1.00 - Reserve Percentage)
(a) "London Rate" means the interest rate at which Bank's London
Branch, London, Great Britain, would offer U.S. Dollar deposits for the
applicable interest period to other major banks in the London inter-bank market
at approximately 11:00 a.m. London time two (2) Banking Days before the
commencement of the interest period.
(b) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member banks of the
Federal Reserve System for Eurocurrency Liabilities, as defined in Federal
Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent.
The percentage will be expressed as a decimal, and will include, but not be
limited to, marginal, emergency, supplemental, special, and other reserve
percentages.
"LIBOR Rate Interest Period" means, for any extension of credit bearing
interest at the LIBOR Rate, the period commencing on the date of the interest
rate designation and ending from two (2) weeks to six (6) months thereafter, as
requested by Borrower.
"LIBOR Rate Portion" means all or such part of the principal balance of
credit provided under this Agreement for which interest is payable at the rate
related to the LIBOR Rate.
"Loan Documents" means this Agreement and all other documents required to
be executed and delivered to Bank in connection with this Agreement.
"Material Adverse Change" means (a) a material adverse change in, or a
material adverse effect upon, the operations, business, properties, condition
(financial or otherwise) or prospects of Borrower or Borrower and its Material
Subsidiaries, taken as a whole, or as to any Material Subsidiary, (b) a material
impairment of the ability of Borrower to perform under any Loan Document and to
avoid any Event of Default, or (c) a material adverse effect upon the legality,
validity, binding effect or enforceability against Borrower of any Loan
Document.
"Material Subsidiary" means Safeguard Health Plans, Inc., a California
corporation, SafeHealth Life Insurance Company, a California corporation,
Safeguard Health Plans, Inc., a Texas corporation, American Dental and TRC, and
includes, without limitation, any Subsidiary whose net revenues, at any time,
represent ten percent (10%) or more of the consolidated revenues of Borrower.
"Maturity Date" means March 31, 2002.
"Metroplex Dental" means contracts assigned to American pursuant to the
Assignment and Assumption Agreement dated September 26, 1996.
"Minimum Fixed Charge Coverage Ratio" means the ratio of Cash Flow to Fixed
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Charges.
"Permitted Acquisition" means a transaction or series of related
transactions for the purpose of or resulting, directly or indirectly, in the
acquisition or purchase of the assets, business or securities of a Person
("Target"), provided:
(a) Such acquisition or purchase has been approved by the board of
directors or similar governing body of the Target;
(b) The Consideration paid through the Maturity Date for any such
acquisition or purchase does not, when added to the total Consideration paid in
connection with earlier Permitted Acquisitions, exceed Five Million Dollars
($5,000,000), plus the net proceeds received by Borrower in respect of the
issuance and sale of shares of its capital stock, less the amount of any Equity
Prepayment, up to a maximum of Ten Million Dollars ($10,000,000);
(c) The indebtedness of the Target will not, when assumed by
Borrower and added to the outstanding indebtedness of Borrower, violate any of
the financial covenants contained in Section 9 below;
(d) The Target is engaged in the same or a similar line of business
as Borrower or any Subsidiary;
(e) No contingent liability is assumed by Borrower or any
Subsidiary;
(f) The Target has a positive trailing four quarter EBITA, computed
in accordance with GAAP consistently applied;
(g) The acquisition complies in all material respects with all
applicable requirements of law of Governmental Authorities having jurisdiction
over the transaction and Borrower;
(h) Financial statements of the Target, as of the most recently
ended fiscal year have been audited by a "Big Six" CPA firm, or another
nationally recognized CPA firm which is acceptable to Bank;
(i) The transaction does not involve the incurrence of debt by a
Subsidiary;
(j) Seller financing incurred by Borrower plus the assumption of
funded debt by Borrower or Target does not exceed One Million Dollars
($1,000,000); provided that any debt incurred by Borrower must be unsecured, or
in the case of assumed debt, secured solely by the specific fixed assets
financed, as evidenced by copies of lien searches and filings submitted to Bank;
(k) Bank receives a Compliance Certificate executed by a
Responsible Officer certifying that after taking into consideration the
Permitted Acquisition, Borrower is in compliance with all financial covenants
listed on Section 9 of this Agreement, and Borrower and Target are in compliance
with all financial responsibility and other material requirements of
Governmental Authorities having jurisdiction over Borrower and Target; and
(l) Bank receives and finds acceptable a summary of sources and
uses of funds for the acquisition.
4
<PAGE>
"Person" means an individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association,
or joint venture.
"Reference Rate" means the rate of interest publicly announced from time to
time by Bank in San Francisco, California, as its reference rate. Any change in
the Reference Rate shall take effect on the day specified in the public
announcement of such change. The Reference Rate is set by Bank based on various
factors, including Bank's costs and desired return, general economic conditions
and other factors, and is used as a reference point for pricing some loans.
Bank may price loans at, above or below the Reference Rate.
"Reference Rate Portion" means all or such part of the principal balance of
credit provided under this Agreement for which interest is payable at the
Reference Rate.
"Responsible Officer" means the chief executive officer or president of
Borrower, or any other officer having substantially the same authority and
responsibility; or, with respect to compliance with financial covenants, the
chief financial officer or the treasurer of Borrower, or any other officer
having substantially the same authority and responsibility.
"Revolving Acquisition Credit Limit" means the amount of Twenty-Two Million
Dollars ($22,000,000).
"Revolving Acquisition Facility" means the line of credit described in
Section 2.1 of this Agreement.
"Revolving Credit Facilities" means the Revolving Acquisition Facility and
the Revolving Working Capital Facility.
"Revolving Working Capital Credit Limit" means the amount of Eight Million
Dollars ($8,000,000).
"Revolving Working Capital Facility" means the line of credit described in
Section 2.2 of this Agreement.
"Selling Shareholders" means James L. Davenport, D.D.S., Martin Rinker,
D.D.S. and William N. Rees, Jr.
"Subsidiary" or "Subsidiaries" means any corporation, association,
partnership, limited liability company, joint venture or other business entity
of which more than fifty percent (50%) of the voting stock, membership interests
or other equity interests is owned or controlled, directly or indirectly, by
Borrower.
"Tangible Net Worth" means the gross book value of the assets of Borrower
(exclusive of goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense, deferred charges and
other like intangibles, and monies due from affiliates, officers, directors or
shareholders of Borrower) less (a) reserves applicable thereto, and (b) all
liabilities (including accrued and deferred income taxes).
"Total Funded Debt" means all indebtedness for borrowed money, including,
but not limited to, outstanding debt under the Bank credit facilities, seller
notes, non-compete agreements, purchase money agreements, and lease agreements.
"Total Liabilities" means all liabilities of Borrower defined in accordance
with GAAP.
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"TRC" means T.R.C. Agency, Inc., a Texas corporation.
"TRC Acquisition" means the acquisition by Borrower of all of the issued
and outstanding capital stock of TRC.
1.2 FINANCIAL REQUIREMENTS. Unless otherwise specified in this
Agreement, all accounting terms used in this Agreement shall be interpreted, all
financial computations required under this Agreement shall be made, and all
financial information required under this Agreement shall be prepared in
accordance with GAAP.
1.3 OTHER INTERPRETIVE PROVISIONS.
(a) The meanings of defined terms are equally applicable to the
singular and plural forms of the defined terms.
(b) The words "hereof", "herein", "hereunder" and similar words
refer to this Agreement as a whole and not to any particular provision of this
Agreement; and subsection, Section, Schedule and Exhibit references are to this
Agreement unless otherwise specified. The term "documents" includes any and all
instruments, documents, agreements, certificates, indentures, notices and other
writings, however evidenced. The term "including" is not limiting and means
"including without limitation". In the computation of periods of time from a
specified date to a later specified date, the word "from" means "from and
including"; the words "to" and "until" each mean "to but excluding", and the
word "through" means "to and including".
(c) Unless otherwise expressly provided herein, (i) references to
agreements (including this Agreement) and other contractual instruments shall be
deemed to include all subsequent amendments and other modifications thereto, but
only to the extent such amendments and other modifications are not prohibited by
the terms of any Loan Document, and (ii) references to any statute or regulation
are to be construed as including all statutory and regulatory provisions
consolidating, amending, replacing, supplementing or interpreting the statute or
regulation.
(d) The captions and headings of this Agreement are for convenience
of reference only and shall not affect the interpretation of this Agreement.
This Agreement and other Loan Documents may use several different limitations,
tests or measurements to regulate the same or similar matters. All such
limitations, tests and measurements are cumulative and shall each be performed
in accordance with their terms. Unless otherwise expressly provided, any
reference to any action of the Bank by way of consent, approval or waiver shall
be deemed modified by the phrase "in its sole discretion."
(e) The Loan Documents are the result of negotiations between, and
have been reviewed by counsel to, Bank and Borrower, and are the products of
both parties. Accordingly, they shall not be construed against Bank merely
because of Bank's involvement in their preparation.
2. CREDIT FACILITIES.
2.1 REVOLVING ACQUISITION FACILITY. From time to time during the
Availability Period, Bank, on a revolving basis, will make advances to Borrower
as provided herein. The total of all advances, may not exceed at any one time
the amount provided herein.
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(a) ADVANCES UNDER REVOLVING ACQUISITION FACILITY.
(i) TOTAL ADVANCES. The total of all advances outstanding at
any one time under the Revolving Acquisition Facility may not exceed the
Revolving Acquisition Credit Limit;
(ii) INITIAL ADVANCE. The initial advance under the Revolving
Acquisition Facility (the "Initial Advance") shall be for an amount not to
exceed Nineteen Million Dollars ($19,000,000);
(iii) USE OF PROCEEDS. Borrower shall use the proceeds of
the Initial Advance to concurrently finance the American Acquisition and
the TRC Acquisition; and
(iv) PERMITTED ACQUISITIONS. The balance of the Revolving
Acquisition Credit Limit, including amounts available under the Revolving
Acquisition Credit Facility shall be used by Borrower solely to finance
Permitted Acquisitions.
(b) REPAYMENT.
(i) INTEREST PAYMENTS. Except as provided in
Section 2.3(b)(iii) below, interest on advances under the Revolving
Acquisition Facility shall be due and payable on a monthly basis commencing
on the last day of the month following the Closing Date and continuing
through the Maturity Date; provided, that in the event the Closing Date
falls on or after the twentieth (20th) day of a month, interest payments
will commence on the last day of the next succeeding month;
(ii) REVOLVING ACQUISITION CREDIT LIMIT REDUCTIONS.
(1) QUARTERLY REDUCTIONS. On the last day of every
calendar quarter, commencing June 30, 1997, the Revolving Acquisition
Credit Limit shall be reduced by the amounts set forth below:
Period Amount
------ ------
On June 30, 1997 $500,000
On September 30, 1997
and December 31, 1997 $750,000 per quarter
From March 31, 1998
through December 31, 1998 $875,000 per quarter
From March 31, 1999
through December 31, 2001 $1,000,000 per quarter
On March 31, 2002 $1,500,000
(2) EQUITY PREPAYMENT. The Revolving Acquisition Credit
Limit shall be automatically reduced by an amount equal to fifty
percent (50%) of the net proceeds received by Borrower from any
issuance and sale of shares of its capital stock ("Equity
Prepayment") up to a maximum reduction in the Revolving Acquisition
Credit Limit of Ten Million Dollars ($10,000,000);
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(3) STEP DOWN. The Revolving Acquisition Credit
Limit shall be automatically reduced by Three Million Dollars
($3,000,000) on September 30, 1998 ("Principal Reduction"); provided,
however, that the reduction required under this subsection (3) shall
not be required if on or before September 30, 1998, the Revolving
Acquisition Credit Limit has been reduced by at least Three Million
Dollars ($3,000,000) as a result of Equity Prepayment(s);
(4) VOLUNTARY PREPAYMENTS. The Revolving
Acquisition Credit Limit shall not be reduced by voluntary
prepayments made by Borrower; and
(5) FINAL PAYMENT. Borrower shall repay the
entire unpaid balance of advances under the Revolving Acquisition
Facility, including accrued but unpaid interest, on the Maturity
Date.
2.2 REVOLVING WORKING CAPITAL FACILITY. From time to time during the
Availability Period, Bank, on a revolving basis, will make advances to Borrower
as provided herein. The total of all advances may not exceed at any one time
the amount provided herein.
(a) ADVANCES UNDER THE REVOLVING WORKING CAPITAL FACILITY.
(i) TOTAL ADVANCES. The total of all advances outstanding at
any one time under the Revolving Working Capital Facility may not exceed
the Revolving Working Capital Credit Limit.
(ii) USE OF PROCEEDS. Borrower shall use the proceeds of
advances under the Revolving Working Capital Facility for working capital
and other general corporate purposes of Borrower and its Subsidiaries,
excluding Acquisitions and investments other than investments in marketable
securities.
(b) REPAYMENT.
(i) INTEREST PAYMENTS. Except as provided in Section
2.3(b)(iii) below, interest on advances under the Revolving Working Capital
Facility shall be due and payable on a monthly basis commencing on the last
day of the month following the initial advance under the Revolving Working
Capital Facility and continuing through the Maturity Date.
(ii) FINAL PAYMENT. Borrower shall repay the entire principal
balance of outstanding advances under the Revolving Working Capital
Facility, as well as accrued but unpaid interest, on the Maturity Date.
2.3 RATES OF INTEREST.
(a) REFERENCE RATE. Advances under the Revolving Credit Facilities
shall bear interest during each quarter at a rate per annum equal to the
Reference Rate plus the percentage points set forth below corresponding to the
ratio set forth below as of the end of the immediately preceding quarterly
accounting period.
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Funded Debt/Trailing Reference Rate Spread LIBOR Rate Spread
Four Quarter EBITDA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
>1.75:1 0.25% 2.00%
- --------------------------------------------------------------------------------
> or equal to 1.75:1>1.00 0.125% 1.875%
- --------------------------------------------------------------------------------
< or equal to 1.00 0.00% 1.75%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(b) LIBOR RATE. In lieu of the interest rate related to the
Reference Rate, Borrower may elect to have all or portions of advances under the
Revolving Credit Facilities bear interest during each calendar quarter at the
LIBOR Rate plus the percentage points set forth above corresponding to the ratio
set forth above as of the end of the immediately preceding quarterly accounting
period; and further subject to the following requirements:
(i) Each LIBOR Rate Portion shall be for an amount not less
than Five Hundred Thousand Dollars ($500,000).
(ii) A LIBOR Rate Interest Period shall not end later than the
last day of the Availability Period.
(iii) Borrower shall pay interest on each LIBOR Rate Portion
on the earlier of the last day of each LIBOR Rate Interest Period for such
portion, or ninety (90) days from the date of the advance of such portion.
(iv) A LIBOR Rate Portion shall not be converted to a different
interest rate during its LIBOR Rate Interest Period. Upon the expiration
of a LIBOR Rate Interest Period, the LIBOR Rate Portion shall thereafter
bear interest at the rate related to the Reference Rate unless Borrower
elects a new interest rate as provided hereunder.
(v) Any payment of a LIBOR Rate Portion prior to the last day
of the LIBOR Rate Interest Period for such portion, whether voluntary, by
reason of acceleration or otherwise, including any mandatory payments
required under this Agreement and applied by Bank to an LIBOR Rate Portion,
shall be accompanied by the amount of accrued interest on the amount repaid
and by the amount (if any) by which (1) the additional interest which would
have been payable on the amount repaid had it not been paid until the last
day of its LIBOR Rate Interest Period exceeds, and (2) the interest which
would have been recoverable by Bank by placing the amount repaid on deposit
in the London inter-bank market for a period starting on the date it was
repaid and ending on the last day of the LIBOR Rate Interest Period for
such portion.
(vi) Bank shall have no obligation to accept an election for a
LIBOR Rate Portion if any of the following described events has occurred
and is continuing:
(1) Dollar deposits in the principal amount, and for
periods equal to the interest period, of a LIBOR Rate Portion are not
available in the London inter-bank market; or
(2) The LIBOR Rate does not accurately reflect the cost
of a LIBOR Rate Portion.
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(vii) Upon the occurrence of an Event of Default, Bank may
terminate the availability of the rate related to the LIBOR Rate for LIBOR
Rate Interest Periods commencing after the occurrence of the Event of
Default.
