As filed with the Securities and Exchange Commission on October 4, 1996
Registration No. 333-____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
MUTUAL HEALTH SYSTEMS, INC.
(to be changed to GENTLE DENTAL SERVICE CORPORATION)
(Name of small business issuer in its charter)
Washington 8099 91-1577891
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
or organization)
900 WASHINGTON STREET, SUITE 1100
VANCOUVER, WASHINGTON 98660
(360) 750-7975
(Address and telephone number of principal executive offices
and principal place of business)
DANY Y. TSE, DMD
President and Chief Executive Officer
MUTUAL HEALTH SYSTEMS, INC.
900 Washington Street, Suite 1100
Vancouver, Washington 98660
(360) 750-7975
(Name, address and telephone number of agent for service)
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Copies to:
Stuart W. Chestler Thomas P. Palmer
Stoel Rives LLP Tonkon, Torp, Galen, Marmaduke & Booth
900 SW Fifth Avenue, Suite 2300 888 SW Fifth Avenue
Portland, Oregon 97204-1268 Portland, Oregon 97204
(503) 224-3380 (503) 221-1440
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Approximate date of proposed sale to the public: as soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ] ____________________
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
================================================================================================================================
Proposed maximum Proposed maximum
Title of each class of securities to Amount to be offering price per aggregate offering Amount of
be registered registered share(1) price(1) registration fee
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<S> <C> <C> <C> <C>
Common Stock 1,437,500 (2) $7.00 $10,062,500 $3,050
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<FN>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes 187,500 shares that the Underwriters have the option to purchase to cover overallotments, if any.
</FN>
</TABLE>
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
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SUBJECT TO COMPLETION, DATED OCTOBER 4, 1996
PROSPECTUS
1,250,000 Shares
GENTLE DENTAL SERVICE CORPORATION
Common Stock
All of the shares of Common Stock offered hereby are being sold by
Gentle Dental Service Corporation (the "Company"). Before this offering,
there has been no public market for the Common Stock of the Company. It is
estimated that the initial public offering price will be between $5.00 and
$7.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company
has applied to have the Common Stock quoted on the Nasdaq SmallCap Market
under the symbol "GNTL."
--------------------
See "Risk Factors" beginning on page 6 for a discussion of certain
factors that should be considered by prospective purchasers of the Common
Stock.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
Per Share................. $ $ $
Total (3)................. $ $ $
================================================================================
(1) Excludes a nonaccountable expense allowance, payable by the Company to
Black & Company, Inc., the representative (the "Representative") of
the Underwriters, equal to 0.5% of the total Price to Public. The
Company has also agreed to sell to the Representative, for nominal
consideration, warrants to purchase up to 125,000 shares of Common
Stock for a price equal to 120% of the initial public offering price
(the "Representative's Warrants") and to indemnify the underwriters
against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at
$500,000, including the Representative's nonaccountable expense
allowance.
(3) The Company has granted to the Underwriters a 30-day option to
purchase up to 187,500 additional shares of Common Stock solely to
cover overallotments, if any. If the Underwriters exercise this option
in full, the Price to Public, the Underwriting Discount, and Proceeds
to Company will be $_________, $__________, and $____________,
respectively. See "Underwriting." __________________
The shares of Common Stock are offered by the several Underwriters
named herein, subject to prior sale, when, as and if delivered to and
accepted by the Underwriters, and subject to certain other conditions. The
Underwriters reserve the right to reject any order in whole or in part and
to withdraw, cancel, or modify the offering without notice. It is expected
that delivery of certificates representing the Common Stock will be made
against payment therefor at the offices of the agent of Black & Company,
Inc. in New York, New York on or about , 1996.
BLACK & COMPANY, INC.
The date of this Prospectus is , 1996
<PAGE>
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements appearing elsewhere in this
Prospectus. Investors should carefully consider the information set forth
under "Risk Factors." Except as otherwise noted, all information in this
Prospectus (i) assumes no exercise of the Underwriters' overallotment
option and (ii) gives retroactive effect to a one-for-two reverse split of
the Common Stock and other amendments to the Company's Articles of
Incorporation to be effected in October 1996.
The Company
Gentle Dental Service Corporation (the "Company") provides dental
practice management support services to two professional corporations that
employ 62 dentists, orthodontists, and other specialists at 20 locations in
the Portland, Oregon and Seattle, Washington metropolitan areas. The
Company provides facilities, equipment, staffing, management support and
other ancillary services to the multi-specialty dental practices that
constitute the Company's network of affiliated dental service providers
(the "Gentle Dental Network"). The Company intends to rapidly expand the
Gentle Dental Network through acquisitions in both its existing markets as
well as new geographic markets. From January 1, 1995 through June 30, 1996,
the Company acquired 11 dental practices.
Dental spending in the United States is expected to total $40.8
billion in 1996 according to the American Dental Association ("ADA") and
reach $79.1 billion by the year 2005 according to the Congressional Budget
Office. The aging of the U.S. population, a widely recognized demographic
trend, is expected to increase the demand for dental services. Demand for
dentists' new services, such as cosmetic dentistry, also is expected to
contribute to market growth.
Dentistry has traditionally been and continues to be a highly
fragmented industry dominated by solo practitioners. According to the ADA's
1995 Survey of Dental Practice, 67% of dentists were solo practitioners and
only 12% practiced in groups of three or more dentists. The Company
believes traditional practices have high operating costs, little purchasing
power with suppliers and must spread overhead over a relatively small
revenue base. In addition, these practices often have insufficient capital
to purchase new technologies and lack the systems necessary to develop
economies of scale. As a result, the Company believes that dentists
increasingly will find it attractive to affiliate with larger
organizations, such as the Gentle Dental Network, and that there are
significant opportunities to consolidate dental practices.
The Company's objective is to become a leading provider of dental
practice management support services through its growing network of
affiliated dentists and specialists. The Company's strategy to achieve this
objective is to enter selected geographic markets and develop locally
prominent, multi- specialty dental care delivery networks that provide high
quality, cost-effective dental care. In pursuing this strategy, the Company
will seek to replicate the dental service network it has developed and
supports in the Portland, Oregon area. From its base of operations in
Portland, the Company began its geographic expansion into the Seattle,
Washington area in 1995. The Company intends to enter additional geographic
markets by acquiring established dental practices, and will initially
target a significant group practice in each market. Upon entering a new
geographic market, the Company intends to acquire additional individual or
group practices as quickly as possible to realize the economies of scale in
administration and marketing that come from achieving critical mass in a
market. The Company will then recruit specialists, extend office hours, and
add locations in the geographic area as appropriate to provide patients a
comprehensive range of dental care at convenient times and locations
throughout the area. In the past,
3
<PAGE>
the Company has targeted for acquisition practices that derive all or a
high percentage of their revenue from fee-for-service sources, as opposed
to managed care sources. In the near term, the Company plans to continue
this approach as fee-for-service care is generally more profitable than
managed care.
The Company's operating strategy provides solutions for long standing
problems faced by dentists and patients while simultaneously yielding
economic efficiencies. Upon joining the Gentle Dental Network, dentists are
freed from administrative burdens, allowing them to focus on the practice
of dentistry and increase their productivity. The extended office hours
offered by Gentle Dental Network offices give patients the convenience of
expanded scheduling opportunities and allow the Company to spread fixed
costs over more hours. The Gentle Dental Network's full service approach,
which includes on-staff specialists such as orthodontists, pedodontists,
periodontists, and oral surgeons, enables patients to receive comprehensive
dental care while capturing incremental revenue for the Company. Flexible
payment options and convenient locations are among the other amenities the
Gentle Dental Network offers to its customers.
The Company was organized as a Washington corporation in December 1992
to provide dental practice management support services to Tse, Saiget,
Watanabe & McClure, Inc., P.S., a Washington professional corporation, and
Gentle Dental of Oregon, P.C., an Oregon professional corporation
(together, the "Professional Corporations"), and to facilitate the
development and expansion of the Gentle Dental Network. The address of the
Company's executive offices is 900 Washington Street, Suite 1100,
Vancouver, Washington, 98660 and its telephone number is (360) 750-7975.
The Offering
Common Stock offered.......................... 1,250,000 shares
Common Stock to be outstanding
after the offering ......................... 2,809,528 shares (1)
Use of proceeds............................... to repay bank debt and
for acquisitions of
dental practices, capital
improvements, working
capital and general
corporate purposes
Proposed Nasdaq SmallCap Market symbol........ GNTL
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(1) Excludes 351,250 shares of Common Stock subject to outstanding
options, 125,000 shares subject to the Representative's Warrants, and
219,333 shares subject to other outstanding warrants.
4
<PAGE>
Summary Financial Data
(in thousands, except per share amounts and number of dental offices)
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended June 30,
--------------------------------- -----------------------
1993 1994 1995 1995 1996
-------- -------- -------- --------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Support services revenue (1).............. $ 1,541 $ 2,731 $ 9,781 $ 4,837 $ 5,157
Branch costs.............................. - - 4,701 2,321 3,476
Operating expenses........................ 1,168 2,100 4,208 2,020 1,892
-------- -------- -------- -------- --------
Operating income (loss)................... 373 631 872 496 (211)
Interest and other expense, net 3 16 382 40 219
-------- -------- -------- -------- --------
Income (loss) before income taxes......... 370 615 490 456 (430)
Provision (benefit) for income taxes - - 233 218 (46)
-------- -------- -------- -------- --------
Net income (loss)......................... $ 370 $ 615 $ 257 $ 238 $ (384)
======== ======== ======== ======== ========
Net income (loss) per share............... $ .24 $ .20 $ (.26)
======== ======== ========
Unaudited pro forma data (2):
Net income............................. $ 243 $ 404
======== ========
Net income per share................... $ .42 $ .39
======== ========
Weighted average shares outstanding....... 1,304 1,452 1,697 1,679 1,651
Other Data:
Net revenue of Professional Corporations.. $10,270 $12,135 $16,029 $ 7,929 $ 10,313
Number of dental offices at period end.... 10 11 17 14 20
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
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Actual As Adjusted(3)
------ --------------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..................... $ 1,132 $ 2,867
Working capital............................... 1,339 5,681
Total assets.................................. 13,045 14,780
Long-term debt and capital lease
obligations (excludes current portion)..... 2,761 665
Nonredeemable shareholders' equity............ 3,970 10,408
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<FN>
(1) The Company's revenues in 1995 and 1996 have been significantly
affected by changes in the services provided to and level of fees
received from the Professional Corporations. Under the support
services agreements in effect in the respective periods, support
services revenue was 61% of the net revenue of the Professional
Corporations in 1995 and 50% of such revenues in 1996. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
(2) Before 1995, the Company was a subchapter S corporation whose taxable
income was passed through to its shareholders. Effective January 1,
1995, the Company terminated its subchapter S status. The unaudited
pro forma data shows what net income and net income per share would
have been if the Company had been a C corporation during 1993 and
1994.
(3) As adjusted to give effect to the sale of the 1,250,000 shares of
Common Stock offered hereby at an assumed initial public offering
price of $6.00 per share and the application of the estimated net
proceeds therefrom.
</FN>
</TABLE>
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating the Company
and its business before purchasing any shares of Common Stock offered
hereby.
Expansion Program
Much of the Company's future success is predicated on the entrance
into new markets in which the Company has no previous presence or
experience. The Company has had limited expansion experience to date. No
assurances can be given that the Company will be able to complete the
acquisitions necessary for its expansion plans, that such acquisitions will
be on terms favorable to the Company or that the Company will be able to
successfully integrate its business with acquired dental practices. Even
though the Company has completed a number of acquisitions in the past,
there can be no assurance that unforeseen problems with future acquisitions
and expansion will not adversely affect the Company. In addition, the
Company's acquisition model and past experience reflect initial periods in
which the dental practices within a new geographic market will contribute
minimally, if at all, to the Company's earnings. Initial profitability at
the regional level is expected to be low because of the time and capital
required to develop a network of offices and practitioners that is large
enough to permit full implementation of the Gentle Dental business
strategy. See "Business -- The Gentle Dental Strategy." Moreover, delays in
completing acquisitions could cause fluctuations in quarterly earnings and
corresponding fluctuations in the market price of the Common Stock. The
Company intends to use its Common Stock as part of the purchase price of
acquisitions. There can be no assurance that fluctuations in the market
price of the Common Stock will not adversely affect the Company's ability
to use its Common Stock for acquisitions.
Current Lack of Profitability
Although the Company reported net income for 1993, 1994 and 1995, the
Company incurred a net loss of $383,504 for the six months ended June 30,
1996 and expects a net loss for all of 1996. Moreover, the Company would
have incurred a pre-tax loss of approximately $1.3 million for 1995 if the
service fees paid by the Professional Corporations had been 50% of the
Professional Corporations' revenues rather than the one-time 1995 level of
61% of such revenues. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." These losses resulted
primarily from a buildup in executive and general management staff that the
Company began in 1995 to support its expansion plans. There can be no
assurance that the Company will be profitable in the future.
Dependence on Affiliated Professional Corporations
The Company receives fees for services provided to dental practices
under support services agreements, but does not employ dentists or control
the practices of its affiliated dentists. The Company's revenue is
dependent on revenue generated by the Company's affiliated Professional
Corporations and, therefore, performance of the Professional Corporations
is essential to the Company's success. The long-term agreements with the
Professional Corporations are for terms of 40 years and may be terminated
by either party for "cause," which includes a material default by or
bankruptcy of the other party. Any material loss of revenue by the
Professional Corporations would have a material adverse effect on the
Company. In addition, the Company makes unsecured advances to the related
Professional
6
<PAGE>
Corporations. The failure of these entities to repay such advances could
have a material adverse effect on the Company.
Additional Financings
The Company's expansion strategy will require substantial additional
funding. Moreover, the operation of the Gentle Dental Network's dental
offices requires ongoing capital expenditures. These expenditures will be
used for renovation, expansion and the addition of increasingly costly
dental equipment and technology used to provide ancillary services. These
requirements will result in the Company incurring long-term and short-term
indebtedness and in the public or private issuance, from time to time, of
additional equity or debt securities. There can be no assurance that any
such financing will be available to the Company or will be available on
terms acceptable to the Company.
Integration of Affiliated Dental Practices and Management Information Systems
The Company has limited experience in providing management support
services to affiliated dental practices outside of the Portland, Oregon
area. The Company's expansion into new markets will require the Company to
maintain and establish payor and customer relationships and to convert the
patient tracking and financial reporting systems of the acquired practices
to the Company's systems. Significant delays or expenses of such
conversions could have a material adverse effect on the integration of
acquired practices. There can be no assurance that the Company will be able
to maintain or establish payor and customer relationships, convert
management information systems, or integrate new practices into its
existing network.
Government Regulation
The health and dental care industry is subject to extensive federal,
state and local laws, rules and regulations. The Company believes that its
operations are in material compliance with applicable laws. Nevertheless,
because of the special nature of the Company's relationship with the
Professional Corporations, many aspects of the Company's business
operations have not been the subject of state or federal regulatory
interpretation. There can be no assurance that a review of the Company's or
the Professional Corporations' business by courts or regulatory authorities
will not result in a determination that could adversely affect the
operations of the Company or the Professional Corporations. In addition,
the standards of practice of dental care and related federal and state
regulations are subject to change. The Company cannot predict what changes
may be enacted which may affect its business or the manner in which its
business would be affected by such changes.
The laws of many states prohibit business corporations such as the
Company from practicing dentistry or employing dentists to practice
dentistry. In addition, the laws of many states prohibit dentists from
splitting fees with non-dentists. The laws regarding the corporate practice
of dentistry and fee splitting vary from state to state and are enforced by
the courts and by regulatory authorities with broad discretion. In most
states, these laws have been subjected to limited judicial and regulatory
interpretation and the Company has not obtained, or applied for, any
opinion of any regulatory or judicial authority that its business
operations are in compliance with these laws. Therefore, no assurances can
be given that the Company's activities will be found to be in compliance if
scrutinized by such authorities. In addition, the regulatory framework of
certain jurisdictions may limit the Company's expansion into such
jurisdictions if the Company is unable to modify its operational structure
to conform with such regulatory framework.
7
<PAGE>
A small percentage of the revenues of the Professional Corporations
comes from the Medicare and Medicaid programs. Federal law prohibits the
offer, payment, solicitation or receipt of any form of remuneration in
return for, or in order to induce, (i) the referral of a Medicare or
Medicaid patient, (ii) the furnishing or arranging for the furnishing of
items or services reimbursable under Medicare or Medicaid programs or (iii)
the purchase, lease or order of any item or service reimbursable under
Medicare or Medicaid. Pursuant to this anti-kickback law, the federal
government has announced a policy of increased scrutiny of joint ventures
and other transactions among health care providers in an effort to reduce
potential fraud and abuse relating to Medicare and Medicaid costs. The
applicability of these provisions to many business transactions in the
health care industry has been subject to only limited judicial and
regulatory interpretation. Noncompliance with the federal anti-kickback
legislation can result in exclusion from Medicare and Medicaid programs and
civil and criminal penalties.
Congress has considered various types of health care reform, including
comprehensive revisions to the current health care system. It is uncertain
what legislative proposals will be adopted in the future, if any, or what
actions federal or state legislatures or third-party payors may take in
anticipation of or in response to any health care reform proposals or
legislation. Health care reform legislation adopted by Congress could have
a material adverse effect on the operations of the Company.
Managed Care
Managed care arrangements typically shift some of the economic risk of
providing patient care from the person who pays for the care to the
provider of the care by capping fees, requiring reduced fees, or paying a
set fee per patient irrespective of the amount of care delivered. There can
be no assurance that managed care arrangements will not become more
prevalent in the dental care field in the future, that the downward
pressures on fees associated with managed care will not increase, or that
the Company will not be adversely affected by growth in managed dental
care.
Competition
The market for dental services is highly fragmented and is
characterized by large numbers of solo practitioners and small group
practices competing for individual patients. The Company believes that
cost, location, hours of operation and quality of dental services are the
principal factors affecting competition for patients. The Company expects
that the ability to meet the needs of managed care payors will increasingly
be a factor in competing for patients covered by managed care reimbursement
arrangements. There can be no assurance that the Professional Corporations
will be able to compete effectively in the markets they serve, and an
inability to do so would adversely affect the Company.
In pursuing its growth strategy, the Company also faces competitive
pressures for the acquisition of dental practices to be added to the Gentle
Dental Network. In each geographic market it enters, the Company will need
to be competitive with the existing market for dental practices among
dentists. In addition, although the dental practice service industry is
much less developed than the medical practice service industry, the Company
expects competition from other dental practice service companies for the
acquisition of and provision of support services to dental practices. The
Company is aware of several other dental practice service companies that
are in various stages of formation and capitalization. There can be no
assurance that the Company will be able to compete effectively with such
competitors, that additional competitors with greater resources than the
Company will not enter the market, or that such competition will not make
it more difficult to acquire dental practices on terms beneficial to the
Company.
8
<PAGE>
Dependence Upon Key Personnel
In large part, the success of the Company depends on the continued
availability of its executive officers and senior staff members. The
unavailability of certain of these people, or the Company's inability to
attract and retain other key employees, could severely affect the Company's
ability to carry on its business. There is no assurance that these officers
or employees will remain with the Company or that the Company will be able
to attract and retain other key employees. Successful expansion and
marketing of the Company's services and the development of its business
will depend to a large extent on the abilities and continued participation
of its key employees. The loss of any of these employees could have a
material adverse effect on the Company's business. There are no employment
agreements between the Company and any of its key employees.
Dependence Upon Third-Party Payments
A significant portion of the payment for services rendered by the
Professional Corporations is paid by private insurance programs. There is,
and has been in recent years, an ongoing effort to contain and reduce
health care and dental care costs, and, in the event that third-party
payors are successful in obtaining lower payments for specified services,
the Company's results of operations may be materially adversely affected.
Potential Liability and Insurance
Due to the nature of its business, the Company may from time to time
become involved as a defendant in medical malpractice lawsuits brought
against affiliated dental practices or dentists employed by such practices.
In addition, the Company could be involved in litigation in which it is
alleged that the Company has been negligent in performing its duties under
support services agreements. The Company maintains professional and general
liability insurance in amounts deemed appropriate by management based upon
its assessment of historical claims and the nature and risks of its
business. There can be no assurance, however, that an existing or future
claim or claims will not exceed the limits of available insurance coverage,
that any insurer will remain solvent and able to meet its obligations to
provide coverage for any such claim or claims, or that such coverage will
continue to be available or available with sufficient limits and at a
reasonable cost to insure adequately and economically the Company's
operations in the future. A judgment against the Company that exceeds its
insurance coverage could have a material adverse effect on the Company.
No Prior Public Market; Volatility; Dilution
Before this offering, there has been no public market for the
Company's Common Stock. There is no assurance that an active trading market
will be sustained after completion of this offering or that the market
price of the Common Stock will not decline below the initial public
offering price. The initial public offering price of the Common Stock will
be determined through negotiations between the Company and the
Representative. See "Underwriting." The market for securities of early
stage, small business companies has been highly volatile in recent years,
often as a result of factors unrelated to a company's operations. The
Common Stock is expected to be traded on Nasdaq SmallCap Market, which
market has experienced and is likely to experience in the future
significant price and volume fluctuations, which could adversely affect the
price of the Common Stock without regard to the operating performance of
the Company. These factors, as well as general economic conditions such as
recessions or high interest rates,
9
<PAGE>
may adversely affect the market price of the Common Stock. This offering
involves immediate, substantial dilution to new investors. See "Dilution."
Concentration of Stock Ownership
Following this offering, the executive officers and directors of the
Company, together with three other founding shareholders, will beneficially
own or have control over approximately 45% of the Common Stock.
Accordingly, these individuals will have the ability to influence the
election of the Company's directors and effectively control most corporate
actions. This concentration of ownership may also have the effect of
delaying, deterring, or preventing a change of control of the Company. See
"Principal Shareholders."
Shares Eligible for Future Sale
Sales of substantial amounts of Common Stock in the public market
following this offering could adversely affect the price of the Common
Stock. Of the 2,809,528 shares of Common Stock that will be outstanding
following this offering, the 1,250,000 shares of Common Stock offered
hereby will be freely tradable under federal securities law to the extent
they are not held by affiliates of the Company. An additional 40,500 shares
of Common Stock will be freely tradeable without restriction pursuant to
Rule 144(k) under the Securities Act of 1933 (the "Securities Act"), and,
beginning 90 days after the date of this Prospectus, an additional
1,144,862 shares will be eligible for resale subject to compliance with
Rule 144 or Rule 701 under the Securities Act. (Restricted securities that
have been held for more than three years are freely tradable if not held by
affiliates. Restricted securities held for at least two years, whether held
by affiliates or others, may be sold under Rule 144, subject to certain
volume and other limitations.) Holders of 1,163,800 shares of Common Stock
that are restricted securities (including 1,098,750 of the shares eligible
for resale beginning 90 days after the date of this Prospectus) have agreed
that they will not, without the written consent of the Representative,
offer to sell, contract to sell or otherwise sell or dispose of their
shares for one year following this offering. Holders of 100,000 shares of
the Company's Common Stock and of warrants to purchase an additional
104,333 shares are entitled to certain rights with respect to the
registration of such shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights." As of June 30, 1996, options to
purchase 338,750 shares were outstanding under the Company's 1993 Stock
Incentive Plan and additional shares were reserved for issuance upon
exercise of options which may be granted in the future. Shares issued
pursuant to options granted before the completion of this offering (other
than 65,900 shares subject to options held by certain of the Company's
officers, directors or current shareholders, who are subject to lockup
agreements with the Representative) will be eligible for sale in the public
market pursuant to Rule 701 under the Securities Act, subject to the
limitations of Rule 144 (other than the holding period requirement). See
"Description of Capital Stock," "Shares Eligible for Future Sale," and
"Underwriting."
Possible Adverse Effect of Issuance of Preferred Stock; Potential
Antitakeover Effect of Washington Law
The Company is authorized to issue up to 30,000,000 shares of
Preferred Stock, and the board of directors may fix the preferences,
limitations and relative rights of those shares without any vote or action
by the shareholders. The potential issuance of Preferred Stock may delay,
deter, or prevent a change in control of the Company, may discourage bids
for the Common Stock at a premium over the market price of the Common
Stock, and may adversely affect the market price of, and the voting and
other rights of the holders of, Common Stock. The Company has no plans to
issue shares of Preferred
10
<PAGE>
Stock. In addition, certain provisions of Washington law could have the
effect of delaying, deterring, or preventing a change in control of the
Company. See "Description of Capital Stock."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby are estimated to be $6.4 million ($7.5 million if the
Underwriters' overallotment option is exercised in full), assuming an
initial public offering price of $6.00 per share. The Company intends to
use approximately $4.7 million of the net proceeds to repay all outstanding
indebtedness under the Company's bank loan agreement. Of the outstanding
amount, $1,853,592 was borrowed in 1995 and 1996 to fund dental practice
acquisitions and equipment purchases; this amount matures on August 30,
2000 and carries an interest rate of 1.5% over prime (or 9.75% at June 30,
1996). Another $812,500 of the outstanding amount matures on August 30,
1999 and carries an interest rate of 1.25% over prime (or 9.5% at June 30,
1996). The remaining outstanding amount is borrowed pursuant to two lines
of credit. One of the two lines of credit provides a maximum of $1,850,000,
carries an interest rate of 1.0% over prime (or 9.25% at June 30, 1996),
and matures on October 31, 1996. The other line provides a maximum of
$650,000, carries an interest rate of 2.5% over prime (or 10.75% at June
30, 1996), and matures on November 22, 1996, or upon the consummation of
this public offering, if earlier. Upon repayment of the outstanding
indebtedness as described above, all personal guarantees provided by
certain officers, directors, and shareholders of the Company with respect
to the Company's current credit arrangements will be canceled. See "Certain
Transactions."
The balance of the net proceeds, together with the borrowing capacity
resulting from the repayment of outstanding indebtedness, is expected to be
used to fund acquisitions of dental practices, improvements in existing and
acquired practices, working capital and other general corporate purposes.
Although an integral part of the Company's strategy is to grow through
acquisitions, and the Company is currently in discussions with several
dental practices in both its current and potential future geographic
markets, no acquisition is the subject of any definitive agreement.
DIVIDEND POLICY
The payment of dividends is within the discretion of the Company's
Board of Directors. The Company paid cash dividends to its shareholders in
1994 and 1995 in the aggregate amounts of $223,680 and $86,943,
respectively, principally for the payment of the shareholders' income tax
liabilities associated with the Company's status as a subchapter S
corporation. The Company elected to terminate its subchapter S corporation
status on January 1, 1995. The Company intends to retain earnings from
operations for use in the operation and expansion of its business and does
not expect to pay cash dividends in the foreseeable future. Any future
decision with respect to dividends will depend on future earnings,
operations, capital requirements and availability, restrictions in future
financing agreements and other business and financial considerations. The
Company's existing credit agreement prohibits the payment of cash
dividends.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1996 and as adjusted to give effect to the sale of the 1,250,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $6.00 per share and the application of the estimated net proceeds
therefrom.
<TABLE>
<CAPTION>
June 30, 1996
Actual As Adjusted
------ -----------
(in thousands)
<S> <C> <C>
Long-term debt and capital lease obligations,
net of current portion........................................ $2,761 $ 665
Redeemable common stock, 184,065 shares issued
and outstanding............................................... 1,884 1,884
Nonredeemable shareholders' equity:
Preferred stock, 30,000,000 shares authorized, no shares
issued and outstanding
Common stock, 50,000,000 shares authorized, 1,375,463 shares
issued and outstanding, 2,625,463 shares issued
and outstanding as adjusted (1)........................... 3,066 9,504
Shareholder note receivable................................... (40) (40)
Additional paid-in capital.................................... 491 491
Retained earnings............................................. 453 453
------ --------
Total nonredeemable shareholders' equity.................. 3,970 10,408
------ --------
Total capitalization.............................................. $8,615 $ 12,957
====== ========
- -----------------
<FN>
(1) Does not include 338,750 shares of Common Stock subject to outstanding
options at a weighted average exercise price of $9.88 per share,
125,000 shares subject to the Representative's Warrants, and 219,333
shares subject to other outstanding warrants at an exercise price of
$7.50 per share. All outstanding options with exercise prices higher
than the initial public offering price will be repriced to the initial
public offering price, except for options held by Dr. Tse, which will
be repriced to 110% of the initial public offering price.
</FN>
</TABLE>
12
<PAGE>
DILUTION
The net tangible book value of the Company at June 30, 1996 was
$697,186, or $.51 per share of Common Stock. Net tangible book value per
share represents the tangible assets of the Company less its total
liabilities and redeemable common stock, divided by the number of shares
outstanding at June 30, 1996. Without taking into account any changes in
net tangible book value after June 30, 1996, other than to give effect to
the sale of the 1,250,000 shares of Common Stock offered hereby at an
assumed public offering price of $6.00 per share, after deduction of the
underwriting discount and other estimated offering expenses, the net
tangible book value of the Company at June 30, 1996 would have been $2.72
per share of Common Stock, representing an increase in net tangible book
value of $2.21 per share to existing shareholders and dilution of $3.28 per
share to new investors. Dilution is determined by subtracting net tangible
book value per share after the offering from the amount of cash paid by a
new investor for a share of Common Stock in the offering. The following
table illustrates per share dilution.
Assumed public offering price per share................ $6.00
Net tangible book value before the offering........ $ .51
Increase attributable to new investors............. 2.21
-----
Net tangible book value per share after offering....... 2.72
-----
Dilution per share to new investors.................... $3.28
=====
The following table summarizes, as of June 30, 1996, the relative
investments of all existing shareholders and new investors, giving pro
forma effect to the sale by the Company of the shares offered hereby (based
upon an assumed initial public offering price of $6.00 per share).
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- --------------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders................. 1,559,528 55.5% $4,881,518 39.4% $ 3.13
New Investors......................... 1,250,000 44.5% 7,500,000 60.6% 6.00
--------- ------ ----------- ------
Total........................ 2,809,528 100.0% $12,381,518 100.0%
========= ====== =========== ======
</TABLE>
The foregoing computations do not include (i) an aggregate of
1,000,000 shares reserved for issuance under the Company's 1993 Stock
Incentive Plan, of which 338,750 shares were subject to outstanding options
at June 30, 1996 at a weighted average exercise price of $9.88 per share,
(ii) 125,000 shares subject to the Representative's Warrant, and (iii)
219,333 shares subject to other outstanding warrants at an exercise price
of $7.50 per share. All outstanding options with exercise prices higher
than the initial public offering price will be repriced to the initial
public offering price, except for options held by Dr. Tse, which will be
repriced to 110% of the initial public offering price.
13
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for year ended December
31, 1993 have been derived from unaudited financial statements of the
Company. The selected financial data presented below for the years ended
December 31, 1994 and 1995 have been derived from the audited financial
statements of the Company included elsewhere in this Prospectus. The
selected financial data for the six months ended June 30, 1995 and 1996
have been derived from the unaudited financial statements of the Company
included elsewhere in this Prospectus. In the opinion of management of the
Company, the unaudited financial statements have been prepared on the same
basis as the audited financial statements referred to above and include all
adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of the financial position of the Company and its results
of operations for the periods indicated. Operating results for the six
months ended June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. The selected
financial data should be read in conjunction with the financial statements
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended June 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(unaudited) (unaudited)
(in thousands, except per share amounts
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: and number of dental offices )
Support services revenue (1).................... $ 1,541 $ 2,731 $ 9,781 $ 4,837 $ 5,157
Branch costs.................................... - - 4,701 2,321 3,476
Operating expenses.............................. 1,168 2,100 4,208 2,020 1,892
-------- -------- -------- -------- --------
Operating income (loss)......................... 373 631 872 496 (211)
Interest and other expense, net ................ 3 16 382 40 219
-------- -------- -------- -------- --------
Income (loss) before income taxes............... 370 615 490 456 (430)
Provision (benefit) for income taxes............ - - 233 218 (46)
-------- -------- -------- -------- --------
Net income (loss)............................... $ 370 $ 615 $ 257 $ 238 $ (384)
======== ======== ======== ======== ========
Net income (loss) per share..................... $ .24 $ .20 $ (.26)
======== ======== ========
Unaudited pro forma data (2):
Net income................................... $ 243 $ 404
======== ========
Net income per share......................... $ .42 $ .39
======== ========
Weighted average shares outstanding............. 1,304 1,452 1,697 1,679 1,651
Other Data:
Net revenue of Professional Corporations........ $ 10,270 $12,135 $ 16,029 $ 7,929 $ 10,313
Number of dental offices at period end.......... 10 11 17 14 20
</TABLE>
<TABLE>
<CAPTION>
December 31,
1993 1994 1995 June 30, 1996
------- -------- --------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data: (in thousands)
Cash and cash equivalents...................... $ 522 $ 30 $ 689 $ 1,132
Working capital................................ 598 (120) 1,303 1,339
Total assets................................... 976 2,763 10,214 13,045
Long-term debt and capital lease
obligations (excludes current portion)...... - 847 2,734 2,761
Nonredeemable shareholders' equity............. 858 1,268 3,812 3,970
- ---------------------------
<FN>
(1) The Company's revenues in 1995 and 1996 have been significantly
affected by changes in the services provided to and level of fees
received from the Professional Corporations. Under the support
services agreements in effect in the respective periods, support
services revenue was 61% of the net revenue of the Professional
Corporations in 1995 and 50% of such revenues in 1996. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
(2) Before 1995, the Company was a subchapter S corporation whose taxable
income was passed through to its shareholders. Effective January 1,
1995, the Company terminated its subchapter S status. The unaudited
pro forma data shows what net income and net income per share would
have been if the Company had been a C corporation during 1993 and
1994.
</FN>
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company provides facilities, equipment, staffing, management
support and other ancillary services to the Professional Corporations that
employ the dental service providers of the Gentle Dental Network. The
Company intends to rapidly expand the Gentle Dental Network through
acquisitions in both its existing markets as well as new geographic
markets. The Professional Corporations are exclusively in control of all
aspects of the practice of dentistry and the delivery of dental services.
The Company's revenues consist of fees received for services provided under
two Support Services Agreements between the Company and the Professional
Corporations (the "Support Services Agreements"). See "Business -- Support
Services Agreements." The Company's support services revenue ("Support
Services Revenue") is equal to a percentage of the net revenue of the
Professional Corporations ("Net PC Revenue"). Net PC Revenue equals the
gross billings of the Professional Corporations less contractual discounts
and bad debt allowances. Under the current Support Services Agreements,
which went into effect as of January 1, 1996, Support Services Revenue are
equal to 50% of Net PC Revenue for 1996, and increase 1% each year
thereafter until the fees reach 55% of Net PC Revenue. The Company
anticipates that future support services agreements with professional
corporations in new states will similarly provide for an initial support
services revenue percentage of 50% increasing annually to 55%.
Changes in Support Services Agreements. The Company's operating
results for 1995 and 1996 have been significantly affected by changes in
its relationship with the Professional Corporations as reflected in the
Support Services Agreements. The major changes to the relationship effected
as of January 1, 1995 were designed to give the Company a fee and service
structure similar to other practice management support services companies
and to consolidate non-dental functions to facilitate efficient
administration.
Effective January 1, 1995, the Company entered into revised Support
Services Agreements with the Professional Corporations. These agreements
provided for expanded services in exchange for increased fees. The major
changes in the Support Services Agreements were to (i) change the personnel
to be provided by the Company to include all staff at the dental facilities
other than dentists, specialists, hygienists, nurses and dental assistants;
(ii) change the required services to include the provision of dental
equipment and facilities, and financing services, in addition to the
previously provided management, administrative and development services;
(iii) change the method of calculating the Company's fee to a flat
percentage of Net PC Revenue; (iv) require an ongoing assignment of all
patient accounts receivable to the Company at the time patient services are
provided; and (v) allow the Company to collect its service fees by
deducting them from collections and remitting the balance to the
Professional Corporations. As a result of these changes, a number of
expenses incurred directly by the Professional Corporations in 1994 and
prior years have been incurred by the Company since January 1, 1995, and a
corresponding increase has been made in the Support Services Revenue
received by the Company.
To position the Company to perform its obligations under the new
Support Services Agreements, a number of transactions between the Company
and the Professional Corporations were executed as of the last day of 1994
or the first day of 1995. See "Certain Transactions." In these
transactions, the Company purchased all of the Professional Corporations'
dental equipment and supplies which the Company now provides to the
Professional Corporations under the Support Services Agreements, and the
Company purchased the Professional Corporations' accounts receivable.
Equipment leases pursuant to
15
<PAGE>
which the Company previously provided certain dental equipment to the
Professional Corporations were terminated. In addition, the Company
directly assumed all of the leases of existing dental service locations.
Non-Recurring Increase In Support Services Revenue. For 1995, the
Support Services Revenue percentage under the Support Services Agreements
was temporarily established at 61% of Net PC Revenue. This one-time
non-recurring increase was negotiated among the parties to provide
additional compensation to the Company during a transition year in which
the Company significantly increased its staff to support the accelerated
expansion program.
Acquisitions. From January 1, 1995 to June 30, 1996, the Company
acquired four dental practices in the Portland, Oregon metropolitan area
and seven dental practices in the Seattle, Washington metropolitan area.
The total purchase price for these practices was $3,765,177, consisting of
$1,926,290 in cash, $202,970 in promissory notes, and 125,582 shares of
Common Stock valued at an aggregate of $1,635,917.
The Company's acquisition model and past experience reflect initial
periods in which a new geographic market will contribute minimally, if at
all, to the Company's earnings. Initial profitability at the regional level
is expected to be low because of the time and capital required to develop a
network of offices and practitioners that is large enough to permit full
implementation of the Gentle Dental strategy. This strategy requires that
the Company achieve a critical mass that enables it to economically add
longer office hours and higher-margin specialists to the area's general
dentistry practices, to develop customer awareness, and to position the
Company to enter into significant agreements for large groups of customers,
such as service contracts with health plans and self-insured employers. As
this strategy is implemented, the Company expects earnings contribution
from new regions to steadily improve. In the interim, operating income as a
percentage of revenues will be adversely affected by the lower
profitability of new regions.
The Company's recent expansion into the Seattle area has been
consistent with this initial low profitability expectation at the regional
level. Capital constraints delayed planned acquisitions in the Seattle area
and extended the start-up period. The Company plans to use a portion of the
proceeds from this offering to make additional acquisitions in the Seattle
area.
In connection with the acquisition of dental practices, the Company
capitalizes a portion of the purchase price as cost of purchasing the right
to provide management support services to the acquired practices under the
Support Services Agreements. These intangible assets are amortized on a
straight-line basis over the initial 40-year terms of the Support Services
Agreement. The resulting amortization expense reduces net income, but not
cash flow, and the size of this expense will increase as the Company
completes acquisitions.
16
<PAGE>
Results of Operations
The following table shows the derivation of the Company's revenues
from the net revenues of the Professional Corporations for the periods
indicated.
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended June 30,
------------------------------------ ----------------------
1993 1994 1995 1995 1996
------- ------- ------- ------ -------
(unaudited) (unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Net revenues of Professional Corporations............. $10,270 $12,135 $16,029 $7,929 $10,313
Amounts retained by Professional Corporations......... 8,729 9,404 6,248 3,092 5,156
------- ------- ------- ------ -------
Support services revenue.............................. $ 1,541 $ 2,731 $ 9,781 $4,837 $ 5,157
======= ======= ======= ====== =======
</TABLE>
Comparison of the Six Months Ended June 30, 1996 to the Six Months Ended
June 30, 1995
Many of the relationships between the six month periods are affected
by the non-recurring increase in support service fees charged to the
Professional Corporations. See "Overview -- Non-Recurring Increase in
Support Services Revenue."
Revenue. Net PC Revenue increased 30.1% from $7.9 million for the six
months ended June 30, 1995 to $10.3 million for the six months ended June
30, 1996. Increased revenues from branch offices in operation during both
periods accounted for one-fifth of this increase while the remainder was
the net result of nine practice acquisitions, one new branch opening, and
one branch closure during the period of July 1, 1995 to June 30, 1996.
Support Services Revenue increased 6.6% from $4.8 million for the six
months ended June 30, 1995 to $5.2 million for the six months ended June
30, 1996. This lower rate of growth was the result of the reduction in the
percentage of Net PC Revenue payable under the Support Services Agreements
from 61% in 1995 to 50% in 1996.
Branch Costs. Branch costs include all staff compensation and related
payroll costs at the dental facilities, other than dentists, hygienists and
dental assistants and all dental supplies, facilities, equipment
depreciation and general branch administrative expense. Branch costs
increased 49.8% from $2.3 million for the six months ended June 30, 1995 to
$3.5 million for the six months ended June 30, 1996. If 1995 Support
Services Revenue is adjusted to 50% of Net PC Revenue, as in 1996, then the
branch costs increased as a percentage of Support Services Revenue from
58.5% for the six months ended June 30, 1995 to 67.4% for the six months
ended June 30, 1996. In the Portland area, branch costs as a percentage of
Support Services Revenue (if adjusted to 50% of Net PC Revenue) increased
from 58.5% for the first six months of 1995 to 65.0% for the first six
months of 1996. This increase primarily resulted from the start-up costs
that the Company incurred in opening its new flagship dental office in
downtown Portland during November 1995. During the second half of 1995 and
the first half of 1996 the Company acquired practices in Seattle which
experienced branch costs during the first six months of 1996 that were
83.0% of Support Services Revenue. The Company's business strategy has not
yet been fully implemented resulting in higher Seattle branch costs.
Operating Expenses. The Company's operating expenses decreased 6.3%
from $2.0 million for the six months ended June 30, 1995 to $1.9 million
for the six months ended June 30, 1996. If 1995 Support Services Revenue is
adjusted to 50% of Net PC Revenue, as in 1996, then the operating expenses
decreased from 50.9% of Support Services Revenue for the six months ended
June 30, 1995 to 36.4% of Support Services Revenue in 1996. In 1995, the
Company significantly increased its executive and
17
<PAGE>
general management staff to support its expansion plans. In the first half
of 1996, operating expenses declined as a result of cost reduction measures
implemented by the Company. Although the Company expects some increase in
operating expenses, the Company expects further reductions in operating
expenses as a percentage of revenue as the Company continues to experience
economies of scale in administration.
Operating Income (Loss). The Company's operating income decreased from
$0.5 million for the six months ended June 30, 1995 to an operating loss
of $0.2 million for the six months ended June 30, 1996. This decrease is
attributable to the non-recurring increase in the Support Services Revenue
percentage in 1995. The Company would have incurred an operating loss of
$0.4 million for the six months ended June 30, 1995 if the Support Services
Revenue percentage had been 50% in 1995.
Interest and Other Expense, Net. Interest and other expense, net
increased from $40,208 for the six months ended June 30, 1995 to $0.2
million for the six months ended June 30, 1996. The increase for the six
months ended June 30, 1996 partially reflects additional interest expense
related to additional borrowings. In addition, in May 1996, in
consideration for guaranteeing the Company's line of credit, the Company
issued to certain officers, directors, and shareholders of the Company
warrants to purchase 115,000 shares of the Company's common stock. The
estimated fair market value of the warrants was $232,978 and will be
amortized over the six-month term of the line of credit. As of June 30,
1996, $80,586 of interest expense has been recorded related to the
warrants.
Provision (Benefit) for Income Taxes. For the six months ended June
30, 1995, the Company's effective tax rate was approximately 48%. For the
six months ended June 30, 1996, the Company recognized a tax benefit
resulting from its taxable loss for the period. Because the Company has in
the past used and expects most future practice acquisitions to use a
tax-free merger structure, the amortization of intangible assets will
reduce earnings but will not be deductible for tax purposes. Accordingly,
the Company expects that in profitable years, the effective tax rate will
be higher than the applicable statutory tax rate.
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
As discussed above, as a result of the changes to the Support Services
Agreements effective January 1, 1995, a number of expenses incurred
directly by the Professional Corporations prior to 1995 are now being
incurred by the Company and a corresponding increase has been made in the
service fees paid by the Professional Corporations to the Company. Many of
the fluctuations between historical 1995 and 1994 operating results are due
to this change in the relationship between the Company and the Professional
Corporations.
Revenue. Net PC Revenue increased 32.1% from $12.1 million in 1994 to
$16.0 million in 1995. Increased revenues from branch offices in operation
during both periods accounted for 37.8% of this increase while the remainder
was the result of the acquisition of seven dental practices, the closure of
two branches and the opening of one new branch. Support Services Revenue
increased from $2.7 million to $9.8 million from 1994 to 1995 respectively.
This increase is attributed to the increase in the percentage fee payable
under the Support Services Agreements from 1994 to 1995.
Branch Costs. Branch costs did not exist in 1994 at the Company level
based on the structure of the Support Services Agreements. Before January
1, 1995, branch costs were incurred directly by the Professional
Corporations and the related support services were not provided under the
Support Services Agreements.
18
<PAGE>
Operating Expenses. Operating expenses increased 100.4% from $2.1
million in 1994 to $4.2 million in 1995. This increase primarily reflects
the buildup in executive and general management staff required to support
the Company's expansion plans, the expansion of regional, administrative,
and corporate facilities causing an increase in rent expenses, increased
advertising and marketing costs, and increased depreciation.
Operating Income (Loss). Operating income increased 38.2% from $0.6
million in 1994 to $0.9 million in 1995. The increase is attributable to
the non-recurring increase to the Support Services Revenue percentage. The
Company would have incurred an operating loss of $0.9 million for 1995 if
the Support Services Revenue percentage had been 50% in 1995.
Interest and Other Expense, Net. Interest and other expense, net
increased from $16,217 in 1994 to $0.4 million in 1995. The 1995 increase
primarily relates to higher interest expense related to additional
borrowings. In addition, other expense for 1995 includes the recognition of
an $86,187 loss on disposal of computer equipment as a result of a 1995
computer upgrade and conversion.
Quarterly Results
The following table sets forth selected financial data by quarter for
the Company's 1995 fiscal year and the first two quarters of fiscal 1996.
The quarterly information is derived from the Company's unaudited financial
statements. In the opinion of management, the unaudited financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments of a normal and recurring nature
which are necessary for a fair presentation. The operating results for any
quarter are not necessarily indicative of the results for any future
period.
<TABLE>
<CAPTION>
Fiscal 1996 Quarters
Fiscal 1995 Quarters Ended Ended
------------------------------------------------ ----------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
------- ------- -------- ------- ------- -------
(in thousands, except per share data amounts and number of dental offices)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data: (unaudited)
Support services revenue.................... $2,363 $2,474 $2,336 $2,608 $2,480(1) $2,677(1)
Branch costs................................ 1,211 1,110 1,072 1,308 1,751 1,725
Operating expenses.......................... 977 1,043 1,140 1,048 891 1,001
Operating income............................ 175 321 124 252 (162) (49)
Income (loss) before income taxes........... 161 295 86 (52) (251) (179)
Net income (loss)........................... 84 154 46 (27) (189) (194)
Net income (loss) per share................. $ .08 $ .12 $ .04 $ (.01) $ (.14) $ (.12)
Weighted average shares outstanding......... 1,546 1,738 1,759 1,785 1,677 1,656
Other Data:
Net revenue of Professional Corporations.... $3,874 $4,056 $3,830 $4,269 $4,960 $5,353
Number of dental offices at period end...... 13 14 16 17 19 20
- ---------------
<FN>
(1) Support Services Revenue for 1996 reflects the reduction of the
Support Services Revenue percentage from 61% of Net PC Revenue in 1995
to 50% of Net PC Revenue in 1996.
</FN>
</TABLE>
19
<PAGE>
Liquidity and Capital Resources
From January 1, 1995 to June 30, 1996, the Company has financed its
operations and expansion with bank borrowings and cash from operations as
well as $2.6 million in net proceeds from private sales of Common Stock and
warrants.
The Company has a credit facility with its principal bank that
provides access to up to $5,166,092. Of this maximum amount, $4,703,298 was
outstanding as of June 30, 1996. Approximately $812,500 of the outstanding
amount is pursuant to a term loan that matures on August 30, 1999 and
carries an interest rate of 1.25% over prime. Approximately $1,853,592 of
the outstanding amount is pursuant to a term loan that matures on August
30, 2000 and carries an interest rate of 1.5% over prime. The remaining
outstanding amount is pursuant to two lines of credit. One of the two lines
of credit provides a maximum of $1,850,000, carries an interest rate of
1.00% over prime, and matures on October 31, 1996. The other line provides
a maximum of $650,000, carries an interest rate of 2.50% over prime and
matures on November 22, 1996, or upon consummation of this offering, if
earlier. The Company intends to repay all amounts owed to the Company's
principal bank from the proceeds of this offering. After completion of this
offering, the Company expects to negotiate for a new credit facility.
Although the Company expects to obtain improved terms based on its improved
balance sheet, there can be no assurance as to the credit terms the Company
will be able to secure.
The Company believes that its existing cash balances, amounts
available under credit facilities and cash from operations, together with
the proceeds of this offering, will be sufficient to fund its operations
and acquisitions for at least the next 12 months. However, to execute its
long-term business strategy, the Company will require substantial
additional funding to acquire new practices and to expand and maintain
practices within the Gentle Dental Network. The Company may seek to obtain
needed funds through additional long-term or short-term borrowing
arrangements or through the public or private issuance of additional debt
or equity securities.
20
<PAGE>
BUSINESS
Overview
The Company provides dental practice management support services to
two Professional Corporations that employ 62 dentists, orthodontists, and
other specialists at 20 locations in the Portland, Oregon and Seattle,
Washington metropolitan areas. The Company provides facilities, equipment,
staffing, management support and other ancillary services to the
multi-specialty dental practices that constitute the Gentle Dental Network.
The Company intends to rapidly expand the Gentle Dental Network through
acquisitions in both its existing markets as well as new geographic
markets. From January 1, 1995 through June 30, 1996, the Company acquired
11 dental practices.
In each dental office, the dentists, specialists, dental hygienists
and other professional personnel who deliver dental services to patients
are employed by one of the Professional Corporations. Branch management and
support personnel are employed by the Company. The dentists maintain full
control over all clinical aspects of their dental practices. The Company is
not engaged in the practice of dentistry.
The Company was organized in December 1992 to provide support services
to the Professional Corporations and to facilitate the development and
expansion of the Gentle Dental Network. The dental practices composing the
Professional Corporations originated with a single office dental practice
established in 1979 in Vancouver, Washington by Dr. Dany Tse, the President
and Chief Executive Officer of the Company. Over the years, Dr. Tse
expanded the practice by adding new dentists and dental offices in
customer-convenient locations throughout the Portland, Oregon metropolitan
area. In 1995, the Company began the expansion of the Gentle Dental Network
into the Seattle, Washington metropolitan area, and has acquired the
practices of seven dentists in the Seattle area to date.
Industry Background
Dental spending in the United States is expected to total $40.8
billion in 1996 according to the ADA (June 1996 report) and reach $79.1
billion by the year 2005 according to the Congressional Budget Office
(November 1993 report). The aging of the U.S. population, a widely
recognized demographic trend, is expected to increase the demand for dental
services. Due to the success of preventive dentistry in reducing the
incidence of oral disease, older Americans are expected to retain their
teeth longer and to be more aware of the importance of regular dental care.
Demand for dentists' newer services, such as cosmetic dentistry, also is
expected to contribute to market growth. In addition, the Company believes
that some individuals use dental services infrequently because of fear, and
that demand for dental services can be increased by marketing and treatment
approaches designed to alleviate that fear.
Dentistry has traditionally been and continues to be a highly
fragmented industry dominated by solo practitioners. According to the ADA's
1995 Survey of Dental Practice, 67% of dentists were solo practitioners and
only 12% practiced in groups of three or more dentists. The Company
believes traditional practices have high operating costs, wield little
purchasing power with suppliers and must spread overhead over a relatively
small revenue base. In addition, these practices often have insufficient
capital to purchase new technologies and lack the systems necessary to
develop economies of scale. As a result, the Company believes that dentists
increasingly will find it attractive to affiliate with larger
organizations, such as the Gentle Dental Network, and that there are
significant opportunities to consolidate dental practices.
21
<PAGE>
Another factor driving the trend towards consolidation of dental
practices is managed care. As managed dental care becomes more common,
dentists will have an even greater need for the information resources,
management expertise, economies of scale, and access to managed care group
contracts that larger organizations such as the Gentle Dental Network may
be better able to provide. Despite this shift toward managed care, dentists
have traditionally provided dental services on a fee-for-service basis and
this payment method is expected to predominate the dental market for the
next several years. According to the ADA's 1995 Survey of Dental Practices,
less than 6% of the patients surveyed were participating in managed dental
care systems. In addition, fee-for-service care is generally more
profitable than managed care.
The Gentle Dental Strategy
The Company's objective is to become a leading provider of dental
practice management support services through its growing network of
affiliated dentists and specialists. The Company's strategy to achieve this
objective is to enter selected geographic markets and develop locally
prominent, multi-specialty dental care delivery networks that provide high
quality, cost-effective dental care. In pursuing this strategy, the Company
will seek to replicate the dental service network it has developed and
supports in the Portland, Oregon area. The key elements of the Gentle
Dental strategy are as follows:
Provide Convenient, Gentle, Comprehensive Dental Care. The Gentle
Dental Network offers its patients gentle, customer-friendly,
comprehensive, and cost-effective dental care at convenient times and
locations. Because the network includes both general practitioners and
on-staff specialists who can provide a full range of services such as
orthodontics, pedodontics, prosthodontics, and oral surgery, patients can
rely on the Gentle Dental Network to serve all of their families' dental
care needs. Extended office hours and conveniently located offices make it
easier to schedule and keep appointments, while the Gentle Dental Network's
flexible payment options help reduce patients' financial burdens.
Attract High Quality, Productive Dentists and Specialists. The Gentle
Dental Network seeks dentists and specialists who are committed to
delivering gentle, high quality dental care with the needs of patients as
their paramount concern. Dentists and specialists selected to join the
Gentle Dental Network also must be dedicated to expanding and enhancing
their practices. The Professional Corporations' quality assurance programs
are designed to ensure that providers in the Gentle Dental Network maintain
the high standards for quality, gentleness, and customer service that are
central to the Company's philosophy. See "Business -- Quality Assurance
Programs." The Company believes that it can offer significant benefits to
dentists and specialists whose practices and service philosophies meet the
Gentle Dental Network's selection criteria. Practitioners who join the
Gentle Dental Network are freed from administrative burdens associated with
operating a business, allowing them to focus on the practice of dentistry
and increase their productivity. The Company's size and structure also
enable it to offer financial resources for practice development and
enhancement that solo and small group practitioners could not obtain
independently. In addition, joining the Gentle Dental Network offers
established practitioners the opportunity to sell their practices for cash
and Common Stock of the Company while permitting them to continue
practicing dentistry.
Expand the Gentle Dental Network Through Acquisitions. The Company
intends to enter new geographic markets by acquiring established dental
practices and will initially target a significant group practice in each
market. Upon entering a new geographic market, the Company intends to
acquire additional individual or group practices as quickly as possible to
realize the economies of scale in management and marketing that come from
achieving critical mass in a market. The Company will then recruit
specialists, extend office hours, and add locations in the geographic area
as appropriate to provide
22
<PAGE>
patients a comprehensive range of dental care at convenient times and
locations throughout the area. The addition of specialists such as
orthodontists and oral surgeons who serve multiple clinics within the
Gentle Dental Network allows the Company to capture incremental revenue
from the higher fees commanded by specialty services.
Achieve Economies of Scale. The Company intends to build a large
network of multi-specialty dental practices that will allow it to realize
economies of scale and reduce several key operating costs. For example,
economies of scale are experienced through centralization of several
management and administrative functions such as marketing, billing,
collections, human resources, payroll, and general accounting services for
the affiliated practices. In addition, the Company believes that the
network configuration will give it leverage to negotiate with third-party
payors and dental supply vendors to receive rates and contract terms that
are more favorable than those typically available to solo and small group
practitioners. The Company is also developing management information
systems to collect and analyze clinical and administrative data designed to
allow the Company to effectively control overhead expenses, maximize
reimbursement, and provide effective resource management.
Pursue Large Group Fee-For-Service and Managed Care Contracts. The
Company intends to continue to aggressively pursue fee-for-service business
because it is generally more profitable than managed care business. The
Company believes that by providing comprehensive geographic coverage in
each market, the Gentle Dental Network will be strongly positioned to offer
group dental health packages to self-insured employers and dental health
plans in the area, which may allow it to rapidly expand its patient base.
In addition, as managed care penetration in the dental market increases,
the Company plans to develop information systems to improve productivity,
manage complex reimbursement methodologies, measure patient satisfaction
and outcomes of care, and integrate information from multiple sources. As
the Company continues to grow both internally and through acquisitions,
management believes that the Company's network will be positioned to
compete effectively for large group fee-for-service and managed care
business.
Acquisitions
The Company intends to enter new geographic markets by acquiring
dental practices with established patient bases. The Company will initially
target a significant group practice in each new market to secure a solid
foundation upon which to build its regional network of dental practices.
The Company will then seek to acquire additional individual or group
practices as quickly as possible to realize the economies of scale in
management and marketing that come from achieving critical mass in a
market. The Company's growth plan emphasizes the affiliation of practices,
both primary and specialty care, to meet the needs of patients and payors,
adjusted according to the dynamics of individual markets. The Company will
focus on developing and maintaining a comprehensive network of dentists and
specialists in each market it enters. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Acquisitions."
The Company's criteria for entering new geographic markets include:
(i) population size and distribution, (ii) dental practice density,
specialty composition, saturation and average group size, (iii) local
competitors in the dental support services business, (iv) level of managed
care penetration, and (v) local industry and economy. In the past, the
Company has targeted dental practices that derive all or a high percentage
of their revenue from fee-for-service sources as opposed to managed care
sources. In the near term, the Company plans to continue this approach as
it develops its network of practices as fee-for-service care is generally
more profitable than managed care.
23
<PAGE>
The Company generally uses a combination of Common Stock, cash and/or
notes to fund acquisitions. The amount paid for each practice will vary on
a case-by-case basis according to historical revenues, projected earnings
contribution after addition to the Gentle Dental Network, and transaction
structure. After acquisition of a dental practice, the dentist becomes an
employee of a professional corporation with which the Company has entered
into a support services agreement. The employment agreements typically
include a two-year noncompete provision following termination of
employment. The Company anticipates that it will enter into a support
services agreement with one professional corporation in each state into
which it expands the Gentle Dental Network.
Although an integral part of the Company's strategy is to grow through
acquisitions, and the Company is currently in discussions with several
dental practices in both its current and potential geographic markets, no
acquisition is the subject of any definitive agreement.
The Gentle Dental Network
The Gentle Dental Network currently includes two affiliated
Professional Corporations that employ 40 general practitioners and 14
specialists in the Portland area and eight general practitioners in the
Seattle area. There are 114 treatment rooms in the Gentle Dental Network's
Portland area offices and 27 treatment rooms in the Seattle area offices.
The following table provides certain other information about the dental
offices included in the Gentle Dental Network.
<TABLE>
<CAPTION>
Gross Billings
-----------------------------------------
Date Opened Six Months
or Year Ended Ended
Location Acquired December 31, 1995 June 30, 1996
-------- -------------- ----------------- -------------
(in thousands)
<S> <C> <C> <C>
PORTLAND AREA
Cascade Park August 1989 $ 1,841 $ 997
Cedar Hills January 1996 -- 499
Clackamas Town Center December 1986 1,715 839
Cornell Center August 1990 1,187 743
Downtown September 1995 61 255
Eastside September 1986 1,400 600
Eastside 2 January 1995 360 135
Gresham Village December 1994 792 419
Hazel Dell December 1986 2,030 1,136
Hillsboro December 1988 1,141 537
Lake Oswego November 1994 913 514
Lloyd Center April 1993 1,314 737
Tigard January 1990 1,458 750
Vancouver Mall April 1985 1,950 1,062
------- --------
Subtotal 16,162 9,223
SEATTLE AREA
Ballard June 1996 -- 29
Everett October 1995 50 132
Pinehurst August 1995 311 403
Redmond October 1995 189 421
Tacoma October 1995 138 338
Totem Lake January 1996 -- 363
------- --------
Subtotal 688 1,686
------- --------
Total $16,850 $10,909
======= ========
</TABLE>
24
<PAGE>
The Company believes the Gentle Dental Network is differentiated in
the marketplace by its patient-friendly approach to business. In a style
atypical of traditional dental practices, services are provided under the
Gentle Dental name in multi-specialty group practices with
customer-convenient locations and hours. Services are generally available
from 7:00 A.M. until 9:00 P.M. on weekdays and from 8:00 A.M. until 4:00
P.M. on Saturdays. Emergency care is available 24 hours a day, seven days a
week. The Company's extended hours offer patients expanded scheduling
opportunities, providing more convenience to patients and less disruption
for employers.
As the Gentle Dental name suggests, the Gentle Dental Network stresses
comfortable and gentle customer-friendly dentistry. In the Portland, Oregon
metropolitan area, a complete range of family dental health care services
is offered in each location with on-staff dental specialists and
value-added amenities such as flexible payment options. Gentle Dental
dentists provide comprehensive dental care for the entire family, ranging
from routine teeth cleaning and diagnosis to oral surgery, cosmetic
bonding, orthodontia and major rehabilitation. The Professional
Corporations employ family dentists and hygienists along with specialists
in endodontics, oral pathology, oral surgery, orthodontics, pedodontics,
periodontics and prosthodontics. The Company's comprehensive approach
allows the Company to capture incremental revenue generated by on-staff
specialists and ancillary services. The Gentle Dental Network in the
Seattle, Washington area is at an earlier stage of development and does not
yet include specialists.
Quality Assurance Programs
By taking advantage of the Gentle Dental Network's group practice
structure, the Company has assisted the Professional Corporations in
developing quality assurance programs to help implement the Gentle Dental
service philosophy. In addition to encouraging Gentle Dental customers to
provide feedback to the Company about the care they receive, the
Professional Corporations have formal peer-review procedures in place.
These procedures are designed to ensure that high-quality,
customer-oriented dental care is consistently delivered to all Gentle
Dental customers, and include formal evaluations of all dental care
providers at least annually and a system of tracking and responding to all
customer complaints. In addition, because the Gentle Dental Network offers
speciality services and extended hours, there is a greater likelihood that
more than one practitioner will see a given customer and will therefore
have the opportunity to evaluate the work done by other service providers
within the network. This permits direct monitoring of the quality of dental
care delivered through the network. Furthermore, the aggregation of
practitioners within the Gentle Dental Network makes its possible for the
Company to organize in-house training in up-to-date practice techniques for
those practitioners.
Marketing
The Company's marketing approach is based on three central objectives:
retaining existing customers and expanding the services they receive,
attracting new individual customers, and developing contracts to serve
large groups of customers.