2.4 INTEREST RATE PROTECTION. Concurrently with the execution of this
Agreement, and on terms acceptable to Bank, Borrower shall enter into an
interest rate swap for a fixed rate covering (a) at least seventy-five percent
(75%) of the projected annual outstanding principal balance of the Revolving
Acquisition Facility for a term of two (2) years, (b) at least fifty percent
(50%) of the projected annual outstanding principal balance of the Revolving
Acquisition Facility for a term of one (1) year thereafter, and (c) protecting
the LIBOR Rate index from exceeding seven and one-half percent (7.5%).
2.5 MANDATORY PAYMENT. If at any time and for any reason the total
amount of credit outstanding under the Revolving Credit Facilities exceeds the
limitations set forth herein, Borrower shall pay Bank, upon Bank's election and
demand, the amount of the excess. Payments under this Section 2.5 may be
applied to the obligations of Borrower to Bank in the order and manner as Bank
in its discretion may determine.
3. TAXES, YIELD PROTECTION AND ILLEGALITY.
3.1 TAXES. If any payments to Bank under this Agreement are made from
outside the United States, Borrower will not deduct any foreign taxes from any
payments it makes to Bank. If any such taxes are imposed on any payments made
by Borrower (including payments under this Section), Borrower will pay the taxes
and will also pay to Bank, at the time interest is paid, any additional amount
which Bank specifies as necessary to preserve the after-tax yield Bank would
have received if such taxes had not been imposed. Borrower will confirm that it
has paid the taxes by giving Bank official tax receipts (or notarized copies)
within thirty (30) days after the due date.
3.2 ILLEGALITY.
(a) If Bank determines that the introduction of any requirement of
law, or any change in any requirement of law, or in the interpretation or
administration of any requirement of law, has made it unlawful, or that any
central bank or other governmental authority has asserted that it is unlawful,
for Bank or any applicable lending office of Bank to make LIBOR Rate Portions,
then, on notice thereof by Bank to Borrower, any obligation of Bank to make
advances for which interest is payable at the LIBOR Rate shall be suspended
until Bank notifies Borrower that the circumstances giving rise to such
determination no longer exists.
(b) If Bank determines that it is unlawful to maintain LIBOR Rate
Portions, Borrower upon its receipt of notice of such fact and demand from Bank,
prepay in full all LIBOR Rate Portions then outstanding, together with interest
accrued thereon and amounts required under Section 3.3, either on the last day
of the LIBOR Rate Interest Period thereof, if Bank may lawfully continue to
maintain LIBOR Rate Portions to such day, or immediately, if Bank may not
lawfully continue to maintain LIBOR Rate Portions. If Borrower is required to
so prepay any LIBOR Rate Portion, then concurrently with such prepayment,
Borrower shall borrow from Bank, in the amount of such repayment, a Reference
Rate Portion.
3.3 INCREASED COSTS AND REDUCTION OF RETURN.
(a) If Bank determines that, due to either (i) the introduction of
or any change
10
<PAGE>
in or in the interpretation of any law or regulation, or (ii) the compliance by
Bank with any guideline or request from any central bank or other governmental
authority (whether or not having the force of law), there shall be any increase
in the cost to Bank of agreeing to make or making, funding or maintaining any
LIBOR Rate Portion, then Borrower shall be liable for, and shall from time to
time, upon demand, pay to Bank, additional amounts as are sufficient to
compensate Bank for such increased costs.
(b) If Bank shall have determined that (i) the introduction of any
Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation,
(iii) any change in the interpretation or administration of any Capital Adequacy
Regulation by any central bank or other Governmental Authority charged with the
interpretation or administration thereof, or (iv) compliance by Bank (or any
applicable lending office of Bank) or any corporation controlling Bank with any
Capital Adequacy Regulation, affects or would affect the amount of capital
required or expected to be maintained by Bank or any corporation controlling
Bank and (taking into consideration Bank's or such corporation's policies with
respect to capital adequacy and Bank's desired return on capital) determines
that the amount of such capital is increased as a consequence of its commitment
under this Agreement, then, upon demand of Bank to Borrower, Borrower shall pay
to Bank, from time to time as specified by Bank, additional amounts sufficient
to compensate Bank for such increase.
3.4 FUNDING LOSSES. Borrower shall reimburse Bank and hold Bank harmless
from any loss or expense which Bank may sustain or incur as a consequence of:
(a) the failure of Borrower to make on a timely basis any payment of principal
of any LIBOR Rate Portion; (b) the failure of Borrower to borrow, continue or
convert an advance after Borrower has requested an advance or has given (or is
deemed to have given) a Notice of Conversion/Continuation; (c) the failure of
Borrower to make any prepayment in accordance with any notice delivered under
Section 6.3; (d) the prepayment or other payment (including after acceleration
thereof) of a LIBOR Rate Portion on a day that is not the last day of the
relevant LIBOR Rate Interest Period; or (e) the automatic conversion under
Section 6.3 below of any LIBOR Rate Portion to a Reference Rate Portion on a day
that is not the last day of the relevant LIBOR Rate Interest Period; including
any such loss or expense arising from the liquidation or reemployment of funds
obtained by it to maintain any LIBOR Portions or from fees payable to terminate
the deposits from which such funds were obtained.
3.5 INABILITY TO DETERMINE RATES. If Bank determines that for any reason
adequate and reasonable means do not exist for determining the LIBOR Rate for
any requested Interest LIBOR Rate Period with respect to a proposed LIBOR Rate
Portion, for any requested Interest Period, does not adequately and fairly
reflect the cost to Bank of funding such advance, Bank will promptly so notify
Borrower. Thereafter, the obligation of Bank to make or maintain LIBOR Rate
Portions hereunder shall be suspended until Bank revokes such notice in writing.
Upon receipt of such notice, Borrower may revoke any notice of borrowing then
submitted by it. If Borrower does not revoke such notice, Bank shall make,
convert or continue the advance, as proposed by Borrower, in the amount
specified in the applicable notice submitted by Borrower, but such advances
shall be made, converted or continued as a Reference Rate Portion instead of a
LIBOR Rate Portion.
3.6 SURVIVAL. The agreements and obligations of Borrower in this Section
3 shall survive the payment of all other obligations.
4. FEES AND EXPENSES.
4.1 FACILITY FEE. Borrower shall pay Bank a fee ("Facility Fee") of
Seventy-Five
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Thousand Dollars ($75,000) on or before the date of last execution of this
Agreement.
4.2 COMMITMENT FEE. Borrower shall pay Bank a fee ("Commitment Fee") on
the average daily unused portion of the Credit Limit computed on a quarterly
basis in arrears on the last business day of each calendar quarter based upon
the daily utilization for that quarter as calculated by Bank, equal to
one-quarter of one percent (0.25%) per annum. This fee is due quarterly in
arrears on the last day of each accounting quarter commencing on the Closing
Date, and on the last day of each accounting quarter thereafter until the
expiration of the Availability Period.
4.3 EXPENSES.
(a) Borrower agrees to pay to Bank, on demand, all out-of-pocket
costs and expenses reasonably incurred by Bank in connection with the
preparation of the Loan Documents in excess of those fees and costs listed
above. Expenses include, but are not limited to, reasonable attorneys' fees,
including any reasonably allocated costs of Bank's in-house counsel, auditors,
filing, recording and search fees and documentation fees.
(b) Borrower agrees to reimburse Bank for the cost of periodic
audits of the books and records of Borrower and the Material Subsidiaries and
periodic audits and appraisals of the Collateral. Such audits and appraisals
shall not be conducted more than once a year, provided Borrower is not in
default hereunder. The audits and appraisals may be performed by employees of
Bank or by independent auditors or appraisers.
5. COLLATERAL.
5.1 PROPERTY PLEDGED. All obligations of Borrower under this Agreement
shall be secured by one or more security agreements approved by Bank and
executed by Borrower as debtor in favor of Bank as secured party, granting Bank
a first priority security interest in all personal property ("Personal
Property") of Borrower including, but not limited to:
(a) Receivables.
(b) Fixed assets, excluding leasehold improvements.
(c) Patents, trademarks and other general intangibles.
The Personal Property shall be more particularly described in the security
agreement(s) approved by Bank and executed by Borrower. The Personal Property
securing the obligations of Borrower under this Agreement shall also secure all
other present and future obligations of Borrower to Bank and all personal
property securing any other present or future obligations of Borrower to Bank
shall also secure Borrower's obligations under this Agreement.
5.2 STOCK PLEDGE. All obligations of Borrower under this Agreement shall
also be secured by all of the issued and outstanding shares of the capital stock
of all Subsidiaries now or hereinafter formed or acquired (the "Shares" and,
together with the Personal Property, the "Collateral"), all as more particularly
described in the pledge agreement(s) approved by Bank and executed by Borrower.
6. EXTENSIONS OF CREDIT, PAYMENTS AND INTEREST CALCULATIONS.
6.1 PROCEDURE FOR BORROWING. Bank may honor any instructions for
advances or
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repayments or for the designation of optional interest rates which are in
writing and signed by two (2) authorized employees of Borrower. Advances will
be deposited into and repayments will be withdrawn from Borrower's commercial
account number 14559-00150 at the North Orange County Regional Commercial
Banking Office of Bank, or such other account(s) as may be specified in writing
by Borrower. Bank shall honor any instructions made by any two (2) individuals
authorized to sign loan agreements on behalf of Borrower, or any other
individual designated by any such authorized signers. Bank shall be entitled to
rely upon written instructions from persons it reasonably believes to be
authorized by Borrower to make such requests without making independent inquiry.
Borrower hereby indemnifies Bank for, and holds Bank harmless from, any and all
losses, damages, claims and expenses (including reasonable attorneys' fees and
allocated costs of Bank's in-house counsel), however arising, which Bank suffers
or incurs based on or arising out of extensions of credit or payments made on
any written request except that Bank shall not be indemnified against its own
gross negligence or willful misconduct. The provisions of this Section 6.1
shall survive termination of this Agreement.
6.2 REQUEST FOR BORROWING. Each request for an extension of credit must
be received by Bank prior to 9:00 a.m. Los Angeles time (a) two (2) Banking Days
prior to the requested Borrowing Date, in the case of a LIBOR Rate Portion; and
(b) on the requested Borrowing Date, in the case of a Reference Rate Portion,
specifying: (i) the amount of the advance, which shall be in a minimum amount of
Five Hundred Thousand Dollars ($500,000) or any multiple of Two Hundred Fifty
Thousand Dollars ($250,000) in excess thereof; (ii) the requested Borrowing
Date, which shall be a Business Day; (iii) the type of advance requested; and
(iv) the duration of the Interest Period applicable to such extension of credit.
If Borrower fails to specify the duration of the interest period for a LIBOR
Rate Portion, such interest period shall be thirty (30) days.
6.3 CONVERSION AND CONTINUATION ELECTIONS.
(a) Borrower may (i) elect, as of any Banking Day, in the case of a
Reference Rate Portion, or as of the last day of the applicable Interest Period,
in the case of a LIBOR Rate Portion to convert any such advance (or any part
thereof in an amount not less than Five Hundred Thousand Dollars ($500,000), or
that is in an integral multiple of One Million Dollars ($1,000,000) in excess
thereof) into an advance of any other type; or (ii) elect, as of the last day of
the applicable Interest Period, to continue an advance having an Interest Period
expiring on such day (or any part thereof in an amount not less than Five
Hundred Thousand Dollars ($500,000), or that is in an integral multiple of Two
Hundred Fifty Thousand Dollars ($250,000) in excess thereof)
("Conversion/Continuation Date"); PROVIDED, that if at any time the amount of
any LIBOR Rate Portion is reduced, by payment, prepayment, or conversion of part
thereof to be less than Five Hundred Thousand Dollars ($500,000), such LIBOR
Rate Portion shall automatically convert into a Reference Rate Portion, and on
and after such date the right of Borrower to continue such advance, and convert
such advance into a Reference Rate Portion or LIBOR Rate Portion, as the case
may be, shall terminate.
(b) Borrower shall make the election provided for in subsection (a)
above not later than 9:00 a.m. (Los Angeles time) at least (i) three (3) Banking
Days in advance of the Conversion/Continuation Date, if any loan is to be
converted into or continued as a LIBOR Rate Portion; (ii) on the
Conversion/Continuation Date, if any loan is to be converted into a Reference
Rate Portion, specifying: (1) the proposed Conversion/Continuation Date; (2)
the amount of the loan to be converted or continued; (3) the type of loan
resulting from the proposed conversion or continuation; and (4) other than in
the case of conversions into Reference Rate Portions, the duration of the
requested interest period.
6.4 DISBURSEMENTS AND PAYMENTS. Each disbursement by Bank and each
payment by
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Borrower under this Agreement shall be made in immediately available funds, or
such other type of funds selected by Bank, and at such branch of Bank as Bank
may from time to time select.
6.5 BRANCH ACCOUNTS. Each extension of credit under this Agreement shall
be made for the account of such branch of Bank as Bank may from time to time
select.
6.6 EVIDENCE OF INDEBTEDNESS. Principal, interest and all other sums due
Bank under this Agreement shall be evidenced by entries in records maintained by
Bank, and, if required by Bank, by a promissory note or notes. Each payment on
and any other credits with respect to principal, interest and all other sums due
under this Agreement shall be evidenced by entries to records maintained by
Bank.
6.7 DIRECT DEBIT (PRE-BILLING).
(a) Borrower hereby authorizes Bank to debit Borrower's account
number 14559-00150 at the North Orange County Regional Commercial Banking Office
of Bank (the "Designated Account") in the amount of principal, interest, fees or
any other amount due under this Agreement or under any instrument or agreement
required under this Agreement. Bank shall debit the account on the date such
amounts become due, or, if such due date is not a Banking Day, on the next
Banking Day after such due date. If there are insufficient funds in the account
to cover the amount debited to the account in accordance with this Section 6.7,
such debit will be reversed and such amount will remain unpaid.
(b) Approximately ten (10) days prior to each due date, Bank will
mail to Borrower a statement of the amounts that will be due on that due date
(the "Billed Amount"). The calculation will be made on the assumption that no
new extensions of credit or payments will be made between the date of the
billing statement and the due date, and that there will be no changes in the
applicable interest rate.
(c) Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount due on that date (the "Accrued Amount"). If the
Billed Amount debited to the Designated Account differs from the Accrued Amount,
the discrepancy will be treated as follows:
(i) If the Billed Amount is less than the Accrued Amount, the
Billed Amount for the following due date will be increased by the amount of
the discrepancy. Borrower will not be in default by reason of any such
discrepancy.
(ii) If the Billed Amount is more than the Accrued Amount, the
Billed Amount for the following due date will be decreased by the amount of
the discrepancy.
Regardless of any such discrepancy, interest will continue to accrue
based on the actual amount of principal outstanding without compounding. Bank
will not pay Borrower interest on any overpayment.
6.8 DIRECT DEBIT (REVOLVING WORKING CAPITAL FACILITY). Borrower agrees
that Bank may create advances under the Revolving Working Capital Facility to
pay interest and any fees that are due under this Agreement. Bank shall create
such advances on the dates the payments become due. If a due date does not fall
on a Banking Day, Bank shall create the advance on the first Banking Day
following the due date. If the creation of an advance under the Revolving
Working Capital Facility causes the total amount of credit outstanding
thereunder to exceed the limitations set forth in this Agreement, Borrower shall
immediately pay the excess to Bank upon
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Bank's demand.
6.9 INTEREST CALCULATION. Except as otherwise stated in this Agreement,
all interest and fees, if any, payable under this Agreement shall be computed on
the basis of a three hundred sixty (360) day year and actual days elapsed, which
results in more interest or a larger fee than if a three hundred sixty-five
(365) day year were used.
6.10 LATE PAYMENTS; COMPOUNDING. Any sum payable by Borrower hereunder
(including unpaid interest) if not paid when due shall bear interest (payable on
demand) from its due date until payment in full at a rate per annum equal to the
Reference Rate plus two (2) percentage point(s). At the option of Bank, in each
instance, any sum payable hereunder which is not paid when due (including unpaid
interest) may be added to principal of the applicable Revolving Facility and
shall thereafter bear interest at the rate applicable to principal.
6.11 DEFAULT RATE. Upon the occurrence and during the continuation of any
Event of Default, and without constituting a waiver of any such Event of
Default, advances under the applicable Revolving Facility shall at the option of
Bank bear interest at a rate per annum which is two (2) percentage point(s)
higher than the rate of interest otherwise provided under this Agreement.