The Company views customer satisfaction as the key to retaining
existing customers and expanding the services they receive. The Gentle
Dental Network strives to deliver comfortable, high quality dental care at
times and locations that are convenient for the customer, and believes that
these features will motivate customers to return to Gentle Dental offices
for their future dental care needs. Encouraging customers to complete
treatment plans, ensuring that each customer leaves a Gentle Dental clinic
with a future visit already scheduled, and offering specialty services such
as cosmetic bonding, endodontics, oral surgery, orthodontics, pedodontics,
periodontics, and prosthodontics on site also
25
<PAGE>
enhance the Company's ability to build customer loyalty and patronage. In
addition, the Company offers flexible payment alternatives and
sophisticated record-keeping and administrative services to help customers
manage the expense of dental care and the complexity of health plan or
insurance rules.
The Company believes that the same aspects of its business philosophy
that build current customer loyalty will also generate new customers. The
Company seeks to attract new customers on an individual basis by
encouraging referrals from existing customers and by developing marketing
materials and information sources (such as yellow page advertisements) that
communicate the Company's philosophy of high quality customer-oriented
dental care and that increase its visibility in the community.
The Company also targets large groups of customers by seeking to
develop contracts with self-insured employers and health plans in the
metropolitan areas that it serves. As with individual customers, the
Company's large group marketing approach emphasizes the convenience,
quality of care, and large range of services that the Gentle Dental Network
has to offer. The size and economies of scale inherent in the Company's
business strategy may allow it to reduce the administrative burdens that
health plans and self-insured employers might otherwise face. The Company
is also well positioned to respond to managed care opportunities as they
arise.
Support Services Agreements
The Company has entered into a Support Services Agreement with each of
the Professional Corporations under which the Company is the exclusive
administrator of all non-dental aspects of the dental practices conducted
by the Professional Corporations, providing facilities, equipment,
staffing, management support and other ancillary services. Specifically,
under the Support Services Agreements, the Company, among other things, (i)
provides all facilities and equipment used by the Professional
Corporations, (ii) licenses the use of the Gentle Dental service mark,
(iii) receives an assignment of all accounts receivable generated by the
Professional Corporations and bills and collects the receivables in the
name of the Professional Corporations, (iv) purchases and provides all
supplies, (v) provides all clerical, accounting, payroll, computer and
other non-dental support services and personnel, (vi) supervises and
maintains custody of all business records, (vii) provides management
information reports, (viii) provides market research and plans and
implements marketing and advertising programs, (ix) negotiates contracts on
behalf of the Professional Corporations with managed care payors or other
third parties, and (x) assists in the recruitment of dentists.
Under the Support Services Agreements, the Professional Corporations
retain the responsibility for, among other things, (i) hiring and
compensating dentists and other dental professionals, (ii) purchasing and
maintaining malpractice insurance, (iii) maintaining patient records, and
(iv) ensuring that dentists have the required licenses and other
certifications needed to perform their duties. In addition, the
Professional Corporations are exclusively in control of all aspects of the
practice of dentistry and the delivery of dental services, including final
authority over fees charged and practice locations and equipment.
As compensation for all services provided under the Support Services
Agreements, the Company receives fees based on a percentage of the net
revenues of the Professional Corporations, after allowances for contractual
discounts and bad debts. The current Support Services Agreements provide
that these fees are equal to 50% of the Professional Corporations' net
revenues for 1996, increasing 1% each year thereafter until the fees reach
55% of net revenues. The service fees are collected by the Company on an
ongoing basis out of the receivables assigned to the Company by the
Professional Corporations. Cash representing the portion of net revenues
not payable to the Company as service fees is advanced to the
26
<PAGE>
Professional Corporations as necessary to meet their financial obligations
such as payroll, malpractice insurance, continuing education costs, and
taxes. The Company anticipates that future support services agreements with
professional corporations in new states will similarly provide for an
initial support services revenue percentage of 50% increasing annually to
55%.
The Support Services Agreements each have an initial term of 40 years
commencing January 1, 1996, with automatic 10-year extensions thereafter
unless either party gives notice before the end of the term. The Support
Services Agreements are not terminable earlier by the Professional
Corporations unless (i) the Company is the subject of bankruptcy
proceedings or (ii) the Company materially breaches the Agreement and does
not cure the breach following notice.
Government Regulation
General. The health and dental care industry is subject to extensive
federal, state, and local laws, rules, and regulations. The Company
believes that its operations are in material compliance with applicable
laws. Nevertheless, because of the special nature of the Company's
relationship with the Professional Corporations, many aspects of the
Company's business operations have not been the subject of state or federal
regulatory interpretation and there can be no assurance that a review of
the Company's or the Professional Corporations' business by courts or
regulatory authorities will not result in a determination that could
adversely affect the operations of the Company or the Professional
Corporations. In addition, the standards of practice of dental care and
related federal and state regulations are subject to change. The Company
cannot predict what changes may be enacted that may affect its business or
the manner in which its business would be affected by such changes.
Corporate Practice of Dentistry; Fee Splitting. The laws of many
states prohibit business corporations such as the Company from practicing
dentistry or employing dentists to practice dentistry. The Company performs
only non-dental administrative services, does not represent to the public
or its clients that it offers dental services, and does not exercise
influence or control over the practice of dentistry by the Professional
Corporations with which it contracts. Accordingly, the Company believes
that it is not in violation of applicable state laws relating to the
practice of dentistry. In addition, the laws of many states prohibit
dentists from splitting fees with non-dentists. The Company believes that
its receipt of compensation from the Professional Corporations for
providing non-dental management services does not constitute illegal fee
splitting. The laws regarding the corporate practice of dentistry and fee
splitting vary from state to state and are enforced by the courts and by
regulatory authorities with broad discretion. In most states, these laws
have been subjected to limited judicial and regulatory interpretation and
the Company has not obtained, or applied for, any opinion of any regulatory
or judicial authority that its business operations are in compliance with
these laws. Therefore, no assurances can be given that the Company's
activities will be found to be in compliance if scrutinized by such
authorities. In addition, the regulatory framework of certain jurisdictions
may limit the Company's expansion into such jurisdictions if the Company is
unable to modify its operational structure to conform with such regulatory
framework.
Medicare and Medicaid Fraud and Abuse. A small percentage of the
revenues of the Professional Corporations comes from the Medicare and
Medicaid programs. For the year ended December 31, 1995, Medicare and
Medicaid revenues combined represented less than 5% of the gross revenue of
the Professional Corporations.
Federal law prohibits the offer, payment, solicitation, or receipt of
any form of remuneration in return for, or in order to induce, (i) the
referral of a Medicare or Medicaid patient, (ii) the furnishing
27
<PAGE>
or arranging for the furnishing of items or services reimbursable under
Medicare or Medicaid programs, or (iii) the purchase, lease or order of any
item or service reimbursable under Medicare or Medicaid. Pursuant to this
anti-kickback law, the federal government has announced a policy of
increased scrutiny of joint ventures and other transactions among health
care providers in an effort to reduce potential fraud and abuse relating to
Medicare and Medicaid costs. The applicability of these provisions to many
business transactions in the health care industry has been subject to only
limited judicial and regulatory interpretation. Noncompliance with the
federal anti-kickback legislation can result in exclusion from Medicare and
Medicaid programs and civil and criminal penalties.
The Company believes that, although it receives fees under the Support
Services Agreements for administrative services, the Support Services
Agreements do not place the Company in a position to make or influence
referrals of patients for services reimbursed under Medicare or Medicaid
programs to the Professional Corporations, or to receive such referrals.
The Company also does not believe that the activities of the Company or the
Professional Corporations under the Support Services Agreements constitute
furnishing, arranging, purchasing, ordering, or recommending Medicare or
Medicaid items or services under the anti-kickback law. If the Company is
deemed to be in a position to make, influence, or receive referrals from or
to dentists, or the Company is deemed to be a provider under the Medicare
or Medicaid programs, the operations of the Company could be subject to
scrutiny under federal and state anti-kickback and anti-referral laws.
Significant prohibitions against physician referrals have been enacted
by Congress. These prohibitions, commonly known as "Stark II," amended
prior physician self-referral legislation known as "Stark I" by
dramatically enlarging the field of physician-owned or physician-interested
entities to which the referral prohibitions apply. Stark II prohibits a
physician from referring Medicare or Medicaid patients to an entity
providing "designated health services" in which the physician has an
ownership or investment interest, or with which the physician has entered
into a compensation agreement. Although dentists are "physicians" under
Stark II, dental services generally are not designated health services
under the law. Certain services provided by dentists, such as radiology and
outpatient prescription drugs, are designated health services. The Company
does not provide such services, but the Professional Corporations do. The
penalties for violating Stark II include a prohibition on payment by these
government programs and civil penalties of as much as $15,000 for each
impermissible referral and $100,000 for participation in a "circumvention
scheme." To the extent that the Company or either Professional Corporation
is deemed to be subject to Stark II, the Company believes its activities
and the activities of the Professional Corporations fall within the
permissible activities defined in Stark II, including, but not limited to,
the provision of in-office ancillary services.
In addition, the Company also believes that the methods it uses to
acquire existing dental practices do not violate anti-kickback and
anti-referral laws and regulations. Specifically, the Company believes the
consideration paid by the Company to dentists to acquire the tangible and
intangible assets associated with their practices is consistent with fair
market value in arm's length transactions and not intended to induce the
referral of patients. Moreover, the Company does not believe that the
Company or dentists whose practices are acquired by the Company are in a
position to refer, recommend, or arrange Medicare or Medicaid business for
each other. Should the acquisition of dental practices by the Company be
deemed to constitute an arrangement designed to induce the referral of
Medicare or Medicaid patients, then such acquisitions could be viewed as
possibly violating anti-kickback or anti-referral laws and regulations.
Possible Health Care Reform. Congress has considered various types of
health care reform, including comprehensive revisions to the current health
care system. It is uncertain what legislative
28
<PAGE>
proposals will be adopted in the future, if any, or what actions federal or
state legislatures or third-party payors may take in anticipation of or in
response to any health care reform proposals or legislation. Health care
reform legislation adopted by Congress could have a material adverse effect
on the operations of the Company.
Competition
The market for dental services is highly fragmented and is
characterized by large numbers of solo practitioners and small group
practices competing for individual patients. The Company believes that
cost, location, hours of operation, and quality of dental services are the
principal factors affecting competition for patients. The Company expects
that the ability to meet the needs of managed care payors will increasingly
be a factor in competing for patients covered by managed care reimbursement
arrangements. There can be no assurance that the Professional Corporations
will be able to compete effectively in the markets they serve, and an
inability to do so would adversely affect the Company.
In pursuing its growth strategy, the Company faces competitive
pressures for the acquisition of dental practices to be added to the Gentle
Dental Network. In each geographic market it enters, the Company will need
to be competitive with the existing market for dental practices. In
addition, although the dental practice service industry is much less
developed than the medical practice service industry, the Company expects
competition from other dental practice service companies for the
acquisition and provision of support services to dental practices. The
Company is aware of other dental practice service companies that are in
various stages of formation and capitalization. There can be no assurance
that the Company will be able to compete effectively with such competitors,
that additional competitors with greater resources than the Company will
not enter the market, or that such competition will not make it more
difficult to acquire dental practices on terms beneficial to the Company.
Insurance
The Company carries comprehensive liability, fire, and extended
coverage insurance. The Professional Corporations carry professional
liability, general liability, products hazard/completed operations and loss
of practice income insurance. Such insurance coverages are expanded to
include all additional practices that the Company develops or acquires,
with policy specifications, insured limits, and deductibles customarily
carried for similar dental practices.
Service Mark
Other than newly acquired practices, the Company's affiliated dental
practices are operated and marketed under the name Gentle Dental. Newly
acquired practices may or may not immediately use the Gentle Dental name
depending upon each acquired practice's name recognition and other local
market conditions. Gentle Dental is a federally registered service mark
owned by the Company. On April 19, 1989, the Company acquired title to the
federal registration of this service mark as originally issued on October
26, 1982. As part of the purchase, the Company granted an exclusive license
("License") to the seller to use the mark for the sale of dental services
in practices owned or controlled by the seller in the Boston,
Massachusetts, Baltimore, Maryland, and Washington, D.C. metropolitan areas
for a period of 10 years, or through April 19, 1999. As a result, the
Company cannot use the mark in those markets until expiration of the
License. The Company also recognizes that there are numerous other
practices across the country using the name Gentle Dental. Any of those
practices that commenced use of the Gentle Dental mark before October 26,
1982 will have rights to the mark in their geographic markets superior to
the Company's rights. The Company has been advised by counsel that, subject
to the
29
<PAGE>
License, it should have the right to prevent use of the Gentle Dental mark
in geographic markets the Company enters where the competing use commenced
after October 26, 1982. However, until the Company actually begins doing
business in a new market where another practice is using the Gentle Dental
name, the Company generally cannot, and therefore will not, seek to prevent
use of its registered service mark in that market. Given the costs and
inherent uncertainties of service mark litigation, there can be no
assurance that the Company will be able to or will choose to enforce its
service mark rights in any particular market.
Legal Proceedings
Neither the Company nor the Professional Corporations are currently
subject to any material litigation nor, to the Company's knowledge, is any
material litigation threatened against the Company or the Professional
Corporations other than routine litigation arising in the ordinary course
of business, some of which are expected to be covered by liability
insurance and all of which collectively are not expected to have a material
adverse effect on the business, financial condition or results of
operations of the Company.
Employees
At August 31, 1996, the Company had 113 full time and 10 part time
employees and the Professional Corporations had a total of 178 employees,
including 48 general dentistry practitioners, 14 specialists, 32 dental
hygienists, and 84 dental assistants. None of the Company's employees are
represented by a labor union. Management believes it maintains good
relationships with its employees.
Properties
The clinics in the Gentle Dental Network are leased from various
parties pursuant to leases with terms ranging from five to ten years,
except that two clinics, one on the east side of Portland and the other in
Everett, Washington, are leased month-to-month. Several of the leases have
options to renew, and the Company expects to renew or replace leases as
they expire. The Company's corporate headquarters are located in leased
office space in downtown Vancouver, Washington.
30
<PAGE>
MANAGEMENT
Directors and Executive Officers
Information with respect to the executive officers and directors of
the Company is set forth below.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Dany Y. Tse, DMD 46 President, Chief Executive Officer
and Director
John W. Castles 48 Chairman of the Board
Lawrence S. Wasserman 43 Chief Operating Officer
L. Theodore Van Eerden 40 Chief Financial Officer - Corporate
Secretary
Alan J. Resnik 51 Senior Vice President - Marketing
William W. Westrate 36 Vice President - Information
Technology
Steven M. Wolfe 46 Vice President - Human Resources
Richard A. Armstrong 60 Director
Kenneth D. Hooten 33 Director
Daniel P. Hunt 59 Director
Jerald L. Willbur 49 Director
Craig W. Wong, DMD 40 Director
</TABLE>
Dany Y. Tse, DMD. Dr. Tse has served as President and Chief Executive
Officer of the Company since March 1996, and previously served as Chairman
of the Board of the Company from inception in December 1992 to March 1996.
As the founder of the Gentle Dental Network, Dr. Tse opened a solo dental
practice in Vancouver, Washington in August 1979, and established a group
practice by opening additional Gentle Dental locations in the greater
Portland/Vancouver metropolitan area. Dr. Tse has served as the Chairman of
Tse, Saiget, Watanabe & McClure, Inc., P.S. since its formation in 1979,
and Chairman of Gentle Dental of Oregon, P.C. since its formation in 1986.
Dr. Tse is a licensed dentist in Oregon and Washington and continues to
practice dentistry on a part-time basis.
John W. Castles. Mr. Castles has served as Chairman of the Board of
the Company since March 1996, and previously served as President and Chief
Executive Officer of the Company from August 1993 to March 1996. He has
been a director of the Company since inception in December 1992. From
February 1992 until the sale of the company in January 1993, Mr. Castles
was Chairman of Vital Choice, Inc., a home health care company located in
Portland, Oregon that provides intravenous pharmaceutical therapies to
patients throughout the Pacific Northwest. From January 1980 to February
1992,
31
<PAGE>
Mr. Castles was a financial consultant and venture capitalist engaged in a
wide range of investment activities and operating roles with emerging
companies in the Pacific Northwest.
Lawrence S. Wasserman. Mr. Wasserman joined the Company in June 1995
as Chief Financial Officer and became Chief Operating Officer in March
1996. Before joining the Company, Mr. Wasserman provided consulting
services to entrepreneurial companies, specializing in financial and
management functions. From June 1992 to November 1992, he was the Chief
Operating and Financial Officer for LifePort, Inc., a company that provides
aeromedical transportation equipment for air ambulance providers. Before
joining LifePort, Mr. Wasserman spent seven years at TriCare, Inc. as Chief
Financial Officer.
L. Theodore Van Eerden. Before joining the Company as Chief Financial
Officer in March 1996, Mr. Van Eerden was Vice President - Administration
for HOSTS Corporation, a Vancouver, Washington company that provides
proprietary educational software products and instructional delivery
systems to schools throughout the United States. From April 1993 to April
1994, Mr. Van Eerden was Director of Development for The ServiceMaster
Company where he focused on mergers and acquisitions and new business
development. Before that, Mr. Van Eerden was Vice President and Chief
Financial Officer of Medical SafeTec, Inc., a manufacturer of medical waste
destruction equipment.
Alan J. Resnik. In December 1995, Dr. Resnik joined the Company
full-time as Senior Vice President - Marketing. Dr. Resnik previously
served the Company as a director and marketing consultant. From January
1995 to December 1995, he was Executive Vice President, Eastern Region, for
Widmer Brewing Company. Previously, Dr. Resnik served 19 years as a
Professor of Marketing at Portland State University.
William W. Westrate. Before joining the Company in September 1996, Mr.
Westrate was Vice President, Data Center Services of Van Kampen American
Capital from December 1990 to July 1996.
Steven M. Wolfe. Before joining the Company in October 1994, Mr. Wolfe
owned and operated a training and consulting company specializing in
helping clients acquire and maintain customers. Services included training
in sales, marketing, distribution, customer service, and all aspects of
human resource management and development. Mr. Wolfe previously enjoyed a
20-year career with PayLess Drug Stores Northwest, serving most recently as
Vice President of Human Resources and Employee Relations.
Richard A. Armstrong. Mr. Armstrong has been a director of the Company
since July 1995. Mr. Armstrong has served in various positions in The
ServiceMaster Company since 1964. From July 1991 to March 1994, he was
Senior Vice President of People Services. Since March 1994, he has been
Senior Vice President and Advisor to the Chairman.
Kenneth D. Hooten. Mr. Hooten has been a director of the Company since
June 1996. Since 1995, Mr. Hooten has been Vice President of The
ServiceMaster Company responsible for managing the ServiceMaster Ventures
Group, an internal venture capital firm. From 1990 to 1995, Mr. Hooten
served as Vice President of Lasalle Partners Ltd., a real estate company.
Daniel P. Hunt. Mr. Hunt has been a director of the Company since
December 1992. Mr. Hunt has been employed since June 1988 as Chief
Financial Officer for HOSTS Corporation, a Vancouver, Washington company
which provides proprietary educational software products and instructional
delivery systems to schools throughout the United States.
32
<PAGE>
Jerald L. Willbur. Dr. Willbur has been a director of the Company
since December 1992. Dr. Willbur has been the Global Director of
Organizational Effectiveness of S.C. Johnson since March 1996. He is
responsible for strategic planning, human resources, and organization
effectiveness and reports directly to the President. Dr. Willbur was
President and Chief Operating Officer of HOSTS Corporation from June 1988
until February 1996.
Craig W. Wong, DMD. Dr. Wong has been a director of the Company since
March 1995. Dr. Wong has been an oral and maxillofacial surgeon licensed to
practice in the states of Washington and Oregon since 1982. Dr. Wong serves
as the Chief of the Department of Oral and Maxillofacial Surgery for the
Professional Corporations in Oregon and Washington. Dr. Wong also serves as
Section Chief of Oral and Maxillofacial Surgery for the Veterans
Administration Medical Center in Portland, Oregon.
The Company's Restated Articles of Incorporation provide for three
classes of directors. Directors Hooten and Wong have been appointed to
Class I and will serve until the annual meeting of shareholders in 1997;
Directors Armstrong, Hunt, and Willbur have been appointed to Class II and
will serve until the meeting of shareholders in 1998; and Directors Castles
and Tse have been appointed to Class III and will serve until the meeting
of shareholders in 1999. After these directors' initial terms expire, newly
elected directors shall serve for a three year term or until their
successors are duly elected and qualified.
Board Committees
The Board of Directors maintains an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Directors Armstrong, Hunt,
and Hooten, oversees actions taken by the Company's independent auditors,
and reviews the Company's internal audit controls. The Compensation
Committee, consisting of Directors Armstrong, Hunt, and Willbur, reviews
the compensation levels of the Company's employees and makes
recommendations to the Board regarding changes in compensation.
Director Compensation
The members of the Company's Board of Directors are reimbursed for
out-of-pocket and travel expenses incurred in attending Board meetings. In
connection with his initial election as a director in July 1995, Mr.
Armstrong was granted a ten-year stock option for 2,000 shares with an
exercise price of $10.00 per share. The Board of Directors has resolved
that the exercise price of Mr. Armstrong's option will be adjusted to the
per share price established for this offering. In prior years, Directors
Hunt and Willbur received awards of restricted stock as compensation for
services as directors, which awards are only partially vested.
33
<PAGE>
Compensation of Executive Officers
Summary Compensation Table. The following table sets forth
compensation information for the person who served as chief executive
officer of the Company in 1995 and the only other executive officer of the
Company whose total annual salary and bonus exceeded $100,000 in fiscal
1995 (collectively, the "Named Officers").
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation ------------
----------------------------------------- Options All Other
Name and Principal Position Year Salary Bonus Granted Compensation(1)
- --------------------------- ---- ------ ----- ------- ---------------
<S> <C> <C> <C> <C> <C>
Dany Y. Tse, DMD 1995 $208,902 -- 50,000 $4,500
President and Chief
Executive Officer
John W. Castles 1995 $99,219 -- -- $2,971
Chairman of the Board
- -----------------
<FN>
(1) Consists of matching contributions made by the Company to the
Company's 401(k) Plan.
</FN>
</TABLE>
Stock Options Granted in Fiscal 1995. The following table sets forth
information concerning stock options granted to the Named Officers during
1995:
<TABLE>
<CAPTION>
Percentage
of Options
Granted to
Number of Shares Employees
Underlying Options During Exercise Price Expiration
Name Granted Fiscal Year Per Share Date
---- ------- ----------- --------- ----
<S> <C> <C> <C> <C>
Dany Y. Tse, DMD 50,000 (1) 24% $10.00 (2) 7/26/05
- ---------------
<FN>
(1) This option was exercisable in full on its grant date.
(2) The Company's Board of Directors has resolved that the exercise price
for Dr. Tse's option will be adjusted to 110% of the per share price
established for this offering.
</FN>
</TABLE>
34
<PAGE>
Aggregated Option Exercises. No options were exercised by the Named
Officers during 1995. The following table sets forth certain information
concerning the number of shares covered by both exercisable and
unexercisable stock options as of December 31, 1995. Also reported are
values of "in-the-money" options that represent the positive spread between
the respective exercise prices of outstanding stock options and the fair
market value of the Company's Common Stock as of December 31, 1995.
<TABLE>
<CAPTION>
Fiscal Year-End Option Values
Number of Shares Subject to Value of In-the-Money Options at
Unexercised Options at Fiscal Fiscal
Year-End Year-End(1)
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dany Y. Tse, DMD 50,000 0 $0 $0
John W. Castles 6,000 0 $24,000 $0
- ------------------
<FN>
(1) Based on estimated fair market value of $10.00 per share on December
31, 1995.
</FN>
</TABLE>
1993 Stock Incentive Plan. In January 1993 the Board of Directors
adopted, and in March 1993 the shareholders of the Company approved, the
1993 Stock Incentive Plan (the "Plan"). The Plan provides for the award of
incentive stock options to key employees and the award of nonqualified
stock options, stock appreciation rights, bonus rights, and other incentive
grants to employees, directors, independent contractors, and consultants.
The total number of shares of Common Stock that may be issued under the
Plan will not exceed 1,000,000.
The Plan is administered by the Board of Directors, which has the
authority, subject to the terms of the Plan, to determine the persons to
whom options or rights may be granted, the exercise price and number of
shares subject to each option or right, the character of the grant, the
time or times at which all or a portion of each option or right may be
exercised and certain other provisions of each option or right. The Board
of Directors may also delegate authority to administer the Plan to a
committee of the Board of Directors or to a senior executive officer of the
Company, or both.
The purchase price of Common Stock upon exercise of stock options
granted under the Plan must not be less than 85% the fair market value of
the Common Stock at the date of the grant or, in the case of stock options
issued to holders of more than 10% of the Company's outstanding Common
Stock, 110% of fair market value. The purchase price of Common Stock upon
exercise of incentive stock options granted under the Plan must not be less
than 100% the fair market value of the Common Stock at the date of the
grant. The maximum term of any stock option is 10 years or five years in
the case of 10% shareholders. The aggregate fair market value, on the date
of the grant, of the stock for which incentive stock options are
exercisable for the first time by an employee during any calendar year may
not exceed $100,000. Options are exercisable over a period of time in
accordance with the terms of option agreements entered into at the time of
the grant, but may not become exercisable at a rate of less than 20% per
year over the first five years of the option's terms. Generally, options
become exercisable over a five-year period. Options granted under the Plan
are generally nontransferable by the optionee and, unless otherwise
determined by the Board of Directors, must be exercised by the optionee
during the period of the optionee's employment or service with the Company
or within a specified period following termination of employment or
service.
35
<PAGE>
CERTAIN TRANSACTIONS
All of the outstanding stock of the Professional Corporations is owned
by Dany Y. Tse (President and Chief Executive Officer, director, and
principal shareholder of the Company), Craig W. Wong (a director and
principal shareholder of the Company), William J. K. Saiget, Scott T.
McClure and Alvin S. Watanabe (principal shareholders of the Company), and
one other dentist. The Company is a party to Support Services Agreements
with the Professional Corporations pursuant to which the Company earns all
of its revenues. See "Business -- Support Services Agreements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
Effective December 31, 1994, the Company executed asset purchase
agreements with the Professional Corporations for the purchase of certain
tangible assets of the Professional Corporations in exchange for the
forgiving of certain liabilities and the assumption of other third-party
liabilities. The fair market value of the assets purchased, and the
consideration paid, was $1,354,913.
On January 2, 1995, the Company executed asset purchase agreements
with the Professional Corporations for purchase of the Professional
Corporations' accounts receivable in exchange for interest only promissory
notes payable on December 31, 1995. The fair market value of the assets
purchased, and the consideration paid, was $2,092,928.
On June 21, 1996, The ServiceMaster Company, Limited Partnership
("ServiceMaster"), purchased 100,000 shares of the Company's Common Stock
and a warrant to purchase an additional 100,000 shares at $7.50 per share
for total consideration of $1,000,000. ServiceMaster has the right to
require the Company to repurchase any or all of the 100,000 shares
initially purchased (the "Initial Shares"), and any or all shares acquired
upon exercise of the warrant (the "Warrant Shares"), if by June 21, 2001,
the Company has not made a public offering of its Common Stock with a per
share price of at least $22.00 and net proceeds to the Company of at least
$10,000,000. The per share price applicable to ServiceMaster's "put" right
is 20 times the Company's average adjusted net income per share for the two
most recent fiscal years preceding ServiceMaster's exercise of the right.
In connection with its investment, ServiceMaster also was given the right
to designate one person to serve as a director of the Company. This
designee is currently Kenneth D. Hooten. In addition, ServiceMaster has
"piggyback" registration rights with respect to both the Initial Shares and
the Warrant Shares. See "Description of Capital Stock -- Registration
Rights."
On May 31, 1996, the Company executed a modification of its existing
loan and security agreement with the Company's principal bank (the
"Modification"). In connection with the Modification, 14 officers,
directors, and shareholders of the Company provided continuing personal
guarantees on $1,000,000 of the Company's indebtedness to the Company's
principal bank in connection with a $1,000,000 increase in availability
under the Company's operating line of credit. In consideration for the
personal guarantees, the Company issued warrants to purchase an aggregate
total of 115,000 shares of the Company's Common Stock at $7.50 per share.
Each guarantor received warrants to purchase 1,150 shares for each $10,000
of indebtedness guaranteed. The warrants expire on May 31, 2001. The
officers and directors who provided guarantees and the number of shares for
which they received warrants are as follows: Dany Y. Tse, 34,500 shares;
Richard A. Armstrong, 23,000 shares; John W. Castles, 11,500; Craig W.
Wong, 6,900 shares; Jerald L. Willbur, 5,750 shares; Daniel P. Hunt, 5,750
shares; Scott T. McClure, 5,750 shares; William J. K. Saiget, 5,750 shares;
Anna M. Morrison, 4,600 shares; Carleton G. Lindgren, 3,450 shares; L.
Theodore Van Eerden, 2,875 shares; Alan J. Resnik, 2,875 shares; David B.
Hunt, son of director Daniel P. Hunt, 1,150 shares; and Alvin S. Watanabe,
1,150 shares. The guarantors' obligations with respect to the Company's
indebtedness will cease if (i) all
36
<PAGE>
amounts borrowed under the $1,000,000 increase in the line of credit are
repaid, and (ii) the Company is not in default under the loan and security
agreement with the Company's principal bank. All of the guarantees will be
released when the Company repays the Company's principal bank in full from
the proceeds of this offering.
From March to May 1995, the Company offered shares of its Common Stock
at $10.00 per share to accredited investors through a private offering. In
that offering, the Company sold an aggregate total of 174,327 shares. Of
those 174,327 shares, 69,100 were purchased by 11 executive officers,
directors, and principal shareholders of the Company together with members
of their immediate families and trusts for their benefit or the benefit of
their immediate family members. The number of shares purchased by each
executive officer, director, and principal shareholder (including shares
purchased by immediate family members and related trusts) are as follows:
Daniel P. Hunt, 19,800 shares; Dany Y. Tse, 10,000 shares; Richard A.
Armstrong, 10,000 shares; John W. Castles, 10,000; William J. K. Saiget,
5,700 shares; Jerald L. Willbur, 5,000 shares; Scott T. McClure, 4,000
shares; Carleton G. Lindgren, 2,500 shares; Craig W. Wong, 1,000 shares;
and Alvin S. Watanabe, 100 shares. Dr. Tse was permitted to pay for 4,000
shares with a three-year promissory note bearing interest at the applicable
federal rate. This note has been repaid in full.
Transactions with Promoters
The Company was formed by and initially capitalized by contributions
from the following persons: Dany Y. Tse, William J. K. Saiget, Alvin S.
Watanabe, Scott T. McClure, Craig W. Wong, and Edward V. Conzatti.
37
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership, as of August 31, 1996, and as adjusted to reflect the
sale of the Common Stock offered by this Prospectus, of the Common Stock by
(i) each person known by the Company to own beneficially more than 5% of
the Common Stock, (ii) each director of the Company, (iii) the Chief
Executive Officer and each other Named Officer and (iv) all directors and
executive officers as a group. Except as otherwise noted, the Company
believes the persons listed below have sole investment and voting power
with respect to the Common Stock owned by them.
<TABLE>
<CAPTION>
Percentage of
Common Stock
Shares -----------------------
Beneficially Before After
Owned Offering Offering
----- -------- --------
<S> <C> <C> <C>
Dany Y. Tse, DMD (1).................................... 544,500 33.1% 19.3%
ServiceMaster Venture Fund LLC (2)...................... 200,000 12.1% 6.9%
William J. K. Saiget, DMD (3)........................... 166,450 10.6% 5.9%
Alvin S. Watanabe, DMD (4).............................. 156,250 10.0% 5.6%
John W. Castles (5)..................................... 145,000 9.2% 5.1%
Scott T. McClure, DDS (6)............................... 129,750 8.3% 4.6%
Craig W. Wong, DMD (7).................................. 87,900 5.6% 3.1%
Richard A. Armstrong (8)................................ 33,400 2.1% 1.2%
Daniel P. Hunt (9)...................................... 33,050 2.1% 1.2%
Jerald L. Willbur (10).................................. 18,250 1.2% 0.6%
Kenneth D. Hooten....................................... 0 - -
All directors and officers as a group (12 persons) (11) 883,050 51.4% 29.7%
- ----------------
<FN>
(1) Includes 50,000 shares subject to an exercisable option, 34,500 shares
subject to an exercisable warrant and 3,500 shares held by Dr. Tse's
wife.
(2) Includes 100,000 shares subject to an exercisable warrant.
(3) Includes 5,750 shares subject to an exercisable warrant.
(4) Includes 1,150 shares subject to an exercisable warrant.
(5) Includes 6,000 shares subject to an exercisable option and 11,500
shares subject to an exercisable warrant.
(6) Includes 5,750 shares subject to an exercisable warrant.
(7) Includes 6,900 shares subject to an exercisable warrant.
(8) Includes 400 shares subject to an exercisable option and 23,000 shares
subject to an exercisable warrant.
(9) Includes 5,750 shares subject to an exercisable warrant and 550 shares
held by Mr. Hunt's wife.
(10) Includes 5,750 shares subject to an exercisable warrant.
(11) Includes 65,900 shares subject to exercisable options and 93,150
shares subject to exercisable warrants.
</FN>
</TABLE>
38
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized Securities
The authorized capital stock of the Company consists of 50,000,000
shares of Common Stock and 30,000,000 shares of Preferred Stock.
Common Stock. The Company is authorized to issue 50,000,000 shares of
Common Stock. As of August 31, 1996, 1,559,528 shares of Common Stock were
outstanding, held of record by 51 shareholders. After this offering,
2,809,528 shares will be outstanding. Holders of Common Stock are entitled
to receive dividends as may from time to time be declared by the Board of
Directors of the Company out of funds legally available therefor. Holders
of Common Stock are entitled to one vote per share on all matters on which
the holders of Common Stock are entitled to vote and do not have any
cumulative voting rights. Holders of Common Stock have no preemptive,
conversion, redemption, or sinking fund rights. In the event of a
liquidation, dissolution, or winding up of the Company, holders of Common
Stock are entitled to share equally and ratably in the assets of the
Company, if any, remaining after the payment of all liabilities of the
Company and the liquidation preference of any outstanding class or series
of Preferred Stock. The outstanding shares of Common Stock are, and the
shares of Common Stock offered by the Company hereby when issued will be,
fully paid and nonassessable. The rights, preferences, and privileges of
holders of Common Stock are subject to any series of Preferred Stock that
the Company may issue in the future, as described below.
Preferred Stock. The Company is authorized to issue up to 30,000,000
shares of Preferred Stock. As of August 31, 1996, no shares of Preferred
Stock were outstanding. The Board of Directors has the authority to issue
Preferred Stock in one or more series and to fix the number of shares
constituting any such series and the preferences, limitations, and relative
rights, including dividend rights, dividend rate, voting rights, terms of
redemption, redemption price or prices, conversion rights, and liquidation
preferences of the shares constituting any series, without any further vote
or action by the shareholders of the Company. The issuance of Preferred
Stock by the Board of Directors could adversely affect the rights of
holders of Common Stock.
The potential issuance of Preferred Stock may have the effect of
delaying, deterring, or preventing a change in control of the Company, may
discourage bids for the Common Stock at a premium over the market price of
the Common Stock and may adversely affect the market price of, and the
voting and other rights of the holders of, Common Stock. The Company has no
plans to issue shares of Preferred Stock.
Warrants
As of August 31, 1996, there were warrants outstanding to purchase an
aggregate of 219,333 shares of the Company's Common Stock, held of record
by 16 warrantholders. All outstanding warrants have an exercise price of
$7.50 per share. Warrants to purchase 119,333 shares expire in May 2001,
and warrants to purchase 100,000 shares expire in December 2001.
Put Rights
In connection with dental practice acquisitions during 1995 and 1996,
the Company granted "put rights" to certain sellers with respect to some of
the shares of Common Stock issued in the acquisitions. As of September 30,
1996, these put rights cover a total of 84,065 shares of Common Stock and
give
39
<PAGE>
the holders the right to require the Company to repurchase the shares at
prices ranging from $13.38 to $19.62 per share. One holder has put rights
with respect to 16,551 shares that can be exercised in varying amounts in
1997, 1998, 1999, and 2000. All other put rights become exercisable between
January 2000 and January 2003 and expire if not exercised within 60 days of
the exercise date. The put rights with respect to all but 20,000 shares
will terminate if the Company completes a public offering of Common Stock
at a price in excess of $20.00 per share. The Company has also granted
ServiceMaster the right to require the Company to repurchase the 100,000
shares held by ServiceMaster and the 100,000 shares ServiceMaster may
acquire upon exercise of its warrant, if by June 21, 2001, the Company has
not made a public offering of its Common Stock with a per share price of at
least $22.00 and net proceeds to the Company of at least $10,000,000. The
per share price applicable to ServiceMaster's put right is 20 times the
Company's average adjusted net income per share for the two most recent
fiscal years preceding ServiceMaster's exercise of the right. Shares
subject to put rights are classified as Redeemable Common Stock on the
Company's Balance Sheet.
Registration Rights
Certain holders of 100,000 shares of the Company's Common Stock and
warrants to purchase an additional 104,333 shares of the Company's Common
Stock (the "Rights Holders") are entitled to certain rights with respect to
the registration of such shares under the Securities Act. Under the terms
of agreements between the Company and these holders, if the Company
proposes to register any of its Common Stock under the Securities Act for
its own account or for the account of other security holders (other than
pursuant to certain excluded registration forms), the Rights Holders are
entitled to notice of such registration and to include in such registration
shares of Common Stock that they hold, subject to cutback limitations that
may be imposed by the underwriter of any underwritten public offering of
the Company's Common Stock. The Rights Holders are not required to bear any
expenses incurred by the Company in connection with registering the Rights
Holders' shares, but underwriting fees, discounts, or commissions relating
to the sale of each Rights Holder's shares are borne by the applicable
Rights Holder. The Company is not required to include any of the shares
with registration rights in a registration if the holders of such shares
would be able to sell such shares without registration pursuant to Rule 144
of the Securities Act or otherwise. None of the Rights Holders will
participate in this offering.
Indemnification of Directors and Officers
Article VIII of the Company's Restated Articles of Incorporation, as
amended (the "Articles"), authorizes indemnification of directors of the
Company to the fullest extent permitted by the Washington Business
Corporation Act (the "Act"). In addition, Section 10 the Company's Bylaws
requires the Company to indemnify directors and former directors of the
Company to the fullest extent permitted by applicable law, and permits the
Company to indemnify officers, employees, and agents of the Company. The
effects of the Articles, Bylaws and the Act (the "Indemnification
Provisions") are summarized as follows:
(a) The Indemnification Provisions grant a right of
indemnification in respect of any action, suit or proceeding (other than an
action by or in the right of the Company) against expenses (including
attorney fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred, if the director or former director concerned (i)
acted in good faith and in a manner the director or former director
reasonably believed to be, in the case of conduct in the director's or
former director's official capacity, in the best interests of the Company
or, in all other cases, not opposed to the best interests of the Company,
(ii) was not adjudged liable on the basis of receipt of an improper
personal
40
<PAGE>
benefit and (iii) with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was unlawful. The termination of an
action, suit or proceeding by judgment, order, settlement, conviction or
plea of nolo contendere does not, of itself, create a presumption that the
director or former director did not meet the required standards of conduct.
(b) The Indemnification Provisions grant a right of
indemnification in respect of any action or suit by or in the right of the
Company against the expenses (including attorney fees) actually and
reasonably incurred if the director or former director concerned acted in
good faith and in a manner the director or former director reasonably
believed to be, in the case of conduct in the director's or former
director's official capacity, in the best interests of the Company, or in
all other cases, not opposed to the best interests of the Company; except
that no right of indemnification will be granted if the director or former
director is adjudged to be liable to the Company.
(c) Every director and officer who has been wholly successful on
the merits of a controversy described in (a) or (b) above is entitled to
indemnification for reasonable expenses as a matter of right.
(d) Because the limits of permissible indemnification under
Washington law are not clearly defined, the Indemnification Provisions may
provide indemnification broader than that described in (a) and (b).
(e) The Company shall advance to a director or former director
the expenses incurred in defending any action, suit or proceeding in
advance of its final disposition if the director or former director affirms
in good faith that he or she has met the standard of conduct to be entitled
to indemnification as described in (a) or (b) above and undertakes to repay
any amount advanced if it is determined that the director or former
director did not meet the required standard of conduct.
(f) The Company may, by action of the Board of Directors from
time to time, provide indemnification and pay expenses in advance of the
final disposition of a proceeding to officers, employees, and agents of the
Company on the same terms and with the same scope as described above.
The Company may obtain insurance for the protection of its directors
and officers against any liability asserted against them in their official
capacities. The rights of indemnification described above are not exclusive
of any other rights of indemnification to which the persons indemnified may
be entitled under any bylaw, agreement, vote of shareholders or directors
or otherwise.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions or otherwise,
the Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Washington Antitakeover Statute
Washington law contains provisions that may have the effect of
delaying or discouraging a hostile takeover of the Company. Chapter 23B.19
of the Washington Business Corporation Act prohibits, subject to certain
exceptions, a corporation from entering into any "significant business
transactions" with an "Acquiring Person" (defined generally as a person or
affiliated group who acquires 10% or more of the outstanding voting
securities of a corporation without the prior approval of the corporation's
board of
41
<PAGE>
directors) for a period of five years after such person or affiliated group
becomes an Acquiring Person. In addition, pursuant to Chapter 23B.17 of the
Washington Business Corporation Act, the Company is subject to a "fair
price" restriction which provides, subject to certain exceptions, that any
merger, sale of substantially all of a corporation's assets or dissolution
or liquidation involving an "Interested Shareholder" (defined generally as
a person or affiliated group that beneficially owns 20% or more of a
corporations' outstanding voting securities) will be prohibited unless
determined to be at a "fair price" or otherwise approved by either a
majority of the corporation's disinterested directors or two-thirds of the
disinterested shareholders entitled to vote on the transaction.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is
___________________.
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock
in the public market could adversely affect prevailing market prices.
Upon completion of this offering, there will be 2,809,528 shares of
Common Stock outstanding. Of these shares, the 1,250,000 shares sold in
this offering will be eligible for sale to the public without restriction
under the Securities Act, except for any shares purchased by affiliates of
the Company, which will be subject to certain resale limitations of Rule
144 promulgated under the Securities Act. The remaining 1,559,528 shares
are "restricted securities" as defined in Rule 144. Of this amount,
approximately 40,500 shares of Common Stock will be eligible for immediate
sale in the public market without restriction pursuant to Rule 144(k).
Beginning 90 days after the date of this Prospectus, an additional
1,144,862 shares will be eligible for resale subject to compliance with
Rule 144 or Rule 701 under the Securities Act. However, all directors and
executive officers of the Company and certain shareholders have agreed with
the Underwriters not to offer to sell, contract to sell or otherwise sell
or dispose of shares of Common Stock owned by them for a period of one year
after the date of this Prospectus without the prior written consent of
Black & Company, Inc. These persons hold 1,163,800 shares of Common Stock,
including 1,098,750 of the shares otherwise eligible for resale beginning
90 days after the date of this Prospectus.
In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated) who has beneficially owned restricted
securities for at least two years is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of issuer's common stock
(approximately 28,096 shares immediately after this offering) and (ii) the
average weekly trading volume during the four calendar weeks preceding such
sale, provided that certain public information about the issuer as required
by Rule 144 is then available and the seller complies with certain other
requirements. In general, shares issued in compliance with Rule 701
promulgated under the Securities Act may be sold by nonaffiliates subject
to the manner of sale requirements of Rule 144, but without compliance with
the other requirements of Rule 144. Affiliates may sell such shares issued
under Rule 701 in compliance with Rule 144, other than the holding period
requirement. A person who is not an affiliate, has not been an affiliate
within three months preceding the sale and has beneficially owned the
restricted securities for at least three years is entitled to sell such
shares under Rule 144 without regard to any of the limitations described
above.
42
<PAGE>
Sales of substantial amounts of Common Stock in the public market, or
the perception that such sales could occur, could adversely affect
prevailing market prices of the Common Stock and could impair the Company's
future ability to raise capital through an offering of its equity
securities.
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting
Agreement, the Underwriters named below, for which Black & Company, Inc. is
acting as Representative, have severally agreed to purchase from the
Company, and the Company has agreed to sell to each Underwriter, the
aggregate number of shares of Common Stock set forth opposite their
respective names in the table below. The Underwriting Agreement provides
that the obligations of the Underwriters to pay for and accept delivery of
the shares of Common Stock are subject to certain conditions precedent, and
that the Underwriters are committed to purchase and pay for all shares if
any shares are purchased.
Number of
Underwriter Shares
----------- ------
Black & Company, Inc. ...................... _________
Total............................................ 1,250,000
=========
The Company has been advised by the Representative that the
Underwriters propose initially to offer the shares of Common Stock to the
public at the offering price set forth on the cover page of this Prospectus
and to certain dealers (who may include the Underwriters) at such price
less a concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession to certain other dealers (who
may include the Underwriters) not in excess of $ per share. After the
initial offering to the public, the offering price and other selling terms
may be changed by the Representative.
The Company has granted an option to the Underwriters, exercisable
during the 30-day period after the date of this Prospectus, to purchase up
to a maximum of 187,500 shares of Common Stock at the initial public
offering price per share, less the underwriting discounts and commissions,
set forth on the cover page of this Prospectus. The Underwriters may
exercise such option only to cover over-allotments made in connection with
the sale of the Common Stock offered hereby. To the extent the Underwriters
exercise such option, each of the Underwriters will be committed, subject
to certain conditions, to purchase approximately the same percentage of
such additional shares as the number of shares of Common Stock to be
purchased by such underwriter as shown in the above table bears to the
total shown.
The Company has agreed to issue to the Representative the
Representative's Warrants to purchase up to 125,000 shares of Common Stock.
The Representative's Warrants are exercisable for a period of four years
beginning one year from the date of this Prospectus. The Representative's
Warrants are exercisable at a price of $_____ per share (120% of the
initial public offering price). The Representative's Warrants are
nontransferable for a period of one year following the date of this
43
<PAGE>
Prospectus, except (a) to any of the Underwriters or to any individual who
is either an officer or a partner of an Underwriter or (b) by will or the
laws of descent and distribution. The holders of the Representative's
Warrants will have, in that capacity, no voting, dividend, or other
shareholder rights. Any profit realized by the Representative on the sale
of securities issuable on exercise of the Representative's Warrants may be
deemed to be additional underwriting compensation.
The Representative will also receive at closing a nonaccountable
expense allowance equal to 0.5% of the aggregate initial public offering
price of the shares of Common Stock sold in the Offering.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection
with this offering, including liabilities under the Securities Act, or to
contribute payments that the Underwriters may be required to make in
respect thereof.
The Representative has advised the Company that the Underwriters do
not intend to confirm sales to any accounts over which they exercise
discretionary authority.
The Company, its directors, officers, and certain shareholders have
agreed that, without the prior written consent of Black & Company, Inc.,
they will not directly or indirectly offer to sell, sell, or otherwise
dispose of shares of Common Stock or any securities convertible or
exchangeable therefor, for a period of one year after the date of this
Prospectus, subject to certain limited exceptions.
Before this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined
by negotiations between the Company and the Representative. Among the
factors to be considered in such negotiations are the history of and
prospects for the Company and the industry in which it competes, an
assessment of the Company's management, its past and present operations and
financial performance, the present state of the Company's development, the
general condition of the securities markets at the time of the offering and
the market prices of and demand for publicly traded common stock of
comparable companies in recent periods.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will
be passed upon for the Company by Stoel Rives LLP, Portland, Oregon.
Certain legal matters in connection with this offering will be passed upon
for the Underwriters by Tonkon, Torp, Galen, Marmaduke & Booth, Portland,
Oregon.
EXPERTS
The financial statements of the Company as of, and for the year ended,
December 31, 1994 included in this Prospectus have been so included in
reliance on the report of Moss Adams LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The financial statements of the Company as of, and for the year ended,
December 31, 1995 included in this Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of Scott Campbell DDS, P.S. as of and for
the periods ended December 31, 1994 and September 29, 1995 included in this
Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
44
<PAGE>
The financial statements of Peter A. Vermeulen, D.D.S., P.S. (dba
Pinehurst Dental Clinic) as of and for the periods ended December 31, 1994
and June 30, 1995 included in this Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The Company replaced its previous auditors, Moss Adams LLP, with Price
Waterhouse LLP in November 1995. The decision to change accounting firms
was approved by the Company's Board of Directors. There were no adverse
opinions, disclaimers of opinion or qualifications as to uncertainty, audit
scope or accounting principles in the reports of Moss Adams LLP on the
Company's financial statements within the two most recent fiscal years
preceding their dismissal. There were no disagreements with Moss Adams LLP
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of such accountants, would have caused them to
make reference to the subject matter of the disagreements in connection
with their reports. Before engaging Price Waterhouse LLP as its new
independent accountants, the Company did not previously consult with them
regarding any matters related to the application of accounting principles,
the type of audit opinion that might be rendered on the Company's financial
statements or any other such matters.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2, including amendments thereto,
relating to the shares offered hereby has been filed by the Company with
the Securities and Exchange Commission (the "Commission"). This Prospectus
does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. For further information with respect to
the Company and the shares of Common Stock offered hereby, reference is
made to such Registration Statement and exhibits. A copy of the
Registration Statement may be inspected and copied at the offices of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of
the Registration Statement may be obtained from the Public Reference
Section of the Commission, Washington, D.C., upon the payment of the fees
prescribed by the Commission. The Commission also maintains a site on the
World Wide Web that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of such site is http://www.sec.gov.
The Company is not currently subject to the periodic reporting
requirement of the Securities Exchange Act of 1934. The Company intends to
furnish to its shareholders annual reports containing financial statements
audited by an independent public accounting firm.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
GENTLE DENTAL SERVICE CORPORATION
Report of Price Waterhouse LLP............................................ F-1
Report of Moss Adams LLP.................................................. F-2
Balance Sheet as of December 31, 1995 and
June 30, 1996 (unaudited)............................................... F-3
Statement of Operations for the years ended
December 31, 1994 and 1995, and for the six
months ended June 30, 1995 and 1996 (unaudited) ........................ F-4
Statement of Redeemable Common Stock and
Nonredeemable Shareholders' Equity for the
years ended December 31, 1994 and 1995, and for
the six months ended June 30, 1996 (unaudited).......................... F-5
Statement of Cash Flows for the years ended
December 31, 1994 and 1995, and for the six
months ended June 30, 1995 and 1996 (unaudited)......................... F-6
Notes to Financial Statements ............................................ F-7
SCOTT CAMPBELL DDS, P.S.
Report of Price Waterhouse LLP............................................ F-24
Balance Sheet as of December 31, 1994 and
September 29, 1995...................................................... F-25
Statement of Operations and Retained
Earnings for the year ended December 31, 1994
and for the nine months ended September 29, 1995 ....................... F-26
Statement of Cash Flows for the year ended
December 31, 1994 and for the nine months
ended September 29, 1995 ............................................... F-27
Notes to Financial Statements ............................................ F-28
PETER A. VERMEULEN, D.D.S., P.S.
Report of Price Waterhouse LLP............................................ F-32
Balance Sheet as of December 31, 1994 and
June 30, 1995........................................................... F-33
Statement of Operations and Owner's Deficit
for the year ended December 31, 1994
and for the six months ended June 30, 1995 ............................. F-34
Statement of Cash Flows for the year ended
December 31, 1994 and for the six months
ended June 30, 1995 .................................................... F-35
Notes to Financial Statements ............................................ F-36
GENTLE DENTAL SERVICE CORPORATION
Pro Forma Combined Financial Information (unaudited)...................... F-40
Pro Forma Combined Statement of Operations
for the year ended December 31, 1995 (unaudited)........................ F-41
46
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of
Mutual Health Systems, Inc. (to be changed to
Gentle Dental Service Corporation):
The recapitalization described in Note 13 to the financial statements has
not been consummated at October 3, 1996. When it is consummated, we will be
in a position to furnish the following report:
"In our opinion, the accompanying balance sheet and the related
statements of operations, of redeemable common stock and nonredeemable
shareholders' equity and of cash flows present fairly, in all material
respects, the financial position of Gentle Dental Service Corporation
at December 31, 1995 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for the opinion expressed
above.
Gentle Dental Service Corporation is a member of a group of affiliated
companies and, as disclosed in Note 11 to the financial statements,
has transactions with and derives substantially all of its revenue
from members of the group under support services agreements. Such
revenue is based on specified percentages of net dental practice
patient revenues as negotiated with members of the group of affiliated
companies. Because the parties to the support services agreements are
members of the group, it is possible that the terms of these
transactions may not be the same as those that would result from
transactions among wholly unrelated parties."
PRICE WATERHOUSE LLP
Portland, Oregon
March 31, 1996, except as
to Note 13, which is as of
October 3, 1996
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Mutual Health Systems, Inc. (to be changed to
Gentle Dental Service Corporation)
The recapitalization described in Note 13 to the financial statements has
not been consummated at October 3, 1996. When it is consummated, we will be
in a position to furnish the following report:
"We have audited the accompanying statements of operations,
redeemable common stock and nonredeemable shareholders' equity
and of cash flows of Gentle Dental Service Corporation (the
Company) for the year ended December 31, 1994. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 and also
includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the results of
operations and cash flows of the Company for the year ended
December 31, 1994, in conformity with generally accepted
accounting principles.
The Company is a member of a group of affiliated companies and,
as disclosed in Note 11 to the financial statements, has
transactions with and derives substantially all of its revenue
from members of the group under support services agreements.
Such revenue is based on specified percentages of net dental
practice patient revenues as negotiated with members of the
group of affiliated companies. Because the parties to the
support services agreements are members of the group, it is
possible that the terms of these transactions may not be the
same as those that would result from transactions among wholly
unrelated parties."
MOSS ADAMS LLP
February 14, 1995
Vancouver, Washington
F-2
<PAGE>
<TABLE>
<CAPTION>
Gentle Dental Service Corporation
Balance Sheet
- --------------------------------------------------------------------------------------------------------------------
December 31, June 30,
1995 1996
--------------- ---------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 688,518 $ 1,132,337
Accounts receivable, net (Note 1) 2,036,654 2,455,586
Receivables from affiliates (Note 11) 711,862 747,203
Income taxes receivable (Note 8) 174,448 227,137
Supplies 286,000 371,250
Prepaid expenses and other current assets 176,256 592,710
---------------- ---------------
Total current assets 4,073,738 5,526,223
Property and equipment, net (Note 3) 3,654,101 4,133,347
Intangible assets, net (Note 4) 2,057,538 3,272,998
Other assets (Notes 1 and 2) 428,317 112,190
---------------- ---------------
Total assets $ 10,213,694 $ 13,044,758
================ ===============
Liabilities, Redeemable Common Stock and
Nonredeemable Shareholders' Equity
Current liabilities:
Accounts payable $ 270,909 $ 660,496
Accrued payroll and payroll related costs 431,199 415,273
Other accrued liabilities 545,883 298,365
Short-term borrowings (Note 5) 1,049,025 2,037,206
Current portion of long-term debt and capital lease obligations (Note 5) 473,370 775,892
---------------- ---------------
Total current liabilities 2,770,386 4,187,232
---------------- ---------------
Deferred tax liability (Note 8) 187,123 242,208
Long-term debt, less current portion (Note 5) 2,310,212 2,266,780
Capital lease obligations, less current portion (Note 5) 423,428 494,716
---------------- ---------------
Total liabilities 5,691,149 7,190,936
---------------- ---------------
Commitments and contingencies (Notes 5, 6, 9 and 12) Redeemable common
stock, no par value, 57,551 and 184,065 shares
issued and outstanding, respectively (Note 9) 710,694 1,883,638
---------------- ---------------
Nonredeemable shareholders' equity (Note 9):
Preferred stock, 30,000,000 shares authorized, no shares issued
and outstanding - -
Common stock, no par value, 50,000,000 shares authorized, 1,366,145 and
1,375,463 shares issued and outstanding, respectively 2,947,200 3,066,485
Shareholder note receivable (Note 9) (40,000) (40,000)
Additional paid-in capital - 491,157
Retained earnings 904,651 452,542
---------------- ---------------
Total nonredeemable shareholders' equity 3,811,851 3,970,184
---------------- ---------------
Total liabilities, redeemable common stock and
nonredeemable shareholders' equity $ 10,213,694 $ 13,044,758
================ ===============
The accompanying notes are an integral part of this statement.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Gentle Dental Service Corporation
Statement of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Six months ended
December 31, June 30,
1994 1995 1995 1996
--------------- --------------- ---------------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Support services revenue from affiliates
(Notes 1 and 11) $ 2,731,403 $ 9,781,077 $ 4,836,916 $ 5,156,605
Branch costs - 4,700,695 2,320,795 3,476,237
Operating expenses 2,100,067 4,207,739 2,020,333 1,891,974
--------------- --------------- ---------------- --------------
Operating income (loss) 631,336 872,643 495,788 (211,606)
Interest and other expense, net 16,217 382,310 40,208 218,144
--------------- --------------- ---------------- --------------
Income (loss) before income taxes 615,119 490,333 455,580 (429,750)
Provision (benefit) for income taxes (Note 8) - 233,826 217,266 (46,246)
--------------- --------------- ---------------- --------------
Net income (loss) $ 615,119 $ 256,507 $ 238,314 $ (383,504)
=============== =============== ================ ==============
Net income (loss) per share $ .24 $ .20 $ (.26)
=============== ================ ===============
Unaudited pro forma information (Notes 1 and 8):
Income before income taxes $ 615,119
Provision for income taxes 210,678
---------------
Net income $ 404,441
===============
Net income per share $ .39
===============
Weighted average number of
shares outstanding 1,451,896 1,696,687 1,679,231 1,651,150
=============== =============== ================ ===============
The accompanying notes are an integral part of this statement.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Gentle Dental Service Corporation
Statement of Redeemable Common Stock and Nonredeemable Shareholders' Equity
Years Ended December 31, 1994 and 1995 and Six Months Ended June 30, 1996
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Nonredeemable Shareholders' Equity
-------------------------------------------------------------------------
Redeemable Common stock Common stock
common stock Class A Class B
----------------- ------------------ ---------------
Shareholder Additional
note paid-in Retained
Shares Amount Shares Amount Shares Amount receivable capital earnings
------ ------ ------ ------ ------ ------ ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 - $ - 766,000 $ 359,900 385,000 $154,000 $ - $ 343,648
Issuance of stock pursuant to Stock
Incentive Plan - - 3,250 19,500 - - - - -
Conversion (1:1) of Class B to
Class A - - 385,000 154,000 (385,000) (154,000) - - -
Distributions to shareholders - - - - - - - - (223,680)
Net income - - - - - - - - 615,119
------- ---------- ---------- ----------- -------- -------- --------- -------- ----------
Balance, December 31, 1994 - - 1,154,250 533,400 - - - - 735,087
Issuance of stock pursuant to
Stock Incentive Plan - - 20,112 201,115 - - - - -
Common stock issued in connection
with clinic acquisitions 57,551 710,694 28,456 387,003 - - - - -
Common stock issued in connection
with private placement, net of
offering costs - - 169,327 1,633,687 - - - - -
Common stock issued for promissory
note from shareholder - - 4,000 40,000 - - (40,000) - -
Stock options granted - - - 152,195 - - - - -
Repurchase of common stock - - (10,000) (200) - - - - -
Distributions to shareholders - - - - - - - - (86,943)
Net income - - - - - - - 256,507
------- ---------- ---------- ----------- -------- -------- ---------- -------- ----------
Balance, December 31, 1995 57,551 710,694 1,366,145 2,947,200 - - (40,000) - 904,651
Common stock issued in connection
with clinic acquisitions 32,757 445,495 6,818 92,725 - - - - -
Common stock and warrants issued
in connection with private
placement, net of offering costs 100,000 748,868 - - - - - 224,927 -
Exercise of put right (6,243) (90,024) -
Stock warrants issued, related
to debt issuance (Note 5) - - - - - - - 8,778 -
Exercise of stock option - - 2,000 1,600 - - - - -
Stock options granted to
nonemployees - - - - - - - 24,474 -
Stock warrants issued related to
line of credit guarantees
(Notes 5 and 9) - - - - - - - 232,978 -
Accretion of put rights 68,605 (68,605)
Repurchase of common stock - - (2,000) (40) - - - - -
Common stock granted to
nonemployees - - 2,500 25,000 - - - - -
Net loss - - - - - - - (383,504)
------- ---------- ---------- ----------- -------- -------- ---------- ---------- ----------
Balance, June 30, 1996 (unaudited) 184,065 $1,883,638 1,375,463 $ 3,066,485 - $ - $ (40,000) $ 491,157 $ 452,542
======= ========== ========== =========== ======== ======== ========== ========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Gentle Dental Service Corporation
Statement of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Six months ended
December 31, June 30,
1994 1995 1995 1996
---------------- --------------- --------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 615,119 $ 256,507 $ 238,314 $ (383,504)
Adjustments to reconcile change in net cash
provided by operating activities:
Depreciation and amortization 105,685 481,517 199,539 342,800
Loss on disposal of assets - 86,187 - -
Stock options granted as employee compensation - 152,195 - 49,474
Stock issued for fees and compensation 19,500 - - -
Amortization of warrants - - - 80,586
Deferred taxes - 71,470 91,000 6,443
Changes in certain assets and liabilities, net of
acquisitions:
Accounts receivable, net - 348,596 (544,320) (305,495)
Receivables from affiliates and other receivables (231,010) (2,476,343) (899,489) (35,341)
Income taxes receivable - (224,778) - (52,689)
Supplies (104,625) (164,375) (3,500) (57,750)
Prepaid expenses and other current assets (43,976) (11,195) (209,807) (562,095)
Other assets - (78,625) (55,616) (366,401)
Accounts payable 80,606 87,896 257,796 369,903
Accrued liabilities 121,220 685,907 281,732 (279,298)
---------------- --------------- --------------- ----------------
Net cash (used for) provided by
operating activities 562,519 (785,041) (644,351) (460,565)
---------------- --------------- --------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment,
net of acquisitions (783,266) (1,251,180) (175,139) (385,690)
Cash paid for acquisitions, including other direct
costs, net of cash acquired - (1,072,905) (71,113) (649,539)
Dental clinic acquisition pre-payments - (309,130) - -
---------------- --------------- --------------- ----------------
Net cash used for investing activities (783,266) (2,633,215) (246,252) (1,035,229)
---------------- --------------- --------------- ----------------
Cash flows from financing activities:
Net proceeds from short-term borrowings - 916,154 734,500 988,181
Proceeds from issuance of notes payable - 2,703,511 - 169,500
Payments of notes payable (48,242) (1,264,034) (154,020) (63,682)
Payments of capital lease obligations - (26,147) (16,329) (39,717)
Proceeds from issuance of common stock - 1,834,802 1,806,431 973,795
Repurchase of common stock - (200) - (40)
Exercise of put options - - - (90,024)
Exercise of stock options - - - 1,600
Shareholder distributions (223,680) (86,943) (86,943) -
---------------- --------------- --------------- ----------------
Net cash provided by (used for)
financing activities (271,922) 4,077,143 2,283,639 1,939,613
---------------- --------------- --------------- ----------------
Increase (decrease) in cash (492,669) 658,887 1,393,036 443,819
Cash and cash equivalents, beginning of period 522,300 29,631 29,631 688,518
---------------- --------------- --------------- ----------------
Cash and cash equivalents, end of period $ 29,631 $ 688,518 $ 1,422,667 $ 1,132,337
================ =============== =============== ================
The accompanying notes are an integral part of this statement.
</TABLE>
F-6
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Gentle Dental Service Corporation (the "Company"), incorporated on
December 14, 1992, is a Washington corporation headquartered in
Vancouver, Washington. The Company, as part of a multi-specialty
dental care delivery network, provides support services to dental
professional corporations in Oregon and Washington. As of June 30,
1996, the Company provided management support to two professional
corporations under long-term support services agreements: Gentle
Dental of Oregon, P.C. and Tse, Saiget, Watanabe & McClure, Inc.,
P.S., a.k.a., Gentle Dental of Washington, P.C. (together, the
"PC's"). Under the terms of the service agreements, the Company,
among other things, bills and collects patient receivables and
provides all administrative support services to the PC's in exchange
for support services fees (see Note 11).
The Company and the PC's are related through common ownership and a
common member on both the Company's and PC's Boards of Directors. The
Company and its affiliates structure their business enterprises to
comply with the state regulatory mandates requiring dentistry
practices to be owned and operated by state-licensed dentists (see
Note 11).
Interim period statements
The unaudited interim financial data as of June 30, 1996 and for the
six months ended June 30, 1995 and 1996 reflects, in the opinion of
management, all of the adjustments (consisting of normal recurring
adjustments) necessary for a fair statement of the results of such
periods. The results of operations for an interim period are not
necessarily indicative of the results of operations for a full year.
Revenues
Revenues consist primarily of support services fees charged to the
PC's based on an agreed-upon percentage of PC revenues under support
services agreements, net of provisions for contractual adjustments
and doubtful accounts. Such fees are recognized when earned.
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, June 30,
1994 1995 1995 1996
--------------- --------------- ---------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Dental revenue, net of provisions
for contractual adjustments and
doubtful accounts $ 12,134,815 $ 16,028,535 $ 7,929,370 $ 10,313,210
Less amounts retained by the PC's 9,403,412 6,247,458 3,092,454 5,156,605
--------------- --------------- ---------------- ---------------
Support services revenue from affiliates $ 2,731,403 $ 9,781,077 $ 4,836,916 $ 5,156,605
=============== =============== ================ ===============
</TABLE>
F-7
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (Continued)
Statement of cash flows
Cash equivalents consist of liquid investments with maturities at the
date of purchase of 90 days or less.
<TABLE>
<CAPTION>
Supplemental disclosure of cash flow information:
Year ended Six months ended
December 31, June 30,
1994 1995 1995 1996
---------------- --------------- ---------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest paid $ 23,046 $ 289,608 $ 85,686 $ 163,916
Income taxes paid - 350,000 243,000 -
Supplemental schedule of noncash investing
and financing activities:
Capital lease obligations related to the
lease of fixed assets - 534,366 - 152,820
Issuance of common stock in exchange for
shareholder note - 40,000 40,000 -
Accretion of put rights - - - 68,605
Acquisition of clinics from related parties:
Liabilities assumed or issued 1,354,913 2,092,928 2,092,928 -
Tangible assets acquired in connection
with acquisitions 1,354,913 2,092,928 2,092,928 -
Acquisition of clinics from unrelated parties:
Support services agreements - 2,012,409 263,869 1,262,009
Liabilities assumed or issued - 453,285 120,318 146,995
Common stock issued in connection with
acquisitions - 1,097,697 200,000 538,220
Dental clinic acquisition prepayments - - - 309,130
Tangible assets acquired in connection
with acquisitions, excluding cash - 611,478 127,562 381,875
Stock warrants related to line of credit
guarantee issued as compensation - - - 232,078
Stock warrants issued related to debt issuance - - - 8,778
</TABLE>
Accounts receivable and allowances for contractual adjustments and
doubtful accounts
Accounts receivable principally represent receivables from patients
or dental group insurance carriers for dental services provided by
the related PC's. The Company had an allowance for contractual
adjustments and doubtful accounts of $992,851 at December 31, 1995
and $1,025,459 at June 30, 1996 (see Note 2). Contractual adjustments
represent an estimate of the difference between the amount billed by
the Company and the amount which the patient, third party payor or
other is contractually obligated to pay the Company. To-date, such
adjustments have not been significant.
Affiliate receivables
Affiliate receivables consist primarily of amounts owed to the
Company by the PC's in order to reimburse the Company for payment of
the PC payroll and other direct costs net of amounts due to the PC's
related to the acquisitions and the collection of receivables.
Supplies
Supplies consist primarily of operatory dental supplies stored at the
clinics. Supplies are stated at the lower of cost (first-in,
first-out basis) or market.
F-8
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (Continued)
Property and equipment
Property and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to operating expense as incurred
and expenditures for additions and betterments are capitalized. The
cost of assets sold or otherwise disposed of and the related
accumulated depreciation are eliminated from the accounts, and any
resulting gain or loss is reflected in the statement of operations.
Depreciation of property and equipment is calculated using the
straight-line method over estimated useful lives which range from 3
to 10 years.
Intangible assets
Intangible assets relate primarily to support services agreements.
Such intangibles consist of the costs of purchasing the rights to
provide management support services to dental practices. These costs
are amortized on the straight-line basis over the initial
noncancelable 40-year terms of the related support services
agreements. Under these agreements, the dental groups have agreed to
provide dental services on an exclusive basis only through facilities
provided by the Company. Pursuant to the terms of the agreements, the
Company is the exclusive administrator of all non-dental aspects of
the acquired dental practices, providing facilities, equipment,
support staffing, management support and other ancillary services.
The support services agreements are noncancelable except for
performance defaults.
Other intangible assets are amortized on a straight-line method over
their estimated useful lives --five years for organizational costs
and forty years for trademarks (see Note 4).
The Company reviews its asset balances for impairment at the end of
each quarter or more frequently when events or changes in
circumstances indicate that the carrying amount of intangible assets
may not be recoverable. To perform that review, the Company estimates
the sum of expected future undiscounted net cash flows from
intangible assets. If the estimated net cash flows are less than the
carrying amount of the intangible asset, the Company recognizes an
impairment loss in an amount necessary to write-down the intangible
asset to a fair value as determined from expected future cash flows.
No write-down for impairment loss was recorded for the years ended
December 31, 1994 and 1995, or for the six months ended June 30, 1995
and 1996.
Other assets
Other assets at December 31, 1995 consist primarily of cash payments
made during 1995 related to dental clinic acquisitions not
consummated until 1996 (see Note 2).
Income taxes
Prior to 1995, the Company elected to be treated as an S corporation
under provisions of the Internal Revenue Code. As such, the income or
losses of the Company were attributable to its shareholders in their
individual tax returns. Effective January 1, 1995, the Company
terminated its S Corporation status. An unaudited pro forma provision
for income taxes that would have been recorded if the Company had
been a C Corporation for the year ended December 31, 1994 is provided
for comparative purposes in the statement of operations. See Note 8.
F-9
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (Continued)
Accounting for impairment of long-lived assets
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." The statement provides that impairments of long-lived
assets (including property and equipment and intangible assets) be
measured and valued based on the estimated future cash flows of the
Company.
The Company adopted the statement in 1996; however, the adoption did
not have a significant impact on the Company's financial position or
results of operations.
Fair value of financial assets and liabilities
The Company estimates the fair value of its monetary assets and
liabilities based upon the existing interest rates related to such
assets and liabilities compared to current market rates of interest
for instruments with a similar nature and degree of risk. The Company
estimates that the carrying value of all of its monetary assets and
liabilities approximates fair value as of December 31, 1995 and June
30, 1996.
Accounting estimates
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles (GAAP) 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 reported
periods. Actual results may differ from these estimates.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994
financial statements to conform with financial statement
presentations for the six months ended June 30, 1996. Such
reclassifications had no effect on the Company's previously reported
results of operations or financial position.
Net income (loss) per share
Net income (loss) per share is computed based on the weighted average
number of shares of common stock and common stock equivalents
outstanding during the periods. Common stock equivalents consist of
the number of shares issuable upon exercise of the outstanding common
stock warrants and common stock options, less the number of shares,
up to 20% of the common stock outstanding at December 31, 1995, that
could have been purchased with the proceeds from the exercise of the
warrants and options, using the modified treasury stock method. For
purposes of calculating earnings per share, the remainder of the
proceeds is presumed to be used to reduce debt and to make low-risk
investments. The assumed reduction in interest expense and
incremental investment income decreases the net loss applicable to
common shareholders for the earnings per share calculation. Common
stock equivalents are excluded from the computation if their effect
is anti-dilutive, except that, pursuant to the Securities and
Exchange Commission's Staff Accounting Bulletin No. 83, common and
common equivalent shares issued during the 12-month period prior to
an initial public offering are included in the calculations as if
they were outstanding for all periods presented. The unaudited pro
forma net income per share for the year ended
F-10
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (Continued)
December 31, 1994 has been calculated as if the Company had been a C
Corporation for all periods presented.
2. Acquisitions
On December 31, 1994, the Company purchased from the PC's certain
dental, office and computer equipment and supplies totaling
$1,354,913 and assumed certain liabilities totaling $565,557. No cash
was paid by the Company for the net assets purchased. Instead, the
Company decreased its receivables from the PC's. The transaction was
executed at fair market value as determined by independent appraisal.
The equipment purchased was considered by management to be used
equipment and is being depreciated using the straight-line method
over estimated useful lives ranging from 3 to 7 years.
On January 2, 1995, the Company purchased from the PC's the net
accounts receivable of the PC's totaling $2,092,928 in exchange for
interest-only promissory notes payable on December 31, 1995. The
principal portion of the promissory notes issued to the PC's by the
Company were satisfied via reductions to the Company's receivables
from the PC's.
During 1995, the Company acquired substantially all of the assets of
seven dental practices in Washington and Oregon including cash,
accounts receivable, supplies and fixed assets net of the assumption
of certain liabilities. The total purchase price of $2,345,774 for
the seven acquired clinics includes $982,400 paid in cash, $1,097,697
in redeemable and nonredeemable common stock, and $174,872 in
promissory notes. In addition, the Company paid $90,805 in cash for
closing costs which have been included in the total purchase price.
The Company issued a total of 86,007 shares of stock in conjunction
with these acquisitions, of which 20,000 were valued by management at
$10.00 per share for one acquisition in January 1995 and 66,007 were
valued at $13.60 per share for the remaining acquisitions. These
common stock values reflect the estimated fair market value at the
dates of the acquisitions. Certain shares of the common stock issued
are subject to "put rights" from the shareholders as discussed in
Note 9.
Outstanding promissory notes issued related to the acquisitions at
December 31, 1995 totaled $119,871, of which $57,371, included in
short-term borrowings, is due and was subsequently paid in January
1996 and $62,500, included in long-term debt, is due in monthly
instalments of principal and interest at 10.25% commencing in January
1996 and maturing in December 1998.
In 1996, the Company acquired substantially all of the assets of four
clinics in Oregon and Washington, including cash, accounts
receivable, supplies and fixed assets, net of the assumption of
certain liabilities. The total purchase price of $1,537,416 for the
four acquired clinics includes $943,890 in cash, $538,220 in
redeemable and nonredeemable common stock and a promissory note
F-11
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. Acquisitions (Continued)
for $28,098. In addition, the Company paid for closing costs of
$27,208 which have been included in the total purchase price. Certain
shares of the common stock issued are subject to "put rights" from
the shareholders as discussed in Note 9.
The above acquisitions in 1995 and 1996 have been accounted for using
the purchase method of accounting. The excess of the total
acquisition cost over the fair value of the net tangible assets
acquired representing the estimated future value of the support
services agreements is being amortized over forty years using the
straight-line method (see Note 4). The results of operations for
these acquisitions have been included in the financial statements of
the Company since the dates of acquisitions.
The following unaudited pro forma information represents the results
of operations of the Company as if all of the acquisitions had
occurred as of January 1, 1995, after giving effect to amortization
of the cost of acquisition in excess of the fair value of net assets
acquired, adjustments to reflect the difference in compensation
between historical amounts and amounts specified in the purchase
agreements, increased interest expense for notes issued related to
the acquisitions and increased income taxes:
Year ended
December 31,
1995
---------------
(Unaudited)
Support services revenue $ 11,983,208
===============
Net income $ 46,901
===============
Earnings per share $ .03
===============
The pro forma results for the six months ended June 30, 1996 have not
been presented because the effect of 1996 acquisitions on the
Company's operations is not significant.
The unaudited pro forma information does not purport to be indicative
of the results which would actually have been obtained had the
acquisitions occurred as of January 1, 1995 or which may be obtained
in the future.
F-12
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3. Property and Equipment
December 31, June 30,
1995 1996
--------------- ----------------
(Unaudited)
<S> <C> <C>
Dental equipment $ 2,318,955 $ 2,439,770
Computer equipment 481,867 733,884
Office equipment, furniture and fixtures 503,504 561,247
Vehicles 19,443 19,443
Leasehold improvements 761,906 1,065,290
--------------- ----------------
4,085,675 4,819,634
Less accumulated depreciation and amortization (431,574) (686,287)
--------------- ----------------
$ 3,654,101 $ 4,133,347
=============== ================
</TABLE>
At December 31, 1995 and June 30, 1996, property and equipment
include $553,362 and $627,902, respectively, of equipment held under
capital leases with related accumulated amortization aggregating
$55,709 and $111,056, respectively.
4. Intangible Assets
<TABLE>
<CAPTION>
Intangible assets consist of the following:
December 31, June 30,
1995 1996
--------------- ----------------
(Unaudited)
<S> <C> <C>
Support services agreements $ 2,012,409 $ 3,263,830
Trademarks 50,000 50,000
Organizational costs 70,391 70,391
--------------- ----------------
2,132,800 3,384,221
Less accumulated amortization (75,262) (111,223)
--------------- ----------------
$ 2,057,538 $ 3,272,998
=============== ================
</TABLE>
F-13
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. Borrowings
Short-term borrowings
The Company had a total of $2,037,206 outstanding at June 30, 1996
under two operating lines of credit secured by substantially all the
assets of the Company.
Line of credit No. 1 bears interest at prime plus 1% (9.25% at June
30, 1996) and the Company may borrow a maximum of $1,850,000, limited
to a borrowing base calculated as 75% of the Company's net eligible
accounts receivable. All unpaid principal and interest is due and
payable October 31, 1996. The Company must pay a commitment fee of
1/2% per annum of the average daily unused portion of the $1,850,000
available.
Line of credit No. 2 bears interest at prime plus 2.5% (10.75% at
June 30, 1996) and the Company may borrow up to a maximum of
$650,000. All unpaid principal and interest is due and payable
November 22, 1996 or earlier upon certain conditions of the Company
obtaining additional debt and/or equity financing.
In connection with a 1996 modification to line of credit No. 1 and
the issuance of line of credit No. 2, certain directors, officers and
shareholders personally guaranteed a total of $1,000,000 of the two
operating lines of credit. In exchange for the guarantees, the
Company issued 115,000 common stock warrants with an exercise price
of $7.50 to those individuals. In connection with line of credit No.
2, the Company issued 4,333 common stock warrants with an exercise
price of $7.50 to the lender (see Note 9).
The Company had $991,654 outstanding at December 31, 1995 under an
operating line of credit secured by the assets of the Company. The
credit line bore interest at prime plus 1/2% (9.25% at December 31,
1995) and the Company could borrow a maximum of $1,500,000, limited
to a borrowing base calculated as 75% of the Company's net eligible
accounts receivable. The Company paid a commitment fee of 1/2% per
annum of the average daily unused portion of the $1,500,000
available. Additionally, at December 31, 1995, the Company owed to an
individual $57,371 related to receivables purchased in acquiring a
dental practice. These borrowings, as well as any accrued and unpaid
interest, was paid subsequent to December 31, 1995.
F-14
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5. Borrowings (Continued)
December 31, June 30,
1995 1996
--------------- ----------------
(Unaudited)
<S> <C> <C>
Long-term debt
Note payable due in monthly instalments of principal and
interest at prime plus 1.25% effective May 31, 1996 (9.5% at
June 30, 1996) collateralized by accounts
receivable, inventory and equipment, maturing August 1999. $ 937,500 $ 812,500
Notes payable with interest-only payments for the first
12 months at prime plus 1.5% effective May 31, 1996 (9.75% at
June 30, 1996), due in monthly installments of principal and
interest beginning in August 1996, maturing August 2000,
secured by accounts receivable,
inventory and equipment 1,684,064 1,853,592
Note payable due in monthly instalments of principal and
interest at 9.99%, collateralized by a vehicle, maturing
June 2000. 14,727 13,054
Unsecured note payable, due in monthly instalments of
principal and interest at 10.25% commencing on January 1,
1996, maturing December 1998. (Note 2) 62,500 52,716
Unsecured note payable, due in quarterly instalments of
principal and interest at 9% commencing on May 31, 1996,
maturing July 1998 - 28,098
Unsecured note payable, due in monthly instalments of
principal and interest at 10.47% commencing on June 30,
1996, maturing December 2003 - 149,526
--------------- ----------------
2,698,791 2,909,486
Less current portion 388,579 642,706
--------------- ----------------
$ 2,310,212 $ 2,266,780
=============== ================
</TABLE>
Scheduled maturities of long-term debt at December 31, 1995 are as
follows:
Year ending
December 31,
------------
1996 $ 388,579
1997 649,703
1998 689,566
1999 641,810
2000 329,133
---------------
$ 2,698,791
F-15
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. Borrowings (Continued)
The credit line agreement and notes include provisions for
maintaining certain financial covenants including debt service
coverage ratio, current ratio, debt to net worth, minimum working
capital and minimum net worth. At December 31, 1995, the Company
obtained a waiver of certain of these covenants. The credit line
agreement was revised during 1996 and the Company is in compliance
with these covenants at June 30, 1996.
Capital lease obligations
The Company has entered into certain capital lease obligations
related to the acquisition of dental and computer equipment. The
leases bear interest at rates ranging from 12% - 14% and require
monthly payments of principal and interest. The leases are secured by
the equipment and mature in 1999 and 2000.
Future minimum payments under the Company's capital lease obligations
at December 31, 1995 are summarized as follows:
Year ending
December 31,
1996 $ 142,782
1997 142,782
1998 142,782
1999 142,494
2000 99,597
---------------
670,437
Less portion representing interest 162,218
---------------
508,219
Less current portion 84,791
---------------
$ 423,428
===============
6. Bank Credit Commitments
In 1994, the Company cross-guaranteed the borrowings of the PC's. At
December 31, 1994, the outstanding borrowings of the PC's aggregated
$427,907. These borrowings were refinanced without cross-guarantees
during 1995.
F-16
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
7. Profit Sharing Plan
The Company participates in a 401(k) profit sharing plan and trust
covering substantially all employees. Profit sharing contributions
are made at the discretion of management. No employer profit sharing
contributions were made for the years ended December 31, 1994 and
1995 and for the six months ended June 30, 1996. The Company also
provides a non-discretionary matching 401(k) contribution equal to 3%
of participants' eligible compensation. The Company's 401(k)
contributions were $48,936 and $165,228, respectively, for the years
ended December 31, 1994 and 1995, and $80,627 and $121,634,
respectively, for the six months ended June 30, 1995 and 1996.
8. Income Taxes
On January 1, 1995, the Company elected to terminate its S
corporation status. Accordingly, unaudited pro forma income tax
information is presented below, which would have been recorded if the
Company had been a C Corporation during all periods presented, based
on tax laws in effect during those periods, as calculated under
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes."
<TABLE>
<CAPTION>
The provision (benefit) for income taxes is as follows:
Year ended Six months ended
December 31, June 30,
1994 1995 1995 1996
---------------- --------------- --------------- ----------------
(Unaudited (Unaudited) (Unaudited)
pro forma)
<S> <C> <C> <C> <C>
Current:
Federal $ 184,165 $ 147,134 $ 113,266 $ (49,344)
State 1,538 15,222 13,000 (3,345)
---------------- --------------- --------------- ----------------
185,703 162,356 126,266 (52,689)
---------------- --------------- --------------- ----------------
Deferred:
Federal 24,696 64,951 82,000 6,035
State 279 6,519 9,000 408
---------------- --------------- --------------- ----------------
24,975 71,470 91,000 6,443
---------------- --------------- --------------- ----------------
Total provision (benefit) $ 210,678 $ 233,826 $ 217,266 $ (46,246)
================ =============== =============== ================
</TABLE>
The provision for income taxes for the year ended December 31, 1995
includes the recognition of a cumulative net deferred tax liability
of $24,975 associated with the termination of the Company's S
Corporation status on January 1, 1995, in accordance with SFAS 109.
F-17
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
8. Income Taxes (Continued)
<TABLE>
<CAPTION>
Deferred tax assets (liabilities) are comprised of the following
components:
December 31, June 30,
1995 1996
--------------- ----------------
(Unaudited)
<S> <C> <C>
Property and equipment $ (140,983) $ (181,870)
Intangibles (5,642) (13,766)
Cash versus accrual reporting for tax purposes - long-term (40,498) (46,572)
--------------- ----------------
Gross long-term deferred tax liability $ (187,123) $ (242,208)
=============== ================
Cash versus accrual reporting for tax purposes - current $ (20,250) $ -
Accrued payroll related costs 75,156 103,548
--------------- ----------------
Net current deferred tax assets, included in prepaid and
other current assets $ 54,906 $ 103,548
=============== ================
</TABLE>
<TABLE>
<CAPTION>
The effective tax rate differed from the U.S. statutory federal tax
rate due to the following:
Six months
Year ended ended
December 31, June 30,
1995 1996
----------- ------------
(Unaudited)
<S> <C> <C>
Statutory federal rate 34.0% (34.0)%
State taxes, net of federal benefit 2.3 (2.3)
Non-deductible intangibles and other permanent differences 6.3 25.5
Other, primarily cumulative effect from the termination
of S corporation status in 1995 5.1 -
----------- ------------
47.7% (10.8)%
=========== ============
</TABLE>
F-18
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. Redeemable Common Stock and Nonredeemable Shareholders' Equity
Redeemable common stock
As part of the 1995 and 1996 acquisition agreements discussed in Note
2, the Company granted "put rights" to certain shareholders that may
require the Company to redeem 90,308 shares of its common stock at a
redemption price ranging from $13.38 to $19.62 per share. If all
shareholders with such "put rights" exercise their options, the
Company would be required to repurchase the above shares of common
stock for $1,113,009. The redemption periods began April 1, 1996 and
continue through January 4, 2003. If the shareholder does not place a
redemption request during the redemption period, the "put right" will
expire on the stated expiration date. "Put rights" for all but 20,000
shares terminate in the event of the Company successfully completing
a public offering at a price of at least $20.00 per share. During
1996, the Company redeemed 6,243 shares of redeemable common stock
for $90,024.
The shares of common stock subject to the "put rights" are on the
balance sheet as redeemable common stock. Such shares have been
recorded at their fair value as of the dates of acquisition,
inclusive of accretion during the six months ended June 30, 1996. The
Company records accretion over the life of the "put rights" as the
redemption prices increase. Such accretion for the six months ended
June 30, 1996 was $68,605. Accretion in prior years was
insignificant.
Private placement of redeemable common stock and warrants
In May 1996, the Company completed a private placement offering ("the
offering") of 100,000 shares of the Company's common stock which
include warrants to purchase 100,000 additional shares of the
Company's common stock at an exercise price of $7.50 per share. Total
proceeds from the offering (net of offering costs of $26,245) were
$973,795. The net proceeds allocated to common stock aggregated
$748,868. The stock warrants were recorded at an estimated fair value
of $224,927 as additional paid-in capital and are entitled to certain
"piggyback" registration rights. The stock warrants expire on
December 14, 2001 and no stock warrants have been exercised to date.
In connection with the private placement, the shareholder received
certain "put rights" which are exercisable after May 2001 but no
later than May 2003 if the Company has not completed a public
offering of its common stock by May 2001. The per share price
applicable to the "put rights" is 20 times the Company's average
adjusted net income per share for the two most recent fiscal years
preceding the exercise of the rights.
Preferred stock
Preferred stock may be issued by the Board of Directors with
preferences to be determined at the time of issuance. Through June
30, 1996, none of the 30,000,000 authorized shares of the Company's
preferred stock has been issued or is outstanding.
Shareholder note receivable
In 1995, the Company issued to a shareholder 4,000 shares of common
stock at $10 per share in exchange for a note from the shareholder.
The note bears interest at prime plus 1/2% (9.25% at December 31,
1995), collateralized by the common stock and is due May 31, 1998.
This note was repaid on September 26, 1996.
F-19
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. Redeemable Common Stock and Nonredeemable Shareholders' Equity (Continued)
Stock warrants issued in conjunction with debt issuance
As discussed in Note 5, in May 1996 the Company issued warrants to
purchase 4,333 shares of the Company's common stock at $7.50 per
share to a lender. The stock warrants were valued at $8,778 and have
been recorded as debt issuance costs and additional paid-in-capital.
The stock warrants expire on May 31, 2000 and carry certain
"piggyback" registration rights, however, no such stock warrants have
been exercised to date.
In addition, in May 1996, the Company issued to certain officers,
directors and shareholders of the Company warrants to purchase
115,000 shares of the Company's common stock at $7.50 per share in
consideration for guaranteeing the Company's line-of-credit (see Note
5). The estimated fair value of the stock warrants was $232,978 and
will be amortized over the six-month term of the line of credit. As
of June 30, 1996, $80,586 in amortization expense has been recorded.
All stock warrants expire in May 2001 and no such stock warrants have
been exercised to date.
10. Stock Incentive Plan
The Board of Directors adopted a Stock Incentive Plan ("the Plan") in
1993. The Plan was amended in 1994 and 1996, and provides for
issuance of up to 412,500 shares of common stock in connection with
various stock grants, awards and sales granted under such plan. The
Plan authorizes the grant of incentive stock options, non-statutory
stock options, stock appreciation rights or bonus rights; award of
stock bonuses; and/or sale of restricted stock. The exercise price
for incentive stock options may not be less than the fair market
value of the underlying shares on the date of grant. The Plan is
administered by the Company's Board of Directors. The Board has the
authority to determine the persons to whom awards will be made, the
amounts and other terms and conditions of the awards. Shares issued
under the Plan are generally subject to a five-year vesting schedule
from the date of grant.
In addition to the stock options granted, the Plan had issued 83,362
shares for $274,615 through stock bonuses and restricted stock sales
through June 30, 1996.
F-20
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
10. Stock Incentive Plan (Continued)
<TABLE>
<CAPTION>
The following summary presents the options granted and outstanding as
of June 30, 1996 (unaudited):
Exercise
Number of price
shares range
--------------- ----------------
<S> <C> <C>
Outstanding, January 1, 1994 - $ -
Granted 110,000 .80 - 6.00
Exercised - -
Canceled - -
---------------
Outstanding, December 31, 1994 110,000 .80 - 6.00
Granted 208,750 .02 - 13.60
Exercised - -
Canceled (36,000) 6.00 - 10.00
---------------
Outstanding, December 31, 1995 282,750 .02 - 13.60
Granted 128,750 10.00 - 13.60
Exercised (2,000) .80
Canceled (70,750) .80 - 13.60
---------------
Outstanding, June 30, 1996 (unaudited) 338,750 .02 - 13.60
===============
</TABLE>
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", which allows companies to choose whether
to account for stock-based compensation under the current intrinsic
value method as prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees," or under the fair value method permitted
by the new pronouncement, effective for years beginning after
December 15, 1995. The new pronouncement will also require additional
disclosures regarding the pro forma effect of fair value accounting
for stock options on net income and net income per share. The Company
plans to continue to follow the provisions of APB Opinion No. 25. As
a result, management does not believe the implementation of this
pronouncement in 1996 will have a material impact on future earnings.
11. Transactions With Affiliates
Major customers
The Company currently derives substantially all of its revenue from
the PC's, with which it has support services agreements. As described
in Note 1, the Company and the PC's are related through common
ownership and a common member on both the Company's and the PC's
Boards of Directors.
F-21
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
11. Transactions With Affiliates (Continued)
Support service agreements
The Company provides management support services to the PC's under
support services agreements with forty-year terms. The Company is
currently earning revenues under these agreements based on specified
percentages of net dental practice patient revenues as defined in the
agreements. Such percentages are negotiated with the PC's and have
been developed and revised as necessary based on the Company's
services and operating needs. Under the support services agreements
for 1995, support services revenue is based upon 61% of net PC
revenue. However, effective January 1, 1996 the support services
agreements were amended such that support services revenue is based
upon the following percentage of net PC revenue:
1996 50%
1997 51%
1998 52%
1999 53%
2000 54%
2001, and thereafter 55%
Office lease
The Company leases office space for $4,126 per month from Gentle
Dental of Washington, PC (see Note 1) on a month-to-month basis.
Lease expense aggregated approximately $49,512, for each of the
years ended December 31, 1994 and 1995, and $24,756 for the six
months ended June 30, 1996.
Receivables from affiliates
The Company transacts various other business with the PC's,
including short-term operating advances and miscellaneous asset
purchases.
12. Commitments
Effective January 1, 1995, the Company assumed operating leases for
dental service locations. These leases range in term from 5 to 10
years with options to renew several of the leases. The Company has
entered into operating lease agreements for office space and
parking. Rent expense for the years ended December 31, 1994 and 1995
was $10,820 and $837,487, respectively, and for the six months ended
June 30, 1995 and 1996 was $523,326 and $564,045, respectively.
Management expects to renew or replace leases that expire. Following
is a summary of scheduled future minimum lease payments, including
assumed leases:
F-22
<PAGE>
Gentle Dental Service Corporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
12. Commitments (Continued)
Year ending
December 31,
1996 $ 964,148
1997 854,776
1998 867,094
1999 783,382
2000 633,418
Thereafter 851,263
---------------
$ 4,954,081
===============
13. Subsequent Events
In September 1996, the Board of Directors authorized, subject to
shareholder approval, a 1-for-2 reverse stock split of the Company's
common stock. All share and per share amounts in the accompanying
financial statements have been adjusted to retroactively reflect this
reverse stock split.
Additionally, in September 1996, the Board of Directors eliminated
Class B common stock, reclassified Class A voting common stock to
common stock and authorized an additional 42,500,000 shares of common
stock.
Additionally, in September 1996, the Board of Directors approved an
increase to the number of shares available under the Company's stock
incentive plan to 1,000,000 shares.
Additionally, in September 1996, the Board of Directors approved the
change of the Company's name from Mutual Health Systems, Inc. to
Gentle Dental Service Corporation.
Each of the foregoing actions is to be approved at a special meeting
of the Company's shareholders to be held in October 1996.
F-23
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Mutual Health Systems, Inc. (to be changed to
Gentle Dental Service Corporation):
In our opinion, the accompanying balance sheet and the related statements
of operations and retained earnings and of cash flows present fairly, in
all material respects, the financial position of Scott Campbell, DDS, P.S.
at December 31, 1994 and September 29, 1995 and the results of its
operations and its cash flows for the year ended December 31, 1994 and the
nine months ended September 29, 1995 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with generally accepted auditing standards which require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
As more fully described in Note 10, substantially all of the Company's
assets and operating business were sold to Gentle Dental Service
Corporation, effective September 29, 1995.
PRICE WATERHOUSE LLP
Portland, Oregon
September 17, 1996
F-24
<PAGE>
<TABLE>
<CAPTION>
Scott Campbell DDS, P.S.
Balance Sheet
- --------------------------------------------------------------------------------------------------------------------
December 31, September 29,
1994 1995
--------------- ----------------
<S> <C> <C>
Assets
Current assets:
Cash $ 300 $ 1,255
Patient accounts receivable, net (Note 2) 73,103 64,717
Income taxes receivable 5,067 10,462
--------------- ----------------
Total current assets 78,470 76,434
Furniture and equipment, net (Note 3) 11,085 5,647
--------------- ----------------
Total assets $ 89,555 $ 82,081
=============== ================
Liabilities and Shareholder's Equity Current liabilities:
Accounts payable 13,262 25,249
Accrued liabilities 11,133 8,131
Deferred income taxes 7,913 5,920
Current portion of notes payable (Note 5) 10,944 11,503
--------------- ----------------
Total current liabilities 43,252 50,803
--------------- ----------------
Notes payable, less current portion (Note 5) 14,039 5,865
--------------- ----------------
Commitments and contingent liabilities (Note 9)
Shareholder's equity (Note 6):
Common stock 500 500
Retained earnings 31,764 24,913
--------------- ----------------
32,264 25,413
--------------- ----------------
Total liabilities and shareholder's equity $ 89,555 $ 82,081
=============== ================
The accompanying notes are an integral part of this statement.
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
Scott Campbell DDS, P.S.
Statement of Operations and Retained Earnings
- ---------------------------------------------------------------------------------------------------------------------
Nine months
Year ended ended
December 31, September 29,
1994 1995
--------------- ----------------
<S> <C> <C>
Gross revenues $ 688,859 $ 554,365
Less contractual provisions (44,060) (51,851)
--------------- ----------------
Net revenues 644,799 502,514
--------------- ----------------
Clinic expenses 665,600 484,512
General and administrative support expenses 19,724 22,520
--------------- ----------------
685,324 507,032
--------------- ----------------
Operating income (loss) (40,525) (4,518)
Other expense:
Officer's life insurance (1,548) (1,161)
Interest expense, net (3,621) (2,377)
--------------- ----------------
Loss before income taxes (45,694) (8,056)
--------------- ----------------
Benefit from (provision for) income taxes:
Current (400) (788)
Deferred 7,254 1,993
--------------- ----------------
6,854 1,205
--------------- ----------------
Net loss (38,840) (6,851)
Retained earnings, beginning of period 70,604 31,764
--------------- ----------------
Retained earnings, end of period $ 31,764 $ 24,913
=============== ================
The accompanying notes are an integral part of this statement.
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
Scott Campbell DDS, P.S.
Statement of Cash Flows
- -----------------------------------------------------------------------------------------------------------------------
Period
Year ended ended
December 31, September 29,
1994 1995
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (38,840) $ (6,851)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 17,180 5,438
Deferred income tax benefit (7,254) (1,993)
Net change in current assets and liabilities:
Patient accounts receivable, net 54,410 8,386
Other receivables 401 -
Prepaid expenses 1,680 -
Income taxes (2,067) (5,395)
Accounts payable 7,558 11,987
Accrued liabilities (5,746) (3,002)
--------------- ----------------
Net cash provided by operating activities 27,322 8,570
--------------- ----------------
Cash flows from investing activities:
Additions to furniture and equipment (14,522) -
--------------- ----------------
Net cash used in investing activities (14,522) -
--------------- ----------------
Cash flows from financing activities:
Payment on note payable to stockholder (6,138) -
Payments on notes payable (11,558) (7,615)
Payment on capital lease obligation (3,784) -
--------------- ----------------
Net cash used in financing activities (21,480) (7,615)
--------------- ----------------
Net increase (decrease) in cash (8,680) 955
Cash at beginning of period 8,980 300
--------------- ----------------
Cash at end of period $ 300 $ 1,255
=============== ================
The accompanying notes are an integral part of this statement.
</TABLE>
F-27
<PAGE>
Scott Campbell DDS, P.S.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Operations and Significant Accounting Policies
Scott Campbell DDS, P.S. (the Company) is a Washington corporation
that operates a dental clinic in Redmond, Washington.
Significant Accounting Policies
Revenue recognition
Revenues are recognized as services are rendered to patients.
Revenues are reported at the estimated amounts which the patients,
third party payers and others are contractually obligated to pay for
services rendered. See Note 2.
Furniture and equipment
Furniture and equipment are stated at cost and include those
additions and improvements that add to productive capacity or extend
useful life. When property or equipment are sold or otherwise
retired, the cost and related accumulated depreciation are removed
from the respective accounts and the resulting profit or loss is
recorded in operations. The costs of repairs and maintenance are
charged to expense as incurred.
Depreciation is computed using the double-declining balance method
over useful lives of five to seven years for computers, software,
furniture and operating equipment. Leasehold improvements are
amortized on the straight-line basis over the shorter of the asset
life or lease term.
Income taxes
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences relating to differences between the
recorded amounts of assets and liabilities for financial reporting,
and tax purposes, in accordance with Statement of Financial
Accounting Standards No. 109.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Fair value of financial instruments
The recorded amounts of cash, accounts receivable, accounts payable,
and accrued liabilities as presented in the financial statements
approximate fair value because of the short-term maturity of these
instruments. The recorded amount of notes payable approximates fair
value as the actual interest rates are based on the prime rate set by
the lender.
F-28
<PAGE>
Scott Campbell DDS, P.S.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Clinic expenses
Clinic expenses primarily represent all direct operating expenses
such as lease payments, payroll, supplies, depreciation and
utilities.
2. Patient Accounts Receivable
<TABLE>
<CAPTION>
Patient accounts receivable consist of:
December 31, September 29,
1994 1995
--------------- ----------------
<S> <C> <C>
Patient accounts receivable $ 121,839 $ 106,700
Less allowances for doubtful accounts and
contractual allowance 48,736 41,983
--------------- ----------------
Patient accounts receivable, net $ 73,103 $ 64,717
=============== ================
</TABLE>
During the year ended December 31, 1994 and the nine months ended
September 29, 1995, bad debt expense aggregated $0 and $530 and is
included in clinic expenses in the accompanying statement of
operations. Contractual allowances represent an estimate of the
difference between the amount billed by the Company and the amount
which the patient, third party payor or other is contractually
obligated to pay the Company. To-date, such amounts have not been
significant.
3. Furniture and Equipment
<TABLE>
<CAPTION>
Furniture and equipment consist of:
December 31, September 29,
1994 1995
--------------- ----------------
<S> <C> <C>
Dental equipment $ 149,371 $ 149,371
Furniture and operating equipment 17,171 17,171
Leasehold improvements 25,722 25,722
--------------- ----------------
Total fixed assets 192,264 192,264
Accumulated depreciation and amortization (181,179) (186,617)
--------------- ----------------
$ 11,085 $ 5,647
=============== ================
</TABLE>
4. Capital Leases
The Company leased computer equipment under a capital lease
agreement. At December 31, 1994, the gross amount of equipment under
capital leases totaled $13,650, with accumulated amortization of
$13,650.
F-29
<PAGE>
Scott Campbell DDS, P.S.
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. Notes Payable
<TABLE>
<CAPTION>
Notes payable consist of:
December 31, September 29,
1994 1995
--------------- ----------------
<S> <C> <C>
Note payable to U.S. Bank, due in monthly instalments,
plus interest rate at prime plus 1.5%, secured by
accounts receivable $ 24,983 $ 17,368
Less current portion 10,944 11,503
--------------- ----------------
$ 14,039 $ 5,865
=============== ================
</TABLE>
6. Common Stock
The Company has authorized 50,000 shares of common stock with no par
value. Five hundred shares were issued to the sole shareholder and
outstanding as of September 29, 1995 and December 31, 1994.
7. Related Party Transactions
The Company leased office space from a company owned by the sole
shareholder of the Company. The rent payments made to this company
aggregated $28,000 in 1994 and $2,225 in 1995. In January 1995 the
building was sold by the related party lessor to a third party. The
Company continues to lease the office space (see Note 9).
8. Income Taxes
The Company's effective tax rate of 15% for the year ended December
31, 1994 and the nine months ended September 29, 1995 represents the
statutory federal tax rates in effect based upon the amount of the
Company's taxable losses.
F-30
<PAGE>
Scott Campbell DDS, P.S.
Notes to Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deferred tax liabilities (assets) are comprised of the following
components:
December 31, September 29,
1994 1995
--------------- ----------------
<S> <C> <C>
Patient accounts receivable, net $ 11,573 $ 9,708
Accounts payable and accrued liabilities (3,660) (3,788)
--------------- ----------------
$ 7,913 $ 5,920
=============== ================
</TABLE>
9. Commitments and Contingent Liabilities
The Company leases its operating facilities and certain equipment
under agreements which require minimum annual lease payments as
follows:
1995 $ 28,800
1996 28,800
1997 28,800
---------------
$ 86,400
Rent expense totaled $28,000 and $21,600 for the year ended December
31, 1994 and nine months ended September 29, 1995, respectively.
10. Subsequent Event
Effective September 29, 1995, substantially all of the Company's
assets and operating business were sold to Gentle Dental Service
Corporation, a Vancouver, Washington corporation. The purchase price
included cash of $341,400 and shares of Gentle Dental Service
Corporation common stock valued at $247,064.
The accompanying financial statements do not reflect the effects of
the sale.
F-31
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Mutual Health Systems, Inc. (to be changed to
Gentle Dental Service Corporation):
In our opinion, the accompanying balance sheet and the related statements
of operations and owner' deficit and of cash flows present fairly, in all
material respects, the financial position of Peter A. Vermeulen, D.D.S.,
P.S. (dba Pinehurst Dental Clinic) at December 31, 1994 and June 30, 1995,
and the results of its operations and its cash flows for the year ended
December 31, 1994 and the six months ended June 30, 1995, in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
As more fully described in Note 8, substantially all of the Dental Clinic's
assets and operating business were sold to Gentle Dental Service
Corporation, effective July 14, 1995.
PRICE WATERHOUSE LLP
Portland, Oregon
September 17, 1996
F-32
<PAGE>
<TABLE>
<CAPTION>
Peter A. Vermeulen, D.D.S., P.S.
(dba Pinehurst Dental Clinic)
Balance Sheet
- --------------------------------------------------------------------------------------------------------------------
December 31, June 30,
1994 1995
--------------- ----------------
<S> <C> <C>
Assets
Current assets:
Cash $ 1,023 $ 4,688
Patient accounts receivable, net (Note 2) 95,793 77,002
Other receivables 790 590
--------------- ----------------
Total current assets 97,606 82,280
Furniture and equipment, net (Note 3) 54,146 44,046
Other assets 2,428 -
--------------- ----------------
Total assets $ 154,180 $ 126,326
=============== ================
Liabilities and Owner's Deficit Current liabilities:
Accounts payable $ 39,657 $ 37,828
Accrued liabilities 35,670 28,145
Current portion of notes payable (Note 5) 11,301 -
Current portion of obligations under capital lease (Note 4) 4,964 5,933
Line of credit (Note 5) 59,774 54,097
--------------- ----------------
Total current liabilities 151,366 126,003
--------------- ----------------
Capital lease obligations, less current portion (Note 4) 11,132 7,376
Notes payable, less current portion (Note 5) 380,000 -
--------------- ----------------
Total long-term liabilities 391,132 7,376
--------------- ----------------
Commitments and contingent liabilities (Note 7)
Owner's deficit (Note 8) (388,318) (7,053)
--------------- ----------------
Total liabilities and owner's deficit $ 154,180 $ 126,326
=============== ================
The accompanying notes are an integral part of this statement.
</TABLE>
F-33
<PAGE>
<TABLE>
<CAPTION>
Peter A. Vermeulen, D.D.S., P.S.
(dba Pinehurst Dental Clinic)
Statement of Operations and Owner's Deficit
- ---------------------------------------------------------------------------------------------------------------------
Six months
Year ended ended
December 31, June 30,
1994 1995
--------------- ----------------
<S> <C> <C>
Net revenues $ 726,907 $ 365,425
--------------- ----------------
Clinic expenses 679,446 328,835
General and administrative support expenses 17,404 14,712
--------------- ----------------
696,850 343,547
--------------- ----------------
Operating income (loss) 30,057 21,878
Other income (expense):
Interest expense (51,264) (23,674)
Interest income 50 45
--------------- ----------------
Net loss (21,157) (1,751)
Owner's deficit, beginning of period (271,300) (388,318)
Cash distribution to shareholder (95,861)
Loan assumed by shareholder (Note 5 and 6) 380,000
Other liabilities assumed by shareholder (Note 6) 3,016
--------------- ----------------
Owner's deficit, end of period $ (388,318) $ (7,053)
=============== ================
The accompanying notes are an integral part of this statement.
</TABLE>
F-34
<PAGE>
<TABLE>
<CAPTION>
Peter A. Vermeulen, D.D.S., P.S.
(dba Pinehurst Dental Clinic)
Statement of Cash Flows
- --------------------------------------------------------------------------------------------------------------------
Six months
Year ended ended
December 31, June 30,
1994 1995
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (21,157) $ (1,751)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 55,484 14,922
Net change in current assets and liabilities:
Patient accounts receivable, net 36,167 18,791
Other receivables (200) 200
Accounts payable 10,931 (1,829)
Accrued liabilities, net of liabilities assumed by
shareholder in 1995 5,983 (4,509)
--------------- -----------------
Net cash provided (used in) by operating activities 87,208 25,824
--------------- ----------------
Cash flows from investing activities:
Additions to furniture and equipment - (2,394)
--------------- ----------------
Net cash used in investing activities - (2,394)
--------------- ----------------
Cash flows from financing activities:
Payments on capital lease obligation (7,460) (2,787)
Proceeds from borrowings 37,627 -
Payments on notes (20,491) (11,301)
Payment on line of credit (5,677)
Cash distributions to shareholder (95,861) -
--------------- ----------------
Net cash used in financing activities (86,185) (19,765)
--------------- ----------------
Net increase in cash 1,023 3,665
Cash at beginning of period - 1,023
--------------- ----------------
Cash at end of period $ 1,023 $ 4,688
=============== ================
The accompanying notes are an integral part of this statement.
</TABLE>
F-35
<PAGE>
Peter A. Vermeulen, D.D.S., P.S.
(dba Pinehurst Dental Clinic)
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Operations and Significant Accounting Policies
Peter A. Vermeulen, D.D.S., P.S. dba Pinehurst Dental Clinic (the
Clinic) operates a dentist practice providing dental services. Prior
to May 16, 1995, the Clinic was a sole proprietorship. On May 16,
1995 the Clinic became a Washington corporation and elected to become
an S corporation.
Significant Accounting Policies
Fair value of financial instruments
The recorded amounts of cash, accounts receivable, accounts payable,
notes payable, and accrued liabilities as presented in the financial
statements approximate fair value because of the short-term maturity
of these instruments. The recorded amount of long-term debt
approximates fair value as the actual interest rates approximate
current competitive rates.
Revenue recognition
Revenues are recognized as services are rendered to patients.
Revenues are reported at the estimated amounts which the patients,
third party payors and others are contractually obligated to pay for
services rendered.
Furniture and equipment
Furniture and equipment are stated at cost and include those
additions and improvements that add to productive capacity or extend
useful life. When property or equipment are sold or otherwise
retired, the cost and related accumulated depreciation are removed
from the respective accounts and the resulting profit or loss is
recorded in operations. The costs of repairs and maintenance are
charged to expense as incurred.
Depreciation is computed using the double-declining balance method
over useful lives of five to seven years for computers, software,
furniture and operating equipment. Leasehold improvements are
amortized on the straight-line basis over the shorter of the asset
life or lease term.
Income taxes
As a sole proprietorship and as an S corporation, the Clinic's
taxable income or loss is attributed directly to its owner for
inclusion in his separate income tax returns. Accordingly, the
accompanying statements of operations do not include a provision or
benefit for income taxes.
Statement of Cash Flows
During the years ended December 31,1994 and 1995, the Clinic made
cash interest payments of approximately $54,570 and $25,236,
respectively. As described in Note 6, when the Clinic changed from a
sole proprietorship to an S Corporation, the Clinic's owner
personally assumed a note for $380,000. Further, the sole owner
assumed accrued liabilities aggregating $3,016. These noncash items
have been excluded from the accompanying statement of operations and
owner's deficit.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles
F-36
<PAGE>
Peter A. Vermeulen, D.D.S., P.S.
(dba Pinehurst Dental Clinic)
Notes to Financial Statements
- --------------------------------------------------------------------------------
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Clinic expenses
Clinic expenses represent all direct operating expenses such as lease
payments, payroll, supplies, depreciation and utilities.
2. Patient Accounts Receivable
<TABLE>
<CAPTION>
Patient accounts receivable consist of:
December 31, June 30,
1994 1995
--------------- ----------------
<S> <C> <C>
Gross patient accounts receivable $ 120,075 $ 96,252
Less allowances for doubtful accounts (24,282) (19,250)
--------------- ----------------
Patient accounts receivable, net $ 95,793 $ 77,002
=============== ================
</TABLE>
During the year ended December 31, 1994 and the six months ended June
30, 1995, bad debt expense aggregated $41,215 and $17,862 ,
respectively, and is included in clinic expenses. There are no
contractual allowances as all services are billed at amounts which do
not vary significantly from actual cash receipts.
3. Furniture and Equipment
<TABLE>
<CAPTION>
Furniture and equipment consist of:
December 31, June 30,
1994 1995
--------------- ----------------
<S> <C> <C>
Dental equipment $ 149,475 $ 150,927
Furniture and operating equipment 91,024 91,024
Leasehold improvements 6,361 6,361
--------------- ----------------
246,860 248,312
Accumulated depreciation and amortization (192,714) (204,266)
--------------- ----------------
Furniture and equipment, net $ 54,146 $ 44,046
=============== ================
</TABLE>
4. Capital Lease Obligations
The Clinic leases computer equipment under a capital lease agreement.
At December 31, 1994 and June 30, 1995, the cost of equipment under
capital leases totaled $24,865 and accumulated amortization
aggregated $11,183 and $16,156, respectively.
F-37
<PAGE>
Peter A. Vermeulen, D.D.S., P.S.
(dba Pinehurst Dental Clinic)
Notes to Financial Statements
- --------------------------------------------------------------------------------
4. Capital Lease Obligations (Continued)
<TABLE>
<CAPTION>
Future minimum lease payments for equipment under these leases at
December 31, 1994 are summarized as follows:
Year ending
December 31,
------------
<S> <C>
1995 $ 7,460
1996 7,460
1997 5,596
Thereafter -
---------------
20,516
Less amount representing interest 4,420
Present value of future minimum lease payments 16,096
Less current portion of obligations under capital lease 4,964
---------------
Capital lease obligation - long-term $ 11,132
===============
</TABLE>
5. Notes Payable and Line of Credit
The Clinic has a $60,000 line of credit with SeaFirst Bank.
Outstanding borrowings under the line aggregated $59,774 and $54,097
at December 31, 1994 and June 30, 1995, respectively. Borrowings bear
interest at prime plus 2.25% (10.75% and 11.25% at December 31, 1994
and June 30, 1995). This line of credit does not have any debt
covenants.
<TABLE>
<CAPTION>
Notes payable consists of:
December 31, June 30,
1994 1995
--------------- ----------------
<S> <C> <C>
Note payable to father of sole owner, with interest
at 12% (See Note 6) $ 380,000 $ -
Note to SeaFirst Bank, secured by accounts receivable,
payable in monthly instalments of $1,889 11,301 -
--------------- ----------------
391,301 -
Less current portion 11,301 -
--------------- ----------------
$ 380,000 $ -
=============== ================
</TABLE>
F-38
<PAGE>
Peter A. Vermeulen, D.D.S., P.S.
(dba Pinehurst Dental Clinic)
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. Related Party Transactions
On January 12, 1990 the father of the sole owner loaned the Clinic
$380,000 (See Note 5). The note did not have established maturity
dates, and interest at 12% was paid on a monthly basis. On May 16,
1995 when the Clinic changed from a sole proprietorship to an S
corporation, the Clinic's owner personally assumed all payment
responsibilities pursuant to this note. In addition, the sole owner
assumed accrued liabilities aggregating $3,016 on that date. Such
assumptions were recorded as decreases in owner's deficit.
7. Commitments and Contingent Liabilities
The Clinic leases its operating facilities and certain equipment
under agreements which require minimum annual lease payments at
December 31, 1994 as follows:
1995 $ 30,300
1996 2,525
---------------
$ 32,825
The Clinic leases operating space for its Seattle facility. Rent
expense related to this facility totaled $30,300 and $15,150 for the
year ended December 31, 1994 and the period ended June 30, 1995,
respectively.
8. Subsequent Event
Effective July 14, 1995 substantially all of the Clinic's assets and
operating business were sold to Gentle Dental Service Corporation, a
Vancouver, Washington corporation. The owner received cash of
$262,000 and shares of Gentle Dental Service Corporation common stock
valued at $335,621. As part of the purchase agreement, Gentle Dental
Service Corporation granted the owner "put rights" that may require
it to redeem the shares of its common stock after the rights have
been exercised.
The accompanying financial statements do not reflect the effects of
the sale of the practice.
F-39
<PAGE>
Gentle Dental Service Corporation
Pro Forma Combined Financial Information
(Unaudited)
- --------------------------------------------------------------------------------
Effective July 14, 1995, Gentle Dental Service Corporation ("GDSC")
acquired substantially all of the assets of the dental practice of Peter A.
Vermeulen, D.D.S., P.S. ("Vermeulen").
Effective September 29, 1995, GDSC acquired substantially all of the assets
of the dental practice of Scott Campbell, D.D.S., P.S. ("Campbell").
Effective October 12, 1995, GDSC acquired substantially all of the assets
of the dental practice of Kristan K. Overby, D.D.S., P.S. ("Overby").
In addition, GDSC acquired substantially all of the assets of four other
dental practices in 1995 and four dental practices in 1996, each of which
is individually insignificant to the GDSC Pro Forma Combined Statement of
Operations.
The following unaudited pro forma combined statement of operations combines
the GDSC historical statement of operations for the year ended December 31,
1995 with the Vermeulen historical statement of operations for the six
months ended June 30, 1995, the Campbell historical statement of operations
for the period ended September 29, 1995, the Overby historical statement of
operations for the period ended September 30, 1995, and the historical
statements of operations for the year ended December 31, 1995 of the
individually insignificant dental practices acquired in 1995 and 1996. The
pro forma combined statement of operations includes adjustments resulting
from the acquisitions. Such acquisition adjustments include:
1. the elimination of the net dental revenue generated by the
acquired dental clinics and attributable to the Professional
Corporations;
2. the addition of $2,202,131 in support services revenue;
3. the elimination of $1,247,410 of historical professional salaries
and wages attributed to the Professional Corporations by whom the
dentists were employed after the respective acquisitions;
4. the incremental amortization of intangible assets acquired of
$62,001; and
5. the increase in interest of $113,594 on borrowings incurred in
conjunction with the acquisitions.
An unaudited pro forma combined statement of operations for the six months
ended June 30, 1996 has not been presented as the dental practices acquired
in 1996 are insignificant, individually and in the aggregate, to the
historical results of operations.
The unaudited pro forma combined statement of operations is not necessarily
indicative of the operating results that would have been achieved had the
transactions been in effect as of the beginning of the period presented and
should not be construed as representative of future operations.
The historical financial statements of GDSC and the historical statements
of operations of Vermeulen and Campbell are included elsewhere in this
Prospectus and the unaudited pro forma combined statement of operations
presented herein should be read in conjunction with those financial
statements and related notes.
F-40
<PAGE>
<TABLE>
<CAPTION>
Gentle Dental Service Corporation
Pro Forma Combined Statement of Operations
Year ended December 31, 1995 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Gentle 1995 1996
Dental Individually Individually
Service Insignificant Insignificant
Corp. P. Vermeulen S. Campbell K. Overby Acquisitions Acquisitions Adjustments Combined
----------- ------------ ----------- ----------- ----------- ------------ ----------------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dental revenue, net $ - $ 365,425 $ 502,514 $ 339,162 $ 286,553 $ 2,116,397 $ (3,610,051)(1) $ -
Support services
revenue from
affiliates 9,781,077 2,202,131 (2) 11,983,208
Branch costs 4,700,695 342,297 489,764 304,724 314,396 2,043,762 (1,247,410)(3) 6,948,228
Operating expenses 4,207,739 1,250 19,086 34,330 10,833 86,545 62,001 (4) 4,421,784
----------- ---------- --------- --------- ---------- ----------- ------------
Operating income
(loss) 872,643 21,878 (6,336) 108 (38,676) (13,910) 613,196
Interest and other
expense, net 382,310 23,629 1,720 515 - 1,772 113,594(5) 523,540
----------- ---------- ---------- ---------- ------------- ---------- -----------
Income (loss)
before income
taxes 490,333 (1,751) (8,056) (407) (38,676) (15,682) 89,656
Provision (benefit)
for income taxes 233,826 - - - - - (191,071) 42,755
----------- ---------- ---------- ---------- ------------- ---------- -----------
Net income (loss) $ 256,507 $ (1,751) $ (8,056) $ (407) $ (38,676) $ (15,682) $ 46,901
=========== ========= ========== ========== ========== =========== ===========
Pro forma net
income per share $ .03
-----------
Pro forma weighted
average common
shares and
equivalents
1,420,365
===========
</TABLE>
F-41
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in
this Prospectus in connection with this offering and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer to sell, or solicitation of an offer to buy, any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information herein is correct as of any
time subsequent to the date hereof or that there has been no change in the
affairs of the Company since such date.
------------------
Table of Contents
-----------------
Page
----
Prospectus Summary...............................................3
Risk Factors.....................................................6
Use of Proceeds.................................................11
Dividend Policy.................................................11
Capitalization..................................................12
Dilution........................................................13
Selected Financial Data.........................................14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.................................................15
Business .......................................................21
Management......................................................31
Certain Transactions............................................36
Principal Shareholders..........................................38
Description of Capital Stock....................................39
Shares Eligible for Future Sale.................................42
Underwriting....................................................43
Legal Matters...................................................44
Experts.........................................................44
Additional Information..........................................45
Index to Financial Statements...................................46
--------------
Until , 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in
this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting
as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
<PAGE>
================================================================================
1,250,000 Shares
GENTLE DENTAL SERVICE
CORPORATION
Common Stock
--------------
PROSPECTUS
--------------
BLACK & COMPANY, INC.
, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Article VIII of the Registrant's Restated Articles of Incorporation,
as amended (the "Articles"), authorizes indemnification of directors of the
Registrant to the fullest extent permitted by the Washington Business
Corporation Act (the "Act"). In addition, Section 10 the Registrant's
Bylaws requires the Registrant to indemnify directors and former directors
of the Registrant to the fullest extent permitted by applicable law, and
permits the Registrant to indemnify officers, employees, and agents of the
Registrant. The effects of the Articles, Bylaws and the Act (the
"Indemnification Provisions") are summarized as follows:
(a) The Indemnification Provisions grant a right of
indemnification in respect of any action, suit or proceeding (other than an
action by or in the right of the Registrant) against expenses (including
attorney fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred, if the director or former director concerned (i)
acted in good faith and in a manner the director or former director
reasonably believed to be, in the case of conduct in the director's or
former director's official capacity, in the best interests of the
Registrant or, in all other cases, not opposed to the best interests of the
Registrant, (ii) was not adjudged liable on the basis of receipt of an
improper personal benefit and (iii) with respect to any criminal action or
proceeding, had no reasonable cause to believe the conduct was unlawful.
The termination of an action, suit or proceeding by judgment, order,
settlement, conviction or plea of nolo contendere does not, of itself,
create a presumption that the director or former director did not meet the
required standards of conduct.
(b) The Indemnification Provisions grant a right of
indemnification in respect of any action or suit by or in the right of the
Registrant against the expenses (including attorney fees) actually and
reasonably incurred if the director or former director concerned acted in
good faith and in a manner the director or former director reasonably
believed to be, in the case of conduct in the director's or former
director's official capacity, in the best interests of the Registrant, or
in all other cases, not opposed to the best interests of the Registrant;
except that no right of indemnification will be granted if the director or
former director is adjudged to be liable to the Registrant.
(c) Every director and officer who has been wholly successful on
the merits of a controversy described in (a) or (b) above is entitled to
indemnification for reasonable expenses as a matter of right.
(d) Because the limits of permissible indemnification under
Washington law are not clearly defined, the Indemnification Provisions may
provide indemnification broader than that described in (a) and (b).
(e) The Registrant shall advance to a director or former director
the expenses incurred in defending any action, suit or proceeding in
advance of its final disposition if the director or former director affirms
in good faith that he or she has met the standard of conduct to be entitled
to indemnification as described in (a) or (b) above and undertakes to repay
any amount advanced if it is determined that the director or former
director did not meet the required standard of conduct.
II-1
<PAGE>
(f) The Registrant may, by action of the Board of Directors from
time to time, provide indemnification and pay expenses in advance of the
final disposition of a proceeding to officers, employees, and agents of the
Registrant on the same terms and with the same scope as described above.
The Registrant may obtain insurance for the protection of its
directors and officers against any liability asserted against them in their
official capacities. The rights of indemnification described above are not
exclusive of any other rights of indemnification to which the persons
indemnified may be entitled under any bylaw, agreement, vote of
shareholders or directors or otherwise.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth an itemized statement of expenses of
the Registrant in connection with the sale of the Common Stock being
registered hereby. All of the expenses are estimated, except for the SEC
registration fee, the NASD filing fee and the Nasdaq SmallCap Market
listing fees.
SEC registration fee...................................... $ 3,050
NASD filing fee........................................... $ 1,506
Representative's nonaccountable expense allowance......... $ 37,500
Blue Sky fees and expenses
(including legal expenses) ............................. $ 20,000
Printing and engraving expenses........................... $ 100,000
Legal fees and expenses................................... $ 125,000
Auditors' fees and expenses............................... $ 140,000
Transfer Agent and Registrar fees......................... $ 10,000
Nasdaq listing fees....................................... $ 9,341
Miscellaneous expenses.................................... $ 53,603
-------------
Total................................................. $ 500,000
=============
Item 26. Recent Sales of Unregistered Securities
Within the last three years the Registrant has sold securities without
registration under the Securities Act in the transactions and in reliance
on the exemptions described below. The numbers of shares stated under each
item give retroactive effect to the one-for-two reverse stock split of the
Registrant's Common Stock that will be effected in October 1996.
1. Between January 1995 and January 1996 the Registrant issued an
aggregate total of 125,584 shares of its Common Stock to eight dentists in
connection with the acquisition of their dental practices. The sales of the
stock were exempt from registration under Section 4(2) of the Securities
Act because all of the purchasers, either alone or together with their
legal and other advisors, had the knowledge and experience in business and
financial matters to evaluate an investment in the Registrant, received
information about the Registrant and made appropriate investment
representations.
2. From March to May 1995, the Registrant sold an aggregate total of
174,327 shares of its Common Stock at $10.00 per share to 27 purchasers
through a private offering. The sales of the stock were exempt from
registration under Section 4(2) of the Securities Act and Rule 506 of
Regulation D thereunder because all purchasers were accredited investors
within the meaning of Rule 501.
II-2
<PAGE>
3. On May 31, 1995 the Registrant sold an aggregate total of 20,112
shares of Common Stock at $9.00 per share to dentists employed by
professional corporations to which the Registrant provides management
support services. The sales of the stock were exempt from registration
under Rule 701 under the Securities Act because the shares were offered
pursuant to a written compensation plan of the Registrant.
4. On May 31, 1996 the Registrant issued warrants to purchase an
aggregate total of 115,000 shares of Common Stock at an exercise price of
$7.50 per share to 14 officers, directors, and shareholders of the
Registrant who provided personal guarantees to the Registrant's principal
bank. The issuance of the warrants was exempt from registration under
Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder
because the officers, directors, and shareholders of the Registrant who
received warrants were accredited investors within the meaning of Rule 501.