7. CONDITIONS PRECEDENT.
7.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF BANK. Bank's obligation to
extend credit under this Agreement is subject to Bank's receipt of the
following, each of which must be in form and substance satisfactory to Bank.
(a) PURCHASE AGREEMENTS. The Purchase Agreement for the American
Acquisition and the TRC Acquisition and all documents to be delivered in
connection therewith (the "Purchase Documents"), including, but not limited to,
the non-competition agreements with William N. Rees, Jr., James L. Davenport,
D.D.S., and Martin J. Rinker, D.D.S., the Assignment and Assumption Agreement,
dated September 26, 1996, executed by American, D&R Dental Services Group
(Metroplex Dental Group/Irving L.L.P) ("D & R") and the Selling Shareholders,
the Cross Marketing Agreement, dated as of September 26, 1996, and the NorWest
Bank Texas Escrow Agreement Holdback, dated as of September 26, 1996 are in form
and substance substantially the same as the Purchase Documents reviewed and
found acceptable by Bank, and have been executed by the parties thereto;
(b) LOAN DOCUMENTS. The Loan Documents executed by Borrower;
(c) RESOLUTIONS; INCUMBENCY. (i) Copies of the resolutions of the
board of directors of Borrower and D & R authorizing the transactions
contemplated hereby, certified as of the Closing Date by the Secretary of
Borrower and D & R; and (ii) a certificate of the Secretary of Borrower and D &
R certifying the names and true signatures of the officers of Borrower and D & R
who are authorized to execute, deliver and perform, as applicable, this
Agreement, and all other Loan Documents to be delivered by it hereunder;
(d) ORGANIZATION DOCUMENTS; GOOD STANDING. Each of the following
documents: (i) the articles or certificate of incorporation and the bylaws of
Borrower and each Subsidiary as in effect on the Closing Date, certified by the
Secretary of Borrower and each Subsidiary as of the Closing Date; and (ii) a
good standing and tax clearance certificate for Borrower and each Material
Subsidiary from the Secretary of State (or similar, applicable Governmental
Authority) of its state of incorporation and each state where Borrower and each
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Material Subsidiary is qualified to do business as a foreign corporation as of a
recent date, together with a bring-down certificate by facsimile, dated the
Closing Date for those Subsidiaries located in California and Texas and as soon
as possible after the Closing Date for all other Material Subsidiaries;
(e) LEGAL OPINION. A favorable opinion of counsel to Borrower,
addressed to Bank, with respect to such legal matters relating hereto as Bank
may request;
(f) PAYMENT OF FEES. Evidence of payment by Borrower of all
accrued and unpaid fees, costs and expenses to the extent then due and payable
on the Closing Date, together with attorney fees and expenses of Bank to the
extent invoiced prior to or on the Closing Date, plus such additional amounts of
attorney fees and expenses as shall constitute Bank's reasonable estimate of
costs and expenses incurred or to be incurred by it through the closing
proceedings (provided that such estimate shall not thereafter preclude final
settling of accounts between Borrower and Bank); including any such costs, fees
and expenses arising under or referenced in Sections 12.4 and 12.5 below;
(g) CERTIFICATE. A certificate executed by a Responsible Officer
dated as of the Closing Date, stating that: (i) the representations and
warranties contained in Section 8 are true and correct on and as of such date,
as though made on and as of such date; (ii) no Default or Event of Default
exists or would result from the execution and delivery of this Agreement; (iii)
there has occurred since June 30, 1996, no event or circumstance that has
resulted or could reasonably be expected to result in a Material Adverse Change;
(iv) Borrower and its Material Subsidiaries are in compliance with all material
regulations of Governmental Authorities having jurisdiction over Borrower and
each such Material Subsidiary; (v) after taking into consideration the
transactions contemplated by this Agreement, Borrower is in compliance with the
financial covenants described in Section 9 below and Borrower and its Material
Subsidiaries are in compliance with all financial responsibility and other
material requirements of all Governmental Authorities having jurisdiction over
Borrower and its Material Subsidiaries, including the California Department of
Corporations and the Texas Department of Insurance; and (vi) stating the sources
and uses of funds for the American Acquisition and the TRC Acquisition;
(h) TERMINATION STATEMENTS. Evidence of the satisfaction and
termination of all liens affecting the Collateral;
(i) PERMITS. Evidence that Borrower and each Material Subsidiary
possess the necessary licenses and permits to conduct its business as presently
conducted;
(j) REGULATORY APPROVAL. Evidence that Borrower has received all
approvals, clearances or expirations of waiting periods for the Acquisitions
required by all federal, state and local Governmental Authorities having
jurisdiction over Borrower, its Material Subsidiaries and the transactions
contemplated by this Agreement;
(k) FINANCIAL STATEMENTS. Bank shall have received and found
acceptable the following financial statements:
(i) The combined and combining income statements of American,
TRC and Metroplex Dental for the fiscal year ended December 31, 1995, with
proforma adjustments made to the historical financial statements to take
into consideration the effect of the termination of Borrower's contract
with the Employees Retirement System of Texas and compensation formerly
paid to the Selling Shareholders, and interim combined and combining
financial statements of Borrower, American, TRC and Metroplex Dental
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for the six (6) month period ending June 30, 1996. The financial
statements shall be accompanied by the opinion of Deloitte and Touche
("Deloitte") which report shall state that they have examined the proforma
adjustments in accordance with the standards established by the American
Institute of Certified Public Accountants;
(ii) The audited financial statements of TRC for fiscal years
ended December 31, 1993, December 31, 1994 and December 31, 1995, and
interim audited financial statement of TRC for the six (6) month period
ended June 30, 1996;
(iii) The interim financial statement of American for the
six (6) month period ended June 30, 1996, audited by Robert Allen, CPA;
(iv) The audited financial statement of Safeguard Health Plans,
Inc., a California corporation, Safeguard Health Plans, Inc., a Texas
corporation, and SafeHealth Life Insurance Company, a California
corporation for the fiscal year ended December 31, 1995, and unaudited
year-to-date results for each corporation;
(v) The financial statement of Metroplex Dental for the most
recent fiscal year and the interim financial statement for the quarter
ended June 30, 1996, prepared by Borrower;
(vi) CPA management letters for fiscal years ended December 31,
1994 and 1995 for Borrower and American;
(vii) Consolidated and consolidating projections for
Borrower, American and TRC for fiscal years 1996 through and including
2000, and a certificate executed by a Responsible Officer, certifying to
Bank that the financial projections are:
(1) either based on (A) facts which are true, correct
and complete in all material respects, or (B) consistent with such
facts; and
(2) reasonably consistent with such facts and
assumptions.
(viii) Pre-closing and post-closing pro forma Borrower
prepared consolidated and consolidating balance sheets of Borrower,
American, TRC and Metroplex Dental, to include accompanying explanatory
notes.
(l) MATERIAL CONTRACTS. A listing and summary of all material
contracts of Borrower, its Material Subsidiaries and Target, the terms of which
shall be acceptable to Bank. Borrower shall provide Bank with copies of any
material contracts requested by Bank;
(m) UCC-1 FINANCING STATEMENTS. Borrower shall deliver to Bank two
(2) UCC-1 Financing Statements in paper form for filing with the California and
Delaware Secretaries of State and Bank shall have received a certificate of the
Secretary of State of California and Delaware showing said financing statements
to be subject to no prior filings;
(n) INSURANCE. Borrower shall deliver to Bank, within thirty (30)
days, a copy of the Property insurance policy for Borrower listing Bank as loss
payee or; and
(p) OTHER DOCUMENTS. Such other approvals, opinions, documents or
materials as Bank may request.
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7.2 ADDITIONAL CONDITIONS TO EXTENSION OF CREDIT FOR THE AMERICAN
ACQUISITION AND THE TRC ACQUISITION. Bank's obligation to extend credit for the
American Acquisition and the TRC Acquisition is subject to Bank's receipt of the
following, each of which must be in form and substance satisfactory to Bank:
(a) PURCHASE DOCUMENTS. Evidence that all conditions to the
effectiveness of the Purchase Documents have been satisfied or waived.
(b) CONDITIONS PRECEDENT. Satisfaction of all of the conditions of
Section 7.1 above.
(c) COMPLIANCE CERTIFICATE. Bank shall have received a Compliance
Certificate executed by a Responsible Officer in form and substance reasonably
satisfactory to Bank.
7.3 CONDITIONS TO EACH EXTENSION OF CREDIT FOR THE PERMITTED
ACQUISITIONS. Bank's obligation to extend credit for a Permitted Acquisition is
subject to Bank's receipt of the following, each of which must be in form and
substance satisfactory to Bank.
(a) COMPLIANCE CERTIFICATE. Bank shall have received a Compliance
Certificate executed by a Responsible Officer in form and substance reasonably
acceptable to Bank.
(b) PURPOSE STATEMENT. A certificate executed by a Responsible
Officer stating the specific purpose of the requested advance.
(c) CONTINUATION OF REPRESENTATIONS AND WARRANTIES. Bank shall
have received a certificate executed by a Responsible Officer that the
representations and warranties of Borrower set forth in this Agreement are true
and correct as though made at and as of the date of the certificate.
7.4 CONDITION TO EACH EXTENSION OF CREDIT UNDER REVOLVING WORKING CAPITAL
FACILITY. Before each extension of credit, including the first, Bank shall have
received a certificate executed by a Responsible Officer setting forth the
specific corporate or working capital needs that will be met with the proceeds
of an extension of credit including, to the extent applicable, the Subsidiary on
whose behalf the advance will be utilized.
8. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants (and each request for an extension of
credit under this Agreement shall be deemed a representation and warranty made
on the date of such request) that:
8.1 ORGANIZATION. Borrower and each of its Subsidiary is a corporation
duly organized and existing under the laws of the state of its organization and
the execution, delivery, and performance of this Agreement and of any instrument
or agreement required by this Agreement are within Borrower's powers, have been
duly authorized, and are not in conflict with the terms of any charter, bylaw,
or other organization papers of Borrower.
8.2 NO CONFLICTS. The execution, delivery, and performance of this
Agreement and of any instrument or agreement required by this Agreement are not
in conflict with any law or any indenture, agreement, or undertaking to which
Borrower or any Material Subsidiary is a party or by which Borrower is bound or
affected.
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8.3 ENFORCEABILITY. This Agreement is a legal, valid and binding
agreement of Borrower, enforceable against Borrower in accordance with its
terms, and any instrument or agreement required under this Agreement, when
executed and delivered, will be similarly legal, valid, binding and enforceable.
8.4 GOOD STANDING. Borrower and each Material Subsidiary is properly
licensed and in good standing in each state in which Borrower is doing business
and Borrower has qualified under, and complied with, where required, the
fictitious name statute of each state in which Borrower is doing business.
8.5 COMPLIANCE WITH LAWS. Borrower and each Material Subsidiary has
complied with all federal, state, and local laws, rules, and regulations
affecting the business of Borrower including, but not limited to, laws
establishing capital, equity, liquidity and surplus requirements for Borrower
and its Material Subsidiaries.
8.6 TITLE TO PROPERTIES. All property of Borrower and each Subsidiary
shall be owned or leased free and clear of all security interests, liens,
encumbrances and rights of others except the rights of any lessor under any
lease or security interest, the rights of Bank under any security agreements or
deeds of trust required under this Agreement and those consented to in writing
by Bank.
8.7 PERMITS, FRANCHISES. Borrower and each Material Subsidiary possess
all permits, memberships, franchises, contracts and licenses required and all
trademark rights, trade name rights, patent rights and fictitious name rights
necessary to enable it to conduct the business in which it is now engaged.
8.8 PERFECTED SECURITY INTEREST IN COLLATERAL. Except for the filing of
a financing statement with respect to the Collateral and the delivery to Bank of
any Collateral as to which possession is the only method of perfecting a
security interest therein, no further action is necessary in order to establish
and perfect Bank's lien on or security interest in the Collateral.
8.9 LITIGATION. There is no litigation, tax claim, proceeding or dispute
pending, or, to the knowledge of Borrower, threatened, against or affecting the
property of Borrower or any Material Subsidiary, the adverse determination of
which might affect the financial condition or operations of Borrower or any
Material Subsidiary, or impair Borrower's ability to perform its obligations
hereunder or under any instrument or agreement required hereunder.
8.10 NO EVENT OF DEFAULT. No event has occurred and is continuing or
would result from the extension of credit under this Agreement which constitutes
or would constitute an Event of Default or which, upon a lapse of time or notice
or both, would become an Event of Default.
8.11 OTHER OBLIGATIONS. Except as disclosed in writing to Bank, neither
Borrower nor any Material Subsidiary is in default under any other agreement
involving the borrowing of money, the extension of credit, or the lease of real
or personal property to which Borrower is a party as borrower, guarantor,
installment purchaser or lessee.
8.12 INFORMATION SUBMITTED. All financial and other information that has
been or will be submitted by Borrower to Bank, including Borrower's financial
statements dated as of June 30, 1996, is and will be:
(a) Prepared in accordance with GAAP consistently applied;
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(b) True and correct in all material respects and is complete
insofar as may be necessary to give Bank a true and accurate knowledge of the
subject matter thereof;
(c) In form and content required by Bank; and
(d) In compliance with all government regulations applicable
thereto.
8.13 NO MATERIAL ADVERSE CHANGE. There has been no Material Adverse
Change in the financial condition or operation of Borrower and its Material
Subsidiaries since the date of the most recent financial statements submitted to
Bank.
8.14 ERISA PLAN COMPLIANCE.
(a) Borrower has fulfilled its obligations, if any, under the
minimum funding standards of ERISA and the Internal Revenue Code of 1986, as
amended from time to time, (the "Code") with respect to each ERISA Plan and is
in compliance in all material respects with the presently applicable provisions
of ERISA and the Code, and has not incurred any liability with respect to any
ERISA Plan under Title IV of ERISA;
(b) No reportable event has occurred under Section 4043(b) of ERISA
for which the Pension Benefit Guaranty Corporation requires 30 day notice;
(c) No action by Borrower to terminate or withdraw from any ERISA
Plan has been taken and no notice of intent to terminate an ERISA Plan has been
filed under Section 4041 of ERISA; and
(d) No proceeding has been commenced with respect to an ERISA Plan
under Section 4042 of ERISA, and no event has occurred or condition exists which
might constitute grounds for the commencement of such a proceeding.
8.15 LOCATION OF BORROWER. Borrower's place of business (or, if Borrower
has more than one place of business, its chief executive office) is located at
the address listed under Borrower's signature on this Agreement.
9. AFFIRMATIVE COVENANTS.
So long as credit is available under this Agreement and until full and
final payment of all of Borrower's obligations under this Agreement and any
instrument or agreement required under this Agreement, unless Bank waives
compliance in writing, Borrower shall, and shall cause its Subsidiaries to:
9.1 NOTICE OF CERTAIN EVENTS. Immediately give written notice to Bank
of:
(a) All litigation where the amount claimed is One Million Dollars
($1,000,000) or more;
(b) Any material dispute which may exist with any governmental
regulatory body or law enforcement authority;
(c) Any Event of Default or any event which, upon a lapse of time
or notice or both, would become an Event of Default;
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(d) The occurrence of any reportable event under Section 4043(b) of
ERISA for which the Pension Benefit Guaranty Corporation requires thirty (30)
day notice; any action by Borrower to terminate or withdraw from an ERISA Plan
or the filing of any notice of intent to terminate under Section 4041 of ERISA;
any notice of noncompliance made with respect to an ERISA Plan under Section
4041(b) of ERISA; or the commencement of any proceeding with respect to an ERISA
Plan under Section 4042 of ERISA;
(e) Any material notice received from a governmental authority; or
(f) Any other matter which has resulted or might result in a
Material Adverse Change in the financial condition or operations of Borrower and
its Material Subsidiaries.