5. On May 31, 1996 the Registrant issued a warrant to purchase 4,333
shares of Common Stock at an exercise price of $7.50 per share to the
Registrant's principal bank in connection with modifying the Registrant's
existing loan and security agreement with that bank. The issuance of the
warrant was exempt from registration under Section 4(2) of the Securities
Act and Rule 506 of Regulation D thereunder because the Registrant's
principal bank is an accredited investor within the meaning of Rule 501.
6. On May 31, 1996 the Registrant sold 2,000 shares of Common Stock to
a departing employee upon exercise of the vested portion of a stock option
granted to the employee under the Registrant's 1993 Stock Incentive Plan.
The option's exercise price per share was $0.80. The sale of the stock was
exempt from registration under Rule 701 of the Securities Act because the
sale was made to an employee of the Registrant pursuant to a written
compensation plan.
7. On June 21, 1996 the Registrant sold 100,000 shares of its Common
Stock and a warrant to purchase an additional 100,000 shares at $7.50 per
share to The ServiceMaster Company Limited Partnership. The total
consideration for the stock and warrant was $1,000,000. The sale of the
stock and the warrant was exempt from registration under Section 4(2) of
the Securities Act and Rule 506 of Regulation D thereunder because The
ServiceMaster Company Limited Partnership is an accredited investor within
the meaning of Rule 501.
II-3
<PAGE>
Item 27. Exhibits
A. Exhibits:
* 1.1 - Form of Underwriting Agreement.
3.1 - Form of Restated Articles of Incorporation.
3.2 - Bylaws, as amended.
4.1 - See Articles II and III of Exhibit 3.1 and Sections I,
IV, and V of Exhibit 3.2.
* 5.1 - Opinion of Stoel Rives LLP as to the validity of the
securities being registered.
10.1 - Form of Support Services Agreement dated as of January
1, 1996 between the Registrant and Tse, Saiget,
Watanabe & McClure, Inc., P.S.
10.2 - Form of Support Services Agreement dated as of January
1, 1996 between the Registrant and Gentle Dental of
Oregon, P.C.
10.3 - Asset Purchase Agreement dated as of December 31, 1994
between the Registrant and Tse, Saiget, Watanabe &
McClure, Inc., P.S.
10.4 - Asset Purchase Agreement dated as of December 31, 1994
between the Registrant and Gentle Dental of Oregon,
P.C.
10.5 - Asset Purchase Agreement dated as of January 2, 1995
between the Registrant and Tse, Saiget, Watanabe &
McClure, Inc., P.S.
10.6 - Asset Purchase Agreement dated as of January 2, 1995
between the Registrant and Gentle Dental of Oregon,
P.C.
10.7 - 1993 Stock Incentive Plan.
10.8 - Stock Acquisition Agreement dated as of June 21, 1996
between the Registrant and The ServiceMaster Company
Limited Partnership.
10.9 - Form of Warrant Subscription and Guarantor Agreement
dated as of May 31, 1996 between the Registrant and
various officers, directors, and shareholders of the
Registrant.
11.1 - Statement re computation of earnings per common share.
16.1 - Letter on Changes in Certifying Accountant.
* 23.1 - Consent of Stoel Rives LLP (included in Exhibit 5.1).
23.2 - Independent Auditors' Consent of Price Waterhouse LLP.
23.3 - Independent Auditors' Consent of Moss Adams LLP.
24.1 - Powers of Attorney (included on signature page herewith).
27.1 - Financial Data Schedule.
- ------------
* To be filed by amendment.
B. Schedules:
No supporting schedules have been included because they are not
required.
Item 28. Undertakings
The Registrant will provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations
and registered in such names as required by the Underwriters to permit
prompt delivery to each purchaser.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission (the "Commission") such indemnification
is against public policy as expressed in the Securities Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
For determining any liability under the Securities Act, the Registrant
agrees to treat the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this
Registration Statement as of the time the Commission declared it effective.
For determining any liability under the Securities Act, the Registrant
agrees to treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in
the registration statement and the offering of the securities at that time
as the initial bona fide offering of those securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Vancouver, State of Washington,
on the 4th day of October, 1996.
MUTUAL HEALTH SYSTEMS, INC.
By: DANY Y. TSE
-------------------------------------
Dany Y. Tse, DMD
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints DANY Y. TSE and L. THEODORE
VAN EERDEN, or either of them, his or her true and lawful attorneys-in-fact
and agents, each with full power of substitution and resubstitution, for
him or her and in his or her name, place and stead, in any and all
capacities, to sign any amendments (whether pre-effective or
post-effective) to this Registration Statement, and to file the same with
all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto each of said
attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that each of
said attorneys-in-fact and agents, or their substitute or substitutes, may
do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities indicated on October 4, 1996:
Signature Title
--------- -----
Principal Executive Officer:
DANY Y. TSE President, Chief Executive
- ---------------------------------- Officer, and Director
Dany Y. Tse, DMD
Principal Financial and
Accounting Officer:
L. THEODORE VAN EERDEN Chief Financial Officer and
- ---------------------------------- Corporate Secretary
L. Theodore Van Eerden
II-6
<PAGE>
JOHN W. CASTLES Director
- ----------------------------------
John W. Castles
Director
- ----------------------------------
Richard A. Armstrong
Director
- ----------------------------------
Kenneth D. Hooten
DANIEL P. HUNT Director
- ----------------------------------
Daniel P. Hunt
JERALD L. WILLBUR Director
- ----------------------------------
Jerald L. Willbur, Ed.D.
CRAIG W. WONG Director
- ----------------------------------
Craig W. Wong, DMD
II-7
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
* 1.1 - Form of Underwriting Agreement.
3.1 - Form of Restated Articles of Incorporation.
3.2 - Bylaws, as amended.
4.1 - See Articles II and III of Exhibit 3.1 and Sections I,
IV, and V of Exhibit 3.2.
* 5.1 - Opinion of Stoel Rives LLP as to the validity of the
securities being registered.
10.1 - Form of Support Services Agreement dated as of January
1, 1996 between the Registrant and Tse, Saiget,
Watanabe & McClure, Inc., P.S.
10.2 - Form of Support Services Agreement dated as of January
1, 1996 between the Registrant and Gentle Dental of
Oregon, P.C.
10.3 - Asset Purchase Agreement dated as of December 31, 1994
between the Registrant and Tse, Saiget, Watanabe &
McClure, Inc., P.S.
10.4 - Asset Purchase Agreement dated as of December 31, 1994
between the Registrant and Gentle Dental of Oregon,
P.C.
10.5 - Asset Purchase Agreement dated as of January 2, 1995
between the Registrant and Tse, Saiget, Watanabe &
McClure, Inc., P.S.
10.6 - Asset Purchase Agreement dated as of January 2, 1995
between the Registrant and Gentle Dental of Oregon,
P.C.
10.7 - 1993 Stock Incentive Plan.
10.8 - Stock Acquisition Agreement dated as of June 21, 1996
between the Registrant and The ServiceMaster Company
Limited Partnership.
10.9 - Form of Warrant Subscription and Guarantor Agreement
dated as of May 31, 1996 between the Registrant and
various officers, directors, and shareholders of the
Registrant.
11.1 - Statement re computation of earnings per common share.
16.1 - Letter on Changes in Certifying Accountant.
* 23.1 - Consent of Stoel Rives LLP (included in Exhibit 5.1).
23.2 - Independent Auditors' Consent of Price Waterhouse LLP.
23.3 - Independent Auditors' Consent of Moss Adams LLP.
24.1 - Powers of Attorney (included on signature page herewith).
27.1 - Financial Data Schedule.
- ------------
* To be filed by amendment.
RESTATED ARTICLES OF INCORPORATION
OF
MUTUAL HEALTH SYSTEMS, INC.
(changing its name to Gentle Dental Service Corporation)
Pursuant to RCW 23B.10.070, Mutual Health Systems, Inc. adopts the
following Restated Articles of Incorporation, which shall supersede its
heretofore existing Articles of Incorporation and all amendments thereto.
ARTICLE I
Name
----
The name of this Corporation is Gentle Dental Service Corporation.
ARTICLE II
Capital Stock
-------------
A. The Corporation is authorized to issue a total of Eighty Million
(80,000,000) shares, without par value, consisting of Fifty Million
(50,000,000) shares of Common Stock and Thirty Million (30,000,000) shares
of Preferred Stock.
B. Holders of Common Stock are entitled to one vote per share. On
dissolution of the Corporation, after any preferential amount with respect
to the Preferred Stock has been paid or set aside, the holders of Common
Stock and the holders of any series of Preferred Stock entitled to
participate in the distribution of assets are entitled to receive the net
assets of the Corporation.
C. The Board of Directors is authorized, subject to limitations
prescribed by the Washington Business Corporation Act, as amended from time
to time (the "Act"), and by the provisions of this Article, to provide for
the issuance of shares of Preferred Stock in series, to establish from time
to time the number of shares to be included in each series and to determine
the designations, relative rights, preferences and limitations of the
shares of each series. The authority of the Board of Directors with respect
to each series includes determination of the following:
(1) The number of shares in and the distinguishing designation of
that series;
(2) Whether shares of that series shall have full, special,
conditional, limited or no voting rights, except to the extent otherwise
provided by the Act;
<PAGE>
(3) Whether shares of that series shall be convertible and the
terms and conditions of the conversion, including provision for adjustment
of the conversion rate in circumstances determined by the Board of
Directors;
(4) Whether shares of that series shall be redeemable and the
terms and conditions of redemption, including the date or dates upon or
after which they shall be redeemable and the amount per share payable in
case of redemption, which amount may vary under different conditions or at
different redemption dates;
(5) The dividend rate, if any, on shares of that series, the
manner of calculating any dividends and the preferences of any dividends;
(6) The rights of shares of that series in the event of voluntary
or involuntary dissolution of the Corporation and the rights of priority of
that series relative to the Common Stock and any other series of Preferred
Stock on the distribution of assets on dissolution; and
(7) Any other rights, preferences and limitations of that series
that are permitted by law to vary.
D. When these Restated Articles of Incorporation become effective,
each of the shares of Class A Voting Common Stock issued and outstanding of
the Corporation immediately prior thereto shall be reclassified and changed
into and shall constitute one-half of a fully paid and nonassessable share
of Common Stock of the Corporation, without further action of any kind.
After such time, each holder of shares of Class A Voting Common Stock shall
present the certificate representing such shares to the Corporation and
receive promptly in exchange therefore a new certificate representing the
number of shares Common Stock into which such shares have been
reclassified. Until so surrendered, each certificate which prior to the
reclassification represented shares of Class A Voting Common Stock shall be
deemed, for all purposes, to evidence ownership of the number of shares of
Common Stock into which such shares shall have been reclassified. No
fractional shares of Common Stock shall be issued pursuant to this
reclassification; any fractional amount resulting from the reclassification
as described above shall be rounded up to the nearest full share.
ARTICLE III
No Preemptive Rights
--------------------
Except as may otherwise be provided by the Board of Directors, no
holder of any shares of this Corporation shall have any preemptive right to
purchase, subscribe for or otherwise acquire any securities of this
Corporation of any class or kind now or hereafter authorized.
2
<PAGE>
ARTICLE IV
Number and Tenure of Directors
------------------------------
This Corporation shall have at least three directors, the actual
number to be fixed in accordance with the Bylaws. The directors shall be
divided into three classes, as nearly equal in number as possible, with the
term of office of the first class ("Class I") to expire at the 1997 annual
meeting of shareholders, the term of office of the second class ("Class
II") to expire at the 1998 annual meeting of shareholders and the term of
office of the third class ("Class III") to expire at the 1999 annual
meeting of shareholders. At each annual meeting of shareholders following
such initial classification and election, directors elected to succeed
those directors whose terms expire shall be elected to serve three-year
terms and until their successors are elected and qualified, so that the
term of one class of directors will expire each year. If the number of
directors is changed pursuant to the Bylaws, any newly created
directorships, or any decrease in directorships, shall be so apportioned
among the classes so as to make all classes as nearly equal as possible.
ARTICLE V
Cumulative Voting
-----------------
There shall be no cumulative voting of shares in this Corporation.
ARTICLE VI
Shareholder Voting on Significant Corporate Action
--------------------------------------------------
Any corporate action for which the Washington Business Corporation
Act, as then in effect, would otherwise require approval by either a
two-thirds vote of the shareholders of the Corporation or by a two-thirds
vote of one or more voting groups shall be deemed approved by the
shareholders or the voting group(s) if it is approved by the affirmative
vote of the holders of a majority of shares entitled to vote or, if
approval by voting groups is required, by the holders of a majority of
shares within each voting group entitled to vote separately.
Notwithstanding this Article, effect shall be given to any other provision
of these Articles that specifically requires a greater vote for approval of
any particular corporate action.
3
<PAGE>
ARTICLE VII
Limitation on Director Liability
--------------------------------
To the fullest extent permitted by Washington law and subject to the
Bylaws of this Corporation, a director of this Corporation shall not be
liable to the Corporation or its shareholders for monetary damages for his
or her conduct as a director. Any amendment to or repeal of this Article
shall not adversely affect any right of a director of this Corporation
hereunder with respect to any acts or omissions of the director occurring
prior to amendment or repeal.
ARTICLE VIII
Indemnification of Directors
----------------------------
To the fullest extent permitted by its Bylaws and Washington law, this
Corporation is authorized to indemnify any of its directors. The Board of
Directors shall be entitled to determine the terms of indemnification,
including advance of expenses, and to give effect thereto through the
adoption of Bylaws, approval of agreements, or by any other manner approved
by the Board of Directors. Any amendment to or repeal of this Article shall
not adversely affect any right of an individual with respect to any right
to indemnification arising prior to such amendment or repeal.
MUTUAL HEALTH SYSTEMS, INC.
By
-------------------------------------
Dany Y. Tse
President and Chief Executive Officer
4
-------------------------------------------------------
BYLAWS
OF
MUTUAL HEALTH SYSTEMS, INC.
-------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
SECTION I SHAREHOLDERS AND SHAREHOLDERS'
MEETINGS........................................ 1
1.1 Annual Meeting.................................. 1
1.2 Special Meetings................................ 1
1.3 Notice of Meetings.............................. 1
1.4 Waiver of Notice................................ 2
1.5 Shareholders' Action Without a
Meeting......................................... 2
1.6 Telephone Meetings.............................. 2
1.7 List of Shareholders............................ 2
1.8 Quorum and Voting............................... 2
1.9 Adjourned Meetings.............................. 3
1.10 Proxies......................................... 3
SECTION II BOARD OF DIRECTORS.............................. 3
2.1 Number and Qualification........................ 3
2.2 Election--Term of Office........................ 3
2.3 Vacancies....................................... 4
2.4 Quorum and Voting............................... 4
2.5 Regular Meetings................................ 4
2.6 Special Meetings................................ 4
2.7 Notice of Meetings.............................. 4
2.8 Directors' Action Without A Meeting............. 5
2.9 Committees of the Board of Directors............ 5
2.10 Telephone Meetings.............................. 6
2.11 Compensation of Directors....................... 6
SECTION III OFFICERS ....................................... 6
3.1 Officers Enumerated--Election................... 6
3.2 Qualifications.................................. 6
3.3 Duties of the Officers.......................... 6
3.4 Vacancies....................................... 7
3.5 Removal......................................... 7
3.6 Compensation.................................... 7
SECTION IV SHARES AND CERTIFICATES OF SHARES............... 8
4.1 Share Certificates.............................. 8
4.2 Consideration for Shares........................ 8
4.3 Transfers....................................... 9
4.4 Loss or Destruction of Certificates............. 9
4.5 Fixing Record Date.............................. 9
<PAGE>
SECTION V BOOKS, RECORDS AND REPORTS...................... 10
5.1 Records of Corporate Meetings,
Accounting Records and
Share Registers................................. 10
5.2 Copies of Corporate Records..................... 10
5.3 Examination of Records.......................... 10
5.4 Financial Statements............................ 11
SECTION VI FISCAL YEAR..................................... 11
SECTION VII CORPORATE SEAL.................................. 11
SECTION VIII MISCELLANEOUS PROCEDURAL PROVISIONS............. 11
SECTION IX AMENDMENT OF BYLAWS............................. 11
SECTION X INDEMNIFICATION OF DIRECTORS
AND OTHERS...................................... 12
10.1 Grant of Indemnification........................ 12
10.2 Limitations on Indemnification.................. 12
10.3 Advancement of Expenses......................... 12
10.4 Right to Enforce Indemnification................ 12
10.5 Nonexclusivity.................................. 13
10.6 Indemnification of Officers,
Employees and Agents............................ 13
10.7 Insurance and Other Security.................... 13
10.8 Amendment or Modification....................... 14
10.9 Effect of Section............................... 14
SECTION XI REPRESENTATION OF SHARES OF
OTHER CORPORATIONS.............................. 14
ii
<PAGE>
Adopted December 14, 1992
BYLAWS
OF
MUTUAL HEALTH SYSTEMS, INC.
SECTION I
SHAREHOLDERS AND SHAREHOLDERS' MEETINGS
---------------------------------------
1.1 Annual Meeting. The annual meeting of the shareholders of
this corporation (the "Corporation") for the election of directors and for
the transaction of such other business as may properly come before the
meeting shall be held each year at the principal office of the Corporation,
or at some other place either within or without the State of Washington as
designated by the Board of Directors, on the third Tuesday in March, or on
such other day and time as may be set by the Board of Directors. If the
specified day is a legal holiday, then the meeting will take place on the
next business day at the same time or on such other day and time as may be
set by the Board of Directors. The failure to hold the annual meeting as
specified herein shall not affect the validity of any corporate action.
1.2 Special Meetings. Special meetings of the shareholders for
any purpose or purposes may be called at any time by the Board of
Directors, the Chairman of the Board, the President, a majority of the
Board of Directors, or any shareholder or shareholders holding in the
aggregate one-fourth of the voting power of all shareholders. The meetings
shall be held at such time and place as the Board of Directors may
prescribe, or, if not held upon the request of the Board of Directors, at
such time and place as may be established by the President or by the
Secretary in the President's absence. Only business within the purpose or
purposes described in the meeting notice may be conducted.
1.3 Notice of Meetings. Written notice of the place, date and
time of the annual shareholders' meeting and written notice of the place,
date, time and purpose or purposes of special shareholders' meetings shall
be delivered not less than 10 (or, if required by Washington law, 20) or
more than 60 days before the date of the meeting, either personally, by
facsimile, or by mail, or in any other manner approved by law, by or at the
direction of the President or the Secretary, to each shareholder of record
entitled to notice of such meeting. Mailed notices shall be deemed to be
delivered when deposited in the mail, first-class postage prepaid,
correctly addressed to the shareholder's address shown in the Corporation's
current record of shareholders.
<PAGE>
1.4 Waiver of Notice. Except where expressly prohibited by law or
the Articles of Incorporation, notice of the place, date, time and purpose
or purposes of any shareholders' meeting may be waived in a signed writing
delivered to the Corporation by any shareholder at any time, either before
or after the meeting. Attendance at the meeting in person or by proxy
waives objection to lack of notice or defective notice of the meeting
unless the shareholder at the beginning of the meeting objects to holding
the meeting or transacting business at the meeting. A shareholder waives
objection to consideration of a particular matter at a meeting that is not
within the purpose or purposes described in the meeting notice, unless the
shareholder objects to considering the matter when it is presented.
1.5 Shareholders' Action Without a Meeting. The shareholders may
take any action without a meeting that they could properly take at a
meeting, if one or more written consents setting forth the action so taken
are signed by all of the shareholders entitled to vote with respect to the
subject matter and are delivered to the Corporation for inclusion in the
minutes or filing with the corporate records. If required by Washington
law, all nonvoting shareholders must be given written notice of the
proposed action at least ten days before the action is taken, unless such
notice is waived in a manner consistent with these Bylaws. Actions taken
under this section are effective when all consents have been delivered to
the Corporation, unless the consent specifies a later effective date. A
shareholder may withdraw consent only by delivering a written notice of
withdrawal to the Corporation prior to the time that all consents have been
delivered to the Corporation.
1.6 Telephone Meetings. Shareholders may participate in a meeting
of shareholders by means of a conference telephone or any similar
communications equipment that enables all persons participating in the
meeting to hear each other during the meeting. Participation by such means
shall constitute presence in person at a meeting.
1.7 List of Shareholders. At least ten days before any
shareholders' meeting, the Secretary of the Corporation or the agent having
charge of the stock transfer books of the Corporation shall have compiled a
complete list of the shareholders entitled to notice of a shareholders'
meeting, arranged in alphabetical order and by voting group, with the
address of each shareholder and the number, class, and series, if any, of
shares owned by each.
1.8 Quorum and Voting. The presence in person or by proxy of the
holders of a majority of the votes entitled to be cast on a matter at a
meeting shall constitute a quorum of shareholders for that matter. If a
quorum exists, action on a
2
<PAGE>
matter shall be approved by a voting group if the votes cast within a
voting group favoring the action exceed the votes cast within the voting
group opposing the action, unless a greater number of affirmative votes is
required by the Articles of Incorporation or by law. If the Articles of
Incorporation or Washington law provide for voting by two or more voting
groups on a matter, action on a matter is taken only when voted upon by
each of those voting groups counted separately. Action may be taken by one
voting group on a matter even though no action is taken by another voting
group.
1.9 Adjourned Meetings. If a shareholders' meeting is adjourned
to a different place, date or time, whether for failure to achieve a quorum
or otherwise, notice need not be given of the new place, date or time if
the new place, date or time is announced at the meeting before adjournment.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in these Bylaws, that determination
shall apply to any adjournment thereof, unless Washington law requires
fixing a new record date. If Washington law requires that a new record date
be set for the adjourned meeting, notice of the adjourned meeting must be
given to shareholders as of the new record date. Any business may be
transacted at an adjourned meeting that could have been transacted at the
meeting as originally called.
1.10 Proxies. A shareholder may appoint a proxy to vote or
otherwise act for the shareholder by signing an appointment form, either
personally or by an agent. No appointment shall be valid after 11 months
from the date of its execution unless the appointment form expressly so
provides. An appointment of a proxy is revocable unless the appointment is
coupled with an interest. No revocation shall be effective until written
notice thereof has actually been received by the Secretary of the
Corporation or any other person authorized to tabulate votes.
SECTION II
BOARD OF DIRECTORS
------------------
2.1 Number and Qualification. The business affairs and property
of the Corporation shall be managed under the direction of a Board of
Directors. The number of directors shall be at least five and no more than
twelve. Within this range, the initial number of directors shall be five,
and the Board of Directors may increase or decrease the number of directors
by resolution from time to time. A decrease in the number of directors
shall not shorten the term of an incumbent director.
2.2 Election--Term of Office. Each director shall serve from the
time elected until his or her successor is elected and qualified.
3
<PAGE>
2.3 Vacancies. Except as otherwise provided by law, vacancies in
the Board of Directors, whether caused by resignation, death, retirement,
disqualification, removal, increase in the number of directors, or
otherwise, may be filled for the remainder of the term by the Board of
Directors, by the shareholders, or, if the directors in office constitute
less than a quorum of the Board of Directors, by an affirmative vote of a
majority of the remaining directors. The term of a director elected to fill
a vacancy expires at the next shareholders' meeting at which directors are
elected. A vacancy that will occur at a specific later date may be filled
before the vacancy occurs, but the new director may not take office until
the vacancy occurs.
2.4 Quorum and Voting. At any meeting of the Board of Directors,
the presence in person (including presence by electronic means such as a
telephone conference call) of a majority of the number of directors
presently in office shall constitute a quorum for the transaction of
business. Notwithstanding the foregoing, in no case shall a quorum be less
than one-third of the maximum number of directors authorized under section
2.1. If a quorum is present at the time of a vote, the affirmative vote of
a majority of the directors present at the time of the vote shall be the
act of the Board of Directors and of the Corporation except as may be
otherwise specifically provided by the Articles of Incorporation, by these
Bylaws, or by law. A director who is present at a meeting of the Board of
Directors when action is taken is deemed to have assented to the action
taken unless: (a) the director objects at the beginning of the meeting, or
promptly upon his or her arrival, to holding it or to transacting business
at the meeting; (b) the director's dissent or abstention from the action
taken is entered in the minutes of the meeting; or (c) the director
delivers written notice of his or her dissent or abstention to the
presiding officer of the meeting before its adjournment or to the
Corporation within a reasonable time after adjournment of the meeting. The
right of dissent or abstention is not available to a director who votes in
favor of the action taken.
2.5 Regular Meetings. Regular meetings of the Board of Directors
shall be held at such place, date and time as shall from time to time be
fixed by resolution of the Board.
2.6 Special Meetings. Special meetings of the Board of Directors
may be held at any place and at any time and may be called by the Chairman
of the Board, the President, or any two or more directors.
2.7 Notice of Meetings. Unless the Articles of Incorporation
provide otherwise, any regular meeting of the Board of Directors may be
held without notice of the date, time, place, or purpose of the meeting.
Any special meeting of the Board of Directors must be preceded by at least
two days' notice of the
4
<PAGE>
date, time, and place of the meeting, but not of its purpose, unless the
Articles of Incorporation or these Bylaws require otherwise. Notice may be
given personally, by facsimile, by mail, or in any other manner allowed by
law. Oral notice shall be sufficient only if a written record of such
notice is included in the Corporation's minute book. Notice shall be deemed
effective at the earliest of: (a) receipt; (b) delivery to the proper
address or telephone number of the director as shown in the Corporation's
records; or (c) five days after its deposit in the United States mail, as
evidenced by the postmark, if correctly addressed and mailed with
first-class postage prepaid. Notice of any meeting of the Board of
Directors may be waived by any director at any time, by a signed writing,
delivered to the Corporation for inclusion in the minutes, either before or
after the meeting. Attendance or participation by a director at a meeting
shall constitute a waiver of any required notice of the meeting unless the
director promptly objects to holding the meeting or to the transaction of
any business on the grounds that the meeting was not lawfully convened and
the director does not thereafter vote for or assent to action taken at the
meeting.
2.8 Directors' Action Without A Meeting. The Board of Directors
or a committee thereof may take any action without a meeting that it could
properly take at a meeting if one or more written consents setting forth
the action are signed by all of the directors, or all of the members of the
committee, as the case may be, either before or after the action is taken,
and if the consents are delivered to the Corporation for inclusion in the
minutes or filing with the corporate records. Such action shall be
effective upon the signing of a consent by the last director to sign,
unless the consent specifies a later effective date.
2.9 Committees of the Board of Directors. The Board of Directors,
by resolutions adopted by a majority of the members of the Board of
Directors in office, may create from among its members one or more
committees and shall appoint the members thereof. Each such committee must
have two or more members, who shall be directors and who shall serve at the
pleasure of the Board of Directors. Each committee of the Board of
Directors may exercise the authority of the Board of Directors to the
extent provided in its enabling resolution and any pertinent subsequent
resolutions adopted in like manner, provided that the authority of each
such committee shall be subject to applicable law. Each committee of the
Board of Directors shall keep regular minutes of its proceedings and shall
report to the Board of Directors when requested to do so.
2.10 Telephone Meetings. Members of the Board of Directors or of
any committee appointed by the Board of Directors may participate in a
meeting of the Board of Directors or committee by means of a conference
telephone or similar communications equipment that enables all persons
participating in the meeting
5
<PAGE>
to hear each other during the meeting. Participation by such means shall
constitute presence in person at a meeting.
2.11 Compensation of Directors. The Board of Directors may fix
the compensation of directors as such and may authorize the reimbursement
of their expenses.
SECTION III
OFFICERS
--------
3.1 Officers Enumerated--Election. The officers of the
Corporation shall consist of such officers and assistant officers as may be
designated by resolution of the Board of Directors. The officers may
include a Chairman of the Board, a President, one or more Vice Presidents,
a Secretary, a Treasurer, and any assistant officers. The officers shall
hold office at the pleasure of the Board of Directors. Unless otherwise
restricted by the Board of Directors, the President may appoint any
assistant officer, the Secretary may appoint one or more Assistant
Secretaries, and the Treasurer may appoint one or more Assistant
Treasurers; provided that any such appointments shall be recorded in
writing in the corporate records.
3.2 Qualifications. None of the officers of the Corporation need
be a director. Any two or more corporate offices may be held by the same
person.
3.3 Duties of the Officers. Unless otherwise prescribed by the
Board of Directors, the duties of the officers shall be as follows:
(a) Chairman of the Board. The Chairman of the Board shall
preside at meetings of the Board of Directors and of the shareholders and
shall perform such other duties as the Board of Directors may from time to
time prescribe.
(b) President. The President shall be the chief executive
officer of the Corporation and, subject to the control of the Board of
Directors, shall be responsible for the general operation of the
Corporation. In the absence of a Chairman of the Board, the President shall
preside at meetings of the Board of Directors and of the shareholders,
perform the other duties of the Chairman of the Board prescribed in this
Section, and perform such other duties as the Board of Directors may from
time to time designate. In addition, if there is no Secretary in office,
the President shall perform the duties of the Secretary, and if there is no
Treasurer in office, the President shall perform the duties of the
Treasurer.
(c) Vice President. Each Vice President shall perform such
duties as the Board of Directors may from time to time designate. In
addition, the Vice President, or if there is
6
<PAGE>
more than one, the most senior Vice President available, shall act as
President in the absence or disability of the President.
(d) Secretary. The Secretary shall be responsible for and
shall keep, personally or with the assistance of others, minutes of the
meetings of the directors and shareholders; authenticate records of the
Corporation; attest all certificates of stock in the name of the
Corporation; keep the corporate seal, if any, and affix the same to
certificates of stock and other proper documents; keep a record of the
issuance of certificates of stock and the transfers of the same; and
perform such other duties as the Board of Directors may from time to time
designate.
(e) Treasurer. The Treasurer shall have the care and custody
of, and be responsible for, all funds and securities of the Corporation and
shall cause to be kept regular books of account. The Treasurer shall cause
to be deposited all funds and other valuable effects in the name of the
Corporation in such depositories as may be designated by the Board of
Directors. In general, the Treasurer shall perform all of the duties
incident to the office of Treasurer, and such other duties as from time to
time may be assigned by the Board of Directors.
(f) Assistant Officers. Assistant officers may consist of
one or more Assistant Vice Presidents, one or more Assistant Secretaries,
and one or more Assistant Treasurers. Each assistant officer shall perform
those duties assigned to him or her from time to time by the Board of
Directors, the President, or the officer who appointed him or her.
3.4 Vacancies. Vacancies in any office arising from any cause may
be filled by the Board of Directors at any regular or special meeting.
3.5 Removal. Any officer or agent may be removed by action of the
Board of Directors with or without cause, but any removal shall be without
prejudice to the contract rights, if any, of the person removed. Election
or appointment of an officer or agent shall not of itself create any
contract rights.
3.6 Compensation. The compensation of all officers of the
Corporation shall be fixed by the Board of Directors.
SECTION IV
SHARES AND CERTIFICATES OF SHARES
---------------------------------
4.1 Share Certificates. Share certificates shall be issued in
numerical order, and each shareholder shall be entitled to a certificate
signed by the Chairman of the Board, the President or a Vice President, and
attested by the Secretary or an Assistant Secretary. Share certificates may
be sealed with
7
<PAGE>
the corporate seal, if any. Facsimiles of the signatures and seal may be
used as permitted by law. Every share certificate shall state:
(a) the name of the Corporation;
(b) that the Corporation is organized
under the laws of the State of
Washington;
(c) the name of the person to whom the
share certificate is issued;
(d) the number, class and series (if
any) of shares that the certificate
represents;
(e) if the Corporation is authorized to
issue shares of more than one class
or series, that upon written
request and without charge, the
Corporation will furnish any
shareholder with a full statement
of the designations, preferences,
limitations and relative rights of
the shares of each class or series,
and the authority of the Board of
Directors to determine variations
for future series; and
(f) if any agreement restricting sale
of the Corporation's shares that is
applicable to shareholders
generally is in effect at the time
of issuance, that the shares
represented by the certificate are
subject to the terms of such
agreement.
4.2 Consideration for Shares. Shares of the Corporation may be
issued for such consideration as shall be determined by the Board of
Directors to be adequate. The consideration for the issuance of shares may
be paid in whole or in part in cash, or in any tangible or intangible
property or benefit to the Corporation, including but not limited to
promissory notes, services performed, contracts for services to be
performed, or other securities of the Corporation. Establishment by the
Board of Directors of the amount of consideration received or to be
received for shares of the Corporation shall be deemed to be a
determination that the consideration so established is adequate.
4.3 Transfers. Shares may be transferred by delivery of the
certificate, accompanied either by an assignment in writing
8
<PAGE>
on the back of the certificate, or by a written power of attorney to sell,
assign and transfer the same, signed by the record holder of the
certificate. Except as otherwise specifically provided in these Bylaws, no
shares of stock shall be transferred on the books of the Corporation until
the outstanding certificate therefor has been surrendered to the
Corporation.
4.4 Loss or Destruction of Certificates. In the event of the loss
or destruction of any certificate, a new certificate may be issued in lieu
thereof upon satisfactory proof of such loss or destruction, and upon the
giving of security against loss to the Corporation by bond, indemnity or
otherwise, to the extent deemed necessary by the Board of Directors, the
Secretary, or the Treasurer.
4.5 Fixing Record Date. The Board of Directors may fix in advance
a date as the record date for determining shareholders entitled: (i) to
notice of or to vote at any shareholders' meeting or any adjournment
thereof; (ii) to receive payment of any share dividend; or (iii) to receive
payment of any distribution. The Board of Directors may in addition fix
record dates with respect to any allotment of rights or conversion or
exchange of any securities by their terms, or for any other proper purpose,
as determined by the Board of Directors and by law. The record date shall
be not more than 70 days and, in case of a meeting of shareholders, not
less than 10 days (or such longer period as may be required by Washington
law) prior to the date on which the particular action requiring
determination of shareholders is to be taken. If no record date is fixed
for determining the shareholders entitled to notice of or to vote at a
meeting of shareholders, the record date shall be the date before the day
on which notice of the meeting is mailed. If no record date is fixed for
the determination of shareholders entitled to a distribution (other than
one involving a purchase, redemption, or other acquisition of the
Corporation's own shares), the record date shall be the date on which the
Board adopted the resolution declaring the distribution. If no record date
is fixed for determining shareholders entitled to a share dividend, the
record date shall be the date on which the Board of Directors authorized
the dividend.
SECTION V
BOOKS, RECORDS AND REPORTS
--------------------------
5.1 Records of Corporate Meetings, Accounting Records and Share
Registers. The Corporation shall keep, as permanent records, minutes of all
meetings of the Board of Directors and shareholders, and all actions taken
without a meeting, and all actions taken by a committee exercising the
authority of the Board of Directors. The Corporation or its agent shall
maintain, in a form that permits preparation of a list, a list of the names
and addresses of its shareholders, in alphabetical order by class of
shares, and the number, class, and series, if any, of shares held
9
<PAGE>
by each. The Corporation shall also maintain appropriate accounting
records, and at its principal place of business shall keep copies of: (a)
its Articles of Incorporation or restated Articles of Incorporation and all
amendments in effect; (b) its Bylaws or restated Bylaws and all amendments
in effect; (c) minutes of all shareholders' meetings and records of all
actions taken without meetings for the past three years; (d) the year-end
balance sheets and income statements for the past three fiscal years,
prepared as required by Washington law; (e) all written communications to
shareholders generally in the past three years; (f) a list of the names and
business addresses of its current officers and directors; and (g) its most
recent annual report to the Secretary of State.
5.2 Copies of Corporate Records. Any person dealing with the
Corporation may rely upon a copy of any of the records of the proceedings,
resolutions, or votes of the Board of Directors or shareholders, when
certified by the Chairman of the Board, President, Vice President,
Secretary or Assistant Secretary.
5.3 Examination of Records. A shareholder shall have the right to
inspect and copy, during regular business hours at the principal office of
the Corporation, in person or by his or her attorney or agent, the
corporate records referred to in the last sentence of Section 5.1 of these
Bylaws if the shareholder gives the Corporation written notice of the
demand at least five business days before the date on which the shareholder
wishes to make such inspection. In addition, if a shareholder's demand is
made in good faith and for a proper purpose, a shareholder may inspect and
copy, during regular business hours at a reasonable location specified by
the Corporation, excerpts from minutes of any meeting of the Board of
Directors, records of any action of a committee of the Board of Directors
while exercising the authority of the Board of Directors, records of
actions taken by the Board of Directors or shareholders without a meeting
and minutes of any meeting of shareholders, to the extent any of the
foregoing are not subject to inspection under the preceding sentence;
accounting records of the Corporation; or the record of shareholders;
provided that the shareholder shall have made a demand describing with
reasonable particularity the shareholder's purpose and the records the
shareholder desires to inspect, that the records are directly connected to
the shareholder's purpose, and that the shareholder gives the Corporation
written notice of the shareholder's demand at least five business days
before the date on which the shareholder wishes to inspect and copy. This
section shall not affect any right of shareholders to inspect records of
the Corporation that may be otherwise granted to the shareholders by law.
5.4 Financial Statements. Not later than four months after the
end of each fiscal year, or in any event prior to its annual meeting of
shareholders, the Corporation shall prepare a balance sheet and income
statement in accordance with Washington law. The Corporation shall furnish
a copy of each to any shareholder upon written request.
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SECTION VI
FISCAL YEAR
-----------
The fiscal year of the Corporation shall be January 1 to December
31.
SECTION VII
CORPORATE SEAL
--------------
The directors may by resolution adopt or modify a corporate seal.
SECTION VIII
MISCELLANEOUS PROCEDURAL PROVISIONS
-----------------------------------
The Board of Directors may adopt rules of procedure to govern any
meetings of shareholders or directors to the extent not inconsistent with
law, the Corporation's Articles of Incorporation, or these Bylaws, as they
are in effect from time to time. In the absence of any rules of procedure
adopted by the Board of Directors, the chairman of the meeting shall make
all decisions regarding the procedures for any meeting.
SECTION IX
AMENDMENT OF BYLAWS
-------------------
The Board of Directors is expressly authorized to make, alter and
repeal the Bylaws of the Corporation, subject to the power of the
shareholders of the Corporation to change or repeal the Bylaws.
SECTION X
INDEMNIFICATION OF DIRECTORS AND OTHERS
---------------------------------------
10.1 Grant of Indemnification. Subject to Section 10.2, each
person who was or is made a party or is threatened to be made a party to or
is involved (including, without limitation, as a witness) in any
threatened, pending, or completed action, suit or proceeding, whether
formal or informal, civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or
was a director of the Corporation or who, while a director of the
Corporation, is or was serving at the request of the Corporation as a
director, officer, employee or agent of this or another Corporation or of a
partnership, joint venture, trust, other enterprise, or employee benefit
plan, whether the basis of such proceeding is alleged action in an official
capacity as a director or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held
harmless
11
<PAGE>
by the Corporation to the fullest extent permitted by applicable law, as
then in effect, against all expense, liability and loss (including
attorneys' fees, costs, judgments, fines, ERISA excise taxes or penalties
and amounts to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith, and such indemnification shall
continue as to a person who has ceased to be a director and shall inure to
the benefit of his or her heirs, executors and administrators.
10.2 Limitations on Indemnification. Notwithstanding Section
10.1, no indemnification shall be provided hereunder to any such person to
the extent that such indemnification would be prohibited by the Washington
Business Corporation Act or other applicable law as then in effect, nor,
except as provided in Section 10.4 with respect to proceedings seeking to
enforce rights to indemnification, shall the Corporation indemnify any such
person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person except where such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
10.3 Advancement of Expenses. The right to indemnification
conferred in this section shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition, except where the Board of Directors shall
have adopted a resolution expressly disapproving such advancement of
expenses.
10.4 Right to Enforce Indemnification. If a claim under Section
10.1 is not paid in full by the Corporation within 60 days after a written
claim has been received by the Corporation, or if a claim for expenses
incurred in defending a proceeding in advance of its final disposition
authorized under Section 10.3 is not paid within 20 days after a written
claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount
of the claim and, to the extent successful in whole or in part, the
claimant shall be entitled to be paid also the expense of prosecuting such
claim. The claimant shall be presumed to be entitled to indemnification
hereunder upon submission of a written claim (and, in an action brought to
enforce a claim for expenses incurred in defending any proceeding in
advance of its final disposition, where the required undertaking has been
tendered to the Corporation), and thereafter the Corporation shall have the
burden of proof to overcome the presumption that the claimant is so
entitled. It shall be a defense to any such action (other than an action
with respect to expenses authorized under Section 10.3) that the claimant
has not met the standards of conduct which make it permissible hereunder or
under the Washington Business Corporation Act for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving
such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, indepen dent legal counsel,
or its shareholders) to have made a
12
<PAGE>
determination prior to the commencement of such action that indemnification
of or reimbursement or advancement of expenses to the claimant is proper in
the circumstances because he or she has met the applicable standard of
conduct set forth herein or in the Washington Business Corporation Act nor
(except as provided in Section 10.3) an actual determination by the
Corporation (including its Board of Directors, independent legal counsel,
or its shareholders) that the claimant is not entitled to indemnification
or to the reimbursement or advancement of expenses shall be a defense to
the action or create a presumption that the claimant is not so entitled.
10.5 Nonexclusivity. The right to indemnification and the payment
of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this section shall be valid to the extent
consistent with Washington law.
10.6 Indemnification of Officers, Employees and Agents. The
Corporation may, by action of its Board of Directors from time to time,
provide indemnification and pay expenses in advance of the final
disposition of a proceeding to officers, employees and agents of the
Corporation on the same terms and with the same scope and effect as the
provisions of this section 10 with respect to the indemnification and
advancement of expenses of directors of the Corporation or pursuant to
rights granted pursuant to, or provided by, the Washington Business
Corporation Act or on such other terms as the Board may deem proper.
10.7 Insurance and Other Security. The Corporation may maintain
insurance, at its expense, to protect itself and any individual who is or
was a director, officer, employee or agent of the Corporation or another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against or incurred by the individual in that
capacity or arising from his or her status as an officer, director, agent,
or employee, whether or not the Corporation would have the power to
indemnify such person against the same liability under the Washington
Business Corporation Act. The Corporation may enter into contracts with any
director or officer of the Corporation in furtherance of the provisions of
this section and may create a trust fund, grant a security interest or use
other means (including, without limitation, a letter of credit) to ensure
the payment of such amounts as may be necessary to effect indemnification
as provided in this section.
10.8 Amendment or Modification. This section 10 may be altered or
amended at any time as provided in these Bylaws, but no such amendment
shall have the effect of diminishing the rights of any person who is or was
an officer or director as to any acts or omissions taken or omitted to be
taken prior to the effective date of such amendment.
10.9 Effect of Section. The rights conferred by this section 10
shall be deemed to be contract rights between the
13
<PAGE>
Corporation and each person who is or was a director or officer. The
Corporation expressly intends each such person to rely on the rights
conferred hereby in performing his or her respective duties on behalf of
the Corporation.
SECTION XI
REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
Unless otherwise restricted by the Board of Directors, the
Chairman, President, and any Vice President of the Corporation are each
authorized to vote, represent and exercise on behalf of the Corporation all
rights incident to any and all shares of other corporations standing in the
name of the Corporation. This authority may be exercised by such officers
either in person or by a duly executed proxy or power of attorney.
14
MUTUAL HEALTH SYSTEMS, INC.
SUPPORT SERVICES AGREEMENT
"GENTLE DENTAL OF WASHINGTON"
DATE: JANUARY 1, 1996
<PAGE>
TABLE OF CONTENTS
Section Page
1. Facilities 4
2. Furniture, Fixtures and Equipment 4
3. Use of Trade Names and Trademarks 5
4. Administrative Services 5
5. Duties of Group 9
6. Relationship of Parties 11
7. Confidential Information and Trade Secrets 12
8. Working Capital 13
9. MHS' Compensation 14
10. Definitions 14
11. Miscellaneous Authority and Duties of the Parties 15
12. Term and Termination 16
13. Indemnification 17
14. Assignment 17
15. Governing Law 17
16. Waiver 17
17. Amendment 17
18. Entire Agreement 18
19. Notice 18
20. Arbitration 19
21. Miscellaneous Provisions 19
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Mutual Health Systems, Inc. - Support Services Agreement 2
<PAGE>
SUPPORT SERVICES AGREEMENT
--------------------------
This Agreement is effective as of January 1, 1996 (the "Effective Date") by
and between Mutual Health Systems, Inc., a Washington corporation ("MHS"),
and Tse, Saiget, Watanabe & McClure, Inc., P.S., a Washington professional
services corporation, d/b/a Gentle Dental of Washington ("Group"), and is
made with reference to the following facts:
A. Group is a Washington professional service corporation able to
practice dentistry in and pursuant to the laws of the State of
Washington.
B. Group delivers dental services to enrolled members of health care
plans and to the public at large. Group's dental services are
performed by employed dentists, and by independent dentists under
contract with Group.
C. Group employs dentists, hygienists, nurses and dental assistants only.
Group desires to retain a number of various types of dental
professionals, including practitioners of various specialties, in many
different locations in order to create an extensive provider network.
Group does not employ and is not desirous of employing administrative
and management staff or any other personnel. Group desires to confine
its operations to the delivery of dental care services free from
concern over administrative matters. Group therefore desires to
contract with MHS to provide business support services which will
enable Group to concentrate on the development and management of the
professional aspects of its dental practice.
D. Group wishes to lease or utilize certain offices and facilities,
equipment, furnishings and supplies which are owned or leased by MHS
and which are necessary for Group to operate dental clinics.
E. MHS has special expertise and experience in the operation and
marketing of dental clinics of the type intended to be operated by
Group. MHS has developed and will continue to develop expertise in the
non-dental aspects of dental facilities where professional dental care
has been and will be provided at low cost because of efficiencies of
scale and administrative expertise.
F. Group wishes to engage MHS to provide Group with certain personnel and
all necessary and appropriate services relating to the development,
marketing, operations, and administration of all non-dental facets of
Group's dental clinics.
G. Group and MHS are parties to a Support Services Agreement dated as of
January 1, 1995, as amended (the "Prior Agreement"), and now desire to
clarify certain aspects of their existing relationship by entering
into this Agreement.
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Mutual Health Systems, Inc. - Support Services Agreement 3
<PAGE>
NOW, THEREFORE, Group hereby exclusively engages MHS, and MHS agrees with
Group, to provide Group the following described facilities, equipment, and
services so as to enable Group to deliver to its patients efficient and
cost-effective dental care, in accordance with the following terms and
conditions:
1. Facilities.
During the term of this Agreement, and all renewals and extensions
hereof, MHS shall lease to Group, for Group's use, suitable facilities
(hereafter referred to individually as a "Clinic" and collectively as
the "Clinics") for Group to perform its dental care services. The
Clinics will be provided in those locations designated by Group and
shall include those tenant improvements that are reasonably required
by Group. MHS shall bear all development costs, acquisition costs, or
lease costs associated with the provision of these facilities and
shall assume the economic risk for, and shall otherwise be fully
liable under, all leases or property development agreements. Title to,
or rights of tenancy to, the Clinics shall remain in MHS, and upon
termination of this Agreement, Group shall immediately surrender the
Clinics to MHS.
2. Furniture, Fixtures and Equipment.
During the term of this Agreement, and all renewals and extensions
hereof, MHS shall lease to Group, at each Clinic at which Group
performs its dental care services, the dental equipment, office
equipment, furniture, fixtures, furnishings and leasehold improvements
reasonably necessary for Group to perform its dental care services.
The use by Group of such furniture, fixtures, furnishings, and
equipment shall be subject to the following conditions:
a. Title to all such furniture fixtures, furnishings, and equipment
shall remain in MHS and upon termination of this Agreement, Group
shall immediately return and surrender all such furniture,
fixtures, furnishings, and equipment to MHS in as good condition
as when received, normal wear and tear excepted. Group expressly
agrees to execute any appropriate UCC-1 Financing Statement and
UCC-1 Fixture Filings, if so requested in writing by MHS.
b. MHS shall be fully and entirely responsible for all repairs and
maintenance of all such furniture, fixtures, furnishings, and
equipment; provided, however, that Group agrees that it will use
its best efforts to prevent damage, excessive wear, and breakdown
of all such furniture, fixtures, furnishings, and equipment and
shall advise MHS of any and all needed repairs and equipment
failures.
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Mutual Health Systems, Inc. - Support Services Agreement 4
<PAGE>
3. Use of Trade Names and Trademarks.
During the term of this Agreement, Group shall have a non-exclusive
license to use the name "Gentle Dental," together with such insignia,
logos, slogans and other trademarks as MHS may develop in association
with such name. Group shall comply with all guidelines and
restrictions concerning use of such name and trademarks as MHS may
reasonably impose from time to time. Ownership of such name and
trademarks and the sole right to license the use of such name and all
related trademarks shall remain in MHS. In the event of termination of
this Agreement, Group shall cease all use of such name and all
associated trademarks unless MHS otherwise agrees in writing.
4. Administrative Services.
During the term of this Agreement, and all renewals and extensions
hereof, Group hereby engages MHS as the exclusive provider of all
non-dental functions and non-dentist services relating to the
operation of the Clinics; and MHS agrees to furnish to Group all of
the non- dental functions and services that may be reasonably needed
by Group in connection with the operation of the Clinics. Such
non-dental services and functions shall include the following:
a. Bookkeeping and Accounts
MHS shall provide all bookkeeping and accounting services
reasonably necessary or appropriate to support the Clinics,
including, without limitation, maintenance, custody and
supervision of all of business records, papers, documents,
ledgers, journals and reports (the "Books and Records"), the
preparation, distribution and recording of all remittances by
Group for accounts payable or payroll, and the preparation,
distribution and recording of all bills and statements for
professional services rendered by Group, including the billing
and completion of reports and forms required by insurance
companies, governmental agencies or other third-party payors
(such records, papers, documents, ledgers, journals and reports
shall not be deemed to include patient records and other records,
reports and documents which relate to patient treatment by
Group's dentists). The Books and Records at all times shall be
materially correct and complete and contain correct and timely
entries made with respect to transactions entered into pursuant
hereto in accordance with generally accepted accounting
principles ("GAAP") as in effect at such time.
It is understood, however, that all such business records, papers
and documents are the sole property of Group, shall be available
for inspection by Group at all times, and shall be delivered to
Group upon termination of this Agreement. Group shall provide MHS
with a complete copy of all such documents, records, and papers
at Group's expense upon termination of this Agreement.
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Mutual Health Systems, Inc. - Support Services Agreement 5
<PAGE>
b. Contract Administration.
MHS shall provide Group with administrative services reasonably
necessary to enable Group to perform on a timely basis all
non-dental aspects of prepaid dental care contracts and other
dental care contracts of Group. Such services shall include the
preparation and analysis of reports to enable Group to provide
dentist staffing and supervision at the Clinics for the rendering
of efficient and appropriate dental care to patients.
c. Non-dentist Personnel.
MHS shall employ and provide such support personnel to Group as
may be reasonably necessary to enable Group to perform its dental
services at the Clinics subject to the following:
i. MHS shall provide all personnel at the Clinics excluding
dentists, dental assistants, nurses and dental hygienists.
This shall include, but is not limited to, the provision of
all receptionists, secretaries, clerks, purchasing and
marketing personnel, janitorial and maintenance personnel,
and nondentist supervisory personnel as may be deemed
reasonably necessary by MHS for the proper and efficient
operation of the Clinics;
ii. MHS shall be responsible for hiring and firing all such
support personnel, and shall determine compensation for all
such personnel, including the determination of the salaries,
fringe benefits, bonuses, health and disability insurance,
workers' compensation insurance, and any other benefits that
each such employee shall receive; and
iii. MHS shall manage and supervise all licensed support personnel
employed on behalf of Group at the Clinics, including, but
not limited to all nurses, dental assistants, and dental
hygienists, regarding those aspects of their employment that
do not involve performance under the scope of their
licensure; provided, however that Group shall manage and
supervise all activities of such licensed support personnel
performed under the scope of their licensure. Group shall be
solely responsible for management and supervision of
dentists.
Provision of dental services during extended hours of operation,
generally including at least 60 hours per week during which
Clinics are open to the public, is a central feature of Group's
operations and competitive strategy. MHS agrees to provide
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Mutual Health Systems, Inc. - Support Services Agreement 6
<PAGE>
staffing as reasonably required to permit operation of the
Clinics during extended hours of operation.
d. Supplies.
MHS shall acquire and supply to Group all dental and other
supplies of every kind, name or nature, which may reasonably be
required by Group for the operation of the Clinics, provided that
Group shall be responsible for ordering, receiving and handling
all pharmaceuticals and related supplies for which state or
federal certification, registration or licensure is required.
e. Security and Maintenance.
MHS shall provide to Group all services and personnel reasonably
necessary to provide Group with proper security, maintenance, and
cleanliness of the Clinics and the furniture, fixtures,
equipment, and leasehold improvements located thereat.
Additionally, MHS shall furnish to or obtain for Group all
laundry, linens, uniforms, printing, stationery, forms, telephone
service, postage, duplication services, and any and all other
supplies and services of a similar nature which are reasonably
necessary in connection with the day-to-day operation of the
Clinics.
f. Dentist Recruiting.
MHS shall assist Group in recruiting and screening prospective
dentists and licensed support personnel as employees or
contractors for Group. Group shall be solely responsible for
hiring, supervision, training, evaluation and termination of
dentists. Group shall be responsible for hiring and termination
of licensed support personnel and for all supervision, training
and evaluation of such personnel with respect to all activities
performed under the scope of their licensure.
g. Insurance.
MHS shall use all reasonable efforts to obtain for Group and
maintain in full force and effect during the term of this
Agreement, and all extensions and renewals thereof, comprehensive
commercial liability and property insurance which MHS reasonably
determines to be appropriate to protect against loss in the
nature of fire, other catastrophe, theft, business interruption,
public liability, and non-dental negligence, with minimum
coverage limits of $1,000,000 per occurrence. MHS shall assist
Group in obtaining dental malpractice insurance for Group and its
dentist employees.
h. Billing and Collection
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Mutual Health Systems, Inc. - Support Services Agreement 7
<PAGE>
In order to relieve Group of the administrative burden of
handling the billing and collection of sums due for the delivery
of dental services, MHS shall be responsible, on behalf of and
for Group and any contract dentists or independent dentists or
other organizations practicing dentistry for or on behalf of
Group, on their respective billheads as their agent, for billing
and collecting the charges with respect to all dental and other
services provided at the Clinics. Group agrees that it will keep
and provide to MHS all documents, opinions, diagnosis,
recommendations, and other evidence and records necessary for the
purpose of supporting the fees charged for all dental and other
services from time to time.
It is expressly understood that the extent to which MHS will
endeavor to collect such charges, the methods of collecting, the
settling of disputes with respect to charges and the writing off
of charges that may be or appear to be uncollectible shall at all
times be within the sole discretion of MHS (but subject to all
applicable governmental regulations and the terms and conditions
of applicable provider agreements) and that MHS does not
guarantee the extent to which any charges billed will be
collected.
Group or its duly authorized agent shall have the right at all
reasonable times and upon the giving of reasonable notice to
examine, inspect and copy the records of MHS pertaining to such
fees, charges, billings, and collections. At Group's request, MHS
will re-assign to Group, for collection by Group, any accounts
which MHS has determined to be uncollectible.
i. Bank Accounts and Disbursements.
During the term of this Agreement, MHS is hereby expressly
authorized to, and shall, disburse from one or more bank accounts
of Group sums for the payment of Group's expenses as described in
Section 5, MHS' compensation as described in section 9, and all
other costs, expenses and disbursements which are required or
authorized by this Agreement. For administrative convenience, MHS
shall maintain said bank accounts.
j. Market Research.
MHS shall conduct market research with respect to rates, charges,
competitive conditions, competition and business opportunities
for MHS and Group. MHS shall compile such information and provide
marketing reports and analyses to Group. All such marketing
services shall be conducted in accordance with the laws, rules,
regulations and guidelines of all applicable governmental and
quasi-governmental agencies.
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Mutual Health Systems, Inc. - Support Services Agreement 8
<PAGE>
k. Contract Negotiations.
MHS shall negotiate on Group's behalf contracts with health
plans, preferred provider organizations, other group plans,
independent provider associations, employers, hospitals, dentists
and others for Group's services at the Clinics, for admission of
Group's patients for hospitalization, and for the provision of
dental care services for Group's patients by other dentists with
specialties not available at Group. Group shall have final
approval and authority with respect to such contracts, and Group
shall have the sole and absolute right not to enter into any such
contracts.
l. Management and Planning Reports.
MHS shall supply Group on a regular, periodic basis such internal
reports as may be necessary or appropriate for the parties to
assist each other in evaluating the non-dental aspects of the
performance and productivity of their respective employees and
contractors as well as in evaluating the efficiency and
effectiveness of the rendition of their respective management and
other nonprofessional services. MHS shall provide Group with data
and reports for Group's exclusive use in conducting Group's
dental practice, evaluating the performance of Group's dentists
and for other purposes related to maintaining and improving
patient care quality and improving the efficiency of Group's
dentists.
5. Duties of Group
a. Conduct of Dental Practice.
Group shall be solely and exclusively in control of all aspects
of the practice of dentistry and the delivery of dental services
at the Clinics. The rendition of all dental professional
services, including, but not limited to, diagnosis, treatment,
surgery, therapy and the prescription of medicine and drugs, and
the supervision of preparation of dental reports shall be the
responsibility of Group. Group shall have the sole right and
authority to hire, employ, train, supervise, terminate, and
compensate all of its dentist-contractors and dentist-employees,
dental assistants, and dental hygienists.
MHS shall have no authority whatsoever with respect to such
activities, and shall have no authority with respect to the
establishment of fees or charges for the rendition of such
services.
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Mutual Health Systems, Inc. - Support Services Agreement 9
<PAGE>
b. Staffing of Clinics
Group agrees to assign a dentist to act as Clinical Director at
each Clinic. Group will assure that each Clinic is adequately
staffed during operating hours, including extended hours of
operation, with such dental personnel as may be necessary to
efficiently carry out the practice of dentistry at each Clinic.
c. Professional Personnel.
Group shall ensure that dentists and other licensed personnel
employed or contracted by Group are properly licensed and
trained. Group shall be responsible for monitoring quality of
care, responding to any patient complaints concerning dental
services and undertaking appropriate quality improvement
activities. Group shall arrange for continuing education for
licensed personnel in accordance with all legal requirements and
good professional practice.
d. Wages, etc.
Group shall be solely responsible for payment of all wages,
salaries, bonuses and benefits of its employed licensed
personnel, including all payroll taxes, vacation and sick pay,
insurance and pension or profit sharing contributions.
Group shall be solely responsible for payment of all amounts due
to contracted licensed personnel under service contracts with
Group. MHS shall provide payroll processing and accounts payable
services as provided in this Agreement.
e. Professional Expenses.
Group shall pay all professional dues and license fees,
continuing education costs and similar costs incurred by Group's
employees. Group shall pay the cost of all professional liability
insurance maintained pursuant to paragraph 5.f.
f. Professional Liability Insurance.
Group shall continuously maintain throughout the term of this
Agreement professional liability (malpractice) insurance for all
licensed personnel of Group in amounts not less than $1,000,000
per incident and $3,000,000 annual limit for each dentist and
dental hygienist employed by Group. Group shall purchase extended
reporting endorsements ("tail coverage") for personnel leaving
employment with Group, or on change in insurance policies, if
such coverage is available at reasonable rates. Group shall
require all contracted dentists and dental hygienists to maintain
similar coverages. The minimum amounts of insurance required by
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Mutual Health Systems, Inc. - Support Services Agreement 10
<PAGE>
this Agreement shall be increased as necessary to reflect current
standards for dental malpractice coverage.
6. Relationship of Parties.
The President of Group, or another licensed dentist designated by
Group, shall act as Group's liaison to MHS. Group shall delegate to
such person all authority to make decisions on behalf of Group
concerning day-to-day operations. The person so designated shall
consult with MHS on operational matters as requested. If approval by
directors or shareholders of Group is required or requested for any
action recommended or referred for approval by MHS, Group shall take
all reasonable steps to promptly refer the matter for decision to
Group's directors or shareholders, as appropriate.
Group designates MHS' President, or his representative, as Group's
Attorney-In-Fact, with full right and authority, but in each instance
at Group's express direction, to execute contracts on behalf of Group,
including, but not limited to health plan agreements and employment
agreements. As Attorney-In-Fact, MHS' President shall have the right
to authorize expenditures on behalf of Group for all activities
related to its business.
Notwithstanding the above, this Agreement is a business support
services agreement only. MHS shall have no control over Group, and
Group shall retain the sole and exclusive authority over all aspects
of its dental practice including, but not limited to, the authority to
approve the locations of Clinics, the types of improvements,
furnishings, equipment and supplies to be utilized, the manner of
practice of dentistry or related ancillary services, marketing
approaches or advertisements, choice of dental personnel, treatment
decisions, assignment of patients to professionals, the content of
dental evaluation reports, fees charged, programs and services engaged
in, and any aspects of dental practice not listed that are the sole
prerogative of a duly licensed dentist under applicable state law.
In the performance of this Agreement, it is mutually understood and
agreed that all dentists, dental hygienists and dental assistants
practicing at any of the Clinics are at all times acting and
performing as employees of Group or as contractors with Group
("Group's Personnel") and not as employees or agents of MHS. MHS shall
neither have nor exercise any control or direction over the methods by
which Group or Group's Personnel shall practice dentistry.
Group and Group's Personnel shall have no claim under this Agreement
or otherwise against MHS for workers' compensation, unemployment
compensation, sick leave, vacation pay, retirement benefits, Social
Security benefits, or any other employee benefits, all of which shall
be the sole responsibility of Group. Since the Group's Personnel are
not employees of MHS, MHS shall not withhold on behalf of Group's
Personnel pursuant to this Agreement any sums for income tax,
unemployment insurance, Social Security, or
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Mutual Health Systems, Inc. - Support Services Agreement 11
<PAGE>
otherwise pursuant to any law or requirement of any governmental
agency, and all such withholding, if any is required, shall be the
sole responsibility of Group. Group shall indemnify and hold harmless
MHS from any and all loss or liability arising with respect to any of
the foregoing benefits or withholding requirements.
Group shall require all dentists in its employ to execute
non-competition agreements in a form satisfactory to MHS that prohibit
such dentists from providing dental services within five miles of a
location at which they provided dental services for Group for a period
of two years after termination of employment with Group. Group shall
take all reasonable steps to enforce such agreements in the event of
any breach thereof.
All patient records, reports and information obtained, generated or
encountered relating to Clinics shall at all times be the property of
Group and so long as in the possession, use or control of either
party, shall be kept in the strictest confidence by both parties. MHS
shall instruct all of its personnel to keep confidential any such
information, as well as any financial, statistical, personnel, and
patient information obtained or encountered relating to Group or to
Group's operations.
Group shall not solicit, employ or contract with any employee of MHS
or any entity or person that employs or contracts with any employee of
MHS, for a period of two years after any such employee ceases to be
employed by MHS. Should Group breach this specific provision, Group
acknowledges that the damages to MHS would be difficult to ascertain,
and shall as reasonable compensation and liquidated damages promptly
pay MHS the sum of $40,000.
7. Confidential Information and Trade Secrets.
Group recognizes that due to the nature of this Agreement, Group will
have access to information of a proprietary nature owned by MHS
including, but not limited to, any and all computer programs, and any
and all operating manuals or similar materials which constitute the
non-dental systems, policies, procedures, and methods of doing
business developed for the operation of facilities managed by MHS.
Consequently, Group acknowledges and agrees that MHS has a proprietary
interest in all such information and that all such information
constitutes confidential and proprietary information and trade secrets
of MHS. Group hereby waives any and all right, title and interest in
and to such trade secrets and confidential information and agrees to
return all copies of such trade secrets and confidential information
related thereto to MHS, at Group's expense, upon the termination of
this Agreement.
Group further acknowledges and agrees that MHS is entitled to prevent
its competitors from obtaining and utilizing its trade secrets and
confidential information. Therefore, Group agrees to hold MHS' trade
secrets and confidential information in strictest
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Mutual Health Systems, Inc. - Support Services Agreement 12
<PAGE>
confidence and not to disclose them or allow them to be disclosed,
directly or indirectly, to any person or entity other than those
persons or entities who are employed by or affiliated with MHS or
Group, without the prior written consent of MHS. Group shall not,
either during the term of this Agreement, or at any time after the
expiration or sooner termination of this Agreement, disclose to anyone
other than persons or entities who are employed by or affiliated with
MHS or Group any confidential or proprietary information or trade
secret information obtained by Group from MHS, except as otherwise
required by law. Group agrees to require each independent contractor
and employee of the Group, and any such persons or entities to whom
such information is disclosed for the purpose of performance of MHS'
or Group's obligations under this Agreement, to execute a
"Confidentiality Agreement" regarding such information in such form as
from time-to-time may be approved by Group and MHS.
Group acknowledges and agrees that a breach of this Paragraph 7 will
result in irreparable harm to MHS which cannot be reasonably or
adequately compensated in damages, and therefore MHS shall be entitled
to injunctive and/or equitable relief to prevent a breach and to
secure enforcement thereof, in addition to any other relief or award
to which MHS may be entitled.
8. Working Capital.
a. Assignment of Accounts Receivable to MHS.
Group hereby assigns, without recourse, to MHS all of Group's
accounts receivable and other rights and interests in all sums
which Group receives or becomes entitled to receive for the
performance of dental services by Group's Dentists, for other
services performed by employees of Group, and for charges by
Group for supplies and other items for which Group is entitled to
charge as reflected in invoices issued by Group with respect to
the Clinics; provided, however, that no assignment shall be made
of any sums or rights to payment the assignment of which is
prohibited by law.
b. Remittance to Group.
Periodically, as required to meet Group's financial obligations,
and after deduction of amounts which are retained by MHS as
compensation, cash equal to all remaining Net Revenues shall be
remitted to Group. Group shall be responsible for paying the
expenses described in section 5 above from funds of Group.
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Mutual Health Systems, Inc. - Support Services Agreement 13
<PAGE>
9. MHS' Compensation.
For its services hereunder, including lease of all facilities,
furniture, fixtures and equipment at the Clinics, provision of all
employees of MHS who perform services at or for the Clinics, and
provision of insurance, supplies and management services contemplated
hereunder, Group shall pay MHS the following service fee:
during the first calendar year after the Effective Date,
50% of Net Revenues
during the second calendar year after the Effective Date,
51% of Net Revenues
during the third calendar year after the Effective Date,
52% of Net Revenues
during the fourth calendar year after the Effective Date,
53% of Net Revenues
during the fifth calendar year after the Effective Date,
54% of Net Revenues
during the sixth calendar year and for the remainder of the term of
this Agreement and any renewal term 55% of Net Revenues. The service
fee can be adjusted by mutual agreement from time to time. Payment
shall be made by deduction of the amount due from amounts remitted to
Group as provided in paragraph 8.b. above. Monthly payments shall be
made based on unaudited Net Revenues year-to-date; final adjustment of
the fee shall be made based on audited Net Revenue for the calendar
year.
For 1996, the service fee payable to MHS under this Agreement is
allocated to the following services:
10% of Net Revenues Rents and utilities
30% of Net Revenues Support staff and administrative services
10% of Net Revenues Supplies
Increases in MHS' service fee in 1997 and following shall be allocated
proportionately to each of the three service categories. In 2001 and
following, the allocations will be:
11% of Net Revenues Rents and utilities
33% of Net Revenues Support staff and administrative services
11% of Net Revenues Supplies
10. Definitions.
Any accounting term used in this Agreement shall have, unless
otherwise specifically provided herein, the meaning customarily given
in accordance with generally accepted accounting principles ("GAAP"),
and all financial computations hereunder shall be computed unless
otherwise specifically provided herein, in accordance with GAAP as
consistently applied and using the same method of valuation as used in
the preparation of MHS's financial statements.
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Mutual Health Systems, Inc. - Support Services Agreement 14
<PAGE>
"Gross Revenues" means all billings by Group for services rendered
during the term of this Agreement, billed at Group's standard rates.
For purposes of capitated service contracts, "Gross Revenues" means
the amount of revenue received under the service contract for services
rendered during the term of this Agreement.
"Net Revenues" means all Gross Revenues net of allowances for
contractual discounts and bad debt. Bad debt allowances shall be
determined in accordance with GAAP. Contractual discount allowances
shall be based on reasonable estimates as determined by MHS.
11. Miscellaneous Authority and Duties of the Parties.
MHS is hereby exclusively authorized by Group to perform all services
required of MHS pursuant to the terms of this Agreement as MHS deems
reasonable and appropriate in order to meet the day-to-day
requirements of Group. MHS may subcontract with other persons or
entities to perform any part or all of the services required of MHS
hereunder.
Each of the parties agrees to cooperate fully with the other in
connection with the performance of their respective obligations under
this Agreement, and both parties agree to employ their best efforts to
resolve any dispute that may arise under or in connection with this
Agreement. Subject to MHS maintaining the confidentiality of patient
records and Group's confidential information, Group shall provide to
MHS full and complete access to the Group's premises, and to Group
charts, Books and Records, in order that MHS can perform its functions
hereunder.
During the term of this Agreement, at Group's direction MHS shall add
facilities or clinics for the practice of dentistry by Group, and
Group shall staff those facilities with dental personnel and shall
deliver dental services therein. MHS shall exclusively provide the
services contemplated by this Agreement in those facilities. Group
shall not open or otherwise participate in the operation of any dental
clinics or otherwise expand its operations other than through the
exclusive relationship with MHS as described in this Agreement.
Notwithstanding any other provisions contained herein, MHS shall not
be liable to Group, and shall not be deemed to be in default
hereunder, for the failure to perform or provide any of the supplies,
services, personnel, or other obligation to be performed or provided
by MHS pursuant to this Agreement if such failure is a result of a
labor dispute, act of God, or any other event which is beyond the
reasonable control of MHS.
12. Term and Termination.
a. Unless sooner terminated in accordance with the provisions of
this Agreement, this Agreement shall remain in effect for an
initial term of forty (40) years after the
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Mutual Health Systems, Inc. - Support Services Agreement 15
<PAGE>
Effective Date. Following the initial term, this agreement shall
be automatically renewed for successive ten (10) year renewal
terms unless more than 180 days prior to the end of the initial
term or any renewal term either party gives notice of
termination.
b. This Agreement may be terminated by any of the following:
i. In the event of a material breach of this Agreement by
either party, the other party shall have the right to cancel
this Agreement by service of written notice upon the
defaulting party (the "Default Notice"). In the event such
breach is not cured within thirty (30) days after service of
the Default Notice, this Agreement shall immediately
terminate at the election of the non-defaulting party upon
the giving of a written notice of termination to the
defaulting party no later than thirty (30) days after the
giving of the Default Notice, unless such breach cannot be
cured within thirty (30) days and the defaulting party gives
timely notice to the other party to such effect and promptly
undertakes appropriate steps to effect such cure and pursues
such action to conclusion.
ii. MHS may terminate this Agreement upon one (1) day's notice
in the event of the dissolution or liquidation of the Group.
iii. Upon institution of any voluntary or involuntary bankruptcy,
reorganization, insolvency or receivership proceedings, or
any assignment for the benefit of creditors, the other party
may immediately terminate this Agreement on written notice
to the party involved in such proceedings.
c. Upon any termination of this Agreement, it is understood and
agreed that the right of Group to occupy the Clinics and to use
and possession of the furniture, fixtures, furnishings, equipment
and leasehold improvements shall terminate, and Group shall
immediately vacate and surrender possession to MHS of the
Clinics, furniture, fixtures, furnishings, equipment and
leasehold improvements as well as all other materials and
supplies then located in or upon the premises of such Clinics.
The various rights and remedies herein provided shall be
cumulative and in addition to any other rights and remedies the
parties may be entitled to pursue under the law. The exercise of
one or more of such rights or remedies shall
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Mutual Health Systems, Inc. - Support Services Agreement 16
<PAGE>
not impair the rights of either party to exercise any other right
or remedy at law or in equity.
Termination of the Agreement shall not release or discharge
either party from any obligation, debt or liability which shall
have previously accrued and remain to be performed upon the date
of termination.
13. Indemnification.
Each party shall indemnify, hold harmless, and defend the other party
from any and all liability, loss, claims, lawsuits, damages, injury,
costs or expenses (including reasonable attorneys' fees incurred at
trial, on appeal or on review) arising out of or incident to acts or
omissions by such indemnifying party, its employees, contractors and
subcontractors provided, however, neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to
the extent the liability of such party exceeds the amount of such
insurance coverage.
14. Assignment.
This Agreement, and the rights and obligations created hereunder,
shall not be assignable by Group, either voluntarily or by operation
of the law, without the express prior written consent of MHS. Any
assignment without such consent shall be null and void. Group shall
not sublet any Clinic or any part thereof, and Group shall not
sublease any of the furniture, furnishings, leasehold improvements or
equipment referred to in this Agreement without the express prior
written agreement of MHS. Subject to the foregoing, this Agreement
shall be binding upon and inure to the benefit of the parties, their
heirs, executors and assigns.
15. Governing Law.
This Agreement shall be governed by and construed under the laws of
the State of Washington.
16. Waiver.
The waiver of any covenant, condition or duty hereunder by either
party shall not prevent that party from later insisting upon full
performance of the same.
17. Amendment.
No amendment to the terms of this Agreement shall be binding on either
party unless in writing and executed by the duly authorized
representatives of each party.
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Mutual Health Systems, Inc. - Support Services Agreement 17
<PAGE>
18. Entire Agreement.
This Agreement constitutes the entire agreement between the parties in
connection with the subject matter hereof and supersedes all prior
agreements, whether written or oral, and whether explicit or implicit,
which have been entered into before the execution hereof. Should any
litigation or arbitration arise between the parties, neither party
shall (and each party hereby waives the right to) introduce any parol
evidence which would tend to contradict or impeach any of the express
written terms, conditions, and covenants of this Agreement.
19. Notice.
Any notice or other communication required or which may be given
hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed or sent by facsimile, or sent by certified,
registered or express mail, postage prepaid, and shall be deemed given
when so delivered personally, telegraphed or telexed or sent by
facsimile, or if mailed, two days after the day of mailing, as
follows:
(i) If to MHS to:
Mutual Health Systems, Inc.
7725 NE Highway 99, Suite B
Vancouver, WA 98665
Attention: President
With a copy to:
Stoel Rives LLP
900 SW Fifth Avenue, Suite 2300
Portland, OR 97204-1268
Attention: Edward L. Epstein, Esq.
(ii) If to Group:
Tse, Saiget, Watanabe, & McClure, Inc. P.S.
7725 NE Highway 99, Suite B
Vancouver, WA 98665
Attention: President
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Mutual Health Systems, Inc. - Support Services Agreement 18
<PAGE>
20. Arbitration.
Any disagreement which the parties are unable to resolve by mutual
agreement shall be submitted to private arbitration in accordance with
the rules of the American Arbitration Association ("AAA"), except as
modified by this Agreement.
The arbitration shall be conducted by a single, neutral arbitrator
appointed in accordance with AAA procedures. Unless the parties agree
otherwise, the arbitration proceedings and venue for the filing of
exceptions, if any, shall be Clark County, Washington. Discovery of
documents shall be permitted to the full extent permitted by the
Federal Rules of Civil Procedure ("FRCP"). Other types of discovery
available under the FRCP shall be permitted as the arbitrator shall
find to be appropriate. The parties shall share equally the costs of
the arbitrator and all other costs of arbitration, except that each
party shall be solely responsible for its own attorneys' fees and
expenses. Exceptions to the decision of
the arbitrator can be filed in accordance with RCW 7.04.160; in
addition to the grounds recognized in that statute, an exception may
be filed based on mistake of law. Judgment on the arbitration award
can be filed in any court with jurisdiction.
Arbitration under this Agreement shall be governed by the Federal
Arbitration Act, and by Washington law to the extent not inconsistent
with the Federal Arbitration Act.
To the greatest extent consistent with law and disclosure requirements
applicable to either party, and except as required in a judicial
proceeding contemplated by this section 20, the parties shall keep all
matters relating to any arbitration confidential, including the
existence and subject of the arbitration.
21. Miscellaneous Provisions.
a. Changes In Law.
In the event that any state or federal laws or regulations now in
effect or enacted or promulgated after the execution of this
Agreement are interpreted by judicial decision, regulatory agency
or legal counsel in such a manner as to indicate that the
structure of this Agreement may be in violation of such laws or
regulations, the parties shall negotiate in good faith and shall
seek agreement on modifications or amendments to this Agreement
that appropriately address the possible violation of law or
regulation while preserving the intent of this Agreement as
nearly as possible. If the parties are unable to reach agreement
within a reasonable time, the parties shall proceed as set forth
in section 20.
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Mutual Health Systems, Inc. - Support Services Agreement 19
<PAGE>
b. Partial Invalidity.
If any one or more of the terms, provisions, promises, covenants,
or conditions of this Agreement or the application thereof to any
person or circumstance shall be adjudged to any extent invalid,
unenforceable, void or voidable for any reasons whatsoever by a
court of competent jurisdiction, each and all of the remaining
terms, provisions, promises, covenants and conditions of this
Agreement or their application to other persons or circumstances
shall not be affected thereby and shall be valid and enforceable
to the fullest extent permitted by law.
c. Heading, Titles.
The headings appearing herein are for convenience and reference
only and shall not be deemed to govern, limit, modify or in any
manner affect the scope, meaning or intent of the provisions of
this Agreement.
d. Binding Effect.
Subject to the provisions contained herein, this Agreement shall
be binding upon and inure to the benefit of the parties hereto
and their respective successors.
e. Covenants and Conditions.
Each covenant hereof is a condition, and each condition hereof is
as well a covenant by the parties bound thereby unless waived in
writing by the parties hereto.
f. Approval and Consent.
Whenever in this Agreement an approval or consent is required by
one of the parties, the same shall not be unreasonably withheld.
g. Attorneys' Fees.
In the event suit or action is brought to enforce any of the
terms of this Agreement, the prevailing party shall be entitled
to recover fees and expenses incurred in such action or
proceeding, including reasonable attorneys' fees, incurred at
trial, on appeal or on review.
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Mutual Health Systems, Inc. - Support Services Agreement 20
<PAGE>
h. Supersedes Prior Agreement.
This Agreement shall amend, restate and supersede the Prior
Agreement and all amendments thereto effective as of the
Effective Date.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as of the Effective Date.
MUTUAL HEALTH SYSTEMS, INC. TSE, SAIGET, WATANABE & MCCLURE, INC. P.S.
- ----------------------------- ------------------------------------------
John Castles William Saiget, DMD
President President
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Mutual Health Systems, Inc. - Support Services Agreement 21
MUTUAL HEALTH SYSTEMS, INC.
SUPPORT SERVICES AGREEMENT
"GENTLE DENTAL OF OREGON"
DATE: JANUARY 1, 1996
<PAGE>
TABLE OF CONTENTS
Section Page
1. Facilities 4
2. Furniture, Fixtures and Equipment 4
3. Use of Trade Names and Trademarks 4
4. Administrative Services 5
5. Duties of Group 9
6. Relationship of Parties 11
7. Confidential Information and Trade Secrets 12
8. Working Capital 13
9. MHS' Compensation 13
10. Definitions 14
11. Miscellaneous Authority and Duties of the Parties 15
12. Term and Termination 15
13. Indemnification 17
14. Assignment 17
15. Governing Law 17
16. Waiver 17
17. Amendment 17
18. Entire Agreement 18
19. Notice 18
20. Arbitration 19
21. Miscellaneous Provisions 19
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Mutual Health Systems, Inc. - Support Services Agreement 2
<PAGE>
SUPPORT SERVICES AGREEMENT
--------------------------
This Agreement is effective as of January 1, 1996 (the "Effective Date") by
and between Mutual Health Systems, Inc., a Washington corporation ("MHS"),
and Gentle Dental of Oregon, P.C., an Oregon professional corporation
("Group"), and is made with reference to the following facts:
A. Group is an Oregon professional corporation able to practice dentistry
in and pursuant to the laws of the State of Oregon.
B. Group delivers dental services to enrolled members of health care
plans and to the public at large. Group's dental services are
performed by employed dentists, and by independent dentists under
contract with Group.
C. Group employs dentists, hygienists, nurses and dental assistants only.
Group desires to retain a number of various types of dental
professionals, including practitioners of various specialties, in many
different locations in order to create an extensive provider network.
Group does not employ and is not desirous of employing administrative
and management staff or any other personnel. Group desires to confine
its operations to the delivery of dental care services free from
concern over administrative matters. Group therefore desires to
contract with MHS to provide business support services which will
enable Group to concentrate on the development and management of the
professional aspects of its dental practice.
D. Group wishes to utilize certain offices and facilities, equipment,
furnishings and supplies which are owned or leased by MHS and which
are necessary for Group to operate dental clinics.
E. MHS has special expertise and experience in the operation and
marketing of dental clinics of the type intended to be operated by
Group. MHS has developed and will continue to develop expertise in the
non-dental aspects of dental facilities where professional dental care
has been and will be provided at low cost because of efficiencies of
scale and administrative expertise.
F. Group wishes to engage MHS to provide Group with certain personnel and
all necessary and appropriate services relating to the development,
marketing, operations, and administration of all non-dental facets of
Group's dental clinics.
G. Group and MHS are parties to a Support Services Agreement dated as of
January 1, 1995, as amended (the "Prior Agreement"), and now desire to
clarify certain aspects of their existing relationship by entering
into this Agreement.
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Mutual Health Systems, Inc. - Support Services Agreement 3
<PAGE>
NOW, THEREFORE, Group hereby exclusively engages MHS, and MHS agrees with
Group, to provide Group the following described facilities, equipment, and
services so as to enable Group to deliver to its patients efficient and
cost-effective dental care, in accordance with the following terms and
conditions:
1. Facilities.
During the term of this Agreement, and all renewals and extensions
hereof, MHS shall provide to Group, for Group's use, suitable
facilities (hereafter referred to individually as a "Clinic" and
collectively as the "Clinics") for Group to perform its dental care
services. The Clinics will be provided in those locations designated
by Group and shall include those tenant improvements that are
reasonably required by Group. MHS shall bear all development costs,
acquisition costs, or lease costs associated with the provision of
these facilities and shall assume the economic risk for, and shall
otherwise be fully liable under, all leases or property development
agreements. Title to, or rights of tenancy to, the Clinics shall
remain in MHS, and upon termination of this Agreement, Group shall
immediately surrender the Clinics to MHS.
2. Furniture, Fixtures and Equipment.
During the term of this Agreement, and all renewals and extensions
hereof, MHS shall provide to Group, at each Clinic at which Group
performs its dental care services, the dental equipment, office
equipment, furniture, fixtures, furnishings and leasehold improvements
reasonably necessary for Group to perform its dental care services.
The use by Group of such furniture, fixtures, furnishings, and
equipment shall be subject to the following conditions:
a. Title to all such furniture fixtures, furnishings, and equipment
shall remain in MHS and upon termination of this Agreement, Group
shall immediately return and surrender all such furniture,
fixtures, furnishings, and equipment to MHS in as good condition
as when received, normal wear and tear excepted. Group expressly
agrees to execute any appropriate UCC-1 Financing Statement and
UCC-1 Fixture Filings, if so requested in writing by MHS.
b. MHS shall be fully and entirely responsible for all repairs and
maintenance of all such furniture, fixtures, furnishings, and
equipment; provided, however, that Group agrees that it will use
its best efforts to prevent damage, excessive wear, and breakdown
of all such furniture, fixtures, furnishings, and equipment and
shall advise MHS of any and all needed repairs and equipment
failures.
3. Use of Trade Names and Trademarks.
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Mutual Health Systems, Inc. - Support Services Agreement 4
<PAGE>
During the term of this Agreement, Group shall have a non-exclusive
license to use the name "Gentle Dental," together with such insignia,
logos, slogans and other trademarks as MHS may develop in association
with such name. Group shall comply with all guidelines and
restrictions concerning use of such name and trademarks as MHS may
reasonably impose from time to time. Ownership of such name and
trademarks and the sole right to license the use of such name and all
related trademarks shall remain in MHS. In the event of termination of
this Agreement, Group shall cease all use of such name and all
associated trademarks unless MHS otherwise agrees in writing.
4. Administrative Services.
During the term of this Agreement, and all renewals and extensions
hereof, Group hereby engages MHS as the exclusive provider of all
non-dental functions and non-dentist services relating to the
operation of the Clinics; and MHS agrees to furnish to Group all of
the non- dental functions and services that may be reasonably needed
by Group in connection with the operation of the Clinics. Such
non-dental services and functions shall include the following:
a. Bookkeeping and Accounts
MHS shall provide all bookkeeping and accounting services
reasonably necessary or appropriate to support the Clinics,
including, without limitation, maintenance, custody and
supervision of all of business records, papers, documents,
ledgers, journals and reports (the "Books and Records"), the
preparation, distribution and recording of all remittances by
Group for accounts payable or payroll, and the preparation,
distribution and recording of all bills and statements for
professional services rendered by Group, including the billing
and completion of reports and forms required by insurance
companies, governmental agencies or other third-party payors
(such records, papers, documents, ledgers, journals and reports
shall not be deemed to include patient records and other records,
reports and documents which relate to patient treatment by
Group's dentists). The Books and Records at all times shall be
materially correct and complete and contain correct and timely
entries made with respect to transactions entered into pursuant
hereto in accordance with generally accepted accounting
principles ("GAAP") as in effect at such time.
It is understood, however, that all such business records, papers
and documents are the sole property of Group, shall be available
for inspection by Group at all times, and shall be delivered to
Group upon termination of this Agreement. Group shall provide MHS
with a complete copy of all such documents, records, and papers
at Group's expense upon termination of this Agreement.
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Mutual Health Systems, Inc. - Support Services Agreement 5
<PAGE>
b. Contract Administration.
MHS shall provide Group with administrative services reasonably
necessary to enable Group to perform on a timely basis all
non-dental aspects of prepaid dental care contracts and other
dental care contracts of Group. Such services shall include the
preparation and analysis of reports to enable Group to provide
dentist staffing and supervision at the Clinics for the rendering
of efficient and appropriate dental care to patients.
c. Non-dentist Personnel.
MHS shall employ and provide such support personnel to Group as
may be reasonably necessary to enable Group to perform its dental
services at the Clinics subject to the following:
i. MHS shall provide all personnel at the Clinics excluding
dentists, dental assistants, nurses and dental hygienists.
This shall include, but is not limited to, the provision of
all receptionists, secretaries, clerks, purchasing and
marketing personnel, janitorial and maintenance personnel,
and nondentist supervisory personnel as may be deemed
reasonably necessary by MHS for the proper and efficient
operation of the Clinics;
ii. MHS shall be responsible for hiring and firing all such
support personnel, and shall determine compensation for all
such personnel, including the determination of the salaries,
fringe benefits, bonuses, health and disability insurance,
workers' compensation insurance, and any other benefits that
each such employee shall receive; and
iii. MHS shall manage and supervise all licensed support personnel
employed on behalf of Group at the Clinics, including, but
not limited to all nurses, dental assistants, and dental
hygienists, regarding those aspects of their employment that
do not involve performance under the scope of their
licensure; provided, however that Group shall manage and
supervise all activities of such licensed support personnel
performed under the scope of their licensure. Group shall be
solely responsible for management and supervision of
dentists.
Provision of dental services during extended hours of operation,
generally including at least 60 hours per week during which
Clinics are open to the public, is a central feature of Group's
operations and competitive strategy. MHS agrees to provide
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Mutual Health Systems, Inc. - Support Services Agreement 6
<PAGE>
staffing as reasonably required to permit operation of the
Clinics during extended hours of operation.
d. Supplies.
MHS shall acquire and supply to Group all dental and other
supplies of every kind, name or nature, which may reasonably be
required by Group for the operation of the Clinics, provided that
Group shall be responsible for ordering, receiving and handling
all pharmaceuticals and related supplies for which state or
federal certification, registration or licensure is required.
e. Security and Maintenance.
MHS shall provide to Group all services and personnel reasonably
necessary to provide Group with proper security, maintenance, and
cleanliness of the Clinics and the furniture, fixtures,
equipment, and leasehold improvements located thereat.
Additionally, MHS shall furnish to or obtain for Group all
laundry, linens, uniforms, printing, stationery, forms, telephone
service, postage, duplication services, and any and all other
supplies and services of a similar nature which are reasonably
necessary in connection with the day-to-day operation of the
Clinics.
f. Dentist Recruiting.
MHS shall assist Group in recruiting and screening prospective
dentists and licensed support personnel as employees or
contractors for Group. Group shall be solely responsible for
hiring, supervision, training, evaluation and termination of
dentists. Group shall be responsible for hiring and termination
of licensed support personnel and for all supervision, training
and evaluation of such personnel with respect to all activities
performed under the scope of their licensure.
g. Insurance.
MHS shall use all reasonable efforts to obtain for Group and
maintain in full force and effect during the term of this
Agreement, and all extensions and renewals thereof, comprehensive
commercial liability and property insurance which MHS reasonably
determines to be appropriate to protect against loss in the
nature of fire, other catastrophe, theft, business interruption,
public liability, and non-dental negligence, with minimum
coverage limits of $1,000,000 per occurrence. MHS shall assist
Group in obtaining dental malpractice insurance for Group and its
dentist employees.
h. Billing and Collection
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Mutual Health Systems, Inc. - Support Services Agreement 7
<PAGE>
In order to relieve Group of the administrative burden of
handling the billing and collection of sums due for the delivery
of dental services, MHS shall be responsible, on behalf of and
for Group and any contract dentists or independent dentists or
other organizations practicing dentistry for or on behalf of
Group, on their respective billheads as their agent, for billing
and collecting the charges with respect to all dental and other
services provided at the Clinics. Group agrees that it will keep
and provide to MHS all documents, opinions, diagnosis,
recommendations, and other evidence and records necessary for the
purpose of supporting the fees charged for all dental and other
services from time to time.
It is expressly understood that the extent to which MHS will
endeavor to collect such charges, the methods of collecting, the
settling of disputes with respect to charges and the writing off
of charges that may be or appear to be uncollectible shall at all
times be within the sole discretion of MHS (but subject to all
applicable governmental regulations and the terms and conditions
of applicable provider agreements) and that MHS does not
guarantee the extent to which any charges billed will be
collected.
Group or its duly authorized agent shall have the right at all
reasonable times and upon the giving of reasonable notice to
examine, inspect and copy the records of MHS pertaining to such
fees, charges, billings, and collections. At Group's request, MHS
will re-assign to Group, for collection by Group, any accounts
which MHS has determined to be uncollectible.
i. Bank Accounts and Disbursements.
During the term of this Agreement, MHS is hereby expressly
authorized to, and shall, disburse from one or more bank accounts
of Group sums for the payment of Group's expenses as described in
Section 5, MHS' compensation as described in section 9, and all
other costs, expenses and disbursements which are required or
authorized by this Agreement. For administrative convenience, MHS
shall maintain said bank accounts.
j. Market Research.
MHS shall conduct market research with respect to rates, charges,
competitive conditions, competition and business opportunities
for MHS and Group. MHS shall compile such information and provide
marketing reports and analyses to Group. All such marketing
services shall be conducted in accordance with the laws, rules,
regulations and guidelines of all applicable governmental and
quasi-governmental agencies.
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Mutual Health Systems, Inc. - Support Services Agreement 8
<PAGE>
k. Contract Negotiations.
MHS shall negotiate on Group's behalf contracts with health
plans, preferred provider organizations, other group plans,
independent provider associations, employers, hospitals, dentists
and others for Group's services at the Clinics, for admission of
Group's patients for hospitalization, and for the provision of
dental care services for Group's patients by other dentists with
specialties not available at Group. Group shall have final
approval and authority with respect to such contracts, and Group
shall have the sole and absolute right not to enter into any such
contracts.
l. Management and Planning Reports.
MHS shall supply Group on a regular, periodic basis such internal
reports as may be necessary or appropriate for the parties to
assist each other in evaluating the non-dental aspects of the
performance and productivity of their respective employees and
contractors as well as in evaluating the efficiency and
effectiveness of the rendition of their respective management and
other nonprofessional services. MHS shall provide Group with data
and reports for Group's exclusive use in conducting Group's
dental practice, evaluating the performance of Group's dentists
and for other purposes related to maintaining and improving
patient care quality and improving the efficiency of Group's
dentists.
5. Duties of Group
a. Conduct of Dental Practice.
Group shall be solely and exclusively in control of all aspects
of the practice of dentistry and the delivery of dental services
at the Clinics. The rendition of all dental professional
services, including, but not limited to, diagnosis, treatment,
surgery, therapy and the prescription of medicine and drugs, and
the supervision of preparation of dental reports shall be the
responsibility of Group. Group shall have the sole right and
authority to hire, employ, train, supervise, terminate, and
compensate all of its dentist-contractors and dentist-employees,
dental assistants, and dental hygienists.
MHS shall have no authority whatsoever with respect to such
activities, and shall have no authority with respect to the
establishment of fees or charges for the rendition of such
services.
b. Staffing of Clinics
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Mutual Health Systems, Inc. - Support Services Agreement 9
<PAGE>
Group agrees to assign a dentist to act as Clinical Director at
each Clinic. Group will assure that each Clinic is adequately
staffed during operating hours, including extended hours of
operation, with such dental personnel as may be necessary to
efficiently carry out the practice of dentistry at each Clinic.
c. Professional Personnel.
Group shall ensure that dentists and other licensed personnel
employed or contracted by Group are properly licensed and
trained. Group shall be responsible for monitoring quality of
care, responding to any patient complaints concerning dental
services and undertaking appropriate quality improvement
activities. Group shall arrange for continuing education for
licensed personnel in accordance with all legal requirements and
good professional practice.
d. Wages, etc.
Group shall be solely responsible for payment of all wages,
salaries, bonuses and benefits of its employed licensed
personnel, including all payroll taxes, vacation and sick pay,
insurance and pension or profit sharing contributions.
Group shall be solely responsible for payment of all amounts due
to contracted licensed personnel under service contracts with
Group. MHS shall provide payroll processing and accounts payable
services as provided in this Agreement.
e. Professional Expenses.
Group shall pay all professional dues and license fees,
continuing education costs and similar costs incurred by Group's
employees. Group shall pay the cost of all professional liability
insurance maintained pursuant to paragraph 5.f.
f. Professional Liability Insurance.
Group shall continuously maintain throughout the term of this
Agreement professional liability (malpractice) insurance for all
licensed personnel of Group in amounts not less than $1,000,000
per incident and $3,000,000 annual limit for each dentist and
dental hygienist employed by Group. Group shall purchase extended
reporting endorsements ("tail coverage") for personnel leaving
employment with Group, or on change in insurance policies, if
such coverage is available at reasonable rates. Group shall
require all contracted dentists and dental hygienists to maintain
similar coverages. The minimum amounts of insurance required by
this Agreement shall be increased as necessary to reflect current
standards for dental malpractice coverage.
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Mutual Health Systems, Inc. - Support Services Agreement 10
<PAGE>
6. Relationship of Parties.
The President of Group, or another licensed dentist designated by
Group, shall act as Group's liaison to MHS. Group shall delegate to
such person all authority to make decisions on behalf of Group
concerning day-to-day operations. The person so designated shall
consult with MHS on operational matters as requested. If approval by
directors or shareholders of Group is required or requested for any
action recommended or referred for approval by MHS, Group shall take
all reasonable steps to promptly refer the matter for decision to
Group's directors or shareholders, as appropriate.
Group designates MHS' President, or his representative, as Group's
Attorney-In-Fact, with full right and authority, but in each instance
at Group's express direction, to execute contracts on behalf of Group,
including, but not limited to health plan agreements and employment
agreements. As Attorney-In-Fact, MHS' President shall have the right
to authorize expenditures on behalf of Group for all activities
related to its business.
Notwithstanding the above, this Agreement is a business support
services agreement only. MHS shall have no control over Group, and
Group shall retain the sole and exclusive authority over all aspects
of its dental practice including, but not limited to, the authority to
approve the locations of Clinics, the types of improvements,
furnishings, equipment and supplies to be utilized, the manner of
practice of dentistry or related ancillary services, marketing
approaches or advertisements, choice of dental personnel, treatment
decisions, assignment of patients to professionals, the content of
dental evaluation reports, fees charged, programs and services engaged
in, and any aspects of dental practice not listed that are the sole
prerogative of a duly licensed dentist under applicable state law.
In the performance of this Agreement, it is mutually understood and
agreed that all dentists, dental hygienists and dental assistants
practicing at any of the Clinics are at all times acting and
performing as employees of Group or as contractors with Group
("Group's Personnel") and not as employees or agents of MHS. MHS shall
neither have nor exercise any control or direction over the methods by
which Group or Group's Personnel shall practice dentistry.
Group and Group's Personnel shall have no claim under this Agreement
or otherwise against MHS for workers' compensation, unemployment
compensation, sick leave, vacation pay, retirement benefits, Social
Security benefits, or any other employee benefits, all of which shall
be the sole responsibility of Group. Since the Group's Personnel are
not employees of MHS, MHS shall not withhold on behalf of Group's
Personnel pursuant to this Agreement any sums for income tax,
unemployment insurance, Social Security, or otherwise pursuant to any
law or requirement of any governmental agency, and all such
withholding, if any is required, shall be the sole responsibility of
Group. Group shall
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Mutual Health Systems, Inc. - Support Services Agreement 11
<PAGE>
indemnify and hold harmless MHS from any and all loss or liability
arising with respect to any of the foregoing benefits or withholding
requirements.
Group shall require all dentists in its employ to execute
non-competition agreements in a form satisfactory to MHS that prohibit
such dentists from providing dental services within five miles of a
location at which they provided dental services for Group for a period
of two years after termination of employment with Group. Group shall
take all reasonable steps to enforce such agreements in the event of
any breach thereof.
All patient records, reports and information obtained, generated or
encountered relating to Clinics shall at all times be the property of
Group and so long as in the possession, use or control of either
party, shall be kept in the strictest confidence by both parties. MHS
shall instruct all of its personnel to keep confidential any such
information, as well as any financial, statistical, personnel, and
patient information obtained or encountered relating to Group or to
Group's operations.
Group shall not solicit, employ or contract with any employee of MHS
or any entity or person that employs or contracts with any employee of
MHS, for a period of two years after any such employee ceases to be
employed by MHS. Should Group breach this specific provision, Group
acknowledges that the damages to MHS would be difficult to ascertain,
and shall as reasonable compensation and liquidated damages promptly
pay MHS the sum of $40,000.
7. Confidential Information and Trade Secrets.
Group recognizes that due to the nature of this Agreement, Group will
have access to information of a proprietary nature owned by MHS
including, but not limited to, any and all computer programs, and any
and all operating manuals or similar materials which constitute the
non-dental systems, policies, procedures, and methods of doing
business developed for the operation of facilities managed by MHS.
Consequently, Group acknowledges and agrees that MHS has a proprietary
interest in all such information and that all such information
constitutes confidential and proprietary information and trade secrets
of MHS. Group hereby waives any and all right, title and interest in
and to such trade secrets and confidential information and agrees to
return all copies of such trade secrets and confidential information
related thereto to MHS, at Group's expense, upon the termination of
this Agreement.
Group further acknowledges and agrees that MHS is entitled to prevent
its competitors from obtaining and utilizing its trade secrets and
confidential information. Therefore, Group agrees to hold MHS' trade
secrets and confidential information in strictest confidence and not
to disclose them or allow them to be disclosed, directly or
indirectly, to any person or entity other than those persons or
entities who are employed by or
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Mutual Health Systems, Inc. - Support Services Agreement 12
<PAGE>
affiliated with MHS or Group, without the prior written consent of
MHS. Group shall not, either during the term of this Agreement, or at
any time after the expiration or sooner termination of this Agreement,
disclose to anyone other than persons or entities who are employed by
or affiliated with MHS or Group any confidential or proprietary
information or trade secret information obtained by Group from MHS,
except as otherwise required by law. Group agrees to require each
independent contractor and employee of the Group, and any such persons
or entities to whom such information is disclosed for the purpose of
performance of MHS' or Group's obligations under this Agreement, to
execute a "Confidentiality Agreement" regarding such information in
such form as from time-to-time may be approved by Group and MHS.
Group acknowledges and agrees that a breach of this Paragraph 7 will
result in irreparable harm to MHS which cannot be reasonably or
adequately compensated in damages, and therefore MHS shall be entitled
to injunctive and/or equitable relief to prevent a breach and to
secure enforcement thereof, in addition to any other relief or award
to which MHS may be entitled.
8. Working Capital.
a. Assignment of Accounts Receivable to MHS.
Group hereby assigns, without recourse, to MHS all of Group's
accounts receivable and other rights and interests in all sums
which Group receives or becomes entitled to receive for the
performance of dental services by Group's Dentists, for other
services performed by employees of Group, and for charges by
Group for supplies and other items for which Group is entitled to
charge as reflected in invoices issued by Group with respect to
the Clinics; provided, however, that no assignment shall be made
of any sums or rights to payment the assignment of which is
prohibited by law.
b. Remittance to Group.
Periodically, as required to meet Group's financial obligations,
and after deduction of amounts which are retained by MHS as
compensation, cash equal to all remaining Net Revenues shall be
remitted to Group. Group shall be responsible for paying the
expenses described in section 5 above from funds of Group.
9. MHS' Compensation.
For its services hereunder, including provision of all facilities,
furniture, fixtures and equipment at the Clinics, provision of all
employees of MHS who perform services at or
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Mutual Health Systems, Inc. - Support Services Agreement 13
<PAGE>
for the Clinics, and provision of insurance, supplies and management
services contemplated hereunder, Group shall pay MHS the following
service fee:
during the first calendar year after the Effective Date,
50% of Net Revenues
during the second calendar year after the Effective Date,
51% of Net Revenues
during the third calendar year after the Effective Date,
52% of Net Revenues
during the fourth calendar year after the Effective Date,
53% of Net Revenues
during the fifth calendar year after the Effective Date,
54% of Net Revenues
during the sixth calendar year and for the remainder of the term of
this Agreement and any renewal term 55% of Net Revenues. The service
fee can be adjusted by mutual agreement from time to time. Payment
shall be made by deduction of the amount due from amounts remitted to
Group as provided in paragraph 8.b. above. Monthly payments shall be
made based on unaudited Net Revenues year-to-date; final adjustment of
the fee shall be made based on audited Net Revenue for the calendar
year.
For 1996, the service fee payable to MHS under this Agreement is
allocated to the following services, to the extent an allocation is
necessary or appropriate:
10% of Net Revenues Rents and utilities
30% of Net Revenues Support staff and administrative services
10% of Net Revenues Supplies
Increases in MHS' service fee in 1997 and following shall be allocated
proportionately to each of the three service categories, to the extent an
allocation is necessary or appropriate. In 2001 and following, the
allocations will be:
11% of Net Revenues Rents and utilities
33% of Net Revenues Support staff and administrative services
11% of Net Revenues Supplies
10. Definitions.
Any accounting term used in this Agreement shall have, unless
otherwise specifically provided herein, the meaning customarily given
in accordance with generally accepted accounting principles ("GAAP"),
and all financial computations hereunder shall be computed unless
otherwise specifically provided herein, in accordance with GAAP as
consistently applied and using the same method of valuation as used in
the preparation of MHS's financial statements.
"Gross Revenues" means all billings by Group for services rendered
during the term of this Agreement, billed at Group's standard rates.
For purposes of capitated service
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Mutual Health Systems, Inc. - Support Services Agreement 14
<PAGE>
contracts, "Gross Revenues" means the amount of revenue received under
the service contract for services rendered during the term of this
Agreement. "Net Revenues" means all Gross Revenues net of allowances
for contractual discounts and bad debt. Bad debt allowances shall be
determined in accordance with GAAP. Contractual discount allowances
shall be based on reasonable estimates as determined by MHS.
11. Miscellaneous Authority and Duties of the Parties.
MHS is hereby exclusively authorized by Group to perform all services
required of MHS pursuant to the terms of this Agreement as MHS deems
reasonable and appropriate in order to meet the day-to-day
requirements of Group. MHS may subcontract with other persons or
entities to perform any part or all of the services required of MHS
hereunder.
Each of the parties agrees to cooperate fully with the other in
connection with the performance of their respective obligations under
this Agreement, and both parties agree to employ their best efforts to
resolve any dispute that may arise under or in connection with this
Agreement. Subject to MHS maintaining the confidentiality of patient
records and Group's confidential information, Group shall provide to
MHS full and complete access to the Group's premises, and to Group
charts, Books and Records, in order that MHS can perform its functions
hereunder.
During the term of this Agreement, at Group's direction MHS shall add
facilities or clinics for the practice of dentistry by Group, and
Group shall staff those facilities with dental personnel and shall
deliver dental services therein. MHS shall exclusively provide the
services contemplated by this Agreement in those facilities. Group
shall not open or otherwise participate in the operation of any dental
clinics or otherwise expand its operations other than through the
exclusive relationship with MHS as described in this Agreement.
Notwithstanding any other provisions contained herein, MHS shall not
be liable to Group, and shall not be deemed to be in default
hereunder, for the failure to perform or provide any of the supplies,
services, personnel, or other obligation to be performed or provided
by MHS pursuant to this Agreement if such failure is a result of a
labor dispute, act of God, or any other event which is beyond the
reasonable control of MHS.
12. Term and Termination.
a. Unless sooner terminated in accordance with the provisions of
this Agreement, this Agreement shall remain in effect for an
initial term of forty (40) years after the Effective Date.
Following the initial term, this agreement shall be automatically
renewed for successive ten (10) year renewal terms unless more
than 180 days
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Mutual Health Systems, Inc. - Support Services Agreement 15
<PAGE>
prior to the end of the initial term or any renewal term either
party gives notice of termination.
b. This Agreement may be terminated by any of the following:
i. In the event of a material breach of this Agreement by
either party, the other party shall have the right to cancel
this Agreement by service of written notice upon the
defaulting party (the "Default Notice"). In the event such
breach is not cured within thirty (30) days after service of
the Default Notice, this Agreement shall immediately
terminate at the election of the non-defaulting party upon
the giving of a written notice of termination to the
defaulting party no later than thirty (30) days after the
giving of the Default Notice, unless such breach cannot be
cured within thirty (30) days and the defaulting party gives
timely notice to the other party to such effect and promptly
undertakes appropriate steps to effect such cure and pursues
such action to conclusion.
ii. MHS may terminate this Agreement upon one (1) day's notice
in the event of the dissolution or liquidation of the Group.
iii. Upon institution of any voluntary or involuntary bankruptcy,
reorganization, insolvency or receivership proceedings, or
any assignment for the benefit of creditors, the other party
may immediately terminate this Agreement on written notice
to the party involved in such proceedings.
c. Upon any termination of this Agreement, it is understood and
agreed that the right of Group to occupy the Clinics and to use
and possession of the furniture, fixtures, furnishings, equipment
and leasehold improvements shall terminate, and Group shall
immediately vacate and surrender possession to MHS of the
Clinics, furniture, fixtures, furnishings, equipment and
leasehold improvements as well as all other materials and
supplies then located in or upon the premises of such Clinics.
The various rights and remedies herein provided shall be
cumulative and in addition to any other rights and remedies the
parties may be entitled to pursue under the law. The exercise of
one or more of such rights or remedies shall not impair the
rights of either party to exercise any other right or remedy at
law or in equity.
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Mutual Health Systems, Inc. - Support Services Agreement 16
<PAGE>
Termination of the Agreement shall not release or discharge
either party from any obligation, debt or liability which shall
have previously accrued and remain to be performed upon the date
of termination.
13. Indemnification.
Each party shall indemnify, hold harmless, and defend the other party
from any and all liability, loss, claims, lawsuits, damages, injury,
costs or expenses (including reasonable attorneys' fees incurred at
trial, on appeal or on review) arising out of or incident to acts or
omissions by such indemnifying party, its employees, contractors and
subcontractors provided, however, neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to
the extent the liability of such party exceeds the amount of such
insurance coverage.
14. Assignment.
This Agreement, and the rights and obligations created hereunder,
shall not be assignable by Group, either voluntarily or by operation
of the law, without the express prior written consent of MHS. Any
assignment without such consent shall be null and void. Group shall
not sublet any Clinic or any part thereof, and Group shall not
sublease any of the furniture, furnishings, leasehold improvements or
equipment referred to in this Agreement without the express prior
written agreement of MHS. Subject to the foregoing, this Agreement
shall be binding upon and inure to the benefit of the parties, their
heirs, executors and assigns.
15. Governing Law.
This Agreement shall be governed by and construed under the laws of
the State of Oregon.
16. Waiver.
The waiver of any covenant, condition or duty hereunder by either
party shall not prevent that party from later insisting upon full
performance of the same.
17. Amendment.
No amendment to the terms of this Agreement shall be binding on either
party unless in writing and executed by the duly authorized
representatives of each party.
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Mutual Health Systems, Inc. - Support Services Agreement 17
<PAGE>
18. Entire Agreement.
This Agreement constitutes the entire agreement between the parties in
connection with the subject matter hereof and supersedes all prior
agreements, whether written or oral, and whether explicit or implicit,
which have been entered into before the execution hereof. Should any
litigation or arbitration arise between the parties, neither party
shall (and each party hereby waives the right to) introduce any parol
evidence which would tend to contradict or impeach any of the express
written terms, conditions, and covenants of this Agreement.
19. Notice.
Any notice or other communication required or which may be given
hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed or sent by facsimile, or sent by certified,
registered or express mail, postage prepaid, and shall be deemed given
when so delivered personally, telegraphed or telexed or sent by
facsimile, or if mailed, two days after the day of mailing, as
follows:
(i) If to MHS to:
Mutual Health Systems, Inc.
7725 NE Highway 99, Suite B
Vancouver, WA 98665
Attention: President
With a copy to:
Stoel Rives LLP
900 SW Fifth Avenue, Suite 2300
Portland, OR 97204-1268
Attention: Edward L. Epstein, Esq.
(ii) If to Group:
Gentle Dental of Oregon, P.C.
7725 NE Highway 99, Suite B
Vancouver, WA 98665
Attention: President
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Mutual Health Systems, Inc. - Support Services Agreement 18
<PAGE>
20. Arbitration.
Any disagreement which the parties are unable to resolve by mutual
agreement shall be submitted to private arbitration in accordance with
the rules of the American Arbitration Association ("AAA"), except as
modified by this Agreement.
The arbitration shall be conducted by a single, neutral arbitrator
appointed in accordance with AAA procedures. Unless the parties agree
otherwise, the arbitration proceedings and venue for the filing of
exceptions, if any, shall be Multnomah County, Oregon. Discovery of
documents shall be permitted to the full extent permitted by the
Federal Rules of Civil Procedure ("FRCP"). Other types of discovery
available under the FRCP shall be permitted as the arbitrator shall
find to be appropriate. The parties shall share equally the costs of
the arbitrator and all other costs of arbitration, except that each
party shall be solely responsible for its own attorneys' fees and
expenses. Exceptions to the decision of the arbitrator can be filed in
accordance with ORS 36.355; in addition to the grounds recognized in
that statute, an exception may be filed based on mistake of law.
Judgment on the arbitration award can be filed in any court with
jurisdiction.
Arbitration under this Agreement shall be governed by the Federal
Arbitration Act, and by Oregon law to the extent not inconsistent with
the Federal Arbitration Act.
To the greatest extent consistent with law and disclosure requirements
applicable to either party, and except as required in a judicial
proceeding contemplated by this section 20, the parties shall keep all
matters relating to any arbitration confidential, including the
existence and subject of the arbitration.
21. Miscellaneous Provisions.
a. Changes In Law.
In the event that any state or federal laws or regulations now in
effect or enacted or promulgated after the execution of this
Agreement are interpreted by judicial decision, regulatory agency
or legal counsel in such a manner as to indicate that the
structure of this Agreement may be in violation of such laws or
regulations, the parties shall negotiate in good faith and shall
seek agreement on modifications or amendments to this Agreement
that appropriately address the possible violation of law or
regulation while preserving the intent of this Agreement as
nearly as possible. If the parties are unable to reach agreement
within a reasonable time, the parties shall proceed as set forth
in section 20.
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Mutual Health Systems, Inc. - Support Services Agreement 19
<PAGE>
b. Partial Invalidity.
If any one or more of the terms, provisions, promises, covenants,
or conditions of this Agreement or the application thereof to any
person or circumstance shall be adjudged to any extent invalid,
unenforceable, void or voidable for any reasons whatsoever by a
court of competent jurisdiction, each and all of the remaining
terms, provisions, promises, covenants and conditions of this
Agreement or their application to other persons or circumstances
shall not be affected thereby and shall be valid and enforceable
to the fullest extent permitted by law.
c. Heading, Titles.
The headings appearing herein are for convenience and reference
only and shall not be deemed to govern, limit, modify or in any
manner affect the scope, meaning or intent of the provisions of
this Agreement.
d. Binding Effect.
Subject to the provisions contained herein, this Agreement shall
be binding upon and inure to the benefit of the parties hereto
and their respective successors.
e. Covenants and Conditions.
Each covenant hereof is a condition, and each condition hereof is
as well a covenant by the parties bound thereby unless waived in
writing by the parties hereto.
f. Approval and Consent.
Whenever in this Agreement an approval or consent is required by
one of the parties, the same shall not be unreasonably withheld.
g. Attorneys' Fees.
In the event suit or action is brought to enforce any of the
terms of this Agreement, the prevailing party shall be entitled
to recover fees and expenses incurred in such action or
proceeding, including reasonable attorneys' fees, incurred at
trial, on appeal or on review.
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Mutual Health Systems, Inc. - Support Services Agreement 20
<PAGE>
h. Supersedes Prior Agreement.
This Agreement shall amend, restate and supersede the Prior
Agreement and all amendments thereto effective as of the
Effective Date.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as of the Effective Date.
MUTUAL HEALTH SYSTEMS, INC. GENTLE DENTAL OF OREGON, P.C.
- ---------------------------------- ----------------------------------
John Castles William Saiget, DMD
President President
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Mutual Health Systems, Inc. - Support Services Agreement 21
ASSET PURCHASE AGREEMENT
among
MUTUAL HEALTH SYSTEMS, INC.
and
Tse, Saiget, Watanabe & McClure, Inc. P.S.
Dated December 31, 1994
<PAGE>
ASSET PURCHASE AGREEMENT
THIS AGREEMENT is made December 31, 1994, between Tse, Saiget, Watanabe &
McClure, Inc. P.S., ("Seller") and Mutual Health Systems, Inc. ("Buyer").
1. Seller is engaged in the practice of dentistry at various locations in
Vancouver, Washington, and vicinity, under the name of Gentle Dental.
2. Seller, in connection with the operation of the aforementioned dental
practices, is owner of certain dental equipment, fixtures,
furnishings, leasehold improvements and signage.
3. Seller, in connection with the operation of the aforementioned dental
practices, has incurred certain liabilities, both to third parties and
to Buyer.
4. Buyer is desirous of purchasing certain assets. As consideration for
those assets Buyer shall forgive certain liabilities of Seller to
Buyer, and Buyer shall assume certain third party liabilities of
Seller, upon the terms and conditions hereinafter set forth.
NOW THEREFORE, IN CONSIDERATION OF THE MUTUAL BENEFITS ACCRUING TO EACH
PARTY HERETO, IT IS AGREED BETWEEN SELLER AND BUYER AS FOLLOWS:
1. Sale of Assets.
Seller agrees to sell and Buyer agrees to purchase, free from all
liabilities and encumbrances other than those expressly stated herein,
all of those certain assets (the "Assets") described in Schedule 1 -
"Listing of Assets Sold" attached hereto and incorporated herein by
reference as though fully set forth, with a fair market value of
$465,882.
2. Purchase Price.
The Purchase Price for the Assets (the "Purchase Price") shall be
$465,882, consisting of the following:
A. The assumption by Buyer of the liabilities of Seller to the
extent and in the amounts identified on Schedule 2.A. -
"Liabilities Assumed", and in the total amount of $339,297.05
and,
1
<PAGE>
B. The assumption by Buyer of all obligations of Seller under any of
the Leases or Contracts listed on Schedule 2.B - "Leases and
Contracts Assumed", in the amount of $0;
C. The forgiving by Buyer of all obligations of Seller to Buyer
identified on Schedule 2.C - "Liabilities Forgiven", in the total
amount of $126,584.95.
The Purchase Price shall be paid upon the Closing Date. The
Closing Date shall be December 31, 1994, at the offices of Buyer.
At such time Seller shall deliver to Buyer a Bill of Sale, and
all other instruments of sale, conveyance or assignment that may
be required for the proper transfer by Seller to Buyer of all of
the assets being sold hereunder, free of all encumbrances other
than those expressly stated herein.
3. Sellers Indemnity.
Buyer is not assuming any debt, liability, or obligation of Seller,
whether known or unknown, fixed or contingent, other than expressly
stated herein. Seller agrees to indemnify and hold Buyer harmless
against all debt, claims, liabilities and obligations of Seller not
expressly assumed by Buyer, and to pay any and all attorneys fees and
legal costs incurred by Buyer, its successors and assign in connection
therewith.
4. Conditions Precedent to Buyer's Performance.
A. Compliance with the Uniform Commercial Code, Bulk Transfers, or
an opinion of counsel acceptable to Buyer that the transfer
contemplated herein does not constitute a bulk sales transfer
within the meaning of applicable law.
B. Delivery by Seller of any necessary clearances and approvals from
state and/or local taxing authorities.
C. No action, suit, or arbitration before any court or government
body pertaining to or having an effect upon the transaction shall
have been instituted or threatened on or before the Closing Date.
D. All taxes, including, without limitations, state and local sales
and inventory taxes, federal, state, and local income taxes,
license fees and other administrative costs of doing business
affecting or having the potential to affect the assets, shall
have been paid current by Seller to the Closing Date.
5. Documentation Provided.
Seller shall provide Buyer with a Bill of Sale covering all assets
transferred, including the names of all vendors and all other entities
with whom the equipment must re
2
<PAGE>
registered for warranty, service, etc. Seller shall further provide
Buyer with a maintenance history and copies of service contracts
covering the assets transferred.
6. Sales Taxes & Transfer Taxes.
Buyer shall pay all sales taxes and / or transfer taxes incurred in
connection with the sale and transfer of the assets.
7. Warranties and Representations of Seller.
A. Seller has good and marketable title to all of the assets free
and clear of any liens, debts, attachments, pledges and other
claims other than as expressly stated herein.
B. Seller is paid current as of the Closing Date on all payments
relating to the assets, if any.
C. Any and all taxes, including without limitation, state and local
sales and inventory, federal, state, and local income taxes,
license fees and other administrative costs affecting or having
the potential to effect the assets have been paid current as of
the Closing Date.
D. There has not been any default in any obligation to be performed
under any contract to which Seller is a party related to or which
might have an affect upon the assets.
E. There is no suit, action, arbitration, administrative or
governmental proceeding or inquiry pending or, to the best of
Seller's knowledge, threatened against or affecting Seller,
relating to any of the assets.
F. Every consent, approval, authorization or order of any court or
governmental agency that is required for the consummation by
Buyer of the purchase transactions contemplated has been obtained
and will be in effect on the date of the closing.
G. Seller has complied with and is not in violation of applicable
federal, state, and local statutes, ordinances and regulation,
including without limitation, any applicable environmental,
health, building, zoning, or other law, ordinance, or regulation
affecting any of the assets, the premises, or the operation of
Seller's dental practice being conducted at the premises.
H. Seller has fully disclosed all facts and conditions that have or
might reasonable have or might reasonably be expected to have an
adverse impact on the assets.
3
<PAGE>
8. Survival of Representations and Warranties.
All representation, warranties, covenants and agreements of the
parties contained in this agreement, or in any instrument,
certificate, opinion, or other writing provided for herein, shall
survive the Closing.
9. Right to Repurchase Assets.
In the event of the institution of any bankruptcy, insolvency or
receivership proceedings by or against Buyer, Seller shall have a
preferential right, as permitted by law, to repurchase the Assets at
fair market value. Seller must notify Buyer within thirty days of the
date of institution of any bankruptcy, insolvency or receivership
proceedings by or against Buyer of its intention to exercise this
preferential right, and must exercise this right within sixty days, of
the date of institution of any bankruptcy, insolvency or receivership
proceedings by or against Buyer.
10. Indemnification.
Each party shall indemnify, hold harmless, and defend the other party
from any and all liability, loss, claims, lawsuits, damages, injury,
costs or expenses arising out of or incident to the performance or
nonperformance under this Agreement by such indemnifying party, its
employees, contractors, subcontractors, and agents, including (without
limitation) to the other party hereunder for any claim covered by
insurance, except to the extent the liability of such party exceeds
the amount of such insurance coverage.
11. Governing Law.
This Agreement shall be governed by and construed under the laws of
the State of Washington.
12. Waiver.
The waiver of any covenant, condition or duty hereunder by either
party shall not prevent that party from later insisting upon full
performance of the same.
13. Entire Agreement.
This Agreement constitutes the entire agreement between the parties in
connection with the subject matter hereof, and supersedes all prior
agreements, whether written or oral, and whether explicit or implicit,
which have been entered into before the execution hereof. Should any
litigation or arbitration arise between the parties, neither party
shall (and each party hereby waives the right to) introduce any parol
evidence which would
4
<PAGE>
tend to contradict or impeach any of the express written terms,
conditions, and covenants of this Agreement.
14. Notice.
Any notice or other communication required or which may be given
hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed or sent by facsimile, or sent by certified,
registered or express mail, postage prepaid, and shall be deemed given
when so delivered personally, telegraphed or telexed or sent by
facsimile, or if mailed, two days after the day of mailing, as
follows:
(i) If to MHS to:
Mutual Health Systems, Inc.
7725 NE Highway 99, Suite B
Vancouver, WA 98665
Attention: President
With a copy to:
Stoel Rives Boley Jones & Grey
900 SW Fifth Avenue, Suite 2300
Portland, OR 97204-1268
Attention: Edward L. Epstein, Esq.
(ii) If to Group:
Tse, Saiget, Watanabe, & McClure, Inc. P.S.
7725 NE Highway 99, Suite B
Vancouver, WA 98665
Attention: President
15. Arbitration.
Agreement which the parties are unable to resolve by mutual agreement
shall be submitted to private arbitration in accordance with the rules
of the American Arbitration Association ("AAA"), except as modified by
this Agreement.
The arbitration shall be conducted by a single, neutral arbitrator
appointed in accordance with AAA procedures. Unless the parties agree
otherwise, the arbitration proceedings and venue for the filing of
exceptions, if any, shall be Multnomah County, OR. Discovery of
documents shall be permitted to the full extent permitted by the
Federal Rules of Civil Procedure ("FRCP"). Other types of discovery
available under the FRCP shall be permitted as the arbitrator shall
find to be
5
<PAGE>
appropriate. The parties shall share equally the costs of the
arbitrator and all other costs of arbitration, except that each party
shall be solely responsible for its own attorneys' fees and expenses.
Exceptions to the decision of the arbitrator can be filed in
accordance with RCW 7.04.160; in addition to the grounds recognized in
that statute, an exception may be filed based on mistake of law.
Judgment on the arbitration award can be filed in any court with
jurisdiction.
Arbitration under this Agreement shall be governed by the Federal
Arbitration Act, and by Washington law to the extent not inconsistent
with the Federal Arbitration Act.
To the greatest extent consistent with law, and except as required in
a judicial proceeding contemplated by this section 5.3, the parties
shall keep all matters relating to any arbitration confidential,
including the existence and subject of the arbitration.
16. Miscellaneous Provisions.
a. Partial Invalidity.
If any one or more of the terms, provisions, promises, covenants,
or conditions of the Agreement the application thereof to any
person or circumstance shall be adjudged to any extent invalid,
unenforceable, void or voidable for any reasons whatsoever by a
court of competent jurisdiction, each and all of the remaining
terms, provisions, promises, covenants and conditions of this
Agreement or their application to other persons or circumstances
shall not be affected thereby and shall be valid and enforceable
to the fullest extent permitted by law.
b. Heading, Titles.
The headings appearing herein are for convenience and reference
only and shall not be deemed to govern, limit, modify or in any
manner affect the scope, meaning or intent of the provisions of
this Agreement.
c. Binding Effect.
Subject to the provisions contained herein, this Agreement shall
be binding upon and inure to the benefit of the parties hereto
and upon their respective successors.
d. Covenants and Conditions.
Each covenant hereof is a condition, and each condition hereof is
as well a covenant by the parties bound thereby unless waived in
writing by the parties hereto.
6
<PAGE>
e. Approval and Consent.
Whenever in this Agreement an approval or consent is required by
one of the parties, the same shall not be unreasonably withheld.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement:
MUTUAL HEALTH SYSTEMS, INC. TSE, SAIGET, WATANABE & MCCLURE, INC. P.S.
JOHN CASTLES WILLIAM SAIGET
- --------------------------------- ------------------------------------------
JOHN CASTLES WILLIAM SAIGET, DMD
PRESIDENT PRESIDENT
7
ASSET PURCHASE AGREEMENT
among
MUTUAL HEALTH SYSTEMS, INC.
and
Gentle Dental of Oregon, P.C.
Dated December 31, 1994
<PAGE>
ASSET PURCHASE AGREEMENT
THIS AGREEMENT is made December 31, 1994, between Gentle Dental of Oregon,
P.C., ("Seller") and Mutual Health Systems, Inc. ("Buyer").
1. Seller is engaged in the practice of dentistry at various locations in
Portland, Oregon, and vicinity, under the name of Gentle Dental.
2. Seller, in connection with the operation of the aforementioned dental
practices, is owner of certain dental equipment, fixtures,
furnishings, leasehold improvements and signage.
3. Seller, in connection with the operation of the aforementioned dental
practices, has incurred certain liabilities, both to third parties and
to Buyer.
4. Buyer is desirous of purchasing certain assets. As consideration for
those assets Buyer shall forgive certain liabilities of Seller to
Buyer, and Buyer shall assume certain third party liabilities of
Seller, upon the terms and conditions hereinafter set forth.