9.2 FINANCIAL AND OTHER INFORMATION. Deliver to Bank in form and detail
satisfactory to Bank, and in such number of copies as Bank may request:
(a) Within one hundred twenty (120) days after the end of each
fiscal year, the audited consolidated financial statements of Borrower and its
Subsidiaries for such year together with (i) an unqualified opinion of a "Big
Six" CPA firm, or another nationally recognized CPA firm, which is acceptable to
Bank, that the financial statements present fairly the financial position of
Borrower and its Subsidiaries for the period indicated in conformity with GAAP
applied on a basis consistent with prior years, (ii) a copy of the CPA
management letter, and (iii) a Compliance Certificate which includes all
computations made by the accounting firm to determine the compliance by Borrower
and each Material Subsidiary with all financial responsibility requirements
imposed by any Governmental Authority having jurisdiction over Borrower and each
Material Subsidiary;
(b) Within forty-five (45) days after the end of each quarterly
accounting period, the consolidated financial statements of Borrower and its
Subsidiaries for such period prepared by Borrower together with a Compliance
Certificate executed by a Responsible Officer certifying the compliance by
Borrower and the Subsidiaries with all financial responsibility requirements of
Governmental Authorities having jurisdiction over Borrower and each Material
Subsidiary;
(c) Within forty-five (45) days after the end of each quarterly
accounting period, a Compliance Certificate in the form of Exhibit A;
(d) Within forty-five (45) days after the end of each quarterly
accounting period, financial statements of each Material Subsidiary, including a
Compliance Certificate executed by a Responsible Officer certifying that each
such Material Subsidiary is in compliance with all financial responsibility
requirements of Governmental Authorities having jurisdiction over Borrower and
each Material Subsidiary;
(e) Within ten (10) days after the date of filing with the
Securities and Exchange Commission, copies of Borrower's Form 10-K Annual
Report, Form 10-Q Quarterly Report and Form 8-K Current Report;
(f) Within ten (10) days after the date of filing with the
California Department of Corporations, the Texas Department of Insurance, and
any other Governmental Authority having jurisdiction over the business and
affairs of Borrower and any Material Subsidiary, a copy of each filing required
as a result of, or which indicates that, Borrower or any Material Subsidiary is
not in compliance with all financial responsibility requirements of the
applicable
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<PAGE>
Governmental Authority;
(g) Within thirty (30) days prior to the end of a fiscal year,
consolidated financial projections for Borrower and its Subsidiaries for the
remaining fiscal years through the Maturity Date based upon (i) Borrower's
knowledge and belief that the facts are materially true, correct, and complete
in all respects, and (ii) assumptions which are reasonable, complete, and
consistent with such facts.
(h) Within sixty (60) days of closing of a Permitted Acquisition,
consolidated and consolidating balance sheet of Borrower and the Target audited
by an independent accountant acceptable to Bank, which balance sheet shall not
contain any materially adverse information from that provided to the Bank
pursuant to Section 7.1(k)(viii);
(i) Within one hundred twenty (120) days after the end of each
fiscal year, the financial statements of each Material Subsidiary for such
period, prepared by Borrower; and
(j) Promptly upon request of Bank, such other statements, lists of
property and accounts, budgets, forecasts or reports as to Borrower and each
Subsidiary as Bank may reasonably request.
9.3 BOOKS, RECORDS, AUDITS AND INSPECTIONS. Maintain for Borrower and
each Subsidiary adequate books, accounts and records and prepare all financial
statements required hereunder in accordance with GAAP, and in compliance with
the regulations of any Governmental Authority having jurisdiction over Borrower
or a Subsidiary or Borrower's or a Subsidiary's business and permit employees or
agents of Bank at any reasonable time to inspect the Collateral and Borrower's
or a Subsidiary's properties, to conduct appraisals of the Collateral, and to
examine or audit Borrower's or a Subsidiary's books, accounts, and records and
make copies and memoranda thereof. In the event any Collateral, properties,
books, accounts or records are in the possession of or under the control of a
third party, Borrower or its Subsidiary shall direct and hereby authorizes such
third party to permit access to Bank's employees or agents for the purpose of
performing the inspections, appraisals, examinations or audits permitted under
this Section, and to respond to any requests from Bank for information
concerning the amount, status or condition of any Collateral in such third
party's possession or control.
9.4 INSURANCE. Maintain and keep in force fire and hazard insurance
policies covering the tangible property comprising the Collateral. Each such
insurance policy shall be in an amount equal to the full replacement value of
such Collateral, shall include a replacement cost endorsement, shall be issued
by an insurance company with at least a B+, V rating, as set forth in the most
current issue, at any point in time, of "Best's Insurance Guide", and shall
include a loss payable endorsement in favor of Bank in a form acceptable to
Bank. Borrower shall also maintain and keep in force insurance satisfactory to
Bank as to amount, nature and carrier covering property damage (including use
and occupancy) to any of Borrower's other properties, public liability insurance
including coverage for contractual liability, product liability, property damage
and workers' compensation, and any other insurance which is usual for Borrower's
business. Borrower shall require all its Subsidiaries to maintain the same or
better insurance coverage that Bank is requiring of Borrower, including, if
appropriate, professional liability insurance. Borrower shall deliver to Bank
upon Bank's request a copy of each personal property insurance policy listing
Bank as loss payee and a certificate of insurance listing all insurance in force
for Borrower and its Subsidiaries.
9.5 COMPLIANCE WITH LAWS. At all times comply with, or cause to be
complied with,
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all laws, statutes (including but not limited to any fictitious name statute),
rules, regulations, orders and directions of any Governmental Authority having
jurisdiction over the business and operations of Borrower and its Subsidiaries.
9.6 ADDITIONAL ACTS. Perform, on request of Bank, such acts as may be
necessary or advisable to perfect any lien or security interest provided for
herein or otherwise to carry out the intent of this Agreement.
9.7 MINIMUM LIQUIDITY. Maintain on a consolidated basis, a total of
unencumbered and unrestricted cash and market value of cash equivalents and
marketable securities plus the unused amount of advances under the Revolving
Working Capital Facility ("Liquidity") of at least Seven Million Dollars
($7,000,000).
9.8 MAXIMUM TOTAL LIABILITIES TO TANGIBLE NET WORTH. Maintain on a
consolidated basis a ratio of Total Liabilities to Tangible Net Worth of not
more than the ratio indicated for each period set forth below:
Period Ratio
------ -----
From the Closing Date
through December 30, 1996 3.60 to 1
From December 31, 1996
through December 30, 1997 2.80 to 1
From December 31, 1997
through December 30, 1998 1.80 to 1
From December 31, 1998
and thereafter 1.10 to 1
9.9 MINIMUM FIXED CHARGE COVERAGE RATIO. As of the end of each quarterly
accounting period maintain on a consolidated basis a ratio of Cash Flow to Fixed
Charges at least equal to the ratio indicated:
Period Ratio
------ -----
For the one quarter period
ending December 31, 1996 1.10 to 1
For the two quarter period
ending March 31, 1997 1.10 to 1
For the three quarter period
ending June 30, 1997 1.10 to 1
For the four quarter period
ending September 30, 1997 1.15 to 1
For the four quarter periods
ending December 31, 1997 through
September 30, 1998 1.20 to 1
23
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For the four quarter periods
ending December 31, 1998 and
thereafter 1.25 to 1
This ratio shall be calculated quarterly using the income statement results
for the periods stated above. For purposes of computing the Minimum Fixed
Charge Coverage Ratio, the following shall apply:
(a) The amount of Five Hundred Thousand Dollars ($500,000) per
quarter shall be deemed payable for the quarters ending December 31, 1996, and
March 31, 1997; and
(b) The amount of Three Million Dollars ($3,000,000) representing
the principal reduction in the Revolving Acquisition Facility Credit Limit
required under Section 2.1(b) above, shall not be included in calculating the
ratio.
9.10 OUT-OF-DEBT REQUIREMENT. Repay all advances outstanding under the
Revolving Working Capital Facility and not draw any new advances for a period of
at least thirty (30) consecutive calendar days during each rolling twelve (12)
month period during the Availability Period and, in the event the Availability
Period is extended, during each subsequent twelve (12) month period.
9.11 USE OF PROCEEDS. Use the proceeds of the Revolving Acquisition
Facility to finance the Acquisitions; and use the proceeds of the Revolving
Working Capital Facility for working capital and other general corporate
purposes (excluding Acquisition financing).
9.12 EXISTENCE AND PROPERTIES. Maintain and preserve Borrower's existence
and all rights, privileges and franchises now enjoyed, conduct the business of
Borrower and its Subsidiaries in an orderly, efficient and customary manner,
keep all properties of Borrower and its Subsidiaries in good working order and
condition, and from time to time make all needed repairs, renewals or
replacements thereto and thereof so that the efficiency of such property shall
be fully maintained and preserved.
9.13 CHANGE IN NAME, STRUCTURE OR LOCATION. Notify Bank in writing prior
to any change in (a) Borrower's name, (b) Borrower's business or legal
structure, or (c) Borrower's place of business or chief executive office if
Borrower has more than one place of business.
10. NEGATIVE COVENANTS.
So long as credit is available under this Agreement and until full and
final payment of all of Borrower's obligations under this Agreement and any
instrument or agreement required under this Agreement, and unless Bank waives
compliance in writing, Borrower shall not, and shall not permit any Subsidiary
to:
10.1 OTHER INDEBTEDNESS. Create or incur any indebtedness for borrowed
money or for the deferred purchase price of property under capital leases, or
become liable as a surety, guarantor, accommodation endorser, or otherwise for
or upon the obligation of any other person, firm or corporation; provided,
however, that this Section shall not be deemed to prohibit:
(a) Direct or contingent obligations owed to Bank;
(b) The acquisition of goods, supplies or merchandise on normal
trade credit;
24
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(c) The execution of bonds or undertakings in the ordinary course
of its business as presently conducted;
(d) The endorsement of negotiable instruments received in the
ordinary course of its business as presently conducted;
(e) Indebtedness and lease obligations existing as of the date of
this Agreement and which have been disclosed to Bank in writing; and
(f) Additional indebtedness, including lease obligations, for the
acquisition of fixed or capital assets to the extent permitted under this
Agreement.
10.2 LIENS. Create, assume or suffer to exist any security interest, lien
(including the lien of an attachment, judgment or execution) or encumbrance,
securing a charge or obligation, on or of any of its property, real or personal,
whether now owned or hereafter acquired, except:
(a) Security interest(s) and deed(s) of trust in favor of Bank;
(b) Liens, security interests and encumbrances in existence as of
the date of this Agreement which have been disclosed to Bank in writing;
(c) Liens for current taxes, assessments or other governmental
charges which are not delinquent or remain payable without any penalty;
(d) Purchase money security interests in personal or real property
hereafter acquired when the security interest does not extend beyond the
property purchased and the aggregate amount of liabilities secured thereby do
not exceed, at any one time, One Million Dollars ($1,000,000) and on terms
otherwise acceptable to Bank; provided, however, that this exception shall not
apply to any Subsidiary; and
(e) Any mechanic's, materialmen's or other lien on account of labor
or material furnished or used in connection with any construction or
improvements on any of their real or personal property, provided that the
aggregate of all such liens shall not at any point in time exceed One Hundred
Thousand Dollars ($100,000).
10.3 CAPITAL ASSETS. Expend or incur in any fiscal year, obligations
(including obligations incurred under any capital leases) of more than Three
Million One Hundred Thousand Dollars ($3,100,000) for the acquisition of fixed
or capital assets in aggregate.
10.4 ACQUISITIONS. Acquire or purchase the assets or business of any
Person other than the Acquisitions.
10.5 DIVIDENDS. Declare or pay any dividends on any of its shares except
dividends paid to Borrower from its Subsidiaries and dividends payable in
capital stock of Borrower, and not purchase, redeem or otherwise acquire for
value any of its shares, or create any sinking fund in relation thereto in
excess of Two Hundred Fifty Thousand Dollars ($250,000) during each fiscal year
during the Availability Period.
10.6 LOANS. Make any loans, advances or other extensions of credit to any
of Borrower's or its Subsidiary's executives, officers, or directors or
shareholders (or any relatives of any of the foregoing) in excess of Two Hundred
Fifty Thousand Dollars ($250,000) in the
25
<PAGE>
aggregate outstanding at any one time.
10.7 LOSSES. Suffer a loss on a quarterly basis. For purposes of this
Section 10.7, the term "loss" means the absence of a net profit after taxes
computed in accordance with GAAP.
10.8 CHANGE OF CONTROL. Cause, permit, or suffer a Change of Control.
For purposes of this Agreement, the term "Change of Control" means (a) the sale,
lease or transfer of all or substantially all of the assets of Borrower or a
Material Subsidiary, (b) except for the transfer by sale or otherwise to Steven
J. Baileys, D.D.S. and his affiliates, the transfer by sale or otherwise of more
than thirty percent (30%) of the outstanding voting shares of Borrower, (c) the
change in the composition of the board of directors of Borrower such that the
members of the board of director of Borrower does not consist of at least a
majority of the current members of the board of directors of Borrower, or (d)
the shareholders of Borrower approve and adopt a plan of liquidation or
dissolution of Borrower.
10.9 SALES AND LEASEBACKS. Dispose of any of its assets except for full,
fair and reasonable consideration, or enter into any sale and leaseback
agreement covering any of its fixed or capital assets.
10.10 LIQUIDATIONS AND MERGERS. Liquidate or dissolve or enter into any
consolidation, merger, partnership, joint venture or other combination.
10.11 SALE OF ASSETS. Sell, lease, or otherwise dispose of its business or
assets, except in the ordinary course of its business theretofore conducted,
without the prior written consent of Bank; and not to sell, lease or otherwise
dispose of any assets in the ordinary course of business for less than fair
market value.
10.12 BUSINESS ACTIVITIES. Engage in any business activities or operations
substantially different from or unrelated to present business activities and
operations.
11. EVENTS OF DEFAULT.
The occurrence of any of the following Events of Default shall terminate
any obligation on the part of Bank to extend credit under this Agreement and, at
the option of Bank under all Sections (except automatically in the case of
Sections 11.5 and 11.6), shall make all obligations of Borrower to Bank under or
in respect of this Agreement and any instrument or agreement required under this
Agreement immediately due and payable, without notice of default, presentment or
demand for payment, protest or notice of nonpayment or dishonor, or other
notices or demands of any kind or character.
11.1 FAILURE TO PAY. Borrower fails to pay, within three (3) days after
the date when due, any installment of interest or principal or any other sum due
under the Loan Documents in accordance with the terms thereof.
11.2 BREACH OF REPRESENTATION OR WARRANTY. Any representation or warranty
herein or in any agreement, instrument or certificate executed pursuant hereto
or in connection with any transaction contemplated hereby proves to have been
false or misleading in any material respect when made.
11.3 FALSITY OF INFORMATION. Any financial or other information delivered
by Borrower to Bank proves to be false or misleading in any material respect.
11.4 SECURITY INTEREST. Bank fails to have a valid and enforceable
perfected security
26
<PAGE>
interest in or lien on the Collateral or such security interest or lien fails to
be prior to the rights and interest of others except those consented to in
writing by Bank.
11.5 FAILURE TO PAY DEBTS; VOLUNTARY BANKRUPTCY. Borrower or any Material
Subsidiary fails to pay Borrower's or such Material Subsidiary's debts generally
as they come due, or files any petition, proceeding, case, or action for relief
under any bankruptcy, reorganization, insolvency, or moratorium law, or any
other law or laws for the relief of, or relating to, debtors.
11.6 INVOLUNTARY BANKRUPTCY. An involuntary petition is filed under any
bankruptcy or similar statute against Borrower or any Material Subsidiary, or a
receiver, trustee, liquidator, assignee, custodian, sequestrator, or other
similar official is appointed to take possession of the properties of Borrower
or any Material Subsidiary. Such Event of Default shall be deemed cured if such
petition or appointment is set aside or withdrawn or ceases to be in effect
within thirty (30) days from the date of said filing or appointment; provided,
however, that Bank shall not be obligated to extend any additional credit to
Borrower during such period.
11.7 SUITS. One or more suits are filed against Borrower or any Material
Subsidiary by a trade creditor or trade creditors of Borrower or any Material
Subsidiary in the aggregate amount of One Million Dollars ($1,000,000) or more.
11.8 JUDGMENTS. One or more judgments or arbitration awards are entered
against Borrower or any Material Subsidiary, or Borrower or any Material
Subsidiary enters into any settlement agreements with respect to any litigation
or arbitration, in the aggregate amount of One Million Dollars ($1,000,000) or
more on a claim or claims not covered by insurance.
11.9 SUSPENSION OF BUSINESS. Borrower or any Material Subsidiary
voluntarily suspends its business for more than five (5) days in any thirty (30)
day period.
11.10 GOVERNMENTAL ACTION. Any Governmental Authority takes or institutes
action which, in the opinion of Bank, will have a material adverse affect on the
financial condition, operations or ability of Borrower to pay its obligations
under this Agreement or any instrument or agreement required under this
Agreement.
11.11 DEFAULT OF OTHER FINANCIAL OBLIGATIONS. Any default occurs under any
other agreement involving the borrowing of money or the extension of credit to
which Borrower or any Material Subsidiary may be a party as borrower, guarantor
or installment purchaser if such default consists of the failure to pay any
obligation when due or if such default gives to the holder of the obligation
concerned the right to accelerate the obligation.
11.12 MISUSE OF COLLATERAL. Bank, in good faith, considers any Collateral
to be unsafe or in danger of misuse to the extent that Bank's prospect of or
right to payment or performance under this Agreement or any instrument or
agreement required hereunder is materially impaired.
11.13 DEFAULT OF OTHER BANK OBLIGATIONS. Any default occurs under any
other obligation of Borrower or any Material Subsidiary to Bank or to any
subsidiary or affiliate of Bank.
11.14 MATERIAL ADVERSE CHANGE. A Material Adverse Change occurs in the
financial condition or results of operations of Borrower or any Subsidiary, or a
material change occurs in the ability of Borrower to perform its obligations
under this Agreement or under any instrument or agreement required by this
Agreement.
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<PAGE>
11.15 ERISA PLAN TERMINATION. Any ERISA Plan termination or any full or
partial withdrawal from an ERISA Plan occurs which could result in liability of
Borrower to the Pension Benefit Guaranty Corporation or to the ERISA Plan in an
aggregate amount which, in the reasonable opinion of Bank, will have a material
adverse effect on the financial condition of Borrower.
11.16 CHANGE IN CONTROL. A Change in Control occurs regarding Borrower or
any Material Subsidiary.
11.17 OTHER BREACH UNDER AGREEMENT. Borrower breaches, or defaults under,
any term, condition, covenant, provision, representation or warranty contained
in this Agreement not specifically referred to in this Section; provided,
however, that if in Bank's opinion such default is capable of being remedied,
such default shall not be considered an Event of Default hereunder for a period
of thirty (30) days after the date on which Bank gives written notice of such
default to Borrower; it is further provided that, notwithstanding any other
provision of this Agreement, Bank shall be under no obligation to extend
additional credit under this Agreement following the occurrence of any default
hereunder unless and until such default has been cured.
12. MISCELLANEOUS.
12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that Borrower shall not assign this Agreement or any of the
rights, duties or obligations of Borrower hereunder without the prior written
consent of Bank.
12.2 CONSENTS AND WAIVERS. No consent or waiver under this Agreement
shall be effective unless in writing. No waiver of any breach or default shall
be deemed a waiver of any breach or default thereafter occurring.
12.3 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California.
12.4 ADMINISTRATION COSTS. Borrower agrees to pay to Bank, on demand, all
reasonable costs and expenses incurred by Bank in connection with the
administration of this Agreement and any instrument or agreement required under
this Agreement including, but not limited to, documentation, audit and filing
costs.
12.5 ATTORNEYS' FEES. Borrower agrees to pay to Bank, on demand, all
reasonable costs, expenses and attorneys' fees (including allocated costs for
in-house legal services) incurred by Bank in connection with the enforcement and
preservation of any rights or remedies under this Agreement and any instrument
or agreement required under this Agreement, and including any amendment, waiver,
"workout" or restructuring under this Agreement. In the event a legal action or
arbitration proceeding is commenced in connection with the enforcement of this
Agreement or any instrument or agreement required under this Agreement, the
prevailing party shall be entitled to reasonable attorneys' fees (including
allocated costs for in-house legal services), costs and necessary disbursements
incurred in connection with such action or proceeding, as determined by the
court or arbitrator.
12.6 INTEGRATION. This Agreement and any instrument, agreement or
document attached hereto or referred to herein (a) integrate all the terms and
conditions mentioned herein or incidental hereto, (b) supersede all oral
negotiations and prior writings in respect to the subject matter hereof, and (c)
are intended by the parties as the final expression of the agreement with
28
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respect to the terms and conditions set forth in this Agreement and any such
instrument, agreement or document and as the complete and exclusive statement of
the terms agreed to by the parties. In the event of any conflict between the
terms, conditions and provisions of this Agreement and any such instrument,
agreement, or document, the terms, conditions and provisions of this Agreement
shall prevail.
12.7 PARTICIPATION. Bank may at any time sell, assign, grant
participation in, or otherwise transfer to any other person, firm, or
corporation (a "Participant") all or part of the obligations of Borrower under
this Agreement. Borrower agrees that each such disposition will give rise to a
direct obligation of Borrower to the Participant. Borrower authorizes Bank and
each Participant, upon the occurrence of an Event of Default, to proceed
directly by right of setoff, banker's lien, or otherwise, against any assets of
Borrower which may be in the hands of Bank or such Participant, respectively.
Borrower authorizes Bank to disclose to any prospective Participant and any
Participant any and all information in Bank's possession concerning Borrower,
this Agreement and the Collateral. Borrower will not be required to pay any
additional loan fee, placement fee or agency fee in connection with the
syndication of this credit.
12.8 INDEMNIFICATION. Borrower agrees to indemnify Bank against, and hold
Bank harmless from, all claims, actions, losses, costs and expenses (including
attorneys' fees and allocated costs for in-house legal services) incurred by
Bank and arising from any contention, whether well-founded or otherwise, that
there has been a failure to comply with any law regulating Borrower's sales to
or performance of services for receivable debtors and disclosures in connection
therewith. The provisions of this Section shall survive termination of this
Agreement.
12.9 HAZARDOUS WASTE INDEMNIFICATION. Borrower shall indemnify and hold
harmless Bank, its parent company, subsidiaries and all of their directors,
officers, employees agents, successors, attorneys and assigns from and against
any loss, damage, cost, expense or liability directly or indirectly arising out
of or attributable to the use, generation, manufacture, production, storage,
release, threatened release, discharge, disposal or presence of a Hazardous
Substance on, under or about Borrower's or any Subsidiary's property or
operations or property leased to Borrower or any Subsidiary, including, but not
limited to, attorneys' fees (including the reasonable estimate of the allocated
cost of in-house counsel and staff). For purposes of this Agreement, "Hazardous
Substance" means any substance which is or becomes designated as "hazardous" or
"toxic" under any federal, state or local law. This indemnity shall survive
termination of this Agreement.
12.10 ARBITRATION; REFERENCE PROCEEDING.
(a) Any controversy or claim between or among the parties,
including but not limited to those arising out of or relating to this Agreement
or any agreements or instruments relating hereto or delivered in connection
herewith and any claim based on or arising from an alleged tort, shall at the
request of any party be determined by arbitration. The arbitration shall be
conducted in accordance with the United States Arbitration Act (Title 9, U.S.
Code), notwithstanding any choice of law provision in this Agreement, and under
the Commercial Rules of the American Arbitration Association ("AAA"). The
arbitrator(s) shall give effect to statutes of limitation in determining any
claim. Any controversy concerning whether an issue is arbitrable shall be
determined by the arbitrator(s). Judgment upon the arbitration award may be
entered in any court having jurisdiction. The institution and maintenance of an
action for judicial relief or pursuit of a provisional or ancillary remedy shall
not constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.
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(b) Notwithstanding the provisions of subparagraph (a), no
controversy or claim shall be submitted to arbitration without the consent of
all parties if, at the time of the proposed submission, such controversy or
claim arises from or relates to an obligation to Bank which is secured by real
property collateral located in California. If all parties do not consent to
submission of such a controversy or claim to arbitration, the controversy or
claim shall be determined as provided in subparagraph (c).
(c) A controversy or claim which is not submitted to arbitration as
provided and limited in subparagraphs (a) and (b) shall, at the request of any
party, be determined by a reference in accordance with California Code of Civil
Procedure Sections 638 ET SEQ. If such an election is made, the parties shall
designate to the court a referee or referees selected under the auspices of the
AAA in the same manner as arbitrators are selected in AAA-sponsored proceedings.
The presiding referee of the panel, or the referee if there is a single referee,
shall be an active attorney or retired judge. Judgment upon the award rendered
by such referee or referees shall be entered in the court in which such
proceeding was commenced in accordance with California Code of Civil Procedure
Sections 644 and 645.
(d) No provision of this paragraph shall limit the right of any
party to this Agreement to exercise self-help remedies such as setoff, to
foreclose against or sell any real or personal property collateral or security,
or to obtain provisional or ancillary remedies from a court of competent
jurisdiction before, after, or during the pendency of any arbitration or other
proceeding. The exercise of a remedy does not waive the right of either party
to resort to arbitration or reference. At Bank's option, foreclosure under a
deed of trust or mortgage may be accomplished either by exercise of power of
sale under the deed of trust or mortgage or by judicial foreclosure.
12.11 NOTICES. All notices required hereunder shall be delivered by
certified mail return receipt requested, postage prepaid, to the addresses set
forth on the signature page of this Agreement, or to such other addresses as the
parties hereto may specify from time to time in writing.
12.12 SEVERABILITY. The illegality or unenforceability of any provision of
this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
12.13 COUNTERPARTS. This Agreement may be executed in as many counterparts
as may be deemed necessary or convenient, and by the different parties hereto on
separate counterparts each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
agreement.
[SIGNATURE PAGE CONTINUES ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
Bank of America National Trust and Safeguard Health Enterprises, Inc., a
Savings Association Delaware corporation
By: KEN JAMESON By: STEVEN J. BAILEYS, D.D.S.
------------------------------- ---------------------------------------
Typed Name: Ken Jameson Typed Name: Steven J. Baileys, D.D.S.
----------------------- -------------------------------
Title: Vice President Title: President and Chief Operating Ofcr.
-------------------------- -----------------------------------
By: N/A By: RONALD I. BRENDZEL, J.D.
------------------------------- ---------------------------------------
Typed Name: Typed Name: Ronald I. Brendzel, J.D.
----------------------- -------------------------------
Title: Title: Sr. Vice President and Secretary
---------------------------- ------------------------------------
Address where notices to Bank are Address where notices to Borrower are
to be sent: to be sent:
Bank of America National Trust and Safeguard Health Enterprises, Inc.
Savings Association 505 North Euclid
c/o North Orange County Commercial Anaheim, CA 92801
Banking Office #1456 Attention: Ronald I. Brendzel, Esq.
300 South Harbor Blvd.
Anaheim, CA 92805
Attention: Martin Roblee, Vice
President With a copy to:
Gibson, Dunn & Crutcher
4 Park Plaza, Suite 1700
With a copy to: Irvine, CA 92714
Bank of America National Trust and Attention: Walter L. Schindler, Esq.
Savings Association
Legal Department #4017
555 South Flower St., Suite 800
Los Angeles, CA 90071
Attention: John S. Barry, Esq.
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NO. 96-1120
---------
OFFICIAL ORDER
OF THE
COMMISSIONER OF INSURANCE
OF THE
STATE OF TEXAS
AUSTIN, TEXAS
DATE SEPTEMBER 25, 1996
SUBJECT CONSIDERED: ACQUISITION OF
FIRST AMERICAN DENTAL BENEFITS, INC.
dba AMERICAN DENTAL CORPORATION
Dallas, Texas
by
SAFEGUARD HEALTH ENTERPRISES, INC
A Delaware Corporation
Consent Docket No. C-96-0832
GENERAL REMARKS AND OFFICIAL ACTION TAKEN:
On this day came for consideration by the Commissioner of Insurance, the
application of SAFEGUARD HEALTH ENTERPRISES, INC., a Delaware corporation
hereinafter referred to as APPLICANT, for approval of its acquisition of control
of FIRST AMERICAN DENTAL BENEFITS, INC. dba AMERICAN DENTAL CORPORATION, Dallas,
Texas, hereinafter referred to as FIRST AMERICAN DENTAL.
The APPLICANT and the duly authorized representative of FIRST AMERICAN DENTAL
have consented to the entry of this order and request the Commissioner of
Insurance to informally dispose of this matter pursuant to the provisions of
TEX. GOV'T CODE ANN. SECTION 2001.056 and 28 TEX. ADMIN. CODE SECTION 1.47.
WAIVER
APPLICANT and FIRST AMERICAN DENTAL acknowledge the existence of their rights,
including but not limited to, the issuance and service of notice of hearing, a
public hearing, a proposal for decision, rehearing by the Commissioner of
Insurance, and judicial review of this administrative action, as provided in
TEX. INS. CODE ANN. art. 1.04, and TEX. GOV'T CODE ANN. SECTIONS
2001.051-2001.902, and have expressly waived each and every such right.
<PAGE>
96-1120
COMMISSIONER'S ORDER, INC.
FIRST AMERICAN DENTAL BENEFITS
dba AMERICAN DENTAL CORPORATION
PAGE 2 OF 5
FINDINGS OF FACT
Based upon the information submitted to and reviewed by the Texas Department of
Insurance, the Commissioner of Insurance makes the following findings of fact:
1. FIRST AMERICAN DENTAL is a domestic health maintenance organization duly
licensed in the State of Texas pursuant to the provisions of Chapter 20A of
the Texas Insurance Code.
2. APPLICANT is a corporation duly organized under the laws of the state of
Delaware and has its principal executive offices in Anaheim, California.
3. The proposed acquisition plan of APPLICANT provides for the acquisition of
all the issued and outstanding stock of FIRST AMERICAN DENTAL for
approximately $11,950,000.
4. The acquisition will be funded by a Reducing Revolver loan agreement
entered into between APPLICANT and Bank of America in the amount of
$30,000,000. The loan has a maturity date of March 31, 2002, and includes
as security, a first priority interest in all personal property, including
accounts receivables, fixed assets, and intangibles of APPLICANT, except
for newly acquired fixed assets financed by purchase money and liens on
personal property assets existing as of June 30, 1996. Additionally, the
loan will be secured by a pledge of subsidiary stock and a negative pledge
on real property of APPLICANT. APPLICANT currently has no long-term or
short-term debt.
5. After the change of control, the present officers and directors of FIRST
AMERICAN DENTAL will be replaced with the officers and directors of
APPLICANT as follows:
Steven J. Baileys, D.D.S., Chairman, President and
Chief Executive Officer, Director
John E. Cox, Executive Vice President and Chief Operating
Officer, Director
Ronald I. Brendzel, J.D., Senior Vice President,
Secretary and General Counsel, Director
Ronald B. Bolden, Vice President and Executive Director
Thomas C. Tekulve, C.P.A., Vice President Accounting and
Finance, and Treasurer
Jan Ragland, Vice President of Operations
James M. Dills, Chief Financial Officer
George H. Stevens, Director
6. After the change in control, the home office and administrative office of
FIRST AMERICAN DENTAL will remain in Dallas, Texas.
<PAGE>
96-1120
COMMISSIONER'S ORDER, INC.
FIRST AMERICAN DENTAL BENEFITS
dba AMERICAN DENTAL CORPORATION
PAGE 3 OF 5
7. APPLICANT intends for FIRST AMERICAN DENTAL to continue its dental plan
operations in Texas. Following APPLICANT's acquisition of FIRST AMERICAN
DENTAL, APPLICANT anticipates no changes in the operations, products,
forms, contracts, or premium rates of FIRST AMERICAN DENTAL will occur. In
addition, APPLICANT'S wholly-owned subsidiary, Safeguard Health Plans,
Inc., a Texas corporation, will also continue its dental plan operations in
the state of Texas and no changes in the operations, products, forms,
contracts, or premium rates will occur as a result of the acquisition of
FIRST AMERICAN DENTAL.
8. The acquisition involves the execution of non-competition agreements
between APPLICANT and Mr. William N. Rees and between APPLICANT and Dr.
James L. Davenport and Dr. Martin Rinker, owners of all issued and
outstanding shares of FIRST AMERICAN DENTAL. The payment for the non-
competition agreement with Mr. Rees is $50,000, which will be made at
closing. The payment for the non-competition agreement with Dr. Davenport
and Dr. Rinker will be in the aggregate sum of $3,576,000, payable over the
three years ($1,192,000 per year) as consideration for the five-year non-
competition agreement. These payments will be allocated in equal amounts
to Dr. Davenport and Dr. Rinker.