NOW THEREFORE, IN CONSIDERATION OF THE MUTUAL BENEFITS ACCRUING TO
EACH PARTY HERETO, IT IS AGREED BETWEEN SELLER AND BUYER AS
FOLLOWS:
1. Sale of Assets.
Seller agrees to sell and Buyer agrees to purchase, free from all
liabilities and encumbrances other than those expressly stated herein,
all of those certain assets (the "Assets") described in Schedule 1 -
"Listing of Assets Sold" attached hereto and incorporated herein by
reference as though fully set forth, with a fair market value of
$862,031.
2. Purchase Price.
The Purchase Price for the Assets (the "Purchase Price") shall be
$862,031, consisting of the following:
A. The assumption by Buyer of the liabilities of Seller to the
extent and in the amounts identified on Schedule 2.A. -
"Liabilities Assumed", and in the total amount of $225,760.39;
and,
1
<PAGE>
B. The assumption by Buyer of all obligations of Seller under any of
the Leases or Contracts listed on Schedule 2.B - "Leases and
Contracts Assumed", in the amount of $0.
C. The forgiving by Buyer of all obligations of Seller to Buyer
identified on Schedule 2.C - "Liabilities Forgiven", in the total
amount of $636,270.61.
The Purchase Price shall be paid upon the Closing Date. The Closing
Date shall be December 31, 1994, at the offices of Buyer. At such time
Seller shall deliver to Buyer a Bill of Sale, and all other
instruments of sale, conveyance or assignment that may be required for
the proper transfer by Seller to Buyer of all of the assets being sold
hereunder, free of all encumbrances other than those expressly stated
herein.
3. Seller's Indemnity.
Buyer is not assuming any debt, liability, or obligation of Seller,
whether known or unknown, fixed or contingent, other than expressly
stated herein. Seller agrees to indemnify and hold Buyer harmless
against all debt, claims, liabilities and obligations of Seller not
expressly assumed by Buyer, and to pay any and all attorneys fees and
legal costs incurred by Buyer, its successors and assign in connection
therewith.
4. Conditions Precedent to Buyer's Performance.
A. Compliance with the Uniform Commercial Code, Bulk Transfers, or
an opinion of counsel acceptable to Buyer that the transfer
contemplated herein does not constitute a bulk sales transfer
within the meaning of applicable law.
B. Delivery by Seller of any necessary clearances and approvals from
state and/or local taxing authorities.
C. No action, suit, or arbitration before any court or government
body pertaining to or having an effect upon the transaction shall
have been instituted or threatened on or before the Closing Date.
D. All taxes, including, without limitations, state and local sales
and inventory taxes, federal, state, and local income taxes,
license fees and other administrative costs of doing business
affecting or having the potential to affect the assets, shall
have been paid current by Seller to the Closing Date.
5. Documentation Provided.
Seller shall provide Buyer with a Bill of Sale covering all assets
transferred, including the names of all vendors and all other entities
with whom the equipment must re
2
<PAGE>
registered for warranty, service, etc. Seller shall further provide
Buyer with a maintenance history and copies of service contracts
covering the assets transferred.
6. Sales Taxes & Transfer Taxes.
Buyer shall pay all sales taxes and / or transfer taxes incurred in
connection with the sale and transfer of the assets.
7. Warranties and Representations of Seller.
A. Seller has good and marketable title to all of the assets free
and clear of any liens, debts, attachments, pledges and other
claims other than as expressly stated herein.
B. Seller is paid current as of the Closing Date on all payments
relating to the assets, if any.
C. Any and all taxes, including without limitation, state and local
sales and inventory, federal, state, and local income taxes,
license fees and other administrative costs affecting or having
the potential to effect the assets have been paid current as of
the Closing Date.
D. There has not been any default in any obligation to be performed
under any contract to which Seller is a party related to or which
might have an affect upon the assets.
E. There is no suit, action, arbitration, administrative or
governmental proceeding or inquiry pending or, to the best of
Seller's knowledge, threatened against or affecting Seller,
relating to any of the assets.
F. Every consent, approval, authorization or order of any court or
governmental agency that is required for the consummation by
Buyer of the purchase transactions contemplated has been obtained
and will be in effect on the date of the closing.
G. Seller has complied with and is not in violation of applicable
federal, state, and local statutes, ordinances and regulation,
including without limitation, any applicable environmental,
health, building, zoning, or other law, ordinance, or regulation
affecting any of the assets, the premises, or the operation of
Seller's dental practice being conducted at the premises.
H. Seller has fully disclosed all facts and conditions that have or
might reasonable have or might reasonably be expected to have an
adverse impact on the assets.
3
<PAGE>
8. Survival of Representations and Warranties.
All representation, warranties, covenants and agreements of the
parties contained in this agreement, or in any instrument,
certificate, opinion, or other writing provided for herein, shall
survive the Closing.
9. Right to Repurchase Assets.
In the event of the institution of any bankruptcy, insolvency or
receivership proceedings by or against Buyer, Seller shall have a
preferential right, as permitted by law, to repurchase the Assets at
fair market value. Seller must notify Buyer within thirty days of the
date of institution of any bankruptcy, insolvency or receivership
proceedings by or against Buyer of its intention to exercise this
preferential right, and must exercise this right within sixty days, of
the date of institution of any bankruptcy, insolvency or receivership
proceedings by or against Buyer.
10. Indemnification.
Each party shall indemnify, hold harmless, and defend the other party
from any and all liability, loss, claims, lawsuits, damages, injury,
costs or expenses arising out of or incident to the performance or
nonperformance under this Agreement by such indemnifying party, its
employees, contractors, subcontractors, and agents, including (without
limitation) to the other party hereunder for any claim covered by
insurance, except to the extent the liability of such party exceeds
the amount of such insurance coverage.
11. Governing Law.
This Agreement shall be governed by and construed under the laws of
the State of Washington.
12. Waiver.
The waiver of any covenant, condition or duty hereunder by either
party shall not prevent that party from later insisting upon full
performance of the same.
13. Entire Agreement.
This Agreement constitutes the entire agreement between the parties in
connection with the subject matter hereof, and supersedes all prior
agreements, whether written or oral, and whether explicit or implicit,
which have been entered into before the execution hereof. Should any
litigation or arbitration arise between the parties, neither party
shall (and each party hereby waives the right to) introduce any parol
evidence which would
4
<PAGE>
tend to contradict or impeach any of the express written terms,
conditions, and covenants of this Agreement.
14. Notice.
Any notice or other communication required or which may be given
hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed or sent by facsimile, or sent by certified,
registered or express mail, postage prepaid, and shall be deemed given
when so delivered personally, telegraphed or telexed or sent by
facsimile, or if mailed, two days after the day of mailing, as
follows:
(i) If to MHS to:
Mutual Health Systems, Inc.
7725 NE Highway 99, Suite B
Vancouver, WA 98665
Attention: President
With a copy to:
Stoel Rives Boley Jones & Grey
900 SW Fifth Avenue, Suite 2300
Portland, OR 97204-1268
Attention: Edward L. Epstein, Esq.
(ii) If to Group:
Tse, Saiget, Watanabe, & McClure, Inc. P.S.
7725 NE Highway 99, Suite B
Vancouver, WA 98665
Attention: President
15. Arbitration.
Agreement which the parties are unable to resolve by mutual agreement
shall be submitted to private arbitration in accordance with the rules
of the American Arbitration Association ("AAA"), except as modified by
this Agreement.
The arbitration shall be conducted by a single, neutral arbitrator
appointed in accordance with AAA procedures. Unless the parties agree
otherwise, the arbitration proceedings and venue for the filing of
exceptions, if any, shall be Multnomah County, OR. Discovery of
documents shall be permitted to the full extent permitted by the
Federal Rules of Civil Procedure ("FRCP"). Other types of discovery
available under the FRCP shall be permitted as the arbitrator shall
find to be
5
<PAGE>
appropriate. The parties shall share equally the costs of the
arbitrator and all other costs of arbitration, except that each party
shall be solely responsible for its own attorneys' fees and expenses.
Exceptions to the decision of the arbitrator can be filed in
accordance with RCW 7.04.160; in addition to the grounds recognized in
that statute, an exception may be filed based on mistake of law.
Judgment on the arbitration award can be filed in any court with
jurisdiction.
Arbitration under this Agreement shall be governed by the Federal
Arbitration Act, and by Washington law to the extent not inconsistent
with the Federal Arbitration Act.
To the greatest extent consistent with law, and except as required in
a judicial proceeding contemplated by this section 5.3, the parties
shall keep all matters relating to any arbitration confidential,
including the existence and subject of the arbitration.
16. Miscellaneous Provisions.
a. Partial Invalidity.
If any one or more of the terms, provisions, promises, covenants,
or conditions of the Agreement the application thereof to any
person or circumstance shall be adjudged to any extent invalid,
unenforceable, void or voidable for any reasons whatsoever by a
court of competent jurisdiction, each and all of the remaining
terms, provisions, promises, covenants and conditions of this
Agreement or their application to other persons or circumstances
shall not be affected thereby and shall be valid and enforceable
to the fullest extent permitted by law.
b. Heading, Titles.
The headings appearing herein are for convenience and reference
only and shall not be deemed to govern, limit, modify or in any
manner affect the scope, meaning or intent of the provisions of
this Agreement.
c. Binding Effect.
Subject to the provisions contained herein, this Agreement shall
be binding upon and inure to the benefit of the parties hereto
and upon their respective successors.
d. Covenants and Conditions.
Each covenant hereof is a condition, and each condition hereof is
as well a covenant by the parties bound thereby unless waived in
writing by the parties hereto.
6
<PAGE>
e. Approval and Consent.
Whenever in this Agreement an approval or consent is required by
one of the parties, the same shall not be unreasonably withheld.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement:
MUTUAL HEALTH SYSTEMS, INC. GENTLE DENTAL OF OREGON, P.C.
JOHN CASTLES WILLIAM SAIGET
- ----------------------------------- -----------------------------------
JOHN CASTLES WILLIAM SAIGET, DMD
PRESIDENT PRESIDENT
7
<PAGE>
ASSET PURCHASE AGREEMENT
among
MUTUAL HEALTH SYSTEMS, INC.
and
Tse, Saiget, Watanabe & McClure, Inc. P.S.
Dated January 2, 1995
<PAGE>
ASSET PURCHASE AGREEMENT
THIS AGREEMENT is made January 2, 1995, between Tse, Saiget, Watanabe &
McClure, Inc. P.S., ("Seller") and Mutual Health Systems, Inc. ("Buyer").
1. Seller is engaged in the practice of dentistry at various locations in
Vancouver, Washington, and vicinity, under the name of Gentle Dental.
2. Seller, in connection with the operation of the aforementioned dental
practices, is owner of certain dental equipment, fixtures,
furnishings, leasehold improvements and signage.
3. Seller, in connection with the operation of the aforementioned dental
practices, has incurred certain liabilities, both to third parties and
to Buyer.
4. Buyer is desirous of purchasing certain assets. As consideration for
those assets Buyer shall forgive certain liabilities of Seller to
Buyer, and Buyer shall assume certain third party liabilities of
Seller, upon the terms and conditions hereinafter set forth.
NOW THEREFORE, IN CONSIDERATION OF THE MUTUAL BENEFITS ACCRUING TO
EACH PARTY HERETO, IT IS AGREED BETWEEN SELLER AND BUYER AS
FOLLOWS:
1. Sale of Assets.
Seller agrees to sell and Buyer agrees to purchase, free from all
liabilities and encumbrances other than those expressly stated herein,
all of Seller's accounts receivable, with a face value of $1,153,882
and an estimated fair market value of $1,119,266.
2. Purchase Price.
The Purchase Price for the Assets (the "Purchase Price") shall be an
interest only, promissory note for $1,119,266, payable by Buyer on
December 31, 1995. The Purchase Price shall be paid upon the Closing
Date. The Closing Date shall be January 2, 1995, at the offices of
Buyer. At such time Seller shall deliver to Buyer a Bill of Sale, and
all other instruments of sale, conveyance or assignment that may be
required for the proper transfer by Seller to Buyer of all of the
assets being sold hereunder, free of all encumbrances other than those
expressly stated herein.
1
<PAGE>
3. Seller's Indemnity.
Buyer is not assuming any debt, liability, or obligation of Seller,
whether known or unknown, fixed or contingent, other than expressly
stated herein. Seller agrees to indemnify and hold Buyer harmless
against all debt, claims, liabilities and obligations of Seller not
expressly assumed by Buyer, and to pay any and all attorneys fees and
legal costs incurred by Buyer, its successors and assign in connection
therewith.
4. Conditions Precedent to Buyer's Performance.
A. Compliance with the Uniform Commercial Code, Bulk Transfers, or
an opinion of counsel acceptable to Buyer that the transfer
contemplated herein does not constitute a bulk sales transfer
within the meaning of applicable law.
B. Delivery by Seller of any necessary clearances and approvals from
state and/or local taxing authorities.
C. No action, suit, or arbitration before any court or government
body pertaining to or having an effect upon the transaction shall
have been instituted or threatened on or before the Closing Date.
D. All taxes, including, without limitations, state and local sales
and inventory taxes, federal, state, and local income taxes,
license fees and other administrative costs of doing business
affecting or having the potential to affect the assets, shall
have been paid current by Seller to the Closing Date.
5. Documentation Provided.
Seller shall provide Buyer with a Bill of Sale covering all assets
transferred, including the names of all vendors and all other entities
with whom the equipment must re registered for warranty, service, etc.
Seller shall further provide Buyer with a maintenance history and
copies of service contracts covering the assets transferred.
6. Sales Taxes & Transfer Taxes.
Buyer shall pay all sales taxes and / or transfer taxes incurred in
connection with the sale and transfer of the assets.
7. Warranties and Representations of Seller.
A. Seller has good and marketable title to all of the assets free
and clear of any liens, debts, attachments, pledges and other
claims other than as expressly stated herein.
2
<PAGE>
B. Seller is paid current as of the Closing Date on all payments
relating to the assets, if any.
C. Any and all taxes, including without limitation, state and local
sales and inventory, federal, state, and local income taxes,
license fees and other administrative costs affecting or having
the potential to effect the assets have been paid current as of
the Closing Date.
D. There has not been any default in any obligation to be performed
under any contract to which Seller is a party related to or which
might have an affect upon the assets.
E. There is no suit, action, arbitration, administrative or
governmental proceeding or inquiry pending or, to the best of
Seller's knowledge, threatened against or affecting Seller,
relating to any of the assets.
F. Every consent, approval, authorization or order of any court or
governmental agency that is required for the consummation by
Buyer of the purchase transactions contemplated has been obtained
and will be in effect on the date of the closing.
G. Seller has complied with and is not in violation of applicable
federal, state, and local statutes, ordinances and regulation,
including without limitation, any applicable environmental,
health, building, zoning, or other law, ordinance, or regulation
affecting any of the assets, the premises, or the operation of
Seller's dental practice being conducted at the premises.
H. Seller has fully disclosed all facts and conditions that have or
might reasonable have or might reasonably be expected to have an
adverse impact on the assets.
8. Survival of Representations and Warranties.
All representation, warranties, covenants and agreements of the
parties contained in this agreement, or in any instrument,
certificate, opinion, or other writing provided for herein, shall
survive the Closing.
9. Right to Repurchase Assets.
In the event of the institution of any bankruptcy, insolvency or
receivership proceedings by or against Buyer, Seller shall have a
preferential right, as permitted by law, to repurchase the Assets at
fair market value. Seller must notify Buyer within thirty days of the
date of institution of any bankruptcy, insolvency or receivership
proceedings by or against Buyer of its intention to exercise this
preferential right, and must exercise this
3
<PAGE>
right within sixty days, of the date of institution of any bankruptcy,
insolvency or receivership proceedings by or against Buyer.
10. Indemnification.
Each party shall indemnify, hold harmless, and defend the other party
from any and all liability, loss, claims, lawsuits, damages, injury,
costs or expenses arising out of or incident to the performance or
nonperformance under this Agreement by such indemnifying party, its
employees, contractors, subcontractors, and agents, including (without
limitation) to the other party hereunder for any claim covered by
insurance, except to the extent the liability of such party exceeds
the amount of such insurance coverage.
11. Governing Law.
This Agreement shall be governed by and construed under the laws of
the State of Washington.
12. Waiver.
The waiver of any covenant, condition or duty hereunder by either
party shall not prevent that party from later insisting upon full
performance of the same.
13. Entire Agreement.
This Agreement constitutes the entire agreement between the parties in
connection with the subject matter hereof, and supersedes all prior
agreements, whether written or oral, and whether explicit or implicit,
which have been entered into before the execution hereof. Should any
litigation or arbitration arise between the parties, neither party
shall (and each party hereby waives the right to) introduce any parol
evidence which would tend to contradict or impeach any of the express
written terms, conditions, and covenants of this Agreement.
14. Notice.
Any notice or other communication required or which may be given
hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed or sent by facsimile, or sent by certified,
registered or express mail, postage prepaid, and shall be deemed given
when so delivered personally, telegraphed or telexed or sent by
facsimile, or if mailed, two days after the day of mailing, as
follows:
4
<PAGE>
(i) If to MHS to:
Mutual Health Systems, Inc.
7725 NE Highway 99, Suite B
Vancouver, WA 98665
Attention: President
With a copy to:
Stoel Rives BOLEY Jones & Grey
900 SW Fifth Avenue, Suite 2300
Portland, OR 97204-1268
Attention: Edward L. Epstein, Esq.
(ii) If to Group:
Tse, Saiget, Watanabe, & McClure, Inc. P.S.
7725 NE Highway 99, Suite B
Vancouver, WA 98665
Attention: President
15. Arbitration.
Agreement which the parties are unable to resolve by mutual agreement
shall be submitted to private arbitration in accordance with the rules
of the American Arbitration Association ("AAA"), except as modified by
this Agreement.
The arbitration shall be conducted by a single, neutral arbitrator
appointed in accordance with AAA procedures. Unless the parties agree
otherwise, the arbitration proceedings and venue for the filing of
exceptions, if any, shall be Multnomah County, OR. Discovery of
documents shall be permitted to the full extent permitted by the
Federal Rules of Civil Procedure ("FRCP"). Other types of discovery
available under the FRCP shall be permitted as the arbitrator shall
find to be appropriate. The parties shall share equally the costs of
the arbitrator and all other costs of arbitration, except that each
party shall be solely responsible for its own attorneys' fees and
expenses. Exceptions to the decision of the arbitrator can be filed in
accordance with RCW 7.04.160; in addition to the grounds recognized in
that statute, an exception may be filed based on mistake of law.
Judgment on the arbitration award can be filed in any court with
jurisdiction.
Arbitration under this Agreement shall be governed by the Federal
Arbitration Act, and by Washington law to the extent not inconsistent
with the Federal Arbitration Act.
5
<PAGE>
To the greatest extent consistent with law, and except as required in
a judicial proceeding contemplated by this section 5.3, the parties
shall keep all matters relating to any arbitration confidential,
including the existence and subject of the arbitration.
16. Miscellaneous Provisions.
a. Partial Invalidity.
If any one or more of the terms, provisions, promises, covenants,
or conditions of the Agreement the application thereof to any
person or circumstance shall be adjudged to any extent invalid,
unenforceable, void or voidable for any reasons whatsoever by a
court of competent jurisdiction, each and all of the remaining
terms, provisions, promises, covenants and conditions of this
Agreement or their application to other persons or circumstances
shall not be affected thereby and shall be valid and enforceable
to the fullest extent permitted by law.
b. Heading, Titles.
The headings appearing herein are for convenience and reference
only and shall not be deemed to govern, limit, modify or in any
manner affect the scope, meaning or intent of the provisions of
this Agreement.
c. Binding Effect.
Subject to the provisions contained herein, this Agreement shall
be binding upon and inure to the benefit of the parties hereto
and upon their respective successors.
d. Covenants and Conditions.
Each covenant hereof is a condition, and each condition hereof is
as well a covenant by the parties bound thereby unless waived in
writing by the parties hereto.
e. Approval and Consent.
Whenever in this Agreement an approval or consent is required by
one of the parties, the same shall not be unreasonably withheld.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement:
MUTUAL HEALTH SYSTEMS, INC. TSE, SAIGET, WATANABE & MCCLURE, INC. P.S.
JOHN CASTLES WILLIAM SAIGET
- -------------------------------- ------------------------------------------
JOHN CASTLES WILLIAM SAIGET, DMD
PRESIDENT PRESIDENT
7
ASSET PURCHASE AGREEMENT
among
MUTUAL HEALTH SYSTEMS, INC.
and
Gentle Dental of Oregon, P.C.
Dated January 2, 1995
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ASSET PURCHASE AGREEMENT
THIS AGREEMENT is made January 2, 1995, between Gentle Dental of Oregon,
P.C., ("Seller") and Mutual Health Systems, Inc. ("Buyer").
1. Seller is engaged in the practice of dentistry at various locations in
Portland, Oregon, and vicinity, under the name of Gentle Dental.
2. Seller, in connection with the operation of the aforementioned dental
practices, is owner of certain dental equipment, fixtures,
furnishings, leasehold improvements and signage.
3. Seller, in connection with the operation of the aforementioned dental
practices, has incurred certain liabilities, both to third parties and
to Buyer.
4. Buyer is desirous of purchasing certain assets. As consideration for
those assets Buyer shall forgive certain liabilities of Seller to
Buyer, and Buyer shall assume certain third party liabilities of
Seller, upon the terms and conditions hereinafter set forth.
NOW THEREFORE, IN CONSIDERATION OF THE MUTUAL BENEFITS ACCRUING TO
EACH PARTY HERETO, IT IS AGREED BETWEEN SELLER AND BUYER AS
FOLLOWS:
1. Sale of Assets.
Seller agrees to sell and Buyer agrees to purchase, free from all
liabilities and encumbrances other than those expressly stated herein,
all of Seller's accounts receivable, with a face value of $1,313,054
and an estimated fair market value of $1,273,662.
2. Purchase Price.
The Purchase Price for the Assets (the "Purchase Price") shall be an
interest only, promissory note for $1,273,662, payable by Buyer on
December 31, 1995. The Purchase Price shall be paid upon the Closing
Date. The Closing Date shall be January 2, 1995, at the offices of
Buyer. At such time Seller shall deliver to Buyer a Bill of Sale, and
all other instruments of sale, conveyance or assignment that may be
required for the proper transfer by Seller to Buyer of all of the
assets being sold hereunder, free of all encumbrances other than those
expressly stated herein.
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3. Sellers Indemnity.
Buyer is not assuming any debt, liability, or obligation of Seller,
whether known or unknown, fixed or contingent, other than expressly
stated herein. Seller agrees to indemnify and hold Buyer harmless
against all debt, claims, liabilities and obligations of Seller not
expressly assumed by Buyer, and to pay any and all attorneys fees and
legal costs incurred by Buyer, its successors and assign in connection
therewith.
4. Conditions Precedent to Buyer's Performance.
A. Compliance with the Uniform Commercial Code, Bulk Transfers, or
an opinion of counsel acceptable to Buyer that the transfer
contemplated herein does not constitute a bulk sales transfer
within the meaning of applicable law.
B. Delivery by Seller of any necessary clearances and approvals from
state and/or local taxing authorities.
C. No action, suit, or arbitration before any court or government
body pertaining to or having an effect upon the transaction shall
have been instituted or threatened on or before the Closing Date.
D. All taxes, including, without limitations, state and local sales
and inventory taxes, federal, state, and local income taxes,
license fees and other administrative costs of doing business
affecting or having the potential to affect the assets, shall
have been paid current by Seller to the Closing Date.
5. Documentation Provided.
Seller shall provide Buyer with a Bill of Sale covering all assets
transferred, including the names of all vendors and all other entities
with whom the equipment must re registered for warranty, service, etc.
Seller shall further provide Buyer with a maintenance history and
copies of service contracts covering the assets transferred.
6. Sales Taxes & Transfer Taxes.
Buyer shall pay all sales taxes and / or transfer taxes incurred in
connection with the sale and transfer of the assets.
7. Warranties and Representations of Seller.
A. Seller has good and marketable title to all of the assets free
and clear of any liens, debts, attachments, pledges and other
claims other than as expressly stated herein.
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B. Seller is paid current as of the Closing Date on all payments
relating to the assets, if any.
C. Any and all taxes, including without limitation, state and local
sales and inventory, federal, state, and local income taxes,
license fees and other administrative costs affecting or having
the potential to effect the assets have been paid current as of
the Closing Date.
D. There has not been any default in any obligation to be performed
under any contract to which Seller is a party related to or which
might have an affect upon the assets.
E. There is no suit, action, arbitration, administrative or
governmental proceeding or inquiry pending or, to the best of
Seller's knowledge, threatened against or affecting Seller,
relating to any of the assets.
F. Every consent, approval, authorization or order of any court or
governmental agency that is required for the consummation by
Buyer of the purchase transactions contemplated has been obtained
and will be in effect on the date of the closing.
G. Seller has complied with and is not in violation of applicable
federal, state, and local statutes, ordinances and regulation,
including without limitation, any applicable environmental,
health, building, zoning, or other law, ordinance, or regulation
affecting any of the assets, the premises, or the operation of
Seller's dental practice being conducted at the premises.
H. Seller has fully disclosed all facts and conditions that have or
might reasonable have or might reasonably be expected to have an
adverse impact on the assets.
8. Survival of Representations and Warranties.
All representation, warranties, covenants and agreements of the
parties contained in this agreement, or in any instrument,
certificate, opinion, or other writing provided for herein, shall
survive the Closing.
9. Right to Repurchase Assets.
In the event of the institution of any bankruptcy, insolvency or
receivership proceedings by or against Buyer, Seller shall have a
preferential right, as permitted by law, to repurchase the Assets at
fair market value. Seller must notify Buyer within thirty days of the
date of institution of any bankruptcy, insolvency or receivership
proceedings by or against Buyer of its intention to exercise this
preferential right, and must exercise this
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right within sixty days, of the date of institution of any bankruptcy,
insolvency or receivership proceedings by or against Buyer.
10. Indemnification.
Each party shall indemnify, hold harmless, and defend the other party
from any and all liability, loss, claims, lawsuits, damages, injury,
costs or expenses arising out of or incident to the performance or
nonperformance under this Agreement by such indemnifying party, its
employees, contractors, subcontractors, and agents, including (without
limitation) to the other party hereunder for any claim covered by
insurance, except to the extent the liability of such party exceeds
the amount of such insurance coverage.
11. Governing Law.
This Agreement shall be governed by and construed under the laws of
the State of Washington.
12. Waiver.
The waiver of any covenant, condition or duty hereunder by either
party shall not prevent that party from later insisting upon full
performance of the same.
13. Entire Agreement.
This Agreement constitutes the entire agreement between the parties in
connection with the subject matter hereof, and supersedes all prior
agreements, whether written or oral, and whether explicit or implicit,
which have been entered into before the execution hereof. Should any
litigation or arbitration arise between the parties, neither party
shall (and each party hereby waives the right to) introduce any parol
evidence which would tend to contradict or impeach any of the express
written terms, conditions, and covenants of this Agreement.
14. Notice.
Any notice or other communication required or which may be given
hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed or sent by facsimile, or sent by certified,
registered or express mail, postage prepaid, and shall be deemed given
when so delivered personally, telegraphed or telexed or sent by
facsimile, or if mailed, two days after the day of mailing, as
follows:
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(i) If to MHZ to:
Mutual Health Systems, Inc.
7725 NE Highway 99, Suite B
Vancouver, WA 98665
Attention: President
With a copy to:
Stoel Rives Boley Jones & Grey
900 SW Fifth Avenue, Suite 2300
Portland, OR 97204-1268
Attention: Edward L. Epstein, Esq.
(ii) If to Group:
Tse, Saiget, Watanabe, & McClure, Inc. P.S.
7725 NE Highway 99, Suite B
Vancouver, WA 98665
Attention: President
15. Arbitration.
Agreement which the parties are unable to resolve by mutual agreement
shall be submitted to private arbitration in accordance with the rules
of the American Arbitration Association ("AAA"), except as modified by
this Agreement.
The arbitration shall be conducted by a single, neutral arbitrator
appointed in accordance with AAA procedures. Unless the parties agree
otherwise, the arbitration proceedings and venue for the filing of
exceptions, if any, shall be Multnomah County, OR. Discovery of
documents shall be permitted to the full extent permitted by the
Federal Rules of Civil Procedure ("FRCP"). Other types of discovery
available under the FRCP shall be permitted as the arbitrator shall
find to be appropriate. The parties shall share equally the costs of
the arbitrator and all other costs of arbitration, except that each
party shall be solely responsible for its own attorneys' fees and
expenses. Exceptions to the decision of the arbitrator can be filed in
accordance with RCW 7.04.160; in addition to the grounds recognized in
that statute, an exception may be filed based on mistake of law.
Judgment on the arbitration award can be filed in any court with
jurisdiction.
Arbitration under this Agreement shall be governed by the Federal
Arbitration Act, and by Washington law to the extent not inconsistent
with the Federal Arbitration Act.
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To the greatest extent consistent with law, and except as required in
a judicial proceeding contemplated by this section 5.3, the parties
shall keep all matters relating to any arbitration confidential,
including the existence and subject of the arbitration.
16. Miscellaneous Provisions.
a. Partial Invalidity.
If any one or more of the terms, provisions, promises, covenants,
or conditions of the Agreement the application thereof to any
person or circumstance shall be adjudged to any extent invalid,
unenforceable, void or voidable for any reasons whatsoever by a
court of competent jurisdiction, each and all of the remaining
terms, provisions, promises, covenants and conditions of this
Agreement or their application to other persons or circumstances
shall not be affected thereby and shall be valid and enforceable
to the fullest extent permitted by law.
b. Heading, Titles.
The headings appearing herein are for convenience and reference
only and shall not be deemed to govern, limit, modify or in any
manner affect the scope, meaning or intent of the provisions of
this Agreement.
c. Binding Effect.
Subject to the provisions contained herein, this Agreement shall
be binding upon and inure to the benefit of the parties hereto
and upon their respective successors.
d. Covenants and Conditions.
Each covenant hereof is a condition, and each condition hereof is
as well a covenant by the parties bound thereby unless waived in
writing by the parties hereto.
e. Approval and Consent.
Whenever in this Agreement an approval or consent is required by
one of the parties, the same shall not be unreasonably withheld.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement:
MUTUAL HEALTH SYSTEMS, INC. GENTLE DENTAL OF OREGON, P.C.
JOHN CASTLES WILLIAM SAIGET
- ------------------------------ ------------------------------
JOHN CASTLES WILLIAM SAIGET, DMD
PRESIDENT PRESIDENT
7
MUTUAL HEALTH SYSTEMS, INC.
1993 STOCK INCENTIVE PLAN
1. Purpose. The purpose of this 1993 Stock Incentive Plan (the "Plan")
is to enable Mutual Health Systems, Inc. (the "Company") to attract and
retain experienced and able directors, officers, employees and other key
contributors and to provide an additional incentive to these individuals to
exert their best efforts for the Company and its shareholders.
2. Administration.
2.1 Board of Directors. The Plan shall be administered by the
board of directors of the Company (the "Board of Directors"), which shall
determine and designate from time to time the persons to whom grants and
awards shall be made and the amounts, terms and conditions of those grants
and awards. Subject to the provisions of the Plan, the Board of Directors
may from time to time adopt or amend rules and regulations relating to
administration of the Plan, and the interpretation and construction of the
provisions of the Plan by the Board of Directors shall be final and
conclusive. Whenever the operation of the Plan requires that the fair
market value of the Company's Common Stock be determined, the fair market
value shall be determined by, or in a manner approved by, the Board of
Directors.
2.2 Committee. The Board of Directors may delegate to a committee
of the Board of Directors or a senior executive officer of the Company, or
both (the "Committee") any or all authority for administration of the Plan.
If authority is delegated to a Committee, all references to the Board of
Directors in the Plan shall mean and relate to the Committee except (i) as
otherwise provided by the Board of Directors, and (ii) that only the Board
of Directors may amend or terminate the Plan as provided in paragraphs 5
and 11.
3. Eligibility. Grants and awards may be made under the Plan to
directors, officers, and key employees of the Company or any parent or
subsidiary of the Company, and other key individuals such as consultants to
the Company who the Board of Directors believes have made or will make an
essential contribution to the Company; provided, however, that only
employees of the Company shall be eligible to receive Incentive Stock
Options under the Plan.
4. Shares Subject to the Plan. Subject to paragraph 9, an aggregate of
1,000,000 shares of Common Stock of the Company may be issued under the
Plan (i) upon exercise of options and stock appreciation rights granted
under the Plan, (ii) as bonuses under the Plan and (iii) pursuant to sales
under the Plan. If any option under the Plan or stock appreciation right
granted without a related option expires or is cancelled or terminated and
is unexercised in whole or in part, the shares allocable to the unexercised
portion shall again become available for awards under the Plan, except that
shares that are issued on exercise of a stock appreciation right that were
allocable to an option, or portion thereof, surrendered in connection with
the exercise of the stock appreciation right shall not again become
available for awards under the Plan. If Common Stock sold or awarded as a
bonus under the Plan is forfeited to the Company or repurchased by the
Company pursuant to applicable restrictions, the number of shares forfeited
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or repurchased shall again be available under the Plan. Common Stock issued
under the Plan may be subject to such restrictions on transfer, repurchase
rights or other restrictions as are determined by the Board of Directors.
The certificates representing such Common Stock shall bear such legends as
are determined by the Board of Directors.
5. Effective Date and Duration of Plan.
5.1 Effective Date. The Plan shall become effective when adopted
by the Board of Directors (the "Effective Date"), but no option shall
become exercisable until the Plan is approved by a vote of the shareholders
of the Company entitled to vote thereon. Subject to this limitation,
options and stock appreciation rights may be granted and Common Stock may
be awarded as bonuses or sold under the Plan at any time after the
Effective Date and before termination of the Plan.
5.2 Duration of the Plan. The Plan shall continue until, in the
aggregate, options and stock appreciation rights have been granted and
exercised and Common Stock has been awarded as bonuses or sold and the
restrictions on any such Common Stock have lapsed with respect to all
shares subject to the Plan under paragraph 4 (subject to any adjustments
under paragraph 9), provided, however, that unless sooner terminated by the
Board of Directors, the Plan shall terminate on, and no option or stock
appreciation right or bonus right shall be granted and no Common Stock
shall be awarded as a bonus or sold under the Plan on or after, the tenth
anniversary of the Effective Date. The Board of Directors may suspend or
terminate the Plan at any time except with respect to options, stock
appreciation rights and bonus rights, and Common Stock subject to
restrictions then outstanding under the Plan. Termination shall not affect
any right of the Company to repurchase shares or the forfeitability of
shares issued under the Plan.
6. Grants, Awards and Sales.
6.1 Type of Security. The Board of Directors may, from time to
time, take the following actions, separately or in combination, under the
Plan: (i) grant Incentive Stock Options, as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"); (ii) grant options
other than Incentive Stock Options (hereinafter "Non-Statutory Stock
Options"); (iii) grant stock appreciation rights or bonus rights; (iv)
award bonuses of Common Stock; and (v) sell Common Stock subject to
restrictions. The Board of Directors shall specify the action taken with
respect to each person granted, awarded or sold any option or Common Stock
under the Plan and shall specifically designate each option granted under
the Plan as an Incentive Stock Option or a Non-Statutory Stock Option. At
the discretion of the Board of Directors, an individual may be given an
election to surrender an award in exchange for the grant of a new award. No
employee may be granted options or stock appreciation rights under the Plan
for more than an aggregate of 150,000 shares of Common Stock in connection
with the hiring of the employee or 50,000 shares of Common Stock in any
calendar year otherwise.
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6.2 General Rules Relating to Options.
6.2.1 Time of Exercise. Except as provided in paragraph 8,
options granted under the Plan may be exercised over the period stated in
each option in amounts and at times prescribed by the Board of Directors
and stated in the option, provided that (i) no option granted under the
Plan may become exercisable at a rate of less than 20 percent per year over
the first five years of the option, and (ii) options shall not be exercised
for fractional shares. If the optionee does not exercise an option in any
period with respect to the full number of shares to which the optionee is
entitled in that period, the optionee's rights shall be cumulative and the
optionee may purchase those shares in any subsequent period during the term
of the option.
6.2.2 Option Price. The option price per share of each
option granted under the Plan shall be determined by the Board of
Directors, but shall not be less than 85 percent of the fair market value
of the shares covered by the option on the date the option is granted. With
respect to options granted to optionees possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the
Company or of any parent or subsidiary of the Company (a "Ten Percent
Owner"), the option price per share shall not be less than one hundred ten
percent (110%) of the fair market value on the date the option is granted.
6.2.3 Duration of Options. Subject to paragraph 8, each
option granted under the Plan shall continue in effect for the period fixed
by the Board of Directors, except that no option granted under the Plan
shall be exercisable after the expiration of 10 years from the date it is
granted. No option granted to a Ten Percent Owner shall be exercisable
after the expiration of five (5) years from the date such option is
granted.
6.2.4 Purchase of Shares. Shares may be purchased or
acquired pursuant to an option granted under the Plan only on receipt by
the Company of notice in writing from the optionee of the optionee's
intention to exercise, specifying the number of shares the optionee desires
to purchase and the date on which the optionee desires to complete the
transaction, which may not be more than 30 days after receipt of the
notice, and, unless in the opinion of counsel for the Company such a
representation is not required to comply with the Securities Act of 1933,
as amended, containing a representation that it is the optionee's intention
to acquire the shares for investment and not with a view to distribution.
Unless otherwise determined by the Board of Directors, on or before the
date specified for completion of the purchase, the optionee must have paid
the Company the full purchase price in cash, including cash that may be the
proceeds of a loan from the Company, in shares of Common Stock previously
acquired by the optionee valued at fair market value, or in any combination
of cash and shares of Common Stock. No shares shall be issued until full
payment therefor has been made. Each optionee who has exercised an option
shall, on notification of the amount due, if any, and prior to or
concurrently with delivery of the certificates representing the shares for
which the option was exercised, pay to the Company amounts necessary to
satisfy any applicable federal, state and local withholding tax
requirements. If additional withholding becomes required beyond any amount
deposited before delivery of the certificates, the optionee shall pay such
amount to the Company on
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demand. If the employee fails to pay the amount demanded, the Company shall
have the right to withhold that amount from other amounts payable by the
Company to the optionee, including salary, subject to applicable law.
6.3 Incentive Stock Options. Incentive Stock Options shall be
subject to the following additional terms and conditions:
6.3.1 Limitation on Amount of Grants. No employee may be
granted Incentive Stock Options under the Plan such that the aggregate fair
market value, on the date of grant, of the Common Stock with respect to
which Incentive Stock Options are exercisable for the first time by that
employee during any calendar year, under the Plan and under any other
incentive stock option plan (within the meaning of section 422 of the Code)
of the Company or any parent or subsidiary of the Company, exceeds
$100,000.
6.3.2 Option Price. The option price per share under each
option granted under the Plan shall be determined by the Board of Directors
in accordance with paragraph 6.2.2, but the option price with respect to an
Incentive Stock Option shall be not less than 100 percent of the fair
market value of the shares covered by the option on the date the option is
granted.
6.4 Stock Bonuses. Common Stock awarded as a bonus shall be
subject to the terms, conditions and restrictions determined by the Board
of Directors at the time the Common Stock is awarded as a bonus. The Board
of Directors may require the recipient to sign an agreement as a condition
of the award, but may not require the recipient to pay any money
consideration except as provided in the last sentence of this paragraph.
The agreement may contain such terms, conditions, representations and
warranties as the Board of Directors may require. The Company may require
any recipient of a Common Stock bonus to pay to the Company amounts
necessary to satisfy any applicable federal, state or local tax withholding
requirements prior to delivery of certificates. If the recipient fails to
pay the amount demanded, the Company may withhold that amount from other
amounts payable by the Company to the recipient, including salary or fees
for services, subject to applicable law. With the consent of the Board of
Directors, a recipient may deliver Common Stock to the Company to satisfy
this withholding obligation.
6.5 Restricted Stock. The Board of Directors may issue shares of
Common Stock under the Plan for such consideration (including promissory
notes and services) as determined by the Board of Directors in accordance
with the law and with such restrictions concerning transferability,
repurchase by the Company, or forfeiture as determined by the Board of
Directors. If shares of Common Stock are subject to repurchase by the
Company at the original purchase price upon termination of employment of
the recipient, such right of repurchase shall lapse at a rate of no less
than twenty percent (20%) per year over five years from the date the shares
are granted. All shares of Common Stock issued pursuant to this paragraph
6.5 shall be subject to a purchase agreement, which shall be executed by
the Company and the prospective recipient of the Common Stock prior to the
delivery of certificates
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representing such shares to the recipient. Subject to the terms of the
Plan, the purchase agreement shall contain such terms and conditions and
representations and warranties as the Board of Directors shall require. The
Company may require any purchaser of restricted stock to pay to the Company
in cash upon demand amounts necessary to satisfy any applicable federal,
state or local tax withholding requirements. If the purchaser fails to pay
the amount demanded, the Company may withhold that amount from other
amounts payable by the Company to the purchaser, including salary, subject
to applicable law. With the consent of the Board of Directors, a purchaser
may deliver Common Stock to the Company to satisfy this withholding
obligation.
6.6 Stock Appreciation Rights.
6.6.1 Description. Each stock appreciation right shall
entitle the holder, on exercise, to receive from the Company in exchange
therefor an amount equal in value to the excess of the fair market value on
the date of exercise of one share of Common Stock over its fair market
value on the date of grant (or, in the case of a stock appreciation right
granted in connection with an option, the option price per share under the
option to which the stock appreciation right relates), multiplied by the
number of shares covered by the stock appreciation right or the option, or
portion thereof, that is surrendered.
6.6.2 Exercise. A stock appreciation right shall be
exercisable only at the time or times established by the Board of
Directors. If a stock appreciation right is granted in connection with an
option, then it shall be exercisable only to the extent and on the same
conditions that the related option is exercisable. Upon exercise of a stock
appreciation right, any option or portion thereof to which the stock
appreciation right relates must be surrendered unexercised.
6.6.3 Payment. Payment by the Company upon exercise of a
stock appreciation right may be made in shares of Common Stock valued at
fair market value, or in cash, or partly in Common Stock and partly in
cash, as determined by the Board of Directors. No fractional shares shall
be issued upon exercise of a stock appreciation right. In lieu thereof,
cash may be paid in an amount equal to the value of the fraction or, in the
discretion of the Board of Directors, the number of shares may be rounded
to the next whole share.
6.6.4 Adjustment. In the event of any adjustment pursuant to
paragraph 9 in the number of shares of Common Stock subject to an option
granted under the Plan, any stock appreciation right granted hereunder in
connection with such option shall be proportionately adjusted.
6.6.5 Withholding. Each participant who has exercised a
stock appreciation right shall, upon notification of the amount due, pay to
the Company in cash amounts necessary to satisfy any applicable federal,
state and local tax withholding requirements. If the participant fails to
pay the amount demanded, the Company may withhold that amount from other
amounts payable by the Company to the participant including salary, subject
to
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applicable law. With the consent of the Board of Directors a participant
may satisfy this obligation, in whole or in part, by having the Company
withhold from any shares to be issued upon the exercise that number of
shares that would satisfy the withholding amount due or by delivering
Common Stock to the Company to satisfy the withholding amount.
6.7 Cash Bonus Rights.
6.7.1 Grant. The Board of Directors may grant bonus rights
under the Plan in connection with (i) an option or stock appreciation right
granted or previously granted, (ii) Common Stock awarded, or previously
awarded, as a bonus and (iii) Common Stock sold, or previously sold, under
the Plan. Bonus rights will be subject to rules, terms and conditions as
the Board of Directors may prescribe.
6.7.2 Bonus Rights in Connection with Options and Stock
Appreciation Rights. A bonus right granted in connection with an option
will entitle an optionee to a cash bonus when the related option is
exercised (or is surrendered in connection with the exercise of a stock
appreciation right related to the option) in whole or in part. A bonus
right granted in connection with a stock appreciation right will entitle
the holder to a cash bonus when the stock appreciation right is exercised.
Upon exercise of an option, the amount of the bonus shall be determined by
multiplying the excess of the total fair market value of the shares to be
acquired upon the exercise over the total option price for the shares by
the applicable bonus percentage. Upon exercise of a stock appreciation
right, the bonus shall be determined by multiplying the total fair market
value of the shares or cash received pursuant to the exercise of the stock
appreciation right by the applicable bonus percentage. The bonus percentage
applicable to a bonus right shall be determined from time to time by the
Board of Directors but shall in no event exceed 100 percent.
6.7.3 Bonus Rights in Connection with Stock Bonus. A bonus
right granted in connection with Common Stock awarded as a bonus will
entitle the person awarded such Common Stock to a cash bonus either at the
time the Common Stock is awarded or at such time as restrictions, if any,
to which the Common Stock is subject lapse. If Common Stock awarded is
subject to restrictions and is repurchased by the Company or forfeited by
the holder, the bonus right granted in connection with such Common Stock
shall terminate and may not be exercised. The amount of cash bonus to be
awarded and the time such cash bonus is to be paid shall be determined from
time to time by the Board of Directors.
6.7.4 Bonus Rights in Connection with Stock Purchase. A
bonus right granted in connection with Common Stock purchased hereunder
(excluding Common Stock purchased pursuant to an option) shall terminate
and may not be exercised in the event the Common Stock is repurchased by
the Company or forfeited by the holder pursuant to restrictions applicable
to the Common Stock. The amount of cash bonus to be awarded and the time
such cash bonus is to be paid shall be determined from time to time by the
Board of Directors.
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7. Nontransferability. Each option, stock appreciation right, or cash
bonus right granted under the Plan by its terms shall be nonassignable and
nontransferable by the holder except by will or by the laws of descent and
distribution of the state or country of the holder's domicile at the time
of death, and each option, stock appreciation right or cash bonus right by
its terms shall be exercisable during the holder's lifetime only by the
holder.
8. Termination of Employment.
8.1 Retirement or General Termination. Unless otherwise
determined by the Board of Directors, if an employee's employment by the
Company or any parent or subsidiary of the Company is terminated by
retirement or for any reason other than in the circumstances specified in
8.2 below, any option, stock appreciation right or cash bonus right held by
the employee may be exercised at any time prior to its expiration date or
the expiration of three months after the date of the termination, whichever
is the shorter period, but only if and to the extent the employee was
entitled to exercise the option, stock appreciation right or cash bonus
right on the date of termination. Transfer of an employee by the Company or
any parent or subsidiary of the Company to the Company or any parent or
subsidiary of the Company shall not be considered a termination for
purposes of the Plan.
8.2 Death or Disability. Unless otherwise determined by the Board
of Directors, if an employee's employment by the Company or any parent or
subsidiary of the Company is terminated because of death or physical
disability (within the meaning of section 22(e)(3) of the Code), any
option, stock appreciation right or cash bonus right held by the employee
may be exercised at any time prior to its expiration date or the expiration
of one year after the date of termination, whichever is the shorter period,
for the greater of (a) the number of remaining shares for which the
employee was entitled to exercise the option, stock appreciation right or
cash bonus right on the date of termination or (b) the number of remaining
shares for which the employee would have been entitled to exercise the
option, stock appreciation right or cash bonus right if such option or
right had been 50 percent exercisable on the date of termination. If an
employee's employment is terminated by death, any option, stock
appreciation right or cash bonus right held by the employee shall be
exercisable only by the person or persons to whom the employee's rights
under the option, stock appreciation right or cash bonus right pass by the
employee's will or by the laws of descent and distribution of the state or
country of the employee's domicile at the time of death.
8.3 Termination of Unexercised Rights. To the extent an option,
stock appreciation right or cash bonus right held by any deceased employee
or by any employee whose employment is terminated is not exercised within
the limited periods provided above or otherwise provided by the Board of
Directors, all further rights to exercise the option, stock appreciation
right or cash bonus right shall terminate at the expiration of such
periods.
8.4 Termination of Non-Employees. With respect to options, stock
appreciation rights and cash bonus rights granted to persons who are not
employees of the
7
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Company, the Board of Directors may establish provisions relating to the
termination of those persons' status with the Company.
9. Changes in Capital Structure. If the outstanding shares of Common
Stock are increased or decreased or changed into or exchanged for a
different number or kind of shares or other securities of the Company or of
another corporation, by reason of any reorganization, merger,
consolidation, plan of exchange, recapitalization, reclassification, stock
split-up, combination of shares, or dividend payable in shares, appropriate
adjustment shall be made by the Board of Directors in the number and kind
of shares for the purchase of which options or stock appreciation rights
may be granted and for which Common Stock may be awarded as bonuses or sold
subject to restrictions under the Plan. In addition, the Board of Directors
shall make appropriate adjustments in the number and kind of shares as to
which outstanding options, or portions thereof then unexercised, shall be
exercisable, and the number and kind of shares covered by outstanding stock
appreciation rights to the end that each optionee's proportionate interest
shall be maintained as before the occurrence of such event. Adjustments in
outstanding options shall be made without change in the total price
applicable to the unexercised portion of any option and with a
corresponding adjustment in the option price per share. Adjustments in
outstanding stock appreciation rights shall be made without change in their
total value. Any such adjustment made by the Board of Directors shall be
conclusive. In the event of dissolution or liquidation of the Company or a
merger, consolidation, or plan of exchange affecting the Company, in lieu
of making adjustments as provided for above in this paragraph 9, the Board
of Directors may, in its sole discretion, provide a 30-day period
immediately preceding the event during which optionees shall have the right
to exercise options or stock appreciation rights to the extent options are
exercisable at such time. Upon the expiration of such 30-day period all
unexercised options shall be terminated and optionees shall have no further
rights to acquire shares.
10. Corporate Mergers, Acquisitions, Etc. The Board of Directors may
also grant options and stock appreciation rights having terms and
provisions which vary from those specified in this Plan, provided that any
options and stock appreciation rights granted pursuant to this section are
granted in substitution for, or in connection with the assumption of,
existing options and stock appreciation rights granted by another
corporation and assumed or otherwise agreed to be provided for by the
Company pursuant to or by reason of a transaction involving a corporate
merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation to which the Company or a subsidiary is a
party.
11. Amendment of Plan. The Board of Directors may at any time and from
time to time modify or amend the Plan in such respects as it deems
advisable because of changes in the law while the Plan is in effect or for
any other reason. After the Plan has been approved by the shareholders and
except as provided in paragraph 9, however, no change in an option or stock
appreciation right already granted to any person shall be made without the
written consent of such person. Furthermore, unless approved by the
shareholders of the Company entitled to vote thereon, no amendment or
change shall be made in the Plan (a) increasing the total number of
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shares that may be issued under the Plan, or (b) changing the class of
persons eligible to receive options under the Plan.
12. Approvals. The obligations of the Company under the Plan are
subject to the approval of state and federal authorities or agencies with
jurisdiction in the matter. The Company will use its best efforts to take
steps required by state or federal law or applicable regulations, including
rules and regulations of the Securities and Exchange Commission in
connection with the granting of any option or the issuance or sale of any
shares under the Plan. The foregoing notwithstanding, the Company shall not
be obligated to issue or deliver shares of Common Stock under the Plan if
the Company is advised by its legal counsel that such issuance or delivery
would violate applicable state or federal laws.
13. Employment Rights. Nothing in the Plan or any grant pursuant to
the Plan shall confer on any employee any right to be continued in the
employment of the Company or any parent or subsidiary of the Company or
shall interfere in any way with the right of the Company or any parent or
subsidiary of the Company by whom such employee is employed to terminate
such employee's employment at any time, with or without cause.
14. Rights as a Shareholder. A holder of an option or a stock
appreciation right, a recipient of Common Stock awarded as a bonus, or a
purchaser of Common Stock shall have no rights as a shareholder with
respect to any shares covered by any option, stock appreciation right,
bonus award, or stock purchase agreement until the date of issue of a stock
certificate to him or her for such shares. Except as otherwise provided in
the Plan, no adjustment shall be made for dividends or other rights for
which the record date is prior to the date such stock certificate is
issued.
15. Information. The Company will provide all recipients of grants or
awards under Plan with financial statements of the Company on at least an
annual basis.
9
STOCK ACQUISITION AGREEMENT
by and between
MUTUAL HEALTH SYSTEMS, INC.
A WASHINGTON CORPORATION
and
THE SERVICEMASTER COMPANY
LIMITED PARTNERSHIP,
A DELAWARE LIMITED PARTNERSHIP
Dated: June 21, 1996
<PAGE>
STOCK ACQUISITION AGREEMENT
THIS STOCK ACQUISITION AGREEMENT (the "Agreement") is made and entered
into as of this 21st day of June, 1996, by and between Mutual Health
Systems, Inc., a Washington corporation ("Mutual"), and The ServiceMaster
Company Limited Partnership, a Delaware limited partnership
("ServiceMaster").
RECITALS
A. Mutual is engaged in the business of acquiring dental practice
assets and providing administrative and non-clinical support services to
professional dental corporations pursuant to support services agreements;
B. Mutual desires to obtain additional equity capital in order to
expand its operations by acquiring more dental practices across the United
States; and
C. ServiceMaster is willing to make an equity investment in Mutual in
order to facilitate the expansion of Mutual's business, all subject to the
terms and conditions of this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the terms and
conditions set forth herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
-----------
1.1 Defined Terms. As used herein, the terms below shall have the
following meanings:
"1995 Financial Statements" shall mean the audited balance sheet,
statement of income, statement of cash flow, and statement of stockholders'
equity of Mutual as of December 31, 1995 and for the year then ended,
together with the notes thereto and the related unqualified report of
Mutual's certified public accountants. The 1995 Financial Statements are
attached to this Agreement as Exhibit A.
"1996 Preliminary Financial Statements" shall mean the unaudited
balance sheet, statement of income, statement of cash flow, and statement
of stockholders' equity of Mutual as of March 31, 1996. The 1996 Interim
Financial Statements are attached to this Agreement as Exhibit B.
<PAGE>
"Affiliate" shall mean (i) any Person with which Mutual has executed a
support service agreement, including in particular Gentle Dental of Oregon,
P.C. and Tse, Saiget, Watanabe & McClure, Inc., P.S., and (ii) any Person
which, directly or indirectly, or through one or more intermediaries,
controls, or is controlled by, or is under common control with, Mutual.
"Closing" and "Closing Date" shall have the meanings set forth in
Section 3.1.
"Code" shall mean the Internal Revenue Code of 1986, as may be amended
from time to time.
"Contracts" shall mean the agreements, contracts, commitments or other
documents described in Section 5.13(a), Section 5A.10 and Section 5B.10
below.
"Control" shall mean the possession, directly or indirectly, of the
power to direct, or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by contract, or
otherwise.
"Disclosure Schedule" means a written schedule entitled as such and
executed and delivered by Mutual to ServiceMaster at least five (5) days
prior to the date of this Agreement, and updated at and as of the Closing,
which sets forth in detail any exceptions to the representations and
warranties contained in Article VII hereof and certain other information
called for by Article VII and other provisions of this Agreement.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
easement, security interest, right-of-way, encumbrance or other rights of
third parties.
"Facilities" shall mean the offices, facilities, warehouses,
administration buildings and all other real property and related facilities
and fixtures which are owned, leased, managed or otherwise used by Mutual,
including but not limited to (i) Mutual's executive office located at 900
Washington Street, Suite 1100, Vancouver, Washington 98660, and (ii) each
facility at which any dental practice managed by Mutual is located.
"Furnishings and Equipment" shall mean all of the furniture,
furnishings, machinery and equipment owned or leased by Mutual, whether or
not reflected on the 1995 Financial Statements, as well as those items
located in, at or upon any of the Facilities as of December 31, 1995 plus
all additions, replacements or deletions since December 31, 1995 in the
ordinary course of Mutual's business.
"Key Executives" shall mean those persons who have significant
administrative responsibilities within Mutual or the Oregon Corporation or
the Washington Corporation, as the case may be, and who are identified as
such in the Disclosure Schedule. Any executive whose annual base
compensation exceeds $75,000 shall be included in the Disclosure Schedule
as a Key Executive.
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"Laws" shall mean any and all applicable laws, statutes, ordinances,
rules and regulations (whether federal, state or local) as well as any and
all applicable judicial and administrative orders, judgments or decrees.
"Oregon Corporation" shall mean Gentle Dental of Oregon, P.C., an
Oregon Professional Corporation.
"Person" shall mean an individual, partnership, corporation, trust, or
unincorporated organization.
"Put Right" shall have the meaning set forth in Section 4.l.
"Qualified Public Offering" shall mean an offering of the shares of
Voting Stock of Mutual which satisfies all of the following conditions:
(a) the shares are offered under a registration statement filed under
the Securities Act;
(b) the shares are sold to the public pursuant to an underwritten
offering;
(c) the proceeds of the offering net of underwriting commissions and
selling costs was at least ten million dollars ($10,000,000);
(d) the offering was completed at the price to the public of not less
than eleven dollars ($11.00) per share.
"Registration Agreement" shall mean the Agreement to Register the
Voting Stock of Mutual Health Systems, Inc. executed as of June __, 1996
between Mutual and ServiceMaster, and attached hereto as Exhibit D.
"Representative" shall mean any officer, director, principal,
attorney, agent, employee or other representative of the party for whom
such person purports to act.
"Silicon Valley Bank Loan Agreement" shall mean the loan agreement
dated August 18, 1995 between Mutual and Silicon Valley Bank, as may be
amended from time to time.
"Subsidiaries" shall mean all corporations, partnerships, joint
ventures, limited liability companies, associations or other entities in
which Mutual or the Oregon Corporation or the Washington Corporation either
directly or indirectly or through any Representative owns or has the right
to acquire or participate in more than fifty percent (50%) of the equity of
such entity or has any majority voting or management rights.
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<PAGE>
"Support Services Agreements" shall mean the agreements of Mutual to
provide administrative and non-clinical support services to dental
professional corporations.
"Tax" shall mean any federal, state, local or foreign income, sales,
use, transfer, payroll, personal property, occupancy or other tax, levy,
impost, fee, imposition, assessment or similar charge, together with any
related interest or penalty or comparable addition thereto.
"Voting Stock" shall mean Mutual's Class A voting common stock, no par
value, which stock is further described in Section 7.5.
"Washington Corporation" shall mean Tse, Saiget, Watanabe, McClure,
Inc., P.S., a Washington Professional Corporation.
1.2 Other Defined Terms. Certain other terms shall have the meanings
defined for such terms in other provisions of this Agreement or the
attached Exhibits.
ARTICLE II
PURCHASE AND SALE OF STOCK AND WARRANT;
PURCHASE PRICE
--------------
2.1 Purchase of Stock and Warrant. At the Closing and on the terms and
conditions of this Agreement,, Mutual shall issue and sell to ServiceMaster
200,000 shares of Voting Stock (the "Acquired Shares"); and a warrant to
acquire up to 200,000 shares of Voting Stock (the "Warrant"); and
ServiceMaster shall purchase the Acquired Shares and the Warrant and pay
the purchase price therefor as specified in Sections 2.2 and 3.3.
2.2 Purchase Price. At the Closing and on the terms and conditions of
this Agreement, ServiceMaster shall pay Mutual the sum of one million
dollars ($1,000,000) (the "Cash Consideration").
ARTICLE III
CLOSING DATE; DELIVERIES
------------------------
3.1 Closing Date; Place of Closing. The closing of the purchase and
sale of the Acquired Shares and the Warrant shall be held at the offices of
Mutual at 10:00 a.m. local time on June 21, 1996 (the "Closing") or at such
other time and place upon which Mutual and ServiceMaster may agree. (The
date of the Closing is hereinafter referred to as the "Closing Date").
3.2 Deliveries by Mutual. At the Closing, Mutual shall deliver to
ServiceMaster: (1) a certificate or certificates, registered in
ServiceMaster's name, representing the Acquired
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<PAGE>
Shares and (2) a duly executed instrument entitled "Warrant To Purchase
Voting Stock of Mutual Health Systems, Inc." in the form of that attached
hereto as Exhibit C, (3) a duly executed Registration Agreement, in the
form of that attached hereto as Exhibit D and (4) Legal Opinion of Counsel
to Mutual in the form of that attached hereto as Exhibit I.
3.3 Deposit of the Cash Consideration. At the Closing, ServiceMaster
shall pay the Cash Consideration by wire transfer of immediately available
funds into the account which has been established by Mutual at First
Interstate Bank Portland, Oregon office as Account No. 900238370 (the "Cash
Consideration Deposit Account").
ARTICLE III-A
USE OF CASH CONSIDERATION
-------------------------
3A.1 Limitation on Use. Mutual agrees that after it has received the
Cash Consideration, it will not use any part thereof for any purpose except
one or more of the following: (a) working capital, (b) acquisition of
dental practices, and (c) asset additions.
3A.2 Withdrawals from the Cash Consideration Deposit Account. Mutual
agrees that it will not withdraw any of the Cash Consideration Deposit
Account unless the withdrawal is for one of the purposes specified in
Section 3A.l.
3A.3 Prohibition on Use of Cash Consideration. In no event shall
Mutual use any portion of the Cash Consideration (a) subject to Section
3A.4, to repay any portion of the Silicon Valley Bank Loan Agreement or any
loans to Mutual by Silicon Valley Bank which are guaranteed by Mutual's
officers and directors, or (b) subject to Section 3A.4, to pay Smith Barney
Inc all or any part of a broker's fee.
3A.4 Repayment of Bank Loans in Certain Cases. If Mutual raises cash
in an amount which is not less than $3,000,000 as a result of selling
equity securities to one or more persons other than ServiceMaster, item (a)
in Section 3A.3 shall no longer be a prohibited use of the Cash
Consideration and the repayment of any portion of the Silicon Valley Bank
Loan Agreement or any loans to Mutual by Silicon Valley Bank which are
guaranteed by Mutual's officers and directors shall be an additional
permitted use of the Cash Consideration under Section 3A.l.
ARTICLE IV
SERVICEMASTER'S PUT RIGHT
-------------------------
4.1 Basic Right. Except as provided in Section 9.9, if Mutual has not
completed a Qualified Public Offering by the fifth anniversary of the
Closing Date, ServiceMaster shall have the right from time to time
thereafter to sell to Mutual some or all of the Acquired Shares and any
shares of Voting Stock which ServiceMaster has purchased pursuant to the
5
<PAGE>
Warrant, in each case at a price equal to twenty times the average adjusted
net income per share of Mutual for the two most recent fiscal years of
Mutual ending prior to the date on which ServiceMaster makes an exercise of
the foregoing right. Any per share amounts will be adjusted in accordance
with Article XI. The foregoing right is hereinafter referred to as the "Put
Right".
4.2 Adjusted Net Income. For purposes of this Article IV, the term
"adjusted net income" means the net income of Mutual as determined in
accordance with generally accepted accounting principles consistently
applied and then adjusted to add back to net income any extraordinary or
unusual loss, writedown or expense which reduced net income.