9. No evidence was presented that immediately upon the change of control FIRST
AMERICAN DENTAL would not be able to satisfy the requirements for the
issuance of a new certificate of authority to operate a health maintenance
organization as it is presently licensed to do.
10. No evidence was presented that the effect of such acquisition of control
would be to substantially lessen competition among health maintenance
organizations in this state or tend to create a monopoly therein.
11. No evidence was presented that the financial condition of APPLICANT is such
as might jeopardize the financial stability of FIRST AMERICAN DENTAL or
prejudice the interest of its enrollees or the interests of any remaining
shareholders who are unaffiliated with such acquiring party.
12. No evidence was presented that the terms of the acquisition of control are
unfair and unreasonable to the shareholders of FIRST AMERICAN DENTAL.
<PAGE>
96-1120
COMMISSIONER'S ORDER, INC.
FIRST AMERICAN DENTAL BENEFITS
dba AMERICAN DENTAL CORPORATION
PAGE 4 OF 5
13. No evidence was presented that the APPLICANT has any plans or proposals to
liquidate FIRST AMERICAN DENTAL, sell its assets, or consolidate or merge
it with any person, or to make any other material change in its business or
corporate structure or management, or cause it to enter into material
agreements, arrangements, or transactions of any kind with any party that
are unfair, prejudicial, hazardous, or unreasonable to enrollees or
shareholders FIRST AMERICAN DENTAL and not in the public interest.
14. No evidence was presented that the competence, trustworthiness, experience
and integrity of those persons who would control the operations of FIRST
AMERICAN DENTAL are such that it would not be in the interest of the
enrollees of FIRST AMERICAN DENTAL and of the public to permit the
acquisition of control.
15. No evidence was presented that the acquisition of control would violate any
laws of this State, any other state, or the United States.
16. Representatives of the APPLICANT and FIRST AMERICAN DENTAL have waived the
right to a hearing under TEX. INS. CODE ANN. art. 1.33(e) and all
procedural requirements for the entry of this order.
CONCLUSIONS OF LAW
Based upon the foregoing findings of the fact, the Commissioner of Insurance
makes the following conclusions of law:
1. The Commissioner of Insurance has authority and jurisdiction over this
application for approval of acquisition of control pursuant to TEX. INS.
CODE ANN. art. 20A.05, 5(d).
2. The Commissioner of Insurance has authority to dispose of this matter under
TEX. INS. CODE ANN. art. 1.33 (e).
3. APPLICANT and FIRST AMERICAN DENTAL have knowingly and voluntarily waived
all procedural requirements for the entry of this order, including but not
limited to, notice of hearing, a public hearing, a proposal for decision,
rehearing by the Commissioner, and judicial review of the order as provided
for in TEX. GOV'T CODE ANN. SECTIONS 2001.051 and 2001.052.
4. As found in the foregoing findings of fact, the proposed acquisition of
control by APPLICANT of 100 percent of the outstanding stock of FIRST
AMERICAN DENTAL constitutes a change of control of FIRST AMERICAN DENTAL
under the provisions of TEX. INS. CODE ANN. art. 20A.05, SECTION (d).
<PAGE>
96-1120
COMMISSIONER'S ORDER, INC.
FIRST AMERICAN DENTAL BENEFITS
dba AMERICAN DENTAL CORPORATION
PAGE 5 OF 5
5. As found in facts numbered 10 through 16, there is no evidence that any of
the events or conditions listed in 28 TEX. ADMIN. CODE, SECTION 11.1205(a)
would occur or exist after the acquisition of control.
6. As found in the foregoing findings of fact, there is no evidence upon which
the Commissioner could predicate a denial of the acquisition of control,
under TEX. INS. CODE ANN. art. 20A.05. SECTION (d).
7. The application of APPLICANT for acquisition of control of FIRST AMERICAN
DENTAL should be approved.
IT IS THEREFORE ORDERED that the acquisition of control of FIRST AMERICAN
DENTAL BENEFITS, INC. dba AMERICAN DENTAL CORPORATION, Dallas, Texas by
SAFEGUARD HEALTH ENTERPRISES, INC., a Delaware corporation, is hereby approved.
ELTON BOMER
COMMISSIONER OF INSURANCE
By: /s/ Jose Montemayor
---------------------------
JOSE MONTEMAYOR
ASSOCIATE COMMISSIONER
FINANCIAL
COMMISSIONER'S ORDER 96-1064
RECOMMENDED BY:
/s/ Marianne Galea
- ------------------------------
MARIANNE GALEA, ANALYST
FINANCIAL MONITORING
<PAGE>
FIRST AMERICAN DENTAL
BENEFITS, INC.
DBA AMERICAN DENTAL CORP.
FINANCIAL STATEMENTS FOR THE
SIX MONTHS ENDED JUNE 30, 1996, THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
AND INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
First American Dental Benefits, Inc.
Dallas, Texas
I have audited the accompanying balance sheets of First American Dental
Benefits, Inc. as of June 30, 1996, December 31, 1995, December 31, 1994 and
December 31, 1993, and the related statements of income, stockholder's equity
and cash flows for the six months ended June 30, 1996 and for each of the three
years ended December 31, 1995, December 31, 1994 and December 31, 1993. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted the audits in accordance with generally accepted auditing standards.
Those standards require that I 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 evaluation of the overall financial statement
presentation. I believe that my audits provide a reasonable basis for my
opinion.
In my opinion, the financial statements present fairly, in all material
respects, the financial position of First American Dental Benefits, Inc. as of
June 30, 1996, December 31, 1995, December 31, 1994 and December 31, 1993 and
the results of its operations and its cash flows for the six months ended June
30, 1996 and the three years ended December 31, 1995, December 31, 1994, and
December 31, 1993 in conformity with generally accepted accounting principles.
/s/ Robert E. Allen
August 6, 1996
<PAGE>
FIRST AMERICAN DENTAL BENEFITS, INC.
Balance Sheet as of June 30, 1996, December 31, 1995, 1994, and 1993
ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31
---------------- -----------------------------------------
6/30/96 1995 1994 1993
---------------- -----------------------------------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 90,757 $ 316,464 $ 289,846 $ 280,677
Accounts receivable 1,357,111 1,275,296 1,111,647 995,526
Prepaid expenses and other current assets 158,442 143,243 160,396 38,915
---------- ---------- ---------- ----------
TOTAL CURRENT ASSETS $1,606,310 $1,735,003 $1,561,889 $1,315,118
---------- ---------- ---------- ----------
OTHER ASSETS $ 57,580 $ 58,580 $ 58,223 $ 58,392
PROPERTY AND EQUIPMENT:
Property and Equipment $1,092,447 $ 986,521 $ 734,426 $ 535,864
Accumulated depreciation (501,836) (427,076) (294,210) (190,290)
---------- ---------- ---------- ----------
PROPERTY AND EQUIPMENT, NET $ 590,611 $ 559,445 $ 440,216 $ 345,574
TOTAL ASSETS $2,254,501 $2,353,028 $2,060,328 $1,719,084
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FIRST AMERICAN DENTAL BENEFITS, INC.
Balance Sheet as of June 30, 1996, December 31, 1995, 1994, and 1993
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31
---------------- -----------------------------------------
6/30/96 1995 1994 1993
---------------- -----------------------------------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 478,912 $ 457,767 $ 421,527 $ 408,094
Accrued provider fees 1,136,647 784,114 746,616 565,150
Deferred revenue 188,740 185,285 173,552 161,791
Notes payable - banks 36,837 155,539 67,404 12,901
---------- ---------- ---------- ----------
TOTAL CURRENT LIABILITIES $1,841,136 $1,582,705 $1,409,099 $1,147,936
---------- ---------- ---------- ----------
OTHER LIABILITIES:
Deferred income taxes payable $ 30,743 $ 30,743 $ - $ -
Notes payable - banks 5,538 12,943
---------- ---------- ---------- ----------
TOTAL OTHER LIABILITIES $ 30,743 $ 30,743 $ 5,538 $ 12,943
---------- ---------- ---------- ----------
TOTAL LIABILITIES $1,871,879 $1,613,448 $1,414,637 $1,160,879
---------- ---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock -
par value $10.00 per share;
100,000 shares authorized;
17,850 shares issued and outstanding $ 178,500 $ 178,500 $ 178,500 $ 178,500
Common stock -
par value $0.01 per share;
900,000 shares authorized;
21,000 shares issued and outstanding 210 210 210 210
Paid in Capital 20,790 20,790 20,790 20,790
Retained earnings 183,122 540,080 446,191 358,705
---------- ---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY $ 382,622 $ 739,580 $ 645,691 $ 558,205
---------- ---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,254,501 $2,353,028 $2,060,328 $1,719,084
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FIRST AMERICAN DENTAL BENEFITS, INC.
Statement of Income for the
Six Months Ended June 30, 1996, and For the Years Ended December 31, 1995,
1994, and 1993
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31
---------------- -----------------------------------------
6/30/96 1995 1994 1993
---------------- -----------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Premium income $12,298,175 $23,550,341 $21,887,194 $19,580,776
Interest income 5,211 17,170 12,361 11,980
----------- ----------- ----------- -----------
TOTAL REVENUES $12,303,386 $23,567,511 $21,899,555 $19,592,756
----------- ----------- ----------- -----------
EXPENSES:
MEDICAL BENEFITS:
Physician services $ 6,467,624 $10,920,913 $10,631,829 $ 9,334,076
Other professional services 55,675 231,460 141,354 120,159
----------- ----------- ----------- -----------
TOTAL MEDICAL BENEFITS $ 6,523,299 $11,152,373 $10,773,183 $ 9,454,235
----------- ----------- ----------- -----------
ADMINISTRATION:
Compensation $ 1,213,583 $ 1,864,262 $ 1,607,644 $ 1,328,786
Occupancy, depreciation, and
amortization 371,661 607,372 508,378 456,976
Selling and Marketing 3,904,369 8,761,393 7,898,815 7,199,472
Insurance, taxes and other expense 525,476 1,008,236 978,560 1,009,814
----------- ----------- ----------- -----------
TOTAL ADMINISTRATION $ 6,015,089 $12,241,263 $10,993,397 $ 9,995,048
----------- ----------- ----------- -----------
TOTAL EXPENSES $12,538,388 $23,393,636 $21,766,580 $19,449,283
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES $ (235,002) $ 173,875 $ 132,975 $ 143,473
PROVISION FOR FEDERAL INCOME TAXES 0 $ 65,834 $ 45,489 $ 39,090
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (235,002) $ 108,041 $ 87,486 $ 104,383
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FIRST AMERICAN DENTAL BENEFITS, INC.
Statement of Stockholders' Equity
Period Ended June 30, 1996, and Years Ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
--------------------- --------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------ ------ ------ -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 21,000 $210 17,850 $178,500 $20,790 $254,322
Net income 1993 0 0 0 0 0 $104,383
------ ------ ------ -------- ------- --------
Balance, December 31, 1993 21,000 $210 17,850 $178,500 $20,790 $358,705
Net income 1994 0 0 0 0 0 $87,486
------ ------ ------ -------- ------- --------
Balance, December 31, 1994 21,000 $210 17,850 $178,500 $20,790 $446,191
Establish deferred income taxes
payable as of December 31, 1994 0 0 0 0 0 $(14,152)
------ ------ ------ -------- ------- --------
Balance, December 31, 1994
as restated 21,000 $210 17,850 $178,500 $20,790 $432,039
Net income 1995 0 0 0 0 0 $108,041
------ ------ ------ -------- ------- --------
Balance, December 31, 1995 21,000 $210 17,850 $178,500 $20,790 $540,080
Prior Year Adjustments per
Internal Revenue Exam $(121,956)
Net Loss for Six months
Ended June 30, 1996 0 0 0 0 0 $(235,002)
------ ------ ------ -------- ------- --------
Balance, June 30, 1996 21,000 $210 17,850 $178,500 $20,790 $183,122
------ ------ ------ -------- ------- --------
------ ------ ------ -------- ------- --------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FIRST AMERICAN DENTAL BENEFITS, INC.
Statement of Cash Flows
Six Months Ended June 30, 1996, and Years Ended December 31, 1995,
1994, and 1993
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31
---------------- -----------------------------------------
6/30/96 1995 1994 1993
---------------- -----------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (235,002) $ 108,041 $ 87,486 $104,383
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation & amortization $ 74,761 $ 132,866 $ 103,919 $ 84,319
Changes in assets and liabilities:
Decrease (increase) in receivables/prepaid expenses (97,010) (146,495) (237,603) (92,362)
Increase (decrease) in accounts payable (100,810) 52,831 (27,016) (51,934)
Increase (decrease) in claims payable 352,531 37,498 181,467 114,967
Increase (decrease) in unearned premium 3,456 11,734 52,209 (81,780)
----------- --------- --------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ (2,074) $ 196,475 $ 160,462 $ 77,593
----------- --------- --------- --------
CASH FLOW PROVIDED BY INVESTING ACTIVITIES:
Receipts from security deposits $ 1,000 $ - $ 168 $ -
Payments for security deposits (357) (1,300)
Payments for property & equipment (105,927) (252,095) (198,561) (84,948)
----------- --------- --------- --------
NET CASH PROVIDED BY
INVESTING ACTIVITIES $ (104,927) $(252,452) $(198,393) $(86,248)
----------- --------- --------- --------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES:
Loan proceeds from non-affiliates $ 1,575,000 $ 90,000 $ 435,477 $ -
Principal payments on loans from non-affiliates (1,693,702) (7,404) (388,378) (13,509)
----------- --------- --------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES $ (118,702) $ 82,596 $ 47,099 $(13,509)
----------- --------- --------- --------
NET INCREASE (DECREASE) IN CASH
& CASH EQUIVALENTS $ (225,703) $ 26,619 $ 9,168 $(22,164)
----------- --------- --------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 316,464 $ 289,845 $ 280,677 $302,841
----------- --------- --------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 90,761 $ 316,464 $ 289,845 $280,677
----------- --------- --------- --------
----------- --------- --------- --------
SUPPLEMENTARY INFORMATION:
Cash paid during the year for:
Interest 8,487 2,240 2,172 3,081
Income taxes 6,370 15,000 42,000 91,787
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
FIRST AMERICAN DENTAL BENEFITS, INC.
NOTES TO FINANCIAL STATEMENTS FOR SIX MONTHS ENDED JUNE 30, 1996, AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY DESCRIPTION - First American Dental Benefits, Inc. dba American
Dental Corporation (ADC) (formerly Amerident Corporation) is a dental
health maintenance organization providing dental services to its members
through contractual arrangements with qualified practitioners making up a
vast dental panel of providers within the State of Texas. ADC operates in
all populated areas of the state. ADC was incorporated August 5, 1985 in
the State of Texas and received its Certification as a single purpose
health maintenance organization from the Texas Department of Insurance on
January 21, 1988.
REVENUE AND EXPENSE RECOGNITION - Premium revenue is recorded as revenue in
the month for which members are entitled to service. ADC contracts with
dentists for a set per-member, per-month capitation fee to provide dental
care for its members. Expenses are recognized as incurred.
PROPERTY AND EQUIPMENT - Furniture, equipment and leasehold improvements
are stated at cost. Depreciation is computed by the straight-line method
over the estimated useful lives of the related assets or lease term for
leasehold improvements. These assets include office furniture and
equipment, computers and related peripheral equipment and capitalized
software. Leasehold improvements are depreciated over four years, computer
software over five years and all other assets over seven years.
STATEMENT OF CASH FLOWS - The title of cash and cash equivalents as used on
the statement of cash flows includes cash in all bank accounts, cash
investment in Government Bond Fund Shares and postage meter deposits. These
items are shown as cash on the balance sheet and the detail is as follows:
6-30-96 12-31-95 12-31-94 12-31-93
------- -------- -------- --------
Cash in Banks $78,788 $258,353 $258,190 $ 20,779
Cash in Government Bond Fund 6,408 53,041 28,597 258,593
Cash in Postage Meter 5,561 5,070 3,059 1,305
------- -------- -------- --------
$90,757 $316,464 $289,846 $280,677
EMPLOYEE LEASING - During 1995, ADC contracted with an Employee Leasing
company to administer employee payroll, benefits and other related
functions. To maintain comparability between years and to industry
standards, the employee leasing expense has been allocated to Employee
Expense classifications on the financial statements.