4.3 Exercise of Put Right. The Put Right shall be exercised by a
notice in writing to Mutual which states that ServiceMaster has elected to
exercise it rights under this Article IV, shows the number of shares of
Voting Stock as to which such right is being exercised, and the total
amount to be paid to ServiceMaster by Mutual. Such notice shall set a
closing date for the transaction which shall be not later than thirty (30)
business days from the date of receipt of such notice by Mutual.
4.4 Closing. At the closing, Mutual shall pay the purchase price for
the Voting Stock to be purchased by it in full and in cash against the
delivery by ServiceMaster of the certificates for the shares of Voting
Stock, duly endorsed, which ServiceMaster is selling to Mutual and
ServiceMaster's representation that such shares of Voting Stock are free of
all liens and encumbrances.
4.5 Termination of the Put Right. The Put Right shall terminate on the
earlier to occur of: (a) the completion of a Qualified Public Offering, or
(b) the seventh anniversary of the Closing Date.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF MUTUAL
WITH RESPECT TO ITSELF
----------------------
Mutual represents and warrants to ServiceMaster that the statements made in
this Article V are correct and complete as of the date of this Agreement
except as set forth in the Disclosure Schedule.
5.1 Organization of Mutual. (a) Mutual is duly organized, validly
existing and in good standing under the laws of the State of Washington.
(b) Mutual has full corporate power and authority to conduct its
business as it is presently being conducted and as proposed to be conducted
and to own and lease its properties and its assets.
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<PAGE>
(c) Mutual is duly qualified and in good standing in each jurisdiction
in which Mutual conducts business.
(d) Mutual has furnished ServiceMaster with copies of its Articles of
Incorporation and bylaws, as amended, which copies are true, complete and
contain all amendments through the Closing Date.
5.2 Corporate Power. Mutual has all necessary corporate and other
power and authority to enter into this Agreement and has taken all action
necessary to consummate the transactions contemplated hereby and to perform
its obligations hereunder, including (but not limited to) the power to
issue and sell the Acquired Shares, to issue and sell the Warrant, and to
issue Voting Stock pursuant to each exercise of the Warrant.
5.3 Authorization. (a) All corporate action on the part of Mutual, its
directors and stockholders necessary for the authorization, execution,
delivery and performance of this Agreement by Mutual, the authorization,
issuance and delivery of the Acquired Shares and the authorization,
issuance and delivery of the Voting Stock which is issuable pursuant to
each exercise of the Warrant, has been taken prior to the Closing.
(b) This Agreement, when executed and delivered by Mutual, will
constitute a valid and binding obligation of Mutual, enforceable in
accordance with its terms.
(c) The Acquired Shares, when issued in accordance with this
Agreement, will be validly issued, fully paid and non-assessable, will have
the rights, preferences and privileges described in the Articles of
Incorporation, and will be free and clear of any Encumbrance (except that
such stock will be subject to restrictions on transfer under federal and/or
state securities laws as set forth herein) and will not be subject to any
pre-emption rights or rights of first refusal.
5.4 No Conflict or Violation. Neither the execution and delivery of
this Agreement nor the consummation of the transactions contemplated hereby
will result in (i) a violation of or a conflict with any provision of the
Articles of Incorporation or Bylaws of Mutual or any Affiliate; (ii) a
breach of, or a default under, any term or provision of any contract,
agreement, indebtedness, lease, Encumbrance, commitment, license,
franchise, permit, authorization or concession to which Mutual or any
Affiliate is a party or by which its assets are bound; (iii) a violation by
Mutual or any Affiliate of any statute, rule, regulation, ordinance, code,
order, judgment, writ, injunction, decree or award; or (iv) an imposition
of any material Encumbrance, restriction or charge in the business of
Mutual or any Affiliate or on any of its assets.
5.5 Capitalization. (a) The authorized capital stock of Mutual
consists of:
(i) 15,000,000 shares of Class A voting common stock, no par
value (the "Voting Stock"), of which 2,901,776 shares are
issued and outstanding;
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<PAGE>
(ii) 15,000,000 shares of Class B non-voting common stock, no par
value, of which no shares are issued and outstanding; and
(iii) 30,000,000 shares of preferred stock, no par value, of
which no shares are issued and outstanding.
(b) Except as set forth in the Disclosure Schedule, there are no
subscriptions, options, warrants, calls, rights, agreements or commitments
(including any right of conversion or exchange under any outstanding
security or other instrument) relating to the issuance by Mutual of any
class of its capital stock.
5.6 Subsidiaries. Mutual has no Subsidiaries.
5.7 Financial Statements. The 1995 Financial Statements and the 1996
Preliminary Financial Statements are in accordance with the books and
records of Mutual, accurately reflect its assets, liabilities and financial
condition and results of operations indicated thereby in accordance with
generally accepted accounting principles consistently applied, and contain
and reflect all necessary adjustments for a fair representation of the
financial condition of the companies being reported upon as of the date and
for the period covered thereby.
5.8 Events Since December 31, 1995. (a) Since December 31, 1995,
Mutual has managed and carried out its business and affairs in the ordinary
course of business and there has not occurred, arisen or been created, as
the case may be, any change in the business, operations or internal
conditions (financial or otherwise) of Mutual which has had, or which could
reasonably expected to have, a material adverse effect on Mutual.
(b) Without limiting the generality of Section 5.8(a), since December
31, 1995, Mutual has not, except as otherwise stated in the Disclosure
Schedule:
(1) Sold, assigned or transferred any of its assets other than
in the ordinary course of business;
(2) Canceled any indebtedness or waived any rights of
substantial value to Mutual, whether or not in the ordinary
course of business;
(3) Amended, canceled or terminated any Support Service
Agreement;
(4) Failed to repay any material obligation of Mutual;
(5) Suffered any damage, destruction or loss (whether or not
covered by insurance) which adversely affected its
properties, business or prospects;
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<PAGE>
(6) Mortgaged, pledged or otherwise encumbered any of its assets
in amounts which are material singly or in the aggregate,
(7) Declared, set aside or paid any dividends or made any
distributions in respect of any of its capital stock or
other equity securities or redeemed, purchased or otherwise
acquired any of its equity securities;
(8) Issued or (except for this Agreement) committed to issue any
shares of stock or other equity securities or obligations or
securities convertible into or exchangeable for shares of
stock or other equity securities;
(9) Incurred any indebtedness for borrowed money or made any
commitment to borrow money or taken out or agreed to take
out any loans;
(10) Incurred any liabilities except in the ordinary course of
business and consistent with past practice, none of which
are material, or made any increases or changes in any
assumptions underlying or methods of calculating any bad
debt, contingency or other reserves; or
(11) Agreed to take any of the actions described in the foregoing
items (1) through (10).
5.9 Title to Assets, Etc. Mutual has good, insurable and marketable
title to its assets. None of its assets are subject to any Encumbrances,
except as set forth in the Disclosure Statement or except for minor liens
which in the aggregate are not material, do not materially detract from the
value of the property or its assets subject thereto, do not interfere with
their present use and have not arisen other than in the ordinary course of
business.
5.10 Compliance With Lease Obligations. Mutual has in all material
respects performed all the obligations required to be performed by it with
respect to all its assets leased by it through the date hereof, except
where the failure to perform would not have a material adverse effect on
the business or financial condition of Mutual.
5.11 Condition of Facilities. (a) Mutual enjoys peaceful and
undisturbed possession of all Facilities owned or leased by it and Mutual
has not caused nor has knowledge of any Encumbrances, encroachments,
building or use restrictions, exceptions, reservations or limitations which
in any material respect interfere with or impair the present and continued
use thereof in the usual and normal conduct of the business of Mutual.
(b) There are no pending or threatened condemnation proceedings
relating to any of the Facilities.
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<PAGE>
(c) The real property improvements (including leasehold improvements),
equipment and other tangible assets owned or used by Mutual at the
Facilities are adequately insured and are structurally sound with no known
material defects.
(d) None of said improvements, equipment and other assets is subject
to any commitment or other arrangement for their sale or use by any
Affiliate, to Mutual's knowledge, by any third parties.
5.12 Condition of Tangible Assets. The assets, Facilities and
Furnishings and Equipment are in good operating condition and repair
(except for ordinary wear and tear and any defect the cost of repairing of
which would not be material), are sufficient for the operation of Mutual's
business as presently conducted and are in conformity in all material
respects with all applicable laws, ordinances, orders, regulations and
other requirements (including applicable zoning, environmental, motor
vehicle safety or standards, occupational safety and health laws and
regulations) relating thereto currently in effect, except where the failure
to conform would not have a material adverse effect on the business or
financial condition of Mutual.
5.13 Contracts and Commitments. (a) The Disclosure Schedule lists the
following contracts and agreements to which Mutual is a party:
(1) All leases of real property, indicating with respect to each
lease the term, annual rent, renewal options and number of
square feet leased;
(2) All material leases of personal property, indicating with
respect to each lease a general description of the leased
items, term, annual rent and renewal options;
(3) All agreements (and all groups of related agreements) which
extend for more than one year and which involve the purchase
of materials, supplies or other personal property or for the
furnishing or receipt of services (other than employment
agreements and which involve consideration in excess of
$50,000 per year;
(4) Employment contracts to employ executive officers and any
other contracts with officers or directors of Mutual;
(5) Any consulting agreement which provides for annual
compensation in excess of $50,000 per year and which is not
terminable by Mutual within six months;
(6) Any professional services agreements which provides for
total compensation in excess of $50,000; and
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<PAGE>
(7) All Support Services Agreements.
(b) Excluding the Support Services Agreements and excluding contracts
or commitments which are described in the Disclosure Schedule, Mutual is
not a party to any written or oral:
(1) Commitment, contract, note, loan, evidence of indebtedness,
purchase order or letter of credit involving any obligation
or liability on the part of Mutual that is material;
(2) Lease of real property;
(3) Lease of personal property involving an annual expense in
excess of $25,000;
(4) Contracts and commitments not otherwise described above or
listed in the Disclosure Schedule (including purchase orders
over $50,000, franchise agreements and undertakings or
commitments to any governmental or regulatory authority)
relating to the business of Mutual and otherwise materially
affecting Mutual;
(5) Contracts or agreements containing covenants which limit the
freedom of Mutual to engage in any line of business or
compete with any person; or
(6) Employment contracts, including without limitation,
contracts to employ executive officers and other contracts
with officers or directors of Mutual.
Mutual is not (and to the best of Mutual's knowledge, no other party
is) in material breach or violation of, or default under any of the
Contracts or other instruments, obligations, evidences of indebtedness or
commitments described in items 5.13 (a) (1)-(7) above, the breach or
violation of which would have a material adverse effect on the business or
financial condition of Mutual.
5.14 Consents and Approvals. Mutual has all licenses, consents,
approvals and authorizations necessary for the conduct of its business and
there is no license, consent, approval or authorization, or declaration,
filing or registration with, any governmental or regulatory authority or
any other person or entity, that is required to be made or obtained by
Mutual in order to continue its business or in connection with the
execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby. All licenses, consents, approvals
and authorizations necessary for the conduct of Mutual's business or
required in order for Mutual to execute and perform this Agreement have
been identified in the Disclosure Schedule.
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5.15 Litigation and Claims. (a) There is no action, order, writ,
injunction, judgment or decree outstanding or claim, suit, litigation,
proceeding, labor dispute, arbitral action or investigation (collectively,
"Actions") pending or, to the knowledge of Mutual, threatened or
anticipated against, relating to or affecting (i) Mutual, (ii) any benefit
plan for employees or any fiduciary or administrator thereof, (iii) any of
the assets or Contracts, or (iv) the transactions contemplated by this
Agreement.
(b) Mutual is not in default with respect to any judgment, order,
writ, injunction or decree of any court or governmental agency, and there
are no unsatisfied judgments against Mutual, or the business or activities
of Mutual.
5.16 Labor Matters. Mutual is not a party to any labor agreement with
respect to its employees with any labor organization, group or association.
Mutual has not experienced any attempt by organized labor or its
representatives to make Mutual conform to demands of organized labor
relating to its employees or to enter into a binding agreement with
organized labor that would cover the employees of Mutual.
5.17 Liabilities. Mutual has no liabilities or obligations (absolute,
accrued, contingent or otherwise) except (i) liabilities which are
reflected and reserved against on the 1995 Financial Statements, (ii)
liabilities incurred in the ordinary course of business and consistent with
past practice since December 31, 1995, and (iii) liabilities arising under
Contracts, letters of credit, purchase orders, licenses, permits, purchase
agreements and other agreements, business arrangements and commitments
described in the Disclosure Schedule or which are of the type described in
Section 5.13 but which because of the dollar amount or other qualifications
are not required to be listed in the Disclosure Schedule.
5.18 Compliance with Law. Mutual is in compliance with all Laws.
Mutual has not received any written notice to the effect that, or otherwise
been advised that, it is not in compliance with any of such statutes,
regulations, orders, ordinances or other laws, and Mutual has no reason to
anticipate that any presently existing circumstances are likely to result
in violations of any such regulations which would, in any one case or in
the aggregate, have a material adverse effect on the business or financial
condition of Mutual.
5.19 No Brokers. Mutual has not entered into nor will enter into any
Contract, agreement, arrangement or understanding with any person or firm
which will result in the obligation of ServiceMaster or Mutual, to pay any
finder's fee, brokerage commission or similar payment in connection with
the transactions contemplated hereby, except that Mutual is a party to a
letter agreement dated December 12, 1995 from Smith Barney Inc.
5.20 No Other Agreements to Sell Stock. Mutual does not have any legal
obligation, absolute or contingent, to any other person or entity to sell
any of its assets, to sell, issue, transfer or assign any shares, options,
warrants or other rights to purchase equity interests in Mutual, or to
effect any merger, consolidation or other reorganization of Mutual or to
enter into any agreement with respect to any of the above.
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5.21 Proprietary Rights. (a) All of Mutual's registrations of
trademarks and of other marks, trade names or other trade rights, and all
pending applications for any such registrations and all of Mutual's patents
and copyrights and all pending applications therefor; all other trademarks
and other marks, trade names and other trade rights and all other trade
secrets, designs, plans, specifications and other proprietary rights,
whether or not registered (collectively, "Proprietary Rights") are listed
in the Disclosure Schedule. The Proprietary Rights listed in the Disclosure
Schedule are in all material respects all those used in the business of
Mutual.
(b) No person has a right to receive a royalty or similar payment in
respect of any Proprietary Rights pursuant to any contractual arrangements
entered into by Mutual, and no person otherwise has a right to receive a
royalty or similar payment in respect of any such Proprietary Rights.
(c) Mutual has no licenses granted by or to it or no other agreements
to which it is a party, relating in whole or in part to any of the
Proprietary Rights.
(d) Mutual's use of the Proprietary Rights is not infringing upon or
otherwise violating the rights of any third party in or to such Proprietary
Rights, and no proceedings have been instituted against or notices received
by Mutual that are presently outstanding alleging that Mutual's use of its
Proprietary Rights infringes upon or otherwise violates any rights of a
third party in or to such Proprietary Rights.
5.22 Employee Benefit Plans. Except for Mutual's 401(k) plan, Mutual
has no employee benefit plan or similar plan or arrangement subject to the
provisions of the Employee Retirement Income Security Act of 1974, as
amended.
5.23 Transactions with Certain Persons. Except for their respective
employment agreements, neither any Key Executive, officer, director or
employee of Mutual, nor any member of any such person's immediate family,
is presently a party to any material transaction with Mutual relating to
Mutual's business, including without limitation, any contract, agreement or
other arrangement (i) providing for the furnishing of services by, (ii)
providing for the rental of real or personal property from, or (iii)
otherwise requiring payments to (other than for services as officers,
directors or employees of Mutual) any such person or corporation,
partnership, trust or other entity in which any such person has a
substantial interest as a shareholder, officer, director, trustee or
partner.
5.24 Tax Matters. (a) Mutual, every predecessor of Mutual, and all
members for income tax purposes of any affiliated group of corporations of
which Mutual or any such predecessor corporation is or has been a member
(hereinafter referred to collectively as the "Taxpayers") have duly filed
all tax elections, reports and returns required to be filed by them,
including all federal, state, local and foreign tax elections, returns and
reports. The Taxpayers have paid in full all taxes required to be paid by
such Taxpayers before such payment became delinquent. Mutual has made
adequate provision, in conformity with
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generally accepted accounting principles consistently applied, for the
payment of all taxes which may subsequently become due. All taxes which any
Taxpayer has been required to collect or withhold have been duly collected
or withheld and, to the extent required when due, have been or will be duly
paid to the proper taxing authority.
(b) Any consolidated federal income tax returns of Mutual, which have
been examined by the Internal Revenue Service for all periods to and
including those expressly set forth in the Disclosure Schedule, and except
to the extent shown therein, all deficiencies asserted as a result of such
examinations have been paid or finally settled, and no issue has been
raised by the Internal Revenue Service in any such examination which, by
application of similar principles, reasonably could be expected to result
in a proposed deficiency for any other period not so examined.
(c) There are no audits of Mutual's tax returns, except as set forth
in the Disclosure Statement, and there are no claims which have been
asserted relating to any of Mutual's tax returns filed for any year which
if determined adversely would result in the assertion by any governmental
agency of any deficiency.
(d) Mutual has not executed any waivers of statutes of limitations
with respect to any of its tax returns.
(e) None of the Taxpayers has filed a statement under Section 341(f)
of the Code (or any comparable state income tax provision) consenting to
have the provisions of Section 341(f)(2) (collapsible corporations
provisions) of the Code (or any comparable state income tax provision)
apply to any disposition of any of its assets or property, no property of
Mutual is property which ServiceMaster or Mutual is or will be required to
treat as owned by another person pursuant to the provisions of Section
168(f) (safe harbor leasing provisions) of the Code.
(f) Mutual is not a party to any tax-sharing agreement or similar
arrangement with any other party.
(g) Mutual has not made an Election by Small Business Corporation to
be treated as an "S Corporation" for federal income tax purposes.
5.25 Severance Arrangements. Except as set forth in the Disclosure
Statement, Mutual has not entered into any severance or similar arrangement
in respect of any present or former personnel that will result in any
obligation (absolute or contingent) of Mutual to make any payment to any
present or former personnel following termination of employment.
5.26 Insurance. The Disclosure Schedule contains a complete and
accurate list of all insurance policies or binders of fire, liability,
title, worker's compensation, malpractice, life and other forms of
insurance (showing as to each policy or binder the carrier, policy number,
coverage limits, expiration dates, deductibles, owners, beneficiaries,
named
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insiders, annual premiums and a general description of the type of coverage
provided) maintained by Mutual on or with respect to its business, property
or personnel. All of such policies are sufficient for compliance with all
requirements of law and of all Contracts to which Mutual is a party. Mutual
is not in default under any of such policies or binders, and Mutual has not
failed to give any notice or to present any claim under any such policy or
binder in a due and timely fashion. There are no facts upon which an
insurer might be justified in reducing coverage or increasing premiums on
existing policies or binders. There are no outstanding unpaid claims under
any such policies or binders. Such policies and binders provide sufficient
coverage for the risks insured against, are in full force and effect on the
date hereof and shall be kept in full force and effect by Mutual through
the Closing Date.
5.27 Accounts Receivable. The accounts receivable reflected in the
1995 Financial Statements, and all accounts receivable arising since
December 31, 1995, represent bona fide claims against debtors for sales,
services performed or other charges arising on or before the date hereof,
and all the goods delivered and services performed which gave rise to said
accounts were delivered or performed in accordance with the applicable
orders, Contracts or customer requirements. Such accounts receivable are
subject to no defenses, counterclaims or rights of setoff and are fully
collectible in the ordinary course of business without cost to Mutual in
collection efforts therefor except, in the case of accounts receivable
shown in the 1995 Financial Statements, to the extent of the appropriate
reserves set forth in the 1995 Financial Statements, and, in the case of
accounts receivable arising since December 31, 1995, to a reasonable
allowance for bad debts which does not reflect a rate of bad debts higher
than that reflected by the reserve for bad debts in the 1995 Financial
Statements.
5.28 Payments. Mutual has not, directly or indirectly, paid or
delivered any fee, commission or other sum of money or item of property,
however characterized, to any finder, agent, government official or other
party, which is in any manner related to the business or operations of
Mutual, which Mutual knows or has reason to believe to have been illegal
under any Laws of the United States or any other country having
jurisdiction; and Mutual has not participated, directly or indirectly, in
any boycotts or other similar practices affecting any of its actual or
potential customers and has at all times done business in an open and
ethical manner.
5.29 Compliance With Legislation Regulating Safety and Environmental
Quality. There are no toxic wastes or other toxic or hazardous substances
or materials being generated, stored, transported to or from or otherwise
released or held on, under or about any of the Facilities. The Facilities
have been maintained in compliance with all federal, state and local
environmental protection, occupational, health and safety or similar laws,
ordinances, restrictions, licenses and local environmental protection,
occupational, health and safety or similar laws, ordinances, restrictions,
licenses and regulations, including (but not limited to) the Federal Water
Pollution Control Act (33 U.S.C. ss. 1251 et seq.), Resource Conservation &
Recovery Act (42 U.S.C. ss. 6901 et seq.), Safe Drinking Water Act (21
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U.S.C. ss. 349, 42 U.S.C. ss.ss. 201, 300f), Toxic Substances Control Act
(15 U.S.C. ss. 2601 et seq.), Clean Air Act (42 U.S.C. ss. 7401 et seq.),
Comprehensive Environmental Response, Compensation and Liability Act (42
U.S.C. ss. 9601 et seq.), and all state statutes of similar purpose and
effect.
5.30 Material Misstatements Or Omissions. No representations or
warranties by Mutual in this Agreement, or in the Disclosure Schedule, or
in any document, exhibit, statement, certificate or schedule furnished to
ServiceMaster pursuant hereto, or in connection with the transactions
contemplated hereby, contains or will contain any statement of a material
fact or omits or will omit to state any material fact necessary to make the
statements or facts contained therein not misleading. Mutual has disclosed
all events, conditions and facts materially affecting the business,
prospects and financial condition of Mutual.
ARTICLE V-A
REPRESENTATIONS AND WARRANTIES OF MUTUAL
WITH RESPECT TO THE OREGON CORPORATION
--------------------------------------
Mutual represents and warrants to ServiceMaster that the statements made in
this Article V-A with respect to the Oregon Corporation are correct and
complete as of the date of this Agreement except as set forth in the
Disclosure Schedule.
5A.1 Organization of Oregon Corporation. (a) The Oregon Corporation is
duly organized, validly existing and in good standing under the laws of the
State of Oregon.
(b) The Oregon Corporation has full corporate power and authority to
conduct its business as it is presently being conducted and as proposed to
be conducted and to own and lease its properties and its assets.
(c) The Oregon Corporation is not conducting any business outside of
the State of Oregon.
(d) Mutual has furnished ServiceMaster with copies of the Articles of
Incorporation and bylaws, as amended, of the Oregon Corporation which
copies are true, complete and contain all amendments through the Closing
Date.
5A.2 Capitalization. (a) The authorized capital stock of the Oregon
Corporation consists of 5,000,000 shares of common stock, no par value, of
which 1,336,100 shares are issued and outstanding;
(b) Except as set forth in the Disclosure Schedule, there are no
subscriptions, options, warrants, calls, rights, agreements or commitments
(including any right of conversion or exchange under any outstanding
security or other instrument) relating to the issuance by the Oregon
Corporation of any class of its capital stock.
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5A.3 Subsidiaries. The Oregon Corporation has no Subsidiaries.
5A.4 Financial Statements. Mutual has heretofore delivered to
ServiceMaster (i) the certified (by the Chief Financial Officer of Mutual)
1995 balance sheet, statement of income, and statement of stockholders'
equity of the Oregon Corporation and (ii) the unaudited first quarter of
1996, statement of income, of the Oregon Corporation (the "Oregon
Corporation Financial Statements"). Such statements are in accordance with
the books and records of the Oregon Corporation, accurately reflect its
assets, liabilities and financial condition and results of operations
indicated thereby in accordance with generally accepted accounting
principles consistently applied, and contain and reflect all necessary
adjustments for a fair representation of the financial condition of the
companies being reported upon as of the date and for the period covered
thereby.
5A.5 Events Since December 31, 1995. (a) Since December 31, 1995, the
Oregon Corporation has managed and carried out its business and affairs in
the ordinary course of business and there has not occurred, arisen or been
created, as the case may be, any change in the business, operations or
internal conditions (financial or otherwise) of the Oregon Corporation
which has had, or which could reasonably be expected to have, a material
adverse effect on the Oregon Corporation.
(b) Without limiting the generality of Section 5A.5(a), since December
31, 1995, the Oregon Corporation has not:
(1) Sold, assigned or transferred any of its assets other than
in the ordinary course of business;
(2) Canceled any indebtedness or waived any rights of
substantial value to the Oregon Corporation, whether or not
in the ordinary course of business;
(3) Amended, canceled or terminated its Support Service
Agreement with Mutual;
(4) Failed to repay any material obligation of the Oregon
Corporation;
(5) Suffered any damage, destruction or loss (whether or not
covered by insurance) which adversely affected its
properties, business or prospects;
(6) Mortgaged, pledged or otherwise encumbered any of its assets
in amounts which are material singly or in the aggregate,
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(7) Declared, set aside or paid any dividends or made any
distributions in respect of any of its capital stock or
other equity securities or redeemed, purchased or otherwise
acquired any of its equity securities;
(8) Issued or committed to issue any shares of stock or other
equity securities or obligations or securities convertible
into or exchangeable for shares of stock or other equity
securities;
(9) Incurred any indebtedness for borrowed money or made any
commitment to borrow money or taken out or agreed to take
out any loans;
(10) Incurred any liabilities except in the ordinary course of
business and consistent with past practice, none of which
are material, or made any increases or changes in any
assumptions underlying or methods of calculating any bad
debt, contingency or other reserves; or
(11) Agreed to take any of the actions described in the foregoing
items (1) through (10).
5A.6 Title to Assets, Etc. The Oregon Corporation has good, insurable
and marketable title to its assets. None of its assets are subject to any
Encumbrances, except as set forth in the Disclosure Statement or except for
minor liens which in the aggregate are not material, do not materially
detract from the value of the property or its assets subject thereto, do
not interfere with their present use and have not arisen other than in the
ordinary course of business.
5A.7 Compliance With Lease Obligations. The Oregon Corporation has in
all material respects performed all the obligations required to be
performed by it with respect to all its assets leased by it through the
date hereof, except where the failure to perform would not have a material
adverse effect on the business or financial condition of the Oregon
Corporation.
5A.8 Condition of Facilities. (a) The Oregon Corporation enjoys
peaceful and undisturbed possession of all Facilities owned or leased by it
and the Oregon Corporation has not caused nor has knowledge of any
Encumbrances, encroachments, building or use restrictions, exceptions,
reservations or limitations which in any material respect interfere with or
impair the present and continued use thereof in the usual and normal
conduct of the business of the Oregon Corporation.
(b) There are no pending or threatened condemnation proceedings
relating to any of the Facilities.
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(c) The real property improvements (including leasehold improvements),
equipment and other tangible assets owned or used by the Oregon Corporation
at the Facilities are adequately insured and are structurally sound with no
known material defects.
(d) None of said improvements, equipment and other assets is subject
to any commitment or other arrangement for their sale or use by any
Affiliate, to Mutual's knowledge, by any third parties.
5A.9 Condition of Tangible Assets. The assets, Facilities and
Furnishings and Equipment are in good operating condition and repair
(except for ordinary wear and tear and any defect the cost of repairing of
which would not be material), are sufficient for the operation of the
Oregon Corporation's business as presently conducted and are in conformity
in all material respects with all applicable laws, ordinances, orders,
regulations and other requirements (including applicable zoning,
environmental, motor vehicle safety or standards, occupational safety and
health laws and regulations) relating thereto currently in effect, except
where the failure to conform would not have a material adverse effect on
the business or financial condition of the Oregon Corporation.
5A.10 Contracts and Commitments. (a) The Disclosure Schedule lists the
following contracts and agreements to which the Oregon Corporation is a
party:
(1) All leases of real property, indicating with respect to each
lease the term, annual rent, renewal options and number of
square feet leased;
(2) All material leases of personal property, indicating with
respect to each lease a general description of the leased
items, term, annual rent and renewal options;
(3) All agreements (and all groups of related agreements) which
extend for more than one year and which involve the purchase
of materials, supplies or other personal property or for the
furnishing or receipt of services (other than employment
agreements and which involve consideration in excess of
$50,000 per year;
(4) Other than contracts to provide dental services to the
Oregon Corporation, employment contracts to employ executive
officers and any other contracts with officers or directors
of the Oregon Corporation;
(5) Any consulting agreement which provides for annual
compensation in excess of $50,000 per year and which is not
terminable by the Oregon Corporation within six months;
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(6) Any professional services agreements, other than agreements
for the performance of dental services, which provides for
total compensation in excess of $50,000; and
(7) All Support Services Agreements.
(b) Excluding the Support Services Agreements and excluding contracts
or commitments which are described in the Disclosure Schedule, the Oregon
Corporation is not a party to any written or oral:
(1) Commitment, contract, note, loan, evidence of indebtedness,
purchase order or letter of credit involving any obligation
or liability on the part of the Oregon Corporation that is
material;
(2) Lease of real property;
(3) Lease of personal property involving an annual expense in
excess of $10,000;
(4) Contracts and commitments not otherwise described above or
listed in the Disclosure Schedule (including purchase
orders, franchise agreements and undertakings or commitments
to any governmental or regulatory authority) relating to the
business of the Oregon Corporation and otherwise materially
affecting the Oregon Corporation;
(5) Contracts or agreements containing covenants which limit the
freedom of the Oregon Corporation to engage in any line of
business or compete with any person; or
(6) Executive officer employment contracts.
The Oregon Corporation is not (and to the best of Mutual's knowledge,
no other party is) in material breach or violation of, or default under any
of the Contracts or other instruments, obligations, evidences of
indebtedness or commitments described in items 5A.13 (a) (1)-(7) above, the
breach or violation of which would have a material adverse effect on the
business or financial condition of the Oregon Corporation.
5A.11 Consents and Approvals. The Oregon Corporation has all licenses,
consents, approvals and authorizations necessary for the conduct of its
business and there is no license, consent, approval or authorization, or
declaration, filing or registration with, any governmental or regulatory
authority or any other person or entity, that is required to be made or
obtained by the Oregon Corporation in order to continue its business. All
licenses, consents, approvals and authorizations necessary for the conduct
of the Oregon Corporation's business have been identified in the Disclosure
Schedule.
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5A.12 Litigation and Claims. (a) There is no action, order, writ,
injunction, judgment or decree outstanding or claim, suit, litigation,
proceeding, labor dispute, arbitral action or investigation (collectively,
"Actions") pending or, to the knowledge of Mutual, threatened or
anticipated against, relating to or affecting (i) the Oregon Corporation,
(ii) any benefit plan for employees or any fiduciary or administrator
thereof, (iii) any of the assets or Contracts, or (iv) the transactions
contemplated by this Agreement.
(b) The Oregon Corporation is not in default with respect to any
judgment, order, writ, injunction or decree of any court or governmental
agency, and there are no unsatisfied judgments against the Oregon
Corporation, or the business or activities of the Oregon Corporation.
5A.13 Labor Matters. The Oregon Corporation is not a party to any
labor agreement with respect to its employees with any labor organization,
group or association. The Oregon Corporation has not experienced any
attempt by organized labor or its representatives to make the Oregon
Corporation conform to demands of organized labor relating to its employees
or to enter into a binding agreement with organized labor that would cover
the employees of the Oregon Corporation.
5A.14 Liabilities. The Oregon Corporation has no liabilities or
obligations (absolute, accrued, contingent or otherwise) except (i)
liabilities which are reflected and reserved against on the Oregon
Financial Statements, (ii) liabilities incurred in the ordinary course of
business and consistent with past practice since December 31, 1995, and
(iii) liabilities arising under Contracts, letters of credit, purchase
orders, licenses, permits, purchase agreements and other agreements,
business arrangements and commitments described in the Disclosure Schedule
or which are of the type described in Section 5A.13 but which because of
the dollar amount or other qualifications are not required to be listed in
the Disclosure Schedule.
5A.15 Compliance with Law. The Oregon Corporation is in compliance
with all Laws. The Oregon Corporation has not received any written notice
to the effect that, or otherwise been advised that, it is not in compliance
with any of such statutes, regulations, orders, ordinances or other laws,
and the Oregon Corporation has no reason to anticipate that any presently
existing circumstances are likely to result in violations of any such
regulations which would, in any one case or in the aggregate, have a
material adverse effect on the business or financial condition of the
Oregon Corporation.
5A.16 No Other Agreements to Sell Stock. The Oregon Corporation does
not have any legal obligation, absolute or contingent, to any other person
or entity to sell any of its assets, to sell, issue, transfer or assign any
shares, options, warrants or other rights to purchase equity interests in
the Oregon Corporation, or to effect any merger, consolidation or other
reorganization of the Oregon Corporation or to enter into any agreement
with respect to any of the above.
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5A.17 Proprietary Rights. (a) All of the Oregon Corporation's
registrations of trademarks and of other marks, trade names or other trade
rights, and all pending applications for any such registrations and all of
the Oregon Corporation's patents and copyrights and all pending
applications therefor; all other trademarks and other marks, trade names
and other trade rights and all other trade secrets, designs, plans,
specifications and other proprietary rights, whether or not registered
(collectively, "Proprietary Rights") are listed in the Disclosure Schedule.
The Proprietary Rights listed in the Disclosure Schedule are in all
material respects all those used in the business of the Oregon Corporation.
(b) No person has a right to receive a royalty or similar payment in
respect of any Proprietary Rights pursuant to any contractual arrangements
entered into by the Oregon Corporation, and no person otherwise has a right
to receive a royalty or similar payment in respect of any such Proprietary
Rights.
(c) The Oregon Corporation has no licenses granted by or to it or no
other agreements to which it is a party, relating in whole or in part to
any of the Proprietary Rights.
(d) The Oregon Corporation's use of the Proprietary Rights is not
infringing upon or otherwise violating the rights of any third party in or
to such Proprietary Rights, and no proceedings have been instituted against
or notices received by the Oregon Corporation that are presently
outstanding alleging that the Oregon Corporation's use of its Proprietary
Rights infringes upon or otherwise violates any rights of a third party in
or to such Proprietary Rights.
5A.18 Employee Benefit Plans. Except for the 401(k) plan referred to
in Section 5.22, the Oregon Corporation has no employee benefit plan or
similar plan or arrangement subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended.
5A.19 Transactions with Certain Persons. Except for their respective
employment agreements, neither any Key Executive, officer, director or
employee of the Oregon Corporation, nor any member of any such person's
immediate family, is presently a party to any material transaction with the
Oregon Corporation relating to the Oregon Corporation's business, including
without limitation, any contract, agreement or other arrangement (i)
providing for the furnishing of services by, (ii) providing for the rental
of real or personal property from, or (iii) otherwise requiring payments to
(other than for services as officers, directors or employees of the Oregon
Corporation) any such person or corporation, partnership, trust or other
entity in which any such person has a substantial interest as a
shareholder, officer, director, trustee or partner.
5A.20 Tax Matters. (a) The Oregon Corporation, every predecessor of
the Oregon Corporation, and all members for income tax purposes of any
affiliated group of corporations of which the Oregon Corporation or any
such predecessor corporation is or has been a
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member (hereinafter referred to collectively as the "Taxpayers") have duly
filed all tax elections, reports and returns required to be filed by them,
including all federal, state, local and foreign tax elections, returns and
reports. The Taxpayers have paid in full all taxes required to be paid by
such Taxpayers before such payment became delinquent. The Oregon
Corporation has made adequate provision, in conformity with generally
accepted accounting principles consistently applied, for the payment of all
taxes which may subsequently become due. All taxes which any Taxpayer has
been required to collect or withhold have been duly collected or withheld
and, to the extent required when due, have been or will be duly paid to the
proper taxing authority.
(b) Any consolidated federal income tax returns of the Oregon
Corporation, which have been examined by the Internal Revenue Service for
all periods to and including those expressly set forth in the Disclosure
Schedule, and except to the extent shown therein, all deficiencies asserted
as a result of such examinations have been paid or finally settled, and no
issue has been raised by the Internal Revenue Service in any such
examination which, by application of similar principles, reasonably could
be expected to result in a proposed deficiency for any other period not so
examined.
(c) There are no audits of the Oregon Corporation's tax returns, and
there are no claims which have been or may be asserted relating to any of
the Oregon Corporation's tax returns filed for any year which if determined
adversely would result in the assertion by any governmental agency of any
deficiency.
(d) The Oregon Corporation has not executed any waivers of statutes of
limitations with respect to any of its tax returns.
(e) None of the Taxpayers has filed a statement under Section 341(f)
of the Code (or any comparable state income tax provision) consenting to
have the provisions of Section 341(f)(2) (collapsible corporations
provisions) of the Code (or any comparable state income tax provision)
apply to any disposition of any of its assets or property, no property of
the Oregon Corporation is property which ServiceMaster or the Oregon
Corporation is or will be required to treat as owned by another person
pursuant to the provisions of Section 168(f) (safe harbor leasing
provisions) of the Code.
(f) The Oregon Corporation is not a party to any tax-sharing agreement
or similar arrangement with any other party.
(g) The Oregon Corporation has not made an Election by Small Business
Corporation to be treated as an "S Corporation" for federal income tax
purposes.
5A.21 Severance Arrangements. The Oregon Corporation has not entered
into any severance or similar arrangement in respect of any present or
former personnel that will result in any obligation (absolute or
contingent) of the Oregon Corporation to make any payment to any present or
former personnel following termination of employment.
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5A.22 Insurance. The Disclosure Schedule contains a complete and
accurate list of all insurance policies or binders of fire, liability,
title, worker's compensation, malpractice, life and other forms of
insurance (showing as to each policy or binder the carrier, policy number,
coverage limits, expiration dates, deductibles, owners, beneficiaries,
named insiders, annual premiums and a general description of the type of
coverage provided) maintained by the Oregon Corporation on or with respect
to its business, property or personnel. All of such policies are sufficient
for compliance with all requirements of law and of all Contracts to which
the Oregon Corporation is a party. The Oregon Corporation is not in default
under any of such policies or binders, and the Oregon Corporation has not
failed to give any notice or to present any claim under any such policy or
binder in a due and timely fashion. There are no facts upon which an
insurer might be justified in reducing coverage or increasing premiums on
existing policies or binders. There are no outstanding unpaid claims under
any such policies or binders. Such policies and binders provide sufficient
coverage for the risks insured against, are in full force and effect on the
date hereof and shall be kept in full force and effect by the Oregon
Corporation through the Closing Date.
5A.23 Accounts Receivable. The accounts receivable reflected in the
Oregon Corporation Financial Statements, and all accounts receivable
arising since December 31, 1995, represent bona fide claims against debtors
for sales, services performed or other charges arising on or before the
date hereof, and all the goods delivered and services performed which gave
rise to said accounts were delivered or performed in accordance with the
applicable orders, Contracts or customer requirements. Such accounts
receivable are subject to no defenses, counterclaims or rights of setoff
and are fully collectible in the ordinary course of business without cost
to the Oregon Corporation in collection efforts therefor except, in the
case of accounts receivable shown in the Oregon Corporation Financial
Statements, to the extent of the appropriate reserves set forth in the
Oregon Corporation Financial Statements, and, in the case of accounts
receivable arising since December 31, 1995, to a reasonable allowance for
bad debts which does not reflect a rate of bad debts higher than that
reflected by the reserve for bad debts in the Oregon Corporation Financial
Statements.
5A.24 Payments. The Oregon Corporation has not, directly or
indirectly, paid or delivered any fee, commission or other sum of money or
item of property, however characterized, to any finder, agent, government
official or other party, which is in any manner related to the business or
operations of the Oregon Corporation, which the Oregon Corporation knows or
has reason to believe to have been illegal under any Laws of the United
States or any other country having jurisdiction; and the Oregon Corporation
has not participated, directly or indirectly, in any boycotts or other
similar practices affecting any of its actual or potential customers and
has at all times done business in an open and ethical manner.
5A.25 Compliance With Legislation Regulating Safety and Environmental
Quality. There are no toxic wastes or other toxic or hazardous substances
or materials being
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generated, stored, transported to or from or otherwise released or held on,
under or about any of the Facilities. The Facilities have been maintained
in compliance with all federal, state and local environmental protection,
occupational, health and safety or similar laws, ordinances, restrictions,
licenses and local environmental protection, occupational, health and
safety or similar laws, ordinances, restrictions, licenses and regulations,
including (but not limited to) the Federal Water Pollution Control Act (33
U.S.C. ss. 1251 et seq.), Resource Conservation & Recovery Act (42 U.S.C.
ss. 6901 et seq.), Safe Drinking Water Act (21 U.S.C. ss. 349, 42 U.S.C.
ss.ss. 201, 300f), Toxic Substances Control Act (15 U.S.C. ss. 2601 et
seq.), Clean Air Act (42 U.S.C. ss. 7401 et seq.), Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. ss. 9601
et seq.), and all state statutes of similar purpose and effect.
ARTICLE V-B
REPRESENTATIONS AND WARRANTIES OF MUTUAL
WITH RESPECT TO THE WASHINGTON CORPORATION
------------------------------------------
Mutual represents and warrants to ServiceMaster that the statements made in
this Article V-A with respect to the Washington Corporation are correct and
complete as of the date of this Agreement except as set forth in the
Disclosure Schedule.
5B.1 Organization of Washington Corporation. (a) The Washington
Corporation is duly organized, validly existing and in good standing under
the laws of the State of Washington.
(b) The Washington Corporation has full corporate power and authority
to conduct its business as it is presently being conducted and as proposed
to be conducted and to own and lease its properties and its assets.
(c) The Washington Corporation is not conducting any business outside
of the State of Washington.
(d) Mutual has furnished ServiceMaster with copies of the Articles of
Incorporation and bylaws, as amended, of the Washington Corporation which
copies are true, complete and contain all amendments through the Closing
Date.
5B.2 Capitalization. (a) The authorized capital stock of the
Washington Corporation consists of 5,000,000 shares of common stock, no par
value, of which 1,448,100 shares are issued and outstanding;
(b) Except as set forth in the Disclosure Schedule, there are no
subscriptions, options, warrants, calls, rights, agreements or commitments
(including any right of conversion or exchange under any outstanding
security or other instrument) relating to the issuance by The Washington
Corporation of any class of its capital stock.
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5B.3 Subsidiaries. The Washington Corporation has no Subsidiaries.
5B.4 Financial Statements. Mutual has heretofore delivered to
ServiceMaster (i) the certified (by the Chief Financial Officer of Mutual)
1995 balance sheet, statement of income, statement of cash flow and
statement of stockholders' equity of the Washington Corporation and (ii)
the unaudited first quarter of 1996 statement of income of the Washington
Corporation (the "Washington Corporation Financial Statements"). Such
statements are in accordance with the books and records of the Washington
Corporation, accurately reflect its assets, liabilities and financial
condition and results of operations indicated thereby in accordance with
generally accepted accounting principles consistently applied, and contain
and reflect all necessary adjustments for a fair representation of the
financial condition of the companies being reported upon as of the date and
for the period covered thereby.
5B.5 Events Since December 31, 1995. (a) Since December 31, 1995, the
Washington Corporation has managed and carried out its business and affairs
in the ordinary course of business and there has not occurred, arisen or
been created, as the case may be, any change in the business, operations or
internal conditions (financial or otherwise) of the Washington Corporation
which has had, or which could reasonably be expected to have, a material
adverse effect on the Washington Corporation.
(b) Without limiting the generality of Section 5B.5(a), since December
31, 1995, the Washington Corporation has not:
(1) Sold, assigned or transferred any of its assets other than
in the ordinary course of business;
(2) Canceled any indebtedness or waived any rights of
substantial value to the Washington Corporation, whether or
not in the ordinary course of business;
(3) Amended, canceled or terminated its Support Service
Agreement with Mutual;
(4) Failed to repay any material obligation of the Washington
Corporation;
(5) Suffered any damage, destruction or loss (whether or not
covered by insurance) which adversely affected its
properties, business or prospects;
(6) Mortgaged, pledged or otherwise encumbered any of its assets
in amounts which are material singly or in the aggregate,
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(7) Declared, set aside or paid any dividends or made any
distributions in respect of any of its capital stock or
other equity securities or redeemed, purchased or otherwise
acquired any of its equity securities;
(8) Issued or committed to issue any shares of stock or other
equity securities or obligations or securities convertible
into or exchangeable for shares of stock or other equity
securities;
(9) Incurred any indebtedness for borrowed money or made any
commitment to borrow money or taken out or agreed to take
out any loans;
(10) Incurred any liabilities except in the ordinary course of
business and consistent with past practice, none of which
are material, or made any increases or changes in any
assumptions underlying or methods of calculating any bad
debt, contingency or other reserves; or
(11) Agreed to take any of the actions described in the foregoing
items (1) through (10).
5B.6 Title to Assets, Etc. The Washington Corporation has good,
insurable and marketable title to its assets. None of its assets are
subject to any Encumbrances, except as set forth in the Disclosure
Statement or except for minor liens which in the aggregate are not
material, do not materially detract from the value of the property or its
assets subject thereto, do not interfere with their present use and have
not arisen other than in the ordinary course of business.
5B.7 Compliance With Lease Obligations. The Washington Corporation has
in all material respects performed all the obligations required to be
performed by it with respect to all its assets leased by it through the
date hereof, except where the failure to perform would not have a material
adverse effect on the business or financial condition of the Washington
Corporation.
5B.8 Condition of Facilities. (a) The Washington Corporation enjoys
peaceful and undisturbed possession of all Facilities owned or leased by it
and the Washington Corporation has not caused nor has knowledge of any
Encumbrances, encroachments, building or use restrictions, exceptions,
reservations or limitations which in any material respect interfere with or
impair the present and continued use thereof in the usual and normal
conduct of the business of the Washington Corporation.
(b) There are no pending or threatened condemnation proceedings
relating to any of the Facilities.
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(c) The real property improvements (including leasehold improvements),
equipment and other tangible assets owned or used by the Washington
Corporation at the Facilities are adequately insured and are structurally
sound with no known material defects.
(d) None of said improvements, equipment and other assets is subject
to any commitment or other arrangement for their sale or use by any
Affiliate, to Mutual's knowledge, by any third parties.
5B.9 Condition of Tangible Assets. The assets, Facilities and
Furnishings and Equipment are in good operating condition and repair
(except for ordinary wear and tear and any defect the cost of repairing of
which would not be material), are sufficient for the operation of the
Washington Corporation's business as presently conducted and are in
conformity in all material respects with all applicable laws, ordinances,
orders, regulations and other requirements (including applicable zoning,
environmental, motor vehicle safety or standards, occupational safety and
health laws and regulations) relating thereto currently in effect, except
where the failure to conform would not have a material adverse effect on
the business or financial condition of the Washington Corporation.
5B.10 Contracts and Commitments. (a) The Disclosure Schedule lists the
following contracts and agreements to which the Washington Corporation is a
party:
(1) All leases of real property, indicating with respect to each
lease the term, annual rent, renewal options and number of
square feet leased;
(2) All material leases of personal property, indicating with
respect to each lease a general description of the leased
items, term, annual rent and renewal options;
(3) All agreements (and all groups of related agreements) which
extend for more than one year and which involve the purchase
of materials, supplies or other personal property or for the
furnishing or receipt of services (other than employment
agreements and which involve consideration in excess of
$50,000 per year;
(4) Other than contracts to provide dental services to the
Washington Corporation, employment contracts to employ
executive officers and any other contracts with officers or
directors of the Washington Corporation;
(5) Any consulting agreement which provides for annual
compensation in excess of $50,000 per year and which is not
terminable by the Washington Corporation within six months;
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(6) Any professional services agreements, other than agreements
for the performance of dental services, which provides for
total compensation in excess of $50,000; and
(7) All Support Services Agreements.
(b) Excluding the Support Services Agreements and excluding contracts
or commitments which are described in the Disclosure Schedule, the
Washington Corporation is not a party to any written or oral:
(1) Commitment, contract, note, loan, evidence of indebtedness,
purchase order or letter of credit involving any obligation
or liability on the part of the Washington Corporation that
is material;
(2) Lease of real property;
(3) Lease of personal property involving an annual expense in
excess of $10,000;
(4) Contracts and commitments not otherwise described above or
listed in the Disclosure Schedule (including purchase
orders, franchise agreements and undertakings or commitments
to any governmental or regulatory authority) relating to the
business of the Washington Corporation and otherwise
materially affecting the Washington Corporation;
(5) Contracts or agreements containing covenants which limit the
freedom of the Washington Corporation to engage in any line
of business or compete with any person; or
(6) Executive officer employment contracts
The Washington Corporation is not (and to the best of Mutual's
knowledge, no other party is) in material breach or violation of, or
default under any of the Contracts or other instruments, obligations,
evidences of indebtedness or commitments described in items 5B.13 (a)
(1)-(7) above, the breach or violation of which would have a material
adverse effect on the business or financial condition of the Washington
Corporation.
5B.11 Consents and Approvals. The Washington Corporation has all
licenses, consents, approvals and authorizations necessary for the conduct
of its business and there is no license, consent, approval or
authorization, or declaration, filing or registration with, any
governmental or regulatory authority or any other person or entity, that is
required to be made or obtained by the Washington Corporation in order to
continue its business. All
29
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licenses, consents, approvals and authorizations necessary for the conduct
of the Washington Corporation's business have been identified in the
Disclosure Schedule.
5B.12 Litigation and Claims. (a) There is no action, order, writ,
injunction, judgment or decree outstanding or claim, suit, litigation,
proceeding, labor dispute, arbitral action or investigation (collectively,
"Actions") pending or, to the knowledge of Mutual, threatened or
anticipated against, relating to or affecting (i) the Washington
Corporation, (ii) any benefit plan for employees or any fiduciary or
administrator thereof, (iii) any of the assets or Contracts, or (iv) the
transactions contemplated by this Agreement.
(b) The Washington Corporation is not in default with respect to any
judgment, order, writ, injunction or decree of any court or governmental
agency, and there are no unsatisfied judgments against the Washington
Corporation, or the business or activities of the Washington Corporation.
5B.13 Labor Matters. The Washington Corporation is not a party to any
labor agreement with respect to its employees with any labor organization,
group or association. The Washington Corporation has not experienced any
attempt by organized labor or its representatives to make the Washington
Corporation conform to demands of organized labor relating to its employees
or to enter into a binding agreement with organized labor that would cover
the employees of the Washington Corporation.
5B.14 Liabilities. The Washington Corporation has no liabilities or
obligations (absolute, accrued, contingent or otherwise) except (i)
liabilities which are reflected and reserved against on the Washington
Corporation Financial Statements, (ii) liabilities incurred in the ordinary
course of business and consistent with past practice since December 31,
1995, and (iii) liabilities arising under Contracts, letters of credit,
purchase orders, licenses, permits, purchase agreements and other
agreements, business arrangements and commitments described in the
Disclosure Schedule or which are of the type described in Section 5B.13 but
which because of the dollar amount or other qualifications are not required
to be listed in the Disclosure Schedule.
5B.15 Compliance with Law. The Washington Corporation is in compliance
with all Laws. The Washington Corporation has not received any written
notice to the effect that, or otherwise been advised that, it is not in
compliance with any of such statutes, regulations, orders, ordinances or
other laws, and the Washington Corporation has no reason to anticipate that
any presently existing circumstances are likely to result in violations of
any such regulations which would, in any one case or in the aggregate, have
a material adverse effect on the business or financial condition of the
Washington Corporation.
5B.16 No Other Agreements to Sell Stock. The Washington Corporation
does not have any legal obligation, absolute or contingent, to any other
person or entity to sell any of its assets, to sell, issue, transfer or
assign any shares, options, warrants or other rights to purchase equity
interests in the Washington Corporation, or to effect any merger,
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consolidation or other reorganization of the Washington Corporation or to
enter into any agreement with respect to any of the above.
5B.17 Proprietary Rights. (a) All of the Washington Corporation's
registrations of trademarks and of other marks, trade names or other trade
rights, and all pending applications for any such registrations and all of
the Washington Corporation's patents and copyrights and all pending
applications therefor; all other trademarks and other marks, trade names
and other trade rights and all other trade secrets, designs, plans,
specifications and other proprietary rights, whether or not registered
(collectively, "Proprietary Rights") are listed in the Disclosure Schedule.
The Proprietary Rights listed in the Disclosure Schedule are in all
material respects all those used in the business of the Washington
Corporation.
(b) No person has a right to receive a royalty or similar payment in
respect of any Proprietary Rights pursuant to any contractual arrangements
entered into by the Washington Corporation, and no person otherwise has a
right to receive a royalty or similar payment in respect of any such
Proprietary Rights.
(c) The Washington Corporation has no licenses granted by or to it or
no other agreements to which it is a party, relating in whole or in part to
any of the Proprietary Rights.
(d) The Washington Corporation's use of the Proprietary Rights is not
infringing upon or otherwise violating the rights of any third party in or
to such Proprietary Rights, and no proceedings have been instituted against
or notices received by the Washington Corporation that are presently
outstanding alleging that the Washington Corporation's use of its
Proprietary Rights infringes upon or otherwise violates any rights of a
third party in or to such Proprietary Rights.
5B.18 Employee Benefit Plans. Except for the 401(k) plan referred to
in Section 5.22, the Washington Corporation has no employee benefit plan or
similar plan or arrangement subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended.
5B.19 Transactions with Certain Persons. Except for their respective
employment agreements, neither any Key Executive, officer, director or
employee of the Washington Corporation, nor any member of any such person's
immediate family, is presently a party to any material transaction with the
Washington Corporation relating to the Washington Corporation's business,
including without limitation, any contract, agreement or other arrangement
(i) providing for the furnishing of services by, (ii) providing for the
rental of real or personal property from, or (iii) otherwise requiring
payments to (other than for services as officers, directors or employees of
the Washington Corporation) any such person or corporation, partnership,
trust or other entity in which any such person has a substantial interest
as a shareholder, officer, director, trustee or partner.
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5B.20 Tax Matters. (a) The Washington Corporation, every predecessor
of the Washington Corporation, and all members for income tax purposes of
any affiliated group of corporations of which the Washington Corporation or
any such predecessor corporation is or has been a member (hereinafter
referred to collectively as the "Taxpayers") have duly filed all tax
elections, reports and returns required to be filed by them, including all
federal, state, local and foreign tax elections, returns and reports. The
Taxpayers have paid in full all taxes required to be paid by such Taxpayers
before such payment became delinquent. The Washington Corporation has made
adequate provision, in conformity with generally accepted accounting
principles consistently applied, for the payment of all taxes which may
subsequently become due. All taxes which any Taxpayer has been required to
collect or withhold have been duly collected or withheld and, to the extent
required when due, have been or will be duly paid to the proper taxing
authority.
(b) Any consolidated federal income tax returns of the Washington
Corporation, which have been examined by the Internal Revenue Service for
all periods to and including those expressly set forth in the Disclosure
Schedule, and except to the extent shown therein, all deficiencies asserted
as a result of such examinations have been paid or finally settled, and no
issue has been raised by the Internal Revenue Service in any such
examination which, by application of similar principles, reasonably could
be expected to result in a proposed deficiency for any other period not so
examined.
(c) There are no audits of the Washington Corporation's tax returns,
and there are no claims which have been or may be asserted relating to any
of the Washington Corporation's tax returns filed for any year which if
determined adversely would result in the assertion by any governmental
agency of any deficiency.
(d) The Washington Corporation has not executed any waivers of
statutes of limitations with respect to any of its tax returns.
(e) None of the Taxpayers has filed a statement under Section 341(f)
of the Code (or any comparable state income tax provision) consenting to
have the provisions of Section 341(f)(2) (collapsible corporations
provisions) of the Code (or any comparable state income tax provision)
apply to any disposition of any of its assets or property, no property of
The Washington Corporation is property which ServiceMaster or the
Washington Corporation is or will be required to treat as owned by another
person pursuant to the provisions of Section 168(f) (safe harbor leasing
provisions) of the Code.
(f) The Washington Corporation is not a party to any tax-sharing
agreement or similar arrangement with any other party.
(g) The Washington Corporation has not made an Election by Small
Business Corporation to be treated as an "S Corporation" for federal income
tax purposes.
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5B.21 Severance Arrangements. The Washington Corporation has not
entered into any severance or similar arrangement in respect of any present
or former personnel that will result in any obligation (absolute or
contingent) of the Washington Corporation to make any payment to any
present or former personnel following termination of employment.
5B.22 Insurance. The Disclosure Schedule contains a complete and
accurate list of all insurance policies or binders of fire, liability,
title, worker's compensation, malpractice, life and other forms of
insurance (showing as to each policy or binder the carrier, policy number,
coverage limits, expiration dates, deductibles, owners, beneficiaries,
named insiders, annual premiums and a general description of the type of
coverage provided) maintained by the Washington Corporation on or with
respect to its business, property or personnel. All of such policies are
sufficient for compliance with all requirements of law and of all Contracts
to which the Washington Corporation is a party. The Washington Corporation
is not in default under any of such policies or binders, and the Washington
Corporation has not failed to give any notice or to present any claim under
any such policy or binder in a due and timely fashion. There are no facts
upon which an insurer might be justified in reducing coverage or increasing
premiums on existing policies or binders. There are no outstanding unpaid
claims under any such policies or binders. Such policies and binders
provide sufficient coverage for the risks insured against, are in full
force and effect on the date hereof and shall be kept in full force and
effect by the Washington Corporation through the Closing Date.
5B.23 Accounts Receivable. The accounts receivable reflected in the
1995 Financial Statements, and all accounts receivable arising since
December 31, 1995, represent bona fide claims against debtors for sales,
services performed or other charges arising on or before the date hereof,
and all the goods delivered and services performed which gave rise to said
accounts were delivered or performed in accordance with the applicable
orders, Contracts or customer requirements. Such accounts receivable are
subject to no defenses, counterclaims or rights of setoff and are fully
collectible in the ordinary course of business without cost to the
Washington Corporation in collection efforts therefor except, in the case
of accounts receivable shown in the Washington Corporation Financial
Statements, to the extent of the appropriate reserves set forth in the
Washington Corporation Financial Statements, and, in the case of accounts
receivable arising since December 31, 1995, to a reasonable allowance for
bad debts which does not reflect a rate of bad debts higher than that
reflected by the reserve for bad debts in the Washington Corporation
Financial Statements.
5B.24 Payments. The Washington Corporation has not, directly or
indirectly, paid or delivered any fee, commission or other sum of money or
item of property, however characterized, to any finder, agent, government
official or other party, which is in any manner related to the business or
operations of the Washington Corporation, which Mutual knows or has reason
to believe to have been illegal under any Laws of the United States or any
other country having jurisdiction; and the Washington Corporation has not
participated, directly or indirectly, in any boycotts or other similar
practices affecting any of its actual or potential customers and has at all
times done business in an open and ethical manner.
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5B.25 Compliance With Legislation Regulating Safety and Environmental
Quality. There are no toxic wastes or other toxic or hazardous substances
or materials being generated, stored, transported to or from or otherwise
released or held on, under or about any of the Facilities. The Facilities
have been maintained in compliance with all federal, state and local
environmental protection, occupational, health and safety or similar laws,
ordinances, restrictions, licenses and local environmental protection,
occupational, health and safety or similar laws, ordinances, restrictions,
licenses and regulations, including (but not limited to) the Federal Water
Pollution Control Act (33 U.S.C. ss. 1251 et seq.), Resource Conservation &
Recovery Act (42 U.S.C. ss. 6901 et seq.), Safe Drinking Water Act (21
U.S.C. ss. 349, 42 U.S.C. ss.ss. 201, 300f), Toxic Substances Control Act
(15 U.S.C. ss. 2601 et seq.), Clean Air Act (42 U.S.C. ss. 7401 et seq.),
Comprehensive Environmental Response, Compensation and Liability Act (42
U.S.C. ss. 9601 et seq.), and all state statutes of similar purpose and
effect.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF SERVICEMASTER
-----------------------------------------------
ServiceMaster hereby represents and warrants to Mutual as follows:
6.1 Limited Partnership Power. ServiceMaster has all necessary limited
partnership and other power and authority to enter into this Agreement and
has taken all necessary action to consummate the transactions contemplated
hereby and to perform its obligations thereunder.
6.2 Authorization. (a) All action on the part of ServiceMaster and
ServiceMaster Management Corporation (ServiceMaster's general partner) for
the authorization, execution, delivery and performance of this Agreement by
ServiceMaster has been taken prior to the Closing.
(b) This Agreement, when executed and delivered by ServiceMaster, will
constitute a valid and binding obligation of ServiceMaster, enforceable in
accordance with its terms.
6.3 No Conflict or Violation. Neither the execution and delivery of
this Agreement nor the consummation of the transactions contemplated hereby
will result in (i) a violation of, or a conflict with, any provision of the
ServiceMaster's Certificate of Limited Partnership or ServiceMaster's
Agreement of Limited Partnership, as amended and in effect on the Closing
Date, (ii) a violation of, or a conflict with, any provision of the
Certificate of Incorporation or the Bylaws of ServiceMaster Management
Corporation (ServiceMaster's general partner), (iii) a breach of, or a
default under, any term or provision of any contract, agreement,
indebtedness, lease, Encumbrance, commitment, license, franchise, permit,
authorization or concession to which ServiceMaster is a party; or (iv) a
violation by
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ServiceMaster of any statute, rule, regulation, ordinance, code, order,
judgment, writ, injunction, decree or award.
6.4 Consents and Approvals. No consent, approval or authorization of,
or declaration, filing or registration with, any United States federal or
state governmental or regulatory authority is required to be made or
obtained by ServiceMaster in connection with the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby.
6.5 No Brokers. To ServiceMaster's knowledge, neither ServiceMaster
nor any affiliate of ServiceMaster has entered into or will enter into any
agreement, arrangement or understanding with any person or firm which will
result in the obligation of Mutual to pay any finder's fee, brokerage
commission or similar payment in connection with the transactions
contemplated hereby.
6.6 Investment. The Acquired Shares and the Warrant are being acquired
for investment for ServiceMaster's own account and not with a view to sale
or resale, distribution (as that term is defined in the Securities Act), or
transfer, or to offers in connection therewith.
ARTICLE VII
CONDITIONS TO MUTUAL'S OBLIGATION TO CLOSE
------------------------------------------
The obligation of Mutual to issue the Acquired Shares and the Warrant
to ServiceMaster upon the execution of this Agreement are subject, in the
discretion of Mutual, to the satisfaction, prior to the execution of this
Agreement, of each of the following conditions:
7.1 Representations, Warranties and Covenants. All representations and
warranties of ServiceMaster contained in this Agreement shall be true and
correct in all material respects as of the execution of this Agreement, and
ServiceMaster shall have performed in all material respects all agreements
and covenants required hereby to be performed by it prior to or upon the
execution of this Agreement.
7.2 Consents. All consents, approvals and waivers from governmental
authorities and other parties necessary to permit Mutual to issue the
Acquired Shares and the Warrant to ServiceMaster as contemplated hereby
shall have been obtained, unless the failure to obtain any such consent,
approval or waiver would not have a material adverse effect upon Mutual.