-1-
<PAGE>
2. RESTRICTED CASH
In order to meet regulatory requirements for health maintenance
organizations required by Article 20A.13 of the code, ADC has deposited a
$50,000 U.S. Treasury Note with the Texas Department of Insurance. This
note earned interest at 7 3/8% and matured May 15, 1996. ADC paid a $4,551
premium for the Note. These funds are restricted and are shown as other
assets. ADC has not renewed or changed the form of the security at this
time and it remains in the possession of the Texas Department of Insurance.
3. COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS
ADC leases office space under real estate lease contracts and certain
equipment under operating leases. Lease expense for six months ended June
30, 1996 and years ended 1995, 1994 and 1993 was $163,445, $232,928,
$196,767 and $213,999 respectively. Future lease requirements are as
follows:
1997 $243,956
1998 $51,947
1999 $40,824
2000 $29,583
2001 -0-
The ADC home office lease, which expires August 1997, has a five year
renewal option on terms to be negotiated at that time.
Notes payable to banks are detailed as follows:
6-30-96 12-31-95 12-31-94 12-31-93
------- -------- ------- --------
Fixed payment
note $ 1,837 $ 5,539 $12,943 $25,844
Revolving line
of credit 35,000 150,000 60,000 0
------- -------- ------- -------
$36,837 $155,539 $72,943 $25,844
The fixed payment note is dated September 5, 1991 bearing interest of
10.25% for five years with monthly payments of $731 including principal and
interest. This note was used to purchase business equipment.
The revolving line of credit has an available credit line of $200,000 at an
interest rate of prime plus one percent. The credit line is collateralized
by accounts receivable and fixed assets. The expiration date is upon demand
and the lending institution can withdraw the credit line at their option.
There are no compensating balances required.
-2-
<PAGE>
ADC will have cash on deposit at certain times during any month in excess
of the federally insured limits. ADC believes the loss exposure is very
limited since cash deposits can fluctuate above or below the federal
insured limit on a daily basis. Cash invested in the Government Bond Cash
Fund is not federally insured.
Approximately 54% of ADC's revenues resulted from the sale to one customer.
4. RELATED PARTY TRANSACTIONS
The majority shareholders of ADC have interest in three entities that
provide service to ADC. The services performed are medical provider
services through affiliated dental clinics, commission sales through an
affiliated general insurance agency and leased employee service through an
employee leasing company. Payments to these entities are scheduled as
follows:
6-30-96 12-31-95 12-31-94 12-31-93
------- -------- -------- --------
Medical Services $ 942,276 $1,640,473 $2,664,582 $2,817,779
Insurance Agency 2,390,490 5,397,135 4,396,720 4,097,932
Employee Leasing 24,758 -0- -0- -0-
ADC owed the insurance agency unpaid commissions as of the above dates of
$113,596, $238,053, $209,641, $119,675 respectively.
5. FEDERAL INCOME TAXES
ADC follows the liability method for income taxes and has established a
deferred tax liability resulting from the differences between tax
accounting and book accounting depreciation. Since ADC projects that the
six months loss will be absorbed before year-end, it has chosen not to
recognize a deferred tax account. Any tax benefit would not be considered
significant at this time.
6. SUBSEQUENT EVENTS
ADC has entered into a deferred compensation agreement with an employee
dated July 1, 1996. The present value of this liability is approximately
$400,000.
The contract for ADC's largest customer will be expiring on August 31,
1996.
Accounts receivable includes a sixty day old balance of approximately
$66,000 from one of their large customers. ADC believes this receivable is
collectible.
On July 10, 1996, ADC signed a Letter of Intent to sell all of the issued
and outstanding capital stock of ADC. Negotiations continue as of the date
of this report.
-3-
<PAGE>
METROPLEX DENTAL PLAN
FINANCIAL STATEMENTS FOR THE SIX
MONTHS ENDED JUNE 30, 1996 AND THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
AND INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Metroplex Dental Plan:
We have audited the accompanying balance sheets of Metroplex Dental Plan (MDP or
the Proprietorship) as of June 30, 1996 and December 31, 1995, 1994 and 1993,
and the related statements of income, owners' equity (deficit) and cash flows
for the six months ended June 30, 1996 and each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Proprietorship's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles issued and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of MDP as of June 30, 1996 and December 31,
1995, 1994 and 1993, and the results of its operations and its cash flows for
the six months ended June 30, 1996 and each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As described in Note 1, MDP is affiliated through common ownership with First
American Dental Benefits, Inc. (FADB). MDP has historically received
substantially all of its administrative services from FADB at no cost to MDP.
In addition, certain of the MDP's members have received services from the
Metroplex Dental Clinics (which are operated by the owners of MDP) at no cost to
MDP. Accordingly, the accompanying financial statements may not necessarily be
indicative of the conditions that would exist or the results of operations if
MDP had been operated as an unaffiliated entity.
/s/Deloitte & Touche LLP
August 20, 1996
<PAGE>
<TABLE>
<CAPTION>
METROPLEX DENTAL PLAN
BALANCE SHEETS
AS OF JUNE 30, 1996 AND DECEMBER 31, 1995, 1994 AND 1993
- ----------------------------------------------------------------------------------------------------
December 31,
June 30, -------------------------------------
1996 1995 1994 1993
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS -
Cash and cash equivalents (Note 1) $ 37,401 $ 130,318 $ 1,766 $ 23,438
--------- --------- --------- ---------
--------- --------- --------- ---------
LIABILITIES AND OWNERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accrued agents' commissions $ 8,959 $ 10,003 $ 11,683 $ 4,958
Accounts payable - Providers 20,906 15,200 15,375 13,445
--------- --------- --------- ---------
Total current liabilities 29,865 25,203 27,058 18,403
OWNERS' EQUITY (DEFICIT) 7,536 105,115 (25,292) 5,035
--------- --------- --------- ---------
$ 37,401 $ 130,318 $ 1,766 $ 23,438
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See independent auditors' report and
notes to financial statements. 2
<PAGE>
<TABLE>
<CAPTION>
METROPLEX DENTAL PLAN
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- ----------------------------------------------------------------------------------------------------
December 31,
June 30, -------------------------------------
1996 1995 1994 1993
<S> <C> <C> <C> <C>
REVENUES -
Healthcare revenues (Note 1) $ 342,998 $ 733,990 $ 779,120 $ 948,462
EXPENSES:
Healthcare expense 111,607 189,380 177,696 128,416
Other expenses, net (Note 1) 62,367 137,695 151,350 170,499
--------- --------- --------- ---------
Total expenses 173,974 327,075 329,046 298,915
--------- --------- --------- ---------
NET INCOME $ 169,024 $ 406,915 $ 450,074 $ 649,547
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See independent auditors' report and
notes to financial statements. 3
<PAGE>
<TABLE>
<CAPTION>
METROPLEX DENTAL PLAN
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- ----------------------------------------------------------------------------------------------------
December 31,
June 30, ---------------------------------------
1996 1995 1994 1993
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 169,024 $ 406,915 $ 450,074 $ 649,547
Adjustments to reconcile net income to
net cash provided by operating activities -
Changes in assets and liabilities -
Accounts payable and accrued agent's
commissions 4,662 (1,855) 8,655 (8,373)
--------- --------- --------- ---------
Net cash provided by operating activities 173,686 405,060 458,729 641,174
CASH FLOWS FROM FINANCING
ACTIVITIES - Distributions to owners (266,603) (276,508) (480,401) (625,505)
--------- --------- --------- ---------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (92,917) 128,552 (21,672) 15,669
CASH AND CASH EQUIVALENTS,
beginning of period 130,318 1,766 23,438 7,769
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS,
end of period $ 37,401 $ 130,318 $ 1,766 $ 23,438
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See independent auditors' report and
notes to financial statements. 4
<PAGE>
METROPLEX DENTAL PLAN
STATEMENTS OF OWNERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
OWNERS'
EQUITY
BALANCES, January 1, 1993 $ (19,007)
Distributions to owners (625,505)
Net income 649,547
----------
BALANCES, December 31, 1993 5,035
Distributions to owners (480,401)
Net income 450,074
----------
BALANCES, December 31, 1994 (25,292)
Distributions to owners (276,508)
Net income 406,915
----------
BALANCES, December 31, 1995 105,115
Distributions to owners (266,603)
Net income 169,024
----------
BALANCES, June 30, 1996 $ 7,536
----------
----------
See independent auditors' report and
notes to financial statements. 5
<PAGE>
METROPLEX DENTAL PLAN
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Metroplex Dental Plan (MDP) is a prepaid dental plan. MDP
operates as a proprietorship owner by two doctors.
SIGNIFICANT TRANSACTIONS WITH AFFILIATED COMPANIES - MDP is affiliated
through common ownership with FADB and has historically received
substantially all of its administrative functions from FADB, at no cost to
MDP. In addition, certain of MDP's members have received services from the
Metroplex Dental Clinics (which are operated by the owners of MDP) at no
cost to MDP. Accordingly, the accompanying financial statements may not
necessarily be indicative of the conditions that would have existed or the
results of operations if MDP had been operated as an unaffiliated entity.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
HEALTHCARE REVENUE AND EXPENSES - Healthcare revenue is recorded as revenue
in the month the income is earned. Healthcare expense is recognized as
incurred. Operating expenses are recognized when incurred.
CASH AND CASH EQUIVALENTS - MDP considers highly-liquid investments with
original maturities of three months or less when purchased to be cash
equivalents.
INCOME TAXES - No provision for income taxes has been recorded in the
accompanying financial statements as MDP operates as a proprietorship.
2. OWNERS' EQUITY
During the six months ended June 30, 1996 and the years ended December 31,
1995, 1994 and 1993, MDP made combined aggregate distributions to owners
totaling $266,603, $276,508, $480,401 and $625,505, respectively.
3. SUBSEQUENT EVENTS
On July 10, 1996, MDP signed a letter of intent to sell MDP and FADB, and
concurrent with the sale, the shareholders of FADB will enter into a
noncompetition agreement with the buyer.
6
<PAGE>
TRC AGENCY, INC.
FINANCIAL STATEMENTS FOR THE
SIX MONTHS ENDED JUNE 30 1996, THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
AND INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To TRC Agency, Inc.:
We have audited the accompanying balance sheets of TRC Agency, Inc. (TRC or the
Company) as of June 30, 1996 and December 31, 1995, 1994 and 1993 and the
related statements of income, stockholders' equity and cash flows for the six
months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993.
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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of TRC Agency, Inc. as of June 30, 1996 and
December 31, 1995, 1994 and 1993, and the results of its operations and its cash
flows for the six months ended June 30, 1996 and the years ended December 31,
1995, 1994 and 1993 in conformity with generally accepted accounting principles.
As described in Note 1, the Company has historically received all commission
income from First American Dental Benefits, Inc. (FADB), and FADB performs
certain administrative and operational functions on behalf of TRC at no cost to
TRC. The Company has also entered into transactions with other entities
affiliated through common control which are material in amount. Accordingly,
the accompanying financial statements may not necessarily be indicative of the
conditions that would exist or the results of operations if the Company had been
operated as an unaffiliated entity.
/s/Deloitte & Touche LLP
August 1, 1996
<PAGE>
<TABLE>
<CAPTION>
TRC AGENCY, INC.
BALANCE SHEETS
AS OF JUNE 30, 1996 AND DECEMBER 31, 1995, 1994 AND 1993
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
June 30, -------------------------------------------------
1996 1995 1994 1993
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 17,552 $ 6,849 $ 3,955 $ 26,823
Receivable from affiliate (Note 2) 113,596 115,541 110,970 88,974
Other receivables 3,500 6,753
--------- --------- --------- ---------
$ 134,648 $ 129,143 $ 114,925 $ 115,797
--------- --------- --------- ---------
--------- --------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued agents' commissions $ 113,607 $ 115,528 $ 103,728 $ 89,654
Accounts payable 13,240
Payable to affiliate (Note 2) 46,000
--------- --------- --------- ---------
Total current liabilities 159,607 115,528 103,728 102,894
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 100,000 shares
authorized, 1,000 shares issued and
outstanding 1,000 1,000 1,000 1,000
Retained earnings (accumulated deficit) (25,959) 12,615 10,197 11,903
--------- --------- --------- ---------
Total stockholders' equity (deficit) (24,959) 13,615 11,197 12,903
--------- --------- --------- ---------
$ 134,648 $ 129,143 $ 114,925 $ 115,797
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See notes to financial statements. 2
<PAGE>
<TABLE>
<CAPTION>
TRC AGENCY, INC.
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
June 30, ---------------------------------------------------
1996 1995 1994 1993
<S> <C> <C> <C> <C>
REVENUES:
Commission income (Note 1) $ 2,388,784 $ 5,374,893 $ 4,447,482 $ 4,043,847
Other income (expense) (240) 820 90 470
----------- ----------- ----------- -----------
Total revenues 2,388,544 5,375,713 4,447,572 4,044,317
EXPENSES:
Agents' commissions (Note 1) 882,273 1,604,917 1,304,706 1,086,948
Stockholder commissions (Note 2) 2,415,368
Amerident Group agency
commissions (Note 2) 500,441
Other expenses, net (Note 2) 100,845 95,878 76,411 29,657
----------- ----------- ----------- -----------
Total expenses 983,118 1,700,795 1,381,117 4,032,414
----------- ----------- ----------- -----------
NET INCOME $ 1,405,426 $ 3,674,918 $ 3,066,455 $ 11,903
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes to financial statements. 3
<PAGE>
<TABLE>
<CAPTION>
TRC AGENCY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Retained
Common stock earnings
----------------------------- (accumulated
Shares Amount deficit) Total
<S> <C> <C> <C> <C>
BALANCES, January 1, 1993 - $ - $ - $ -
Issuance of stock 1,000 1,000 1,000
Net income 11,903 11,903
----- -------- ---------- ----------
BALANCES, December 31, 1993 1,000 1,000 11,903 12,903
Distributions to stockholders (3,068,161) (3,068,161)
Net income 3,066,455 3,066,455
----- -------- ---------- ----------
BALANCES, December 31, 1994 1,000 1,000 10,197 11,197
Distributions to stockholders (3,672,500) (3,672,500)
Net income 3,674,918 3,674,918
----- -------- ---------- ----------
BALANCES, December 31, 1995 1,000 1,000 12,615 13,615
Distributions to stockholders (1,444,000) (1,444,000)
Net income 1,405,426 1,405,426
----- -------- ---------- ----------
BALANCES, June 30, 1996 1,000 $ 1,000 $ (25,959) $ (24,959)
----- -------- ---------- ----------
----- -------- ---------- ----------
</TABLE>
See notes to financial statements. 4
<PAGE>
<TABLE>
<CAPTION>
TRC AGENCY INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
June 30, ---------------------------------------------------
1996 1995 1994 1993
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 1,405,426 $ 3,674,918 $ 3,066,455 $ 11,903
Adjustments to reconcile net income
to net cash provided by
operating activities:
Changes in assets and liabilities:
Receivable from affiliate 1,945 (4,571) (21,996) (88,974)
Other receivables 3,253 (6,753)
Accounts payable (13,240) 13,240
Accrued agents' commissions (1,921) 11,800 14,074 89,654
Payable to affiliate 46,000
----------- ----------- ----------- -----------
Net cash provided by
operating activities 1,454,703 3,675,394 3,045,293 25,823
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of stock 1,000
Distributions to stockholders (Note 3) (1,444,000) (3,672,500) (3,068,161)
----------- ----------- ----------- -----------
Net cash (used in) provided by
financing activities (1,444,000) (3,672,500) (3,068,161) 1,000
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 10,703 2,894 (22,868) 26,823
CASH AND CASH EQUIVALENTS,
beginning of year 6,849 3,955 26,823
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $ 17,552 $ 6,849 $ 3,955 $ 26,823
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes to financial statements. 5
<PAGE>
TRC AGENCY, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - TRC Agency, Inc. (TRC or the Company) is a managing agent which
oversees and pays agent commissions to a large number of writing and
general (sub) agents on behalf of First American Dental Benefits, Inc.
(FADB) (an affiliated company). The Company was incorporated in the State
of Texas on December 11, 1992 and issued founders stock and commenced
operations in 1993.
TRANSACTIONS WITH AFFILIATED COMPANIES - TRC is affiliated through common
ownership with FADB (the two stockholders owning 100% of TRC also own 90%
of FADB). The Company has historically received all commission income from
FADB. FADB performs certain administrative and operational functions on
behalf of TRC, at no cost to TRC. The Company has also entered into
transactions with other entities affiliated through common control
(including American Dental Benefits Group and Amerident Group), which are
material in amount. Accordingly, the accompanying financial statements may
not necessarily be indicative of the conditions that would have existed or
the results of operations if the Company had been operated as an
unaffiliated entity.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
COMMISSION INCOME AND EXPENSES - Commission income is recorded as revenue
in the month the income is earned. Commission expense is recognized as
incurred. Operating expenses are recognized when incurred.
CASH AND CASH EQUIVALENTS - The Company considers highly-liquid investments
with original maturities of three months or less when purchased to be cash
equivalents.
INCOME TAXES - During fiscal 1993, the Company was taxed as a C
corporation, whereby the taxable income is subject to standard corporate
tax rates. Due to the minimal taxable income during fiscal 1993, the tax
benefit is included in other expenses. At the beginning of fiscal 1994,
the Company converted to S corporation status, whereby the taxable income
is included in the personal returns of the stockholders.
6
<PAGE>
TRC AGENCY, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
- --------------------------------------------------------------------------------
2. RELATED PARTY TRANSACTIONS
The Company receives all commission income from FADB (see Note 1).
Receivable from affiliate represents commission income receivable from
FADB.
Payable to affiliate represents amounts due FADB for consulting services
paid by FADB on behalf of TRC.
The Company made payments for legal services to a minority stockholder of
FADB. These payments totaled $57,006 for the six months ended June 30,
1996 and $89,238 and $19,752 for the years ended December 31, 1995 and
1994, respectively. Such amounts have been included in other expenses in
the accompanying statements of income.
The Company paid commissions to Amerident Group (an affiliated company, see
Note 1) of approximately $500,000 during the year ended December 31, 1993.
During fiscal 1993, the Company paid commissions totaling $2,415,368 to its
two stockholders.
3. STOCKHOLDERS' EQUITY
During the six months ended June 30, 1996 and the years ended December 31,
1995 and 1994, the Company made combined aggregate distributions to its
stockholders, totaling $1,444,000, $3,672,500 and $3,068,161, respectively.
4. SUBSEQUENT EVENTS
On July 10, 1996, the Company signed a letter of intent to sell all of the
issued and outstanding capital stock of the Company and FADB, and
concurrent with the sale, the stockholders will enter into noncompetition
agreements with the buyer. The total consideration for both TRC and FADB
and the noncompete agreements will be $23,576,000 in cash. $19,000,000
will be paid at the closing for the shares of the Company, FADB and the
noncompetition of a minority stockholder of FADB. $3,576,000 will be paid
over three years as consideration for the five-year noncompetition
agreements entered into by the two stockholders of the Company. $1,000,000
will be held in an escrow account to be paid, subject to resolution of any
contingencies or issues that may arise, to the stockholders on the second
anniversary after the closing.
7
<PAGE>
EXHIBIT 99-J
SAFEGUARD HEALTH ENTERPRISES, INC.
CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEAR ENDED DECEMBER 31, 1995 AND
INDEPENDENT ACCOUNTANTS' REPORT
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS INTRODUCTION
The accompanying unaudited pro forma condensed consolidated financial statements
reflect the consolidated financial position of Safeguard Health Enterprises,
Inc. (the "Company") for the six months ended June 30, 1996, and the results of
its consolidated operations for the year ended December 31, 1995, and the six
months ended June 30, 1996, after giving pro forma effect to (a) the purchase of
First American Dental Benefits, Inc. ("First American"), (b) T.R.C. Agency,
Inc. ("TRC"), which is affiliated through common ownership with First American,
and of (c) Metroplex Dental Plan ("MDP"), which is also affiliated through
common ownership with First American. This business combination is described
in Note 1 of these financial statements.
The pro forma adjustments are based upon management's assumptions described in
Note 2. The objective of this pro forma financial information is to show what
the significant effects on the historical financial information might have been,
had the purchased business combination occurred at an earlier date. However,
the pro forma consolidated financial statements are not necessarily indicative
of the results of operations or of the related effects on the financial position
of the Company that would have been attained had the above-referenced purchase
of the businesses actually occurred earlier, or which may be achieved in the
future.
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
PRO FORMA CONSOLIDATED UNAUDITED BALANCE SHEET
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
FIRST
AMERICAN SAFEGUARD
DENTAL TRC METROPLEX HEALTH
BENEFITS, AGENCY, DENTAL ENTERPRISES,
INC. INC. PLAN SUBTOTAL INC. ADJUSTMENTS CONSOLIDATED
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 91 $ 18 $37 $ 146 $ 6 $ - $ 152
Investments available for sale,
at estimated fair value 8,924 (1,000) 7,924
Investments held to maturity,
at cost 3,583 3,583
Accounts and notes receivable, net 1,357 117 1,474 5,468 6,942
Prepaid expenses and other
current assets 158 158 1,295 1,453
Deferred income taxes 262 262
------ ---- --- ------ ------- -------- -------
Total current assets 1,606 135 37 1,778 19,538 (1,000) 20,316
PROPERTY AND EQUIPMENT, net 591 591 14,341 14,932
INVESTMENTS HELD TO MATURITY, at cost 4,327 4,327
OTHER ASSETS 57 57 231 288
INTANGIBLES, net 573 20,134(l) 24,207
3,500(n)
------ ---- --- ------ ------- -------- -------
$2,254 $135 $37 $2,426 $39,010 $22,634 $64,070
------ ---- --- ------ ------- -------- -------
------ ---- --- ------ ------- -------- -------
</TABLE>
See notes to pro forma consolidated unaudited financial statements.
2
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
PRO FORMA CONSOLIDATED UNAUDITED BALANCE SHEET
AS OF JUNE 30, 1996 (Continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
FIRST
AMERICAN SAFEGUARD
DENTAL TRC METROPLEX HEALTH
BENEFITS, AGENCY, DENTAL ENTERPRISES,
INC. INC. PLAN SUBTOTAL INC. ADJUSTMENTS CONSOLIDATED
<S> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $1,615 $160 $29 $1,804 $ 2,325 $ 500 (o) $ 4,629
Reserves for incurred but not
reported claims 1,353 1,353
Income taxes payable 781 781
Deferred revenue 189 189 302 491
Other liabilities 1,200 (n) 1,200
Notes payable, banks 37 37 2,000 (j) 2,037
------ ---- --- ------ ------- ------- -------
Total current liabilities 1,841 160 29 2,030 4,761 3,700 10,491
LONG-TERM LIABILITIES 17,000 (j) 19,300
2,300 (n)
DEFERRED INCOME TAXES 30 30 519 549
STOCKHOLDERS' EQUITY:
Preferred stock 179 179 (179)(m)
Common stock and paid-in capital 21 1 22 21,134 (22)(m) 21,134
Retained earnings 183 (26) 8 165 30,800 (165)(m) 30,800
Treasury stock, at cost (18,123) (18,123)
Net unrealized loss on investment
securities (81) (81)
------ ---- --- ------ ------- ------- -------
Total stockholders' equity 383 (25) 8 366 33,730 (366) 33,730
------ ---- --- ------ ------- ------- -------
$2,254 $135 $37 $2,426 $39,010 $22,634 $64,070
------ ---- --- ------ ------- ------- -------
------ ---- --- ------ ------- ------- -------
</TABLE>
See notes to pro forma consolidated unaudited financial statements.
3
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
PRO FORMA CONSOLIDATED UNAUDITED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST
AMERICAN SAFEGUARD
DENTAL TRC METROPLEX HEALTH
BENEFITS, AGENCY, DENTAL ENTERPRISES,
INC. INC. PLAN ADJUSTMENTS SUBTOTAL INC. ADJUSTMENTS CONSOLIDATED
<C> <C> <C> <C> <C> <C> <C> <C>
HEALTH CARE REVENUES $12,298 $2,388 $343 $(2,388)(a) $6,088 $44,276 $ - $50,364
(6,553)(d)
COSTS AND EXPENSES:
Health care services 6,523 112 (3,481)(d) 2,480 35,011 37,491
(674)(b)
Selling, general and
administrative 6,015 983 62 (2,388)(a) 2,416 7,055 250 (e) 10,071
(229)(b) 350 (f)
(235)(c)
(1,792)(d)
------- ------ ---- ------- ------ ------- ------- -------
Total costs and expenses 12,538 983 174 (8,799) 4,896 42,066 600 47,562
------- ------ ---- ------- ------ ------- ------- -------
OPERATING INCOME (LOSS) (240) 1,405 169 (142) 1,192 2,210 (600) 2,802
OTHER INCOME (EXPENSE), net 5 5 538 (683)(g) (168)
(28)(h)
------- ------ ---- ------- ------ ------- ------- -------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME TAXES (235) 1,405 169 (142) 1,197 2,748 (1,311) 2,634
PROVISION FOR INCOME TAXES 1,061 20 (i) 1,081
------- ------ ---- ------- ------ ------- ------- -------
NET INCOME (LOSS) $ (235) $1,405 $169 $ (142) $ 1,197 $ 1,687 $(1,331) $ 1,553
------- ------ ---- ------- ------ ------- ------- -------
------- ------ ---- ------- ------ ------- ------- -------
NET INCOME PER COMMON SHARE AND
COMMON SHARE EQUIVALENT $0.31
-------
-------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 4,936
-------
-------
</TABLE>
See notes to pro forma consolidated unaudited financial statements.
4
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
PRO FORMA CONSOLIDATED UNAUDITED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST
AMERICAN SAFEGUARD
DENTAL TRC METROPLEX HEALTH
BENEFITS, AGENCY, DENTAL ENTERPRISES,
INC. INC. PLAN ADJUSTMENTS SUBTOTAL INC. ADJUSTMENTS CONSOLIDATED
<C> <C> <C> <C> <C> <C> <C> <C>
HEALTH CARE REVENUES $23,550 $5,376 $734 $ (5,376)(a) $11,458 $81,577 -- $93,035
(12,826)(d)
COSTS AND EXPENSES:
Health care services 11,152 189 (6,104)(d) 4,101 65,578 69,679
(1,136)(b)
Selling, general and
administrative 12,241 1,701 138 (5,376)(a) 4,579 13,451 500 (e) 19,230
(455)(b) 700 (f)
(272)(c)
(3,398)(d)
------- ------ ---- ------- ------ ------- ------- -------
Total costs and expenses 23,393 1,701 327 (16,741) 8,680 79,029 1,200 88,909
------- ------ ---- ------- ------ ------- ------- -------
OPERATING INCOME 157 3,675 407 (1,461) 2,778 2,548 (1,200) 4,126
OTHER INCOME (EXPENSE), net 17 17 1,286 (1,512)(g) (264)
(55)(h)
------- ------ ---- ------- ------ ------- ------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES 174 3,675 407 (1,461) 2,795 2,834 (2,767) 3,862
PROVISION FOR INCOME TAXES 66 66 1,446 102 (i) 1,614
------- ------ ---- ------- ------ ------- ------- -------
NET INCOME (LOSS) $ 108 $3,675 $407 $(1,461) $2,729 $ 2,388 $(2,869) $ 2,248
------- ------ ---- ------- ------ ------- ------- -------
------- ------ ---- ------- ------ ------- ------- -------
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENT $0.48
-------
-------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 4,725
-------
-------
</TABLE>
See notes to pro forma consolidated unaudited financial statements.
5
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
NOTES TO PRO FORMA CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(IN THOUSANDS)
1. BASIS OF PRESENTATION
On August 9, 1996, Safeguard Health Enterprises, Inc. (Safeguard)
entered into stock purchase agreements (the Acquisition) to acquire
all of the outstanding shares of First American Dental Benefits, Inc.
(First American), a Texas corporation, TRC Agency, Inc. (TRC), a Texas
corporation, and the operations of Metroplex Dental Plan (MDP).
First American is a licensed Dental Health Maintenance Organization
(DHMO). TRC is a managing agent which oversees a large number of
writing and general agents on behalf of First American. MDP operates
a prepaid dental health plan. As indicated above, First American,
TRC and MDP have entered into transactions with other entities
affiliated through common control, which are material in amount.
Accordingly, their individual financial statements may not necessarily
be indicative of the conditions that would have existed or the results
of operations if First American, TRC and MDP had been operated as
unaffiliated entities.
As part of the acquisition, the selling shareholders will receive an
aggregate of $20,000,000 in cash ($19,000,000 payable at closing and
$1,000,000 payable, subject to certain conditions, on the second
anniversary after closing) and approximately $3,500,000 payable in
monthly amounts over a three-year period under five-year
noncompetition agreements. The Acquisition is to be accounted for
as a purchase. The pro forma consolidated unaudited statements of
operations give effect to the acquisition as if it had occurred on
January 1, 1995. The pro forma consolidated unaudited balance sheet
gives effect to the acquisition as if it had occurred on
June 30, 1996.
The pro forma consolidated unaudited financial statements do not
purport to represent what the results of operations or financial
position of Safeguard would actually have been if the Acquisition had
occurred on January 1, 1995 or on June 30, 1996 or at any future date.
Pro forma net income per share is computed based on the weighted
average number of Safeguard's common shares and dilutive common
equivalent shares outstanding during the periods presented.
2. PRO FORMA ADJUSTMENTS
The pro forma adjustments (adjustments (a) through (i) pertain to the
consolidated statements of operations, adjustments (j) through (o)
pertain to the consolidated balance sheet) are as described below:
Consolidated statements of operations adjustments:
(a) Elimination of revenues and marketing expenditures between First
American and TRC.
6
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
NOTES TO PRO FORMA CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(IN THOUSANDS)(CONTINUED)
(b) Elimination of expenses recorded in the historical financial
statements which were paid to the selling shareholders, their
relatives and their other business entities and recorded as health
care services and selling, general and administrative expenses.
Such expenses are not expected to be incurred following the
acquisition.
(c) Elimination of compensation expense recorded in the historical
statements of operations of First American for certain employees
who, during the periods presented worked for an affiliated company
owned by the selling shareholders. Such employees will not
continue working at First American and will not be replaced
following the Acquisition.
(d) Elimination of revenues and expenses related to one First American
contract (the State of Texas Employee Retirement System, or ERS)
which has been terminated effective September 1, 1996.
(e) Reflects amortization expense of the estimated $20,000,000 of
goodwill arising from the acquisition, amortized on a
straight-line basis over 40 years. The final allocation of the
purchase price (and the exact amount of goodwill) will be
determined upon consummation of the acquisition or shortly
thereafter.
(f) Reflects amortization expense relating to the approximately
$3,500,000 noncompete agreements arising from the Acquisition.
The consideration for the noncompete agreements is payable monthly
over three years. The costs are being amortized on a
straight-line basis over the five-year term of the agreement.
(g) Reflects additional interest expense (at 8.4% per annum) on
initial bank borrowings of approximately $19,000,000 used to
finance the Acquisition. Principal is payable at $500,000 per
quarter for the first year, $750,000 per quarter in the first
half of the following year, with quarterly payments increasing
thereafter.
(h) Reflects interest income (at 5.5% per annum) lost on the
$1,000,000 portion of the purchase price paid by Safeguard, which
will be taken from investments available for sale.
(i) Reflects the income tax effect of the (i) pro forma adjustments;
(ii) S corporation income (TRC); and (iii) division entity income
(MDP), adjusted for the pro forma effect of nondeductible goodwill
amortization.
Consolidated balance sheet adjustments:
(j) Reflects initial bank borrowings of approximately $19,000,000 used
to finance the acquisition, approximately $2,000,000 of which is
estimated as short-term.
(k) Reflects the use of $1,000,000 of Safeguard's investments
available for sale, applied towards the acquisition.
7
<PAGE>
SAFEGUARD HEALTH ENTERPRISES, INC.
NOTES TO PRO FORMA CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(IN THOUSANDS)(CONTINUED)
(l) Reflects the estimated cost in excess of the identifiable net
assets acquired of First American, TRC and MDP. The final
allocation of purchase price (and the amount of goodwill) will
be determined upon consummation of the acquisition or shortly
thereafter.
(m) Reflects the elimination of First American's and TRC's
shareholders' equity.
(n) Reflects the $3,500,000 noncompete agreement and related
obligation. Such obligation is estimated at approximately
$1,200,000 current and approximately $2,300,000 long-term.
(o) Reflects estimated costs and obligations incurred in connection
with the acquisition.
8