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ARTICLE VIII
CONDITIONS TO SERVICEMASTER'S OBLIGATION TO CLOSE
-------------------------------------------------
The obligations of ServiceMaster to purchase the Acquired Shares and
the Warrant, are subject, in the discretion of ServiceMaster to the
satisfaction, on or prior to the execution of this Agreement, of each of
the following conditions:
8.1 Representations, Warranties and Covenants. All representations and
warranties of Mutual contained in this Agreement shall be true and correct
in all material respects, and Mutual shall have performed in all material
respects all agreements and covenants required hereby to be performed by
Mutual prior to or upon the execution of this Agreement.
8.2 Consents. All consents, approvals and waivers from governmental
authorities and other parties necessary to permit Mutual to issue the
Acquired Shares and the Warrant to ServiceMaster as contemplated hereby
shall have been obtained.
8.3 No Governmental Proceeding or Litigation. No suit, action,
investigation, inquiry or other proceeding by any governmental authority or
other person shall have been instituted or threatened which questions the
validity or legality of the transactions contemplated hereby and which
could reasonably be expected materially and adversely to affect the value
of the Acquired Shares, the Warrant or the business of Mutual.
8.4 Compliance Certificates. Mutual shall have furnished ServiceMaster
with a certificate of the President or Chief Financial Officer of Mutual to
evidence compliance with the conditions set forth in the foregoing Sections
8.1, 8.2 and 8.3.
8.5 Corporate Documents. ServiceMaster shall have received from Mutual
resolutions adopted by the Board approving this Agreement and the
transactions contemplated hereby, certified by the corporate secretary of
Mutual. ServiceMaster shall have also received copies of Certificates of
Incorporation, bylaws and stock transfer books of Mutual and each of its
Affiliates.
8.6 [This section is left blank intentionally]
8.7 Silicon Valley Bank Consents. ServiceMaster shall have received
from Mutual a statement to the effect that no consent of Silicon Valley
Bank is necessary in connection with the terms and conditions of this
Agreement. On or about June 19, 1996 ServiceMaster shall also receive
confirmation from Silicon Valley Bank that Mutual is in compliance with all
of the provisions of the Silicon Valley Bank Loan Agreement.
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8.8 Amendments to the By-Laws of Mutual. ServiceMaster shall have
received from Mutual a certified copy of a resolution appointing the
ServiceMaster representative, Kenneth Hooten, a director.
8.9 Transfer of Patient Charts. Mutual shall transfer to the
Washington Corporation title to patient charts of patients of the
Washington Corporation. Mutual shall transfer to the Oregon Corporation
title to patient charts of patients of the Oregon Corporation.
8.10 Accounting for Support Services Agreements. That portion of the
acquisition price in excess of the value of the acquired tangible assets in
a dental practice acquisition shall be recorded in such a way that Mutual
is not in violation of the laws relating to the corporate practice of
dentistry.
ARTICLE IX
POST-CLOSING COVENANTS OF THE PARTIES
-------------------------------------
9.1 Representation on Board of Directors.
(a) For such period of time as ServiceMaster owns shares of Voting
Stock and/or the Warrant, ServiceMaster shall be entitled to select,
appoint and be represented by one member of Mutual's Board of Directors
(the "Board"). ServiceMaster's initial Board representative shall be
Kenneth Hooten, who shall serve until he resigns or is replaced by
ServiceMaster at the next annual meeting of Mutual's shareholders at which
directors are elected. Any replacement of ServiceMaster's initial
representative on the Board shall be pre-approved by Mutual, which approval
shall not be unreasonably withheld. In connection with the above, Mutual
represents and warrants that its Bylaws permit the Board to increase the
number of directors on the Board from eight (8) to nine (9).
(b) If ServiceMaster (i) exercises the Put Right or (ii) otherwise
disposes of its equity interest in Mutual such that ServiceMaster's
remaining equity interest is less than one-half of its equity interest at
the date of this Agreement, then Mutual's obligations under this Section
9.1 shall terminate. In no event, however, shall a reduction in
ServiceMaster's percentage equity interest in Mutual which is the result of
dilution based on the issuance by Mutual of equity interests to other
persons relieve Mutual of its obligations under this Section 9.1.
9.2 Reports and Rights of Inspection. Mutual will keep proper books
and accounts in which full and correct entries will be made of all dealings
or transactions of or in relation to the business and affairs of Mutual, in
accordance with generally accepted accounting principles consistently
applied (except for changes disclosed in the financial statements
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<PAGE>
furnished pursuant to this Section 9.3 and concurred with by the
independent public accountants referred to in this Section 9.3 hereof), and
will furnish to the ServiceMaster:
(a) Quarterly Statements. As soon as available and in any event within
60 days after the end of each quarterly fiscal period (except the last
quarter of each fiscal year) (i) Mutual's unaudited balance sheet,
statement of income, statement of cash flows and statement of stockholders'
equity, (ii) the statement of income of the Oregon Corporation and (iii)
the statement of income of the Washington Corporation. Each of these
quarterly statements shall be provided by Mutual in reasonable detail and
certified as complete and correct by the Chief Financial Officer of Mutual.
(b) As soon as available and in any event within 120 days after the
close of each fiscal year (i) Mutual's audited balance sheet, statement of
income, statement of cash flows and statement of stockholders' equity, all
in reasonable detail and accompanied by an opinion thereof of a firm of
independent public accountants selected by Mutual and reasonably acceptable
to ServiceMaster to the effect that such financial statements have been
prepared in accordance with generally accepted accounting principles
consistently applied (except for changes in application in which such
accountants concur) and present fairly, in all material respects, the
financial condition of Mutual and that the examination conducted has been
made in accordance with generally accepted auditing standards, and (ii) the
Oregon Corporation's unaudited balance sheet, statement of income and
statement of stockholders' equity, and (iii) the Washington Corporation's
unaudited balance sheet, statement of income and statement of stockholders'
equity. The annual statements to be provided for both the Oregon
Corporation and the Washington Corporation shall be provided by Mutual in
reasonable detail and certified as complete and correct by the Chief
Financial Officer of Mutual.
(c) Audit Reports. Promptly upon receipt thereof, one copy of each
interim or special audit report, if any, made by independent accountants of
the books of Mutual;
(d) SEC and Other Reports. If Mutual is a public company, promptly
upon their becoming available, one copy of each financial statement,
report, notice or proxy statement sent by Mutual to holders of equity
interests and of each regular or periodic report, and any registration
statement or prospectus filed by Mutual with any securities exchange or the
Securities and Exchange Commission or any successor agency, and copies of
any orders in any proceedings to which Mutual is a party, issued by any
governmental agency, Federal or state, having jurisdiction over Mutual;
(e) Requested Information. With reasonable promptness, such other data
and information as ServiceMaster may reasonably request;
(f) Accounting in Future Dental Acquisitions. In dental practice
acquisitions occurring after the Closing Date, Mutual will cause that
portion of the acquisition price in excess of the value of the acquired
tangible assets to be recorded in such a way that Mutual is not in
violation of the laws relating to the corporate practice of dentistry.
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Without limiting the foregoing, Mutual will permit ServiceMaster to visit
and inspect, under Mutual's guidance, any of the properties of Mutual, to
examine all their books of account, records, reports and other papers, to
make copies and extracts therefrom, and to discuss their respective
affairs, finances and accounts with their respective officers, employees,
and independent public accountants (and by this provision Mutual authorizes
said accountants to discuss with ServiceMaster finances and affairs of
Mutual) all at such reasonable times and as often as may be reasonably
requested by ServiceMaster.
9.3 Transactions with Affiliates. Mutual shall not conduct any
transaction with any Affiliate except in the ordinary course of business
and pursuant to the reasonable requirements of Mutual and upon fair and
reasonable terms no less favorable to Mutual than could be obtained in a
comparable arms length transaction with a person other than an Affiliate.
9.4 Unregistered Securities. Any shares of Voting Stock purchased
shall not be sold or transferred unless either (i) they first shall have
been registered under the Securities Act, or (ii) Mutual first shall have
been furnished with an opinion of legal counsel reasonably satisfactory to
Mutual to the effect that such sale or transfer is exempt from the
registration requirements of the Securities Act. Each certificate
representing any Voting Stock that has not been registered or that has not
been sold pursuant to an exemption that permits removal of the legend shall
bear a legend substantially in the following form, as appropriate:
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED
PURSUANT TO THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS
AND MAY NOT BE SOLD, ASSIGNED, PLEDGED, OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO
UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES
LAW OR AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO MUTUAL THAT SUCH
REGISTRATION IS NOT REQUIRED.
Upon the request of ServiceMaster with respect to a certificate
representing any Voting Stock, Mutual shall remove the foregoing legend
from the certificate or issue to ServiceMaster a new certificate therefor
free of any transfer legend, if, with such request, Mutual shall have
received either (i) an opinion of counsel reasonably satisfactory to Mutual
to the effect that such legend may be removed from such certificate or (ii)
if the present Paragraph (k) of Rule 144 or a substantially similar
successor rule remains in force and effect, representations from
ServiceMaster reasonably satisfactory to Mutual that ServiceMaster is not
then, and has not been during the preceding three months, an affiliate of
Mutual and that ServiceMaster has beneficially owned the security (within
the meaning of Rule 144) for three years or more.
Voting Stock may be subject to additional restrictions on transfer
imposed under applicable state and federal law.
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9.5 Further Assurances. On and after the date of the execution of this
Agreement, Mutual and ServiceMaster will take all appropriate action and
execute all documents, instruments or conveyances of any kind which may be
reasonably necessary or advisable to carry out any of the provisions
hereof, including without limitation, the issuance of any share of Voting
Stock to ServiceMaster pursuant to the Warrant.
9.6 Acquisition of Patient Charts. In future dental practice
acquisitions Mutual shall not acquire title to patient charts in states
which prohibit the corporate practice of dentistry, or will acquire them
but immediately transfer them to a professional corporation.
9.7 Termination of Covenants. The covenants of Mutual in Section 9.2
(except subsection 9.2(d)) shall terminate upon the closing of a Qualified
Public Offering.
9.8 Remedies. In the event of a breach of section 9.1, ServiceMaster
shall have the right to immediately exercise its Put Right as set forth in
Article IV.
ARTICLE X
INDEMNIFICATION
---------------
10.1 Survival of Representations, Etc. All statements contained in the
Disclosure Schedule or in any certificate or instrument delivered by or on
behalf of either party pursuant to this Agreement or in connection with the
transactions contemplated hereby, expressly or by implication, shall be
deemed to be representations and warranties by such party hereunder which
are in addition to or in clarification of those contained in Article V and
Article VI above, and elsewhere in this Agreement, and the same are hereby
incorporated into this Agreement by this reference. All representations and
warranties shall be deemed material and to have been made in order to
induce the performance by the other party of the other party's obligations
hereunder. All representations and warranties shall be deemed to have been
made upon the Closing Date or such later date as any particular document is
actually delivered. Except as otherwise expressly provided, all
representations and warranties of Mutual and ServiceMaster shall survive
the execution of this Agreement and the Closing until the date that is the
5th anniversary of thereof, without regard to any investigation made by any
of the parties hereto.
10.2 Mutual's Indemnity. (a) Mutual hereby expressly and unequivocally
agrees to indemnify, defend and hold harmless ServiceMaster and its
officers, directors, employees, agents, partners, affiliates, attorneys,
Representatives and related entities (for purposes of this Section 10.2,
the "Indemnified Parties") from and against and in respect of any and all
claims, demands, losses, costs, expenses, obligations, liabilities,
actions, suits, deficiencies, including without limitation, interest,
diminution in value, penalties, attorneys' fees and all amounts paid in
settlement of any claim, action or suit (collectively, "Claims") which are
asserted against any Indemnified Party or which any Indemnified Party
incurs or suffers,
40
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whether as a result of third party claims or otherwise, and which directly
or indirectly arise out of, result from or relate to (i) any failure by
Mutual to fully perform in a timely manner any agreement, covenant or
obligation of Mutual hereunder or (ii) the existence or non-existence of
any fact or circumstance which is different or a breach of any
representation or warranty of Mutual made herein; or (iii) the acts,
omissions, statements, misstatements or other business, properties and
affairs of Mutual, Mutual's predecessors in interest, or Mutual's business
as conducted or owned at any time prior to the Closing.
(b) All of the foregoing indemnities include without limitation: (i)
Claims for rescission, damages, or other remedies whether based upon breach
of contract, breach of fiduciary duties, fraud, misrepresentation,
malpractice or otherwise which may be made by one or more patients,
dentists or professional corporations in either prosecution or defense of
any lawsuit or other legal proceedings; (ii) Claims based upon violations
of federal or state securities laws; (iii) Claims, assessments, adjustments
or deficiencies asserted by any federal or state taxing authority; and (iv)
Claims made by any other federal, state or local regulatory agency or
governmental or quasi-governmental authority.
(c) The indemnities provided for in this Section 10.2 shall not
require payment as a condition precedent to recovery and ServiceMaster's
rights or remedies hereunder shall not be limited by the consideration paid
for the Voting Stock and the Warrant under Section 2.2, above.
10.3 ServiceMaster's Indemnity. ServiceMaster hereby expressly and
unequivocally agrees to indemnify and hold harmless Mutual and its
officers, directors, employees, agents, partners, affiliates, attorneys,
representatives and related entities (for purposes of this Section 10.3,
the "Indemnified Parties") from and against and in respect of any and all
Claims which are asserted against any Indemnified Party or which any
Indemnified Party incurs or suffers, whether as a result of third party
claims or otherwise, and which directly or indirectly arise out of, result
from or relate to (i) any failure by ServiceMaster to fully perform in a
timely manner or otherwise breach any agreement, covenant or obligation of
ServiceMaster hereunder, or (ii) the existence or non-existence of any fact
or circumstance which is different from or a breach of any representation
or warranty of ServiceMaster made herein. The indemnities provided for in
this Section 10.3 shall not require payment as a condition precedent to
recovery.
10.4 Indemnification Procedures. If either party receives notice of
the commencement of any action or of the existence of any Claim or a
written assertion of any facts by a third party with respect to any matter
that would give rise to a Claim hereunder or otherwise suffers a loss for
which it is entitled to be indemnified pursuant to Section 10.2 or Section
10.3, above, then that party (for purposes of this Section 10.4 the
"Indemnified Party") shall give the other party (the "Indemnifying Party")
reasonable notice thereof and shall permit the other party to have
reasonable access to relevant information in its possession or control
regarding or related to such Claim. The Indemnifying Party shall have the
right to take all reasonable action, at its own expense, as it deems
desirable in order to
41
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minimize or eliminate such Claim. In the event of a Claim requesting solely
monetary damages, the Indemnifying Party shall have the right at its own
expense, to appoint counsel to handle the defense of such matter and the
exclusive right to prosecute, defend, compromise, settle or pay such Claim
provided that the Indemnifying Party acknowledges in writing its
obligations and liability for such Claim as between the parties hereto or
procures from the person making the Claim a full and complete release of
the Indemnified Party which is satisfactory in form and substance to
counsel for the Indemnified Party. If the foregoing acknowledgments and
releases are not furnished to the Indemnified Party, then it may appoint
associate counsel to participate in the defense of such matter at the
expense of the Indemnifying Party. If the person asserting the Claim
requests relief other than or in addition to monetary damages, then the
Indemnified Party reserves the right to control, defend and settle all
aspects of such Claim, subject only to their obligation to act in good
faith.
ARTICLE XI
ADJUSTMENT OF PER-SHARE AMOUNTS AND SHARES IN CERTAIN CASES
-----------------------------------------------------------
11.1 Applicability. In several sections of this Agreement, a value or
price is stated for the Voting Stock in terms of a per-share amount (the
"Per-Share Amount"). If and whenever an event as described in any of the
succeeding sections of this Article XI occurs, this Article XI shall be
applied to adjust, in the manner set forth below, the Per-Share Amount as
stated in any other Article of this Agreement.
11.2 Effect of Distributions in Shares of Voting Stock. If any
dividends or distributions on the Voting Stock payable in shares of Voting
Stock are declared or issued by Mutual, the Per-Share Amount shall be
adjusted by multiplying the Per-Share Amount then in effect by a fraction,
the numerator of which shall be the number of shares of Voting Stock
outstanding immediately prior to such dividend or distribution and the
denominator of which shall be the number of shares of Voting Stock
outstanding immediately after such dividend or distribution. Upon each such
adjustment of the Per-Share Amount, the number of shares of Voting Stock
which may be acquired by ServiceMaster through an exercise of the Warrant
shall be adjusted to the number of such shares which is determined by
multiplying the Per-Share Amount in effect immediately prior to such
adjustment by the number of shares of Voting Stock acquirable upon exercise
of the Warrant immediately prior to such adjustment and dividing the
product thereof by the Per-Share Amount resulting from such adjustment.
11.3 Subdivision, Combination, Reclassification of Shares of Voting
Stock. If at any time after the date hereof the Voting Stock is, by
subdivision, combination or reclassification or through merger or
consolidation or otherwise, changed into a different number or kind of
class of shares of Voting Stock, or into other securities, cash or other
property, then at the same time the equity interests issuable under the
Warrant immediately prior to such change shall be changed into the
securities, cash or other property which ServiceMaster would have received
if ServiceMaster had exercised the Warrant immediately
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prior to such subdivision, combination, reclassification, merger or
consolidation or other action (or any record date applicable thereto) and
Mutual shall reserve for issuance upon exercise of the Warrant the same
type of and amount of securities, cash or other property which would have
been received by ServiceMaster if it had exercised the Warrant immediately
prior to such subdivision, combination, reclassification, merger or
consolidation or other action (or any record date applicable thereto). The
purpose of the foregoing provisions is to entitle ServiceMaster to receive
such securities, cash or property for the same capital contribution to
Mutual as would have occurred if ServiceMaster had fully exercised the
Warrant immediately prior to such subdivision, combination,
reclassification, merger or consolidation or other action (or any record
date applicable thereto).
11.4 Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment pursuant to this Article XI, Mutual at its
expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and furnish to ServiceMaster a certificate
setting forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based. Mutual shall,
upon the written request, at any time, of ServiceMaster, furnish or cause
to be furnished to ServiceMaster, a like certificate setting forth: (i)
such adjustments and readjustments; (ii) the Exercise Price at the time in
effect; and (iii) the number of shares of Voting Stock and the amount, if
any, of other property that at the time would be received upon the exercise
of the Warrant.
11.5 Notices of Record Date. In the event of any taking by Mutual of a
record of shareholders of any class of securities for the purpose of
determining if shareholders are entitled to receive any dividend or other
distribution, Mutual shall mail to ServiceMaster at least ten days prior to
the date specified for the taking of such record, a notice specifying the
date on which any such record is to be taken for the purpose of such
dividend or distribution.
ARTICLE XII
MISCELLANEOUS
-------------
12.1 Assignment. Neither this Agreement nor any of the rights or
obligations hereunder may be assigned by either party without the prior
written consent of the other party, except that ServiceMaster may assign
this Agreement to any affiliate of ServiceMaster, and except that
ServiceMaster's rights hereunder shall transfer in connection with the
Reincorporating Merger described in Section 12.2. Subject to the foregoing,
this Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, and no other
person shall have any right, benefit or obligation hereunder.
12.2 ServiceMaster Reincorporating Merger. Mutual understands that the
shareholders of ServiceMaster's parent entity have previously approved a
merger (the "Reincorporating Merger") which is described in a proxy
statement/prospectus dated December 11, 1991. The Reincorporating Merger is
expected to occur by not later than
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December 31, 1997. As a result of the Reincorporating Merger, ServiceMaster
and ServiceMaster's parent entity will be succeeded by ServiceMaster
Incorporated of Delaware, a Delaware corporation. Before the occurrence of
the Reincorporating Merger, the term "ServiceMaster" as used herein means
The ServiceMaster Company Limited Partnership; after Reincorporating
Merger, the term "ServiceMaster" as used herein means ServiceMaster
Incorporated of Delaware.
12.3 Notices; Transfer of Funds. Unless otherwise provided herein, any
notice, request, instruction or other document to be given hereunder by any
party to the others shall be in writing and delivered in person or by
courier, telegraphed, telexed or by facsimile transmission or mailed by
certified mail, postage prepaid, return receipt requested (such mailed
notice to be effective on the date of such receipt is acknowledged), as
follows:
If to Mutual: Mutual Health Systems, Inc.
900 Washington Street, Suite 1100
Vancouver, Washington 98660
Attn: President
With a copy to: Edward L. Epstein, Esq.
Stoel Rives, LLP
900 SW Fifth Avenue, Suite 2300
Portland, Oregon 97204-1268
If to ServiceMaster: The ServiceMaster Company
One ServiceMaster Way
Downers Grove, Illinois 60515
Attn: Kenneth Hooten
or to such other place and with such other copies as either party may
designate as to itself by written notice to the others.
12.4 Choice of Law. This Agreement shall be construed, interpreted and
the rights of the parties determined in accordance with the laws of the
State of Illinois, without regard to choice of law principles.
12.5 Entire Agreement; Amendments and Waivers. This Agreement,
together with all exhibits, and all certificates and documents delivered in
connection herewith and schedules hereto, constitutes the entire agreement
among the parties pertaining to the subject matter hereof and supersedes
all prior agreements, understandings, negotiations and discussions, whether
oral or written, of the parties. No supplement, modification or waiver of
this Agreement shall be binding unless executed in writing by the party to
be bound thereby. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar), nor shall such waiver constitute a continuing
waiver unless otherwise expressly provided.
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12.6 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.7 Invalidity. In the event that any one or more of the provisions
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not
affect any other provision of this Agreement or any other such instrument.
12.8 Headings. The headings of the Articles and Sections herein are
inserted for convenience of reference only and are not intended to be a
part of or to affect the meaning or interpretation of this Agreement.
12.9 Expenses. Mutual and ServiceMaster will each be liable for its
own costs and expenses incurred in connection with the negotiation,
preparation, execution or performance of this Agreement.
12.10 Publicity. Neither party shall issue any press release or make
any public statement regarding the transactions contemplated hereby,
without the prior approval of the other party.
12.11 Confidential Information. The parties acknowledge that the
transactions described herein are of a confidential nature and shall not be
disclosed except to consultants, advisors and affiliates, or as required by
law, until such time as the parties make a public announcement regarding
the transaction, as provided in Section 12.10. Neither Mutual nor
ServiceMaster shall make any public disclosure of the specific terms of
this Agreement, except as required by law. In connection with the
negotiation of this Agreement and the preparation for the consummation of
the transactions contemplated hereby, each party acknowledges that it will
have access to confidential information relating to the other party. Each
party shall treat such information as confidential, preserve the
confidentiality thereof and not duplicate or use such information, except
to advisors, consultants and affiliates in connection with the transactions
contemplated hereby. Mutual, at a time and in a manner which it reasonably
determines and after prior notice to and consultation with ServiceMaster,
may notify employees, unions and bargaining agents of the fact of the
subject transaction. In the event of the termination of this Agreement for
any reason whatsoever, each party shall return to the other all documents,
work papers and other material (including all copies thereof) obtained in
connection with the transactions contemplated hereby and will use all
reasonable efforts, including instructing its employees and others who have
had access to such information, to keep confidential and not to use any
such information, unless such information is now, or is hereafter
disclosed, through no act or omission of such party, in any manner making
it available to the general public.
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12.12 Third Party Beneficiaries. There are no third party
beneficiaries to this Agreement.
12.13 Time is of the Essence. Time is of the essence with respect to
each of the transactions contemplated hereby.
12.14 Alternative Dispute Resolution. If any dispute arises out of or
relates to this Agreement or the breach thereof and if the dispute cannot
be settled through negotiation, each of the parties shall select one
individual and those two shall, in turn, select a third. These three shall
form an arbitration panel which shall decide the matter using the
Commercial Arbitration Rules of ENDISPUTE then in effect. Judgment upon the
award rendered by the Arbitrators may be entered in any court having
jurisdiction thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed on their respective behalf by their respective officers
thereunto duly authorized, as of the day and year first above written.
"Mutual"
Mutual Health Systems, Inc., a
Washington corporation
By: DANY Y. TSE
------------------------------------
Its: PRESIDENT
-----------------------------------
"ServiceMaster"
The ServiceMaster Company Limited
Partnership, a Delaware limited
partnership
By: ServiceMaster Management
Corporation, its Corporate
General Partner
By: VERNON T. SQUIRES
------------------------------------
Its: SENIOR VICE PRESIDENT AND
GENERAL COUNSEL
-----------------------------------
46
<PAGE>
EXHIBIT C
WARRANT TO PURCHASE VOTING STOCK
OF MUTUAL HEALTH SYSTEMS, INC.
This certifies that, in consideration of sufficient value received,
The ServiceMaster Company Limited Partnership, a Delaware limited
partnership, its successor(s) or its assigns ("ServiceMaster"), is
entitled, upon the terms and subject to the conditions hereafter set forth,
to acquire from Mutual Health Systems, Inc., a Washington corporation
("Mutual"), 200,000 fully paid and nonassessable shares of the Mutual's
Class A voting common stock, no par value ("Voting Stock") at an exercise
price of $3.75 per share on or before December 14, 2001. All capitalized
terms as used herein, and not otherwise defined herein, shall have the same
meaning as set forth in the Stock Acquisition Agreement dated June , 1996
between Mutual and ServiceMaster, or any exhibit attached thereto. The
number and exercise price of the securities that may be acquired through
the exercise of this Warrant to Purchase or Exchange Voting Stock of Mutual
Health Systems, Inc. (the "Warrant") are subject to adjustment as set forth
herein.
SECTION 1--EXERCISE OF WARRANT
This Warrant may be exercised by tendering a duly executed Notice of
Exercise in the form annexed at the office of Mutual, at 900 Washington
Street, Suite 1100, Vancouver, Washington, (or such other office or agency
of Mutual as it may designate) and upon payment to Mutual by wire transfer
of immediately available funds of the exercise price of the shares thereby
purchased. Upon exercise, ServiceMaster shall be entitled to receive,
within a reasonable time, one or more certificates, issued in
ServiceMaster's name or in such name or names as ServiceMaster may direct,
for the number of shares of Voting Stock so purchased. The shares so
purchased shall be deemed to be issued as of the close of business on the
date on which this Warrant shall have been exercised.
Mutual covenants that the shares of Voting Stock to be issued upon the
exercise of rights represented by this Warrant will be fully paid,
nonassessable, and free from all taxes, liens, and charges in respect of
the issue thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue).
SECTION 2--NO FRACTIONAL SHARES OR SCRIP
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. In lieu thereof, a cash payment
shall be made equal to such fraction multiplied by the Exercise Price per
share as then in effect.
SECTION 3--CHARGES, TAXES, AND EXPENSES
Issuance of certificates for shares of Voting Stock upon the exercise
of this Warrant shall be made without charge to ServiceMaster for any issue
or transfer tax or other
<PAGE>
incidental expense in respect of the issuance of such certificate, all of
which taxes and expenses shall be paid by Mutual.
SECTION 4--NO RIGHTS AS SHAREHOLDERS
This Warrant does not entitle ServiceMaster to any voting rights or
other rights as a shareholder of Mutual prior to exercise and payment of
the Exercise Price in accordance with Section 1 hereof.
SECTION 5--ADJUSTMENTS
5.1 Applicability. In several sections of this Warrant, a value or
price is stated for the Voting Stock in terms of a per-share amount (the
"Per-Share Amount"). If and whenever an event as described in any of the
succeeding sections of this Section 5 occurs, this Section 5 shall be
applied to adjust, in the manner set forth below, the Per-Share Amount as
stated in any other Article of this Warrant.
5.2 Effect of Distributions in Shares of Voting Stock. If any
dividends or distributions on the Voting Stock payable in shares of Voting
Stock are declared or issued by Mutual, the Per-Share Amount shall be
adjusted by multiplying the Per-Share Amount then in effect by a fraction,
the numerator of which shall be the number of shares of Voting Stock
outstanding immediately prior to such dividend or distribution and the
denominator of which shall be the number of shares of Voting Stock
outstanding immediately after such dividend or distribution. Upon each such
adjustment of the Per-Share Amount, the number of shares of Voting Stock
which may be acquired by ServiceMaster through an exercise of the Warrants
shall be adjusted to the number of such shares which is determined by
multiplying the Per-Share Amount in effect immediately prior to such
adjustment by the number of shares of Voting Stock acquirable upon exercise
of the Warrant immediately prior to such adjustment and dividing the
product thereof by the Per-Share Amount resulting from such adjustment.
5.3 Subdivision, Combination, Reclassification of Shares of Voting
Stock. If at any time after the date hereof the Voting Stock is, by
subdivision, combination or reclassification or through merger or
consolidation or otherwise, changed into a different number or kind of
class of shares of Voting Stock, or into other securities, cash or other
property, then at the same time the equity interests issuable under the
Warrant immediately prior to such change shall be changed into the
securities, cash or other property which ServiceMaster would have received
if ServiceMaster had exercised the Warrant immediately prior to such
subdivision, combination, reclassification, merger or consolidation or
other action (or any record date applicable thereto) and Mutual shall
reserve for issuance upon exercise of the Warrant the same type of and
amount of securities, cash or other property
C-2
<PAGE>
which would have been received by ServiceMaster if it had exercised the
Warrant immediately prior to such subdivision, combination,
reclassification, merger or consolidation or other action (or any record
date applicable thereto). The purpose of the foregoing provisions is to
entitle ServiceMaster to receive such securities, cash or property for the
same capital contribution to Mutual as would have occurred if ServiceMaster
had fully exercised the Warrant immediately prior to such subdivision,
combination, reclassification, merger or consolidation or other action (or
any record date applicable thereto).
5.4 Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment pursuant to this Section 5, Mutual at its
expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and furnish to ServiceMaster a certificate
setting forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based. Mutual shall,
upon the written request, at any time, of ServiceMaster, furnish or cause
to be furnished to ServiceMaster, a like certificate setting forth: (i)
such adjustments and readjustments; (ii) the exercise price at the time in
effect; and (iii) the number of shares of Voting Stock and the amount, if
any, of other property that at the time would be received upon the exercise
of this Warrant.
5.5 Notices of Record Date. In the event of any taking by Mutual of a
record of shareholders of any class of securities for the purpose of
determining if shareholders are entitled to receive any dividend or other
distribution, Mutual shall mail to ServiceMaster at least ten days prior to
the date specified for the taking of such record, a notice specifying the
date on which any such record is to be taken for the purpose of such
dividend or distribution.
SECTION 6--SALE OR TRANSFER OF THIS WARRANT; LEGEND
This Warrant, and any shares of Voting Stock received upon exercise of
this Warrant, shall not be sold or transferred unless either (i) they first
shall have been registered under the Securities Act, or (ii) Mutual first
shall have been furnished with an opinion of legal counsel reasonably
satisfactory to Mutual to the effect that such sale or transfer is exempt
from the registration requirements of the Securities Act. Each certificate
representing any Warrant and any Voting Stock reviewed upon exercise of the
Warrant that has not been registered and that has not been sold pursuant to
an exemption that permits removal of the legend shall bear a legend
substantially in the following form, as appropriate:
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED
PURSUANT TO THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS
AND MAY NOT BE SOLD, ASSIGNED, PLEDGED, OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO
UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES
LAW OR AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO MUTUAL THAT SUCH
REGISTRATION IS NOT REQUIRED.
C-3
<PAGE>
Upon the request of ServiceMaster with respect to a certificate
representing any Warrant or any Voting Stock received upon exercise of the
Warrant, Mutual shall remove the foregoing legend from the certificate or
issue to ServiceMaster a new certificate therefor free of any transfer
legend, if, with such request, Mutual shall have received either (i) an
opinion of counsel reasonably satisfactory to Mutual to the effect that
such legend may be removed from such certificate or (ii) if the present
Paragraph (k) of Rule 144 or a substantially similar successor rule remains
in force and effect, representations from ServiceMaster reasonably
satisfactory to Mutual that ServiceMaster is not then, and has not been
during the preceding three months, an affiliate of Mutual and that
ServiceMaster has beneficially owned the security (within the meaning of
Rule 144) for three years or more.
Voting Stock received upon exercise of the Warrant may be subject to
additional restrictions on transfer imposed under applicable state and
federal law.
SECTION 7--REPRESENTATIONS
This Warrant is being acquired for investment for ServiceMaster's own
account and not with a view to sale or resale, distribution (as that term
is defined in the Securities Act), or transfer, or to offers in connection
therewith.
SECTION 8--LOSS, THEFT, DESTRUCTION, OR MUTILATION OF WARRANT
Upon receipt by Mutual of evidence reasonably satisfactory to it of
the loss, theft, destruction, or mutilation of this Warrant, and in case of
loss, theft, or destruction of indemnity or security reasonably
satisfactory to it, and upon reimbursement to Mutual of all reasonable
expenses incidental thereto, and upon surrender and cancellation of this
Warrant, if mutilated, Mutual will make and deliver a new Warrant of like
tenor and dated as of such cancellation in lieu of this Warrant.
SECTION 9--SATURDAYS, SUNDAYS, HOLIDAYS, AND SO FORTH
If the last or appointed day for the taking of any action or the
expiration of any right acquired or granted herein shall be a Saturday or a
Sunday or shall be a legal holiday, then such action may be taken or such
right may be exercised on the next succeeding day that is not a legal
holiday.
SECTION 10--AUTHORIZED SHARES
Mutual covenants that during the period this Warrant is outstanding,
it will reserve from its authorized and unissued Voting Stock a sufficient
number of shares to provide for the issuance of Voting Stock upon any
exercise under this Warrant.
C-4
<PAGE>
SECTION 11--ISSUE DATE
The provisions of this Warrant shall be construed and shall be given
effect in all respects as if it had been issued and delivered by Mutual on
the date hereof. This Warrant shall be binding upon any successors or
assigns of Mutual.
SECTION 12--GOVERNING LAW
This Warrant shall constitute a contract under the laws of the State
of Illinois and for all purposes shall be construed in accordance with and
governed by the laws of said state, without regards to choice of law
principles.
SECTION 13--SUCCESSORS AND ASSIGNS
Neither this Agreement nor any of the rights or obligations thereunder
may be assigned by either party without the prior written consent of the
other party, except that ServiceMaster may assign this Warrant to any
affiliate of ServiceMaster, and except that ServiceMaster's rights
hereunder shall transfer in connection with the Reincorporating Merger
described below. Subject to the foregoing, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns, and no other person shall have any right, benefit
or obligation thereunder.
Mutual understands that the shareholders of ServiceMaster's parent
entity have previously approved a merger (the "Reincorporating Merger")
which is described in a proxy statement/prospectus dated December 11, 1991.
The Reincorporating Merger is expected to occur by not later than December
31, 1997. As a result of the Reincorporating Merger, ServiceMaster and
ServiceMaster's parent entity will be succeeded by ServiceMaster
Incorporated of Delaware, a Delaware corporation. Before the occurrence of
the Reincorporating Merger, the term "ServiceMaster" as used herein means
The ServiceMaster Company Limited Partnership; after the Reincorporating
Merger, the term "ServiceMaster" as used herein means ServiceMaster
Incorporated of Delaware.
C-5
<PAGE>
IN WITNESS WHEREOF, Mutual Health Systems, Inc. and The ServiceMaster
Company L.P. have caused this Warrant to be executed by its duly authorized
officers.
Dated: June 21, 1996 Mutual Health Systems, Inc.
By:
------------------------------------
President
By:
------------------------------------
Secretary
The ServiceMaster Company Limited
Partnership, a Delaware limited
partnership
By: ServiceMaster Management Corporation,
its Corporate General Partner
By:
------------------------------------
Its:
------------------------------------
C-6
<PAGE>
NOTICE OF EXERCISE OF WARRANT
To: Mutual Health Systems, Inc.
900 Washington Street
Suite 1100
Vancouver, Washington 98660
1. Pursuant to the terms of the attached Warrant, the undersigned hereby
elects to purchase [NUMBER] shares of Voting Stock and tenders
herewith payment of the purchase price, of such shares in full.
2. Please issue a certificate or certificates representing said shares of
Voting Stock, in the name of the undersigned or in such other name(s)
as is/are specified immediately below or, if necessary, on an
attachment hereto: [LIST NAMES AND ADDRESSES.]
3. In the event of partial exercise, please reissue an appropriate
Warrant exercisable into the remaining shares.
4. The undersigned represents that the aforesaid shares of Voting Stock
are being acquired for the account of the undersigned for investment
and not with a view to, or for resale in connection with, the
distribution thereof and that the undersigned has no present intention
of distributing or reselling such shares. The undersigned further
represents that such shares shall not be sold or transferred unless
either (a) they first shall have been registered under the 1933 Act or
(b) Mutual first shall have been furnished with an opinion of legal
counsel reasonably satisfactory to Mutual to the effect that such sale
or transfer is exempt from the registration requirement.
Date:
------------------------------------------
The ServiceMaster Company Limited
Partnership, a Delaware limited
partnership
By: ServiceMaster Management
Corporation, its Corporate General Partner
By:
--------------------------------------
Its:
-------------------------------------
C-7
<PAGE>
EXHIBIT D
AGREEMENT TO REGISTER VOTING STOCK OF MUTUAL HEALTH
SYSTEMS, INC.
This agreement ("Agreement") is made this 21st day of June, 1996 by
and between Mutual Health Systems, Inc., a Washington corporation
("Mutual") and The ServiceMaster Company Limited Partnership, a Delaware
limited partnership ("ServiceMaster").
RECITALS
A. Concurrent with the execution of this Agreement, Mutual and
ServiceMaster have executed (i) a Stock Acquisition Agreement under which
ServiceMaster has purchased 200,000 shares of Voting Stock and (ii) a
warrant under which ServiceMaster has the right, under certain
circumstances, to acquire up to 200,000 shares of Voting Stock (the
"Warrant").
B. ServiceMaster's willingness to purchase the shares of Voting Stock
pursuant to the Stock Acquisition Agreement was in part conditioned on the
willingness of Mutual to agree to register, under federal and state
securities laws in accordance with the terms and conditions set forth in
this Agreement, the shares of Voting Stock which ServiceMaster has acquired
under the Stock Acquisition Agreement and the shares of Voting Stock which
ServiceMaster may acquire under the Warrant.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the payment and
commitments made by ServiceMaster in the Stock Acquisition Agreement, the
parties agree as follows.
1. DEFINITIONS
1.1 Defined Terms. As used herein, the terms below shall have the
following meanings:
"Exchange Act" means the Securities Exchange Act of 1934 as
constituted at the time such term shall be applied and any other federal
law in force at such time which shall, at such time, have superseded all or
any part of the Exchange Act as constituted on the date hereof or which
shall govern any activity governed by the Exchange Act as constituted on
the date hereof.
"Piggyback Registration" has the meaning set forth in Section 2.2.
D-1
<PAGE>
"Securities Act" means the Securities Act of 1933 as amended at the
time as of which such term shall be applied and any other federal law which
shall at such time have superseded all or any part of the Securities Act as
constituted on the date hereof or which shall govern any activity governed
by the Securities Act as constituted on the date hereof.
"Shares" means and includes the following shares of Voting Stock: (i)
the 200,000 shares received by ServiceMaster on the date hereof under the
Stock Acquisition Agreement; (ii) all shares which are issued upon exercise
of the Warrant; (iii) other equity interests in Mutual which may be
acquired by ServiceMaster and which Mutual in it sole discretion agrees in
writing to count as Shares for purposes of this Agreement; and (iv) all
shares which may be issued with respect to any Shares in any merger or
reorganization or in connection with any stock split or stock dividend or
in a distribution of equity securities to the holders of Shares or in
connection with any other action having a similar substantive effect.
All capitalized terms as used herein that are not defined herein, shall
have the same meaning as set forth in the Stock Acquisition Agreement or
any exhibit attached thereto.
2. PIGGYBACK REGISTRATIONS
2.1 Basic Right. If Mutual makes any Piggyback Registration (as
defined below) of Voting Stock under the Securities Act, ServiceMaster
shall be entitled to include its Shares in such registration and to sell
the Shares so included to the extent permitted by this Agreement. Subject
to section 2.4, Mutual shall keep open its Piggyback Registration until
such time as ServiceMaster has registered and sold all its Shares.
2.2 Defined Terms.
(a) Piggyback Registration. The term "Piggyback Registration"
means a registration by Mutual under the Securities Act other than (i) a
registration made in connection with a merger, purchase of assets or other
similar transaction by Mutual (other than an offering of securities for
cash); (ii) a registration of Voting Stock at least 80% of which are
offered to employees or partners of Mutual or of any of its affiliates
under any compensation arrangement, including a Mutual share option plan or
a Mutual share purchase plan; (iii) a registration in which the majority of
the proceeds will be derived from the sale of debt securities whether or
not convertible into Voting Stock (and for this purpose consideration for a
security representing a right to acquire Voting Stock shall be deemed to
have been paid for such security rather than for those Voting Stock); and
(iv) a registration on a form which does not permit the inclusion of Voting
Stock.
(b) Primary Shares. The term "Primary Shares" when used with
respect to any Piggyback Registration means (i) all Voting Stock which
Mutual desires to sell in such registration and (ii) all Voting Stock to be
included in such registration pursuant to any agreements made by Mutual
with the approval of its Board of Directors which entitles the
D-2
<PAGE>
holders of such Voting Stock to require Mutual to file a registration
statement with respect to such Voting Stock.
(c) Primary Seller. The term "Primary Seller" when applied with
respect to any Piggyback Registration means Mutual, provided that if the
Piggyback Registration shall be undertaken by reason of other rights
granted by Mutual with the approval of its Board of Directors entitling any
holder of Voting Stock to require such registration, then such holder shall
be deemed a "Primary Seller" for purposes of such registration.
(d) Secondary Seller. The term "Secondary Seller" when applied
with respect to any Piggyback Registration means (i) all Shares which
ServiceMaster shall request in its Participation Election to be included in
a proposed Piggyback Registration prior to the Participation Deadline or
such later date on which Mutual in its sole discretion shall elect to
accept such request and (ii) all Voting Stock the owners of which shall be
entitled to include in such registration pursuant to rights granted by
Mutual with the consent of its board of directors on essentially the same
terms granted to ServiceMaster in this Article 2, and (iii) all shares
which are proposed to be sold by Mutual officers and directors.
(e) The term "Secondary Sellers" when applied with respect to any
Piggyback Registration means the owners of the Secondary Shares involved in
such registration.
2.3 Registration Notice. If Mutual proposes to make a Piggyback
Registration, Mutual shall promptly give written notice (herein called a
"Piggyback Registration Notice") to ServiceMaster stating that Mutual
intends to effect such registration and specifying a date (herein called
the "Participation Deadline") by which ServiceMaster's election to
participate ("Participation Election") in the Piggyback Registration must
be submitted to Mutual (which date shall not be less than thirty (30) days
after Mutual gives the Piggyback Registration Notice). The Piggyback
Registration Notice shall be given by Mutual at least thirty (30) days
prior to the filing of the registration statement with the Securities and
Exchange Commission. ServiceMaster shall, subject to the conditions and
terms set forth in this Article 2, have the right to require Mutual to
include in the proposed Piggyback Registration any or all of its Voting
Stock. If ServiceMaster desires to have any or all of its Shares included
in the proposed Piggyback Registration, ServiceMaster shall promptly give
Mutual its Participation Election specifying in writing the number of
Shares which ServiceMaster desires to have included in such registration,
and ServiceMaster shall have the right to decrease such number at any time.
ServiceMaster shall also have the right to increase such number of shares
which ServiceMaster desires to have registered at any time, provided that
(i) if ServiceMaster and Mutual are the only two Persons whose Voting Stock
are included in the registration, then the maximum number of Shares that
shall be included in the registration shall be determined in accordance
with the rationing provisions of Section 2.5 and (ii) if Voting Stock owned
by other Persons are included in such registration, Shares that are in
excess of the number of Shares specified in the Participation Election
shall be included in the registration only if it is unnecessary to apply
the rationing provisions of Section 2.5.
D-3
<PAGE>
2.4 Distribution Arrangement. All decisions and actions with respect
to a Piggyback Registration shall be entirely in the discretion of the
Primary Seller, including but not limited to whether and when the offering
is to be made pursuant to the registration; the selling price of the
securities; the selection of the underwriters (provided that ServiceMaster
shall be entitled to be consulted in this regard); arrangements with the
underwriters and any changes in such arrangements; the postponement or
withdrawal of any such offering; and the contents of the registration
statement and the prospectus. If the Primary Seller shall make arrangements
to sell such Seller's Voting Stock included in a Piggyback Registration to
or through professional investment bankers, then such investment bankers
shall be deemed the "Primary Underwriter" for such registration and
ServiceMaster shall not be entitled to include any Voting Stock in such
registration unless (i) ServiceMaster shall agree to sell such Voting Stock
under arrangements essentially similar to the arrangements for the sale of
the Primary Seller's Voting Stock or such other arrangements as shall be
satisfactory to ServiceMaster and the Primary Seller and (ii) ServiceMaster
shall supply all information, execute all underwriting agreements and other
documents, and take all other actions which shall be reasonably required
under the arrangements specified in clause (i), provided that ServiceMaster
shall not be required to pay any expenses except as provided in Section 6.
ServiceMaster shall not be entitled to include a class of Voting Stock in a
registration which is not being sold by the Primary Seller if the Primary
Underwriter concludes that inclusion of Voting Stock from a class not being
sold by the Primary Seller would materially complicate or could materially
delay the distribution (unless other Secondary Sellers are being allowed to
include Voting Stock of such class).
2.5 Rationing. If the Primary Underwriter determines in good faith
that inclusion of all of the Secondary Shares which the Secondary Sellers
desire to include in a Piggyback Registration would create a significant
risk that either the quantity of securities that the Primary Seller could
otherwise sell or that the price per Share of such securities to be
received by the Primary Seller would be reduced, then (i) the Secondary
Sellers shall be entitled to include in such registration the largest
number of Secondary Shares which the Primary Underwriter determines will
not create such a risk (herein called the "Piggyback Total"), (ii) the
maximum number of Secondary Shares which any given Secondary Seller shall
be entitled to include in the registration shall be determined by
multiplying the Piggyback Total times a fraction the numerator of which is
the number of Secondary Shares which such Secondary Seller desires to
include in such registration and which are not excluded by any of the
preceding provisions of this Article 2 and the denominator of which is the
number of Secondary Shares which all Secondary Sellers desire to include in
such registration and which are not excluded pursuant to any of the
preceding provisions of this Article 2.
2.6 Expenses. ServiceMaster shall not be responsible for any expenses
of any registration required pursuant to this Article 2, except that
ServiceMaster shall pay underwriting commissions attributable to its
Secondary Shares included in such registration and fees and disbursements
of counsel or any other adviser that it may retain.
D-4
<PAGE>
2.7 Withdrawal Right. Mutual and any other Primary Seller shall have
the right in their sole discretion to abandon any registration or offering
proposed pursuant to this Article 2 at any time before such offering is
consummated and shall not have any liability to ServiceMaster by reason of
any such abandonment. ServiceMaster may in its sole discretion withdraw any
or all Shares from any registration or offering proposed pursuant to this
Article 2 at any time before such offering is consummated and ServiceMaster
shall not have any liability to Mutual by reason of such abandonment.
3. GENERAL PROVISIONS
3.1 Reasonable Efforts Regarding Registration. Whenever Mutual is
required to register any Shares under the preceding provisions of this
Agreement, Mutual shall, subject to the withdrawal right provisions of
Section 2.7, use reasonable efforts to do the following in connection with
such registration of Shares pursuant to the Securities Act and the
underwritten public offering and sale of Shares:
(a) prepare and file with the SEC a registration statement with
respect to Voting Stock to be registered and use its reasonable efforts to
cause such registration statement to become effective including, without
limitation, responding to SEC staff comments in such manner as Mutual deems
reasonable;
(b) prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective
for such period, not to exceed 90 days, as ServiceMaster shall request, and
to comply with the provisions of the Securities Act with respect to the
sale of all Voting Stock covered by such registration statement during such
period;
(c) provide ServiceMaster a reasonable opportunity to review and,
in the case of registrations effected pursuant to Section 2.3 hereof,
approve prior to filing, any such registration statement;
(d) furnish to ServiceMaster such number of conformed copies of
such registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of the
prospectus included in such registration statement (including each
preliminary prospectus and prospectus supplement), in conformity with the
requirements of the Securities Act, and such other documents as
ServiceMaster may reasonably request in order to facilitate the sale of
Voting Stock covered by such registration statement;
(e) use its reasonable efforts to register or qualify Voting
Stock covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as ServiceMaster shall reasonably
request, and do any and all other acts and things which
D-5
<PAGE>
may be reasonably necessary or advisable to enable ServiceMaster to
consummate the sale in such jurisdictions of such Shares; provided, that
Mutual shall not for any such purpose be required to qualify generally to
do business as a foreign corporation in any jurisdiction wherein it would
not but for the requirements of this clause (e) be obligated to be so
qualified, to subject itself to taxation in any such jurisdiction or to
consent to general service of process in any such jurisdiction;
(f) use its reasonable efforts to cause all Shares covered by
such registration statement to be listed on each securities exchange on
which Voting Stock of the same class issued by Mutual are then listed or,
if there shall then be no such listing, to be accepted for quotation on
NASDAQ;
(g) provide a transfer agent and registrar for Voting Stock
covered by such registration statement not later than the effective date of
such registration statement;
(h) enter into such agreements (including an underwriting
agreement in customary form) and take such other actions as ServiceMaster
reasonably requests in order to expedite or facilitate the disposition of
such Shares; and
(i ) obtain a "cold comfort" letter from Mutual's independent
public accountants in customary form and covering such matters of the type
customarily covered by "cold comfort" letters as ServiceMaster shall
reasonably request.
3.2 ServiceMaster Support. ServiceMaster shall furnish to Mutual in
writing such information regarding ServiceMaster and the distribution of
Shares as Mutual may reasonably request in writing in connection with any
registration, qualification or compliance referred to in this Agreement,
together with such representations and warranties as Mutual may reasonably
request and shall take such other actions as Mutual shall reasonably
request in connection with such registration (provided that such requests
are not inconsistent with the relative rights and obligations of the
parties prescribed in this Agreement or more onerous than requests made of
other Secondary Sellers which are similarly situated).
3.3 Indemnification.
(a) Mutual shall indemnify and hold harmless (i) ServiceMaster
and, (ii) if ServiceMaster so requests, each underwriter of Shares
registered under this Agreement and (iii) the officers and directors of
ServiceMaster and such underwriters and (iv) each Person, if any, who
controls any thereof within the meaning of Section 15 of the Securities Act
and their respective successors against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained
in any prospectus, prospectus supplement, offering circular or other
document incident to any registration or qualification (or in any related
registration statement, amendment thereto or notification) or any omission
(or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements
D-6
<PAGE>
therein not misleading, or any violation by Mutual of the Securities Act or
any rule or regulation promulgated under the Securities Act applicable to
Mutual and relating to action or inaction required of Mutual in connection
with any such registration or qualification, and (except as otherwise
provided in Section 3.3 (b) below) shall reimburse ServiceMaster and each
such underwriter for any legal and any other expenses reasonably incurred
in connection with investigating or defending any such claim, loss, damage,
liability or action; provided, however, that Mutual shall not be liable in
any such case to the extent that any such claim, loss, damage or liability
arises out of or is based on any untrue statement or omission based upon
written information furnished to Mutual by an instrument duly executed by
ServiceMaster or any underwriter and stated to be specifically for use
therein.
(b) ServiceMaster shall indemnify and hold harmless Mutual and
its partners or shareholders, officers and directors and each person, if
any, who controls any thereof within the meaning of Section 15 of the
Securities Act and their respective successors against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a material
fact contained in any prospectus, prospectus supplement, offering circular
or other document incident to any registration or qualification (or in any
related registration statement, amendment thereto or notification) or any
omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, or any violation by Mutual of the Securities Act or any rule or
regulation promulgated under the Securities Act applicable to Mutual and
relating to action or inaction required of Mutual in connection with any
such registration or qualification, and (except as otherwise provided in
Section 3.3(a) above) shall reimburse Mutual and each other person
indemnified pursuant to this Section 3.3(b) for any legal and any other
expenses reasonably incurred in connection with investigating or defending
any such claim, loss, damage, liability or action; provided, however, that
this Section 3.3(b) shall apply only if (and only to the extent that) such
statement or omission was made in reliance upon information furnished to
Mutual by an instrument duly executed by ServiceMaster and stated to be
specifically for use in such prospectus, offering circular or other
document (or related registration statement or notification) or any
amendment or supplement thereto and not corrected by any other written
statement executed by ServiceMaster or an underwriter and given to Mutual
in time to correct the earlier written information.
(c) Each party entitled to indemnification under this Section 3.3
(herein called the "indemnified party") shall give notice to the party
required to provide indemnification (herein called the "indemnifying
party") of any claim as to which indemnity may be sought promptly after
such indemnified party obtains actual knowledge of such claim, and shall
permit the indemnifying party (at its expense) to assume the defense of any
such claim or any litigation resulting therefrom; provided however, that
counsel for the indemnifying party who shall conduct the defense of such
claim or litigation shall be reasonably satisfactory to the indemnified
party, and the indemnified party may participate in such defense at the
indemnified party's expense; and provided, further, that the omission by
any indemnified party to give notice as provided herein shall not relieve
the indemnifying
D-7
<PAGE>
party of its obligations under this Section 3.3(c), but a refusal to permit
the indemnifying party to conduct such defense by such counsel shall
relieve such indemnifying party of its obligations under this Section
3.3(c). No indemnifying party, in the defense of any such claim or
litigation, shall, except with the consent of each indemnified party,
consent to entry of any judgment or enter in any settlement which is
binding on the indemnified party but which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim
or litigation without any requirement for payment of any consideration by
the indemnified party for such release which is not reimbursable by the
indemnifying party. No indemnified party shall, in connection with any such
claim or litigation, consent to the entry of any judgment or enter into any
settlement without the consent of the indemnifying party, which consent
shall not be unreasonably withheld.
3.4 Reports to be Filed; Rule 144. If and when Mutual becomes subject
to Section 13 and 1 5(d) of the Exchange Act, for as long as ServiceMaster
holds Shares, Mutual shall use all reasonable efforts to file, on a timely
basis, all annual, quarterly and other reports required to be filed by it
under Sections 13 and 15(d) of the Exchange Act, and the rules and
regulations of the SEC thereunder, as amended from time to time. In the
event of any proposed sale of Shares by ServiceMaster pursuant to Rule 144
(or any successor rule) under the Securities Act, Mutual shall cooperate
with ServiceMaster so as to enable such sales to be made in accordance with
applicable laws, rules and regulations.
3.5 ServiceMaster Reincorporating Merger. Mutual understands that the
shareholders of ServiceMaster's parent entity have previously approved a
merger (the "Reincorporating Merger") which is described in a proxy
statement/prospectus dated December 11, 1991. The Reincorporating Merger is
expected to occur by not later than December 31, 1997. As a result of the
Reincorporating Merger, ServiceMaster and ServiceMaster's parent entity
will be succeeded by ServiceMaster Incorporated of Delaware, a Delaware
corporation. Before the occurrence of the Reincorporating Merger, the term
"ServiceMaster" as used herein means The ServiceMaster Company Limited
Partnership); after the Reincorporating Merger, the term "ServiceMaster" as
used herein means ServiceMaster Incorporated of Delaware.
3.6 Personal Rights of ServiceMaster. The rights created by this
Agreement are personal to ServiceMaster, and are not assignable and shall
not inure to the benefit of any subsequent holder of Shares; provided,
however, that ServiceMaster shall have the right to include Shares
beneficially owned by any of its affiliates in any registration to the same
extent that ServiceMaster is entitled to include its own Shares in any such
registration.
3.7 Governing Law. This Agreement shall be governed and construed in
accordance with the internal laws of the State of Illinois, without giving
effect to any choice of law or conflict of law rules.
D-8
<PAGE>
3.8 Notices. Each notice or other communication pursuant to this
Agreement shall be in writing and shall be deemed given if delivered
personally, telecopies, sent by nationally recognized overnight courier or
mailed by registered or certified mail (return receipt requested and
postage prepaid) to the recipient at the following address or telecopy
number:
If to Mutual: Mutual Health Systems, Inc.
900 Washington Street, Suite 1100
Vancouver, Washington 98660
Attn: President
With a copy to: Edward L. Epstein, Esq.
Stoel Rives
900 SW Fifth Avenue, Suite 2300
Portland, Oregon 97204-1268
If to ServiceMaster:
The ServiceMaster Company (or ServiceMaster Incorporated of Delaware,
when appropriate)
One ServiceMaster Way
Downers Grove, Illinois 60515
Attn: Kenneth Hooten
Fax Number: 708-271-5870<F1>
3.9 Termination of Registration Obligation. Mutual's obligation to
effect a registration of Shares under this Agreement shall terminate at
such time as a public market exists for Mutual's Voting Stock and the
Shares obtainable upon an exercise of the Warrant can be legally sold by
ServiceMaster without registration under the Securities Act pursuant to
Rule 144 or otherwise.
3.10 "Market Stand-Off" Agreement. ServiceMaster hereby agrees that,
during the period specified by Mutual and an underwriter of common stock or
other securities of Mutual following the effective date of a registration
statement of Mutual filed under the Securities Act (but not to exceed two
calendar months in any event) it shall not, to the extent requested by
Mutual and such underwriter, directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to
donees who agree to be similarly bound) any securities of Mutual held by it
at any time during such period except common stock included in such
registration; provided, however, that all officers and directors of Mutual
enter into similar agreements. In order to enforce the foregoing covenant,
Mutual may impose stop-transfer instructions with respect to the Shares of
ServiceMaster until the end of such period.
- --------
<F1>630-271-5870 after August 1, 1996.
D-9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed on their respective behalf by their respective officers
thereunto duly authorized, as of the day and year first above written.
Mutual Health Systems, Inc.
a Washington corporation
By:
--------------------------------------
Its:
-------------------------------------
The ServiceMaster Company Limited
Partnership, a Delaware limited
partnership
By: ServiceMaster Management
Corporation, its Corporate General Partner
By:
--------------------------------------
Its:
-------------------------------------
D-10
MUTUAL HEALTH SYSTEMS, INC.
WARRANT SUBSCRIPTION AND GUARANTOR AGREEMENT
1. Subscription and Guaranty. Silicon Valley Bank ("Silicon") has
offered to loan to Mutual Health Systems, Inc. (the "Company") up to an
additional $1,000,000 if shareholders and officers of the Company provide
guaranties to Silicon in the form attached hereto as Exhibit A (the
"Continuing Guaranty") in an aggregate amount equal to $1,000,000. The
Company has proposed to issue a warrant in the form attached hereto as
Exhibit B (the "Warrant") to each person who provides a Continuing
Guaranty, which Warrant shall have a 5-year term and an exercise price of
$3.75 per share and shall provide for the purchase of 2,300 shares of Class
A Voting Common Stock (the "Shares") of the Company for each $10,000
guaranteed under the Continuing Guaranty. The undersigned hereby agrees to
provide a Continuing Guaranty in the amount set forth on the accompanying
signature page and therefore subscribes for a Warrant covering the number
of Shares set forth on the accompanying signature page. An executed
Continuing Guaranty in the correct amount is enclosed with this agreement.
2. Inter-Guarantor Contribution. The undersigned understands that,
until and unless the Company receives an additional equity investment of at
least $1,000,000, each person who signs a Continuing Guaranty (a
"Guarantor") will be jointly and severally liable to Silicon for up to
$1,000,000 of the Company's borrowings if the Company defaults on its loans
from Silicon, regardless of the lesser amount specified on the accompanying
signature page. If any other Guarantors are required to pay to Silicon in
respect of such Guarantors' Continuing Guaranties (other than under
Paragraph 10 thereof) an amount in excess of the amount the Guarantors
agreed to individually guarantee, the undersigned agrees to contribute to
such Guarantors an amount necessary so that the contributions of all
Guarantors actually making payments on their Continuing Guaranties are in
proportion to the amounts each of them agreed to individually guarantee.
The other Guarantors are express third-party beneficiaries of the agreement
set forth in this Section 2.
3. Representations and Warranties. The undersigned represents and
warrants to the Company as follows:
(a) Purchase for Own Account. The Warrant is being acquired for
investment for the undersigned's account and not with a view to
distribution. No other person has an interest in the Warrant.
(b) Accredited Investor. The undersigned is an "accredited
investor" as defined in Rule 501 promulgated under the Securities Act of
1933, a copy of which is attached hereto as Exhibit C, and has such
knowledge and experience in financial and business matters that he or she
is capable of evaluating the merits and risks of an investment in the
Company and is able to bear the economic risks of an investment in the
Warrant for an indefinite period of time.
<PAGE>
(c) Receipt of Information. The undersigned has met with officers
of the Company, has had an opportunity to ask questions and receive answers
concerning the Company and the terms and conditions of an investment in the
Company, has received information about the Company's current financial
condition and need for additional financing in the short term, and has
received historical financial statements and all other information that the
undersigned believes is necessary or desirable in connection with an
investment in the Company.
(d) No Inconsistent Representations or Warranties. Officers of
the Company have made no representations or warranties that are
inconsistent with the statements in this agreement.
(e) Residence. The undersigned is a resident of the state
indicated on the accompanying signature page.
4. Acknowledgments. The undersigned understands and acknowledges that:
(a) Restricted Securities. The Warrant has not been registered or
qualified under any federal or state securities laws in reliance upon
exemptions from the registration requirements, and the Warrant may not be
transferred by the undersigned except in compliance with the registration
requirements of such laws or pursuant to available exemptions from
registration. The offer and sale of the Warrant has not been approved or
disapproved by the United States Securities and Exchange Commission or any
state regulatory authority, and any representation to the contrary is
unlawful.
(b) No Market for the Shares. There is no market for the Shares,
it is unknown whether a market will ever develop, and, accordingly, the
Warrant and any Shares acquired upon exercise of the Warrant may have to be
held for an indefinite period of time.
(c) Investment Risk. An investment in the Warrant involves a
substantial degree of risk.
(d) Acceptance of Subscription. The Company reserves the right to
change or waive the terms and limitations of this offering and can accept
or reject this subscription in whole or in part in its absolute discretion;
provided, however, that if the Company rejects this subscription the
Company shall return to the undersigned the Continuing Guaranty executed by
the undersigned.
5. Indemnification. The undersigned agrees to indemnify and hold the
Company and its directors, officers, agents, employees, representatives,
affiliates and controlling persons harmless from and against any and all
loss, damage or liability (including reasonable attorneys' fees and
disbursements in connection with any investigation, enforcement action,
trial or appeal) due to or arising out of any untruth, inaccuracy, or
breach of any representation, warranty or covenant in this agreement.
2
<PAGE>
SIGNATURE PAGE FOR
WARRANT SUBSCRIPTION AND GUARANTOR AGREEMENT
IN WITNESS WHEREOF, the undersigned has executed this Warrant
Subscription and Guarantor Agreement effective as of May 31, 1996.
----------------------------------------
(Signature)
----------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
(Print name and address)
----------------------------------------
(State of residence)
Accepted:
MUTUAL HEALTH SYSTEMS, INC.
By:
------------------------------
Title:
---------------------------
GUARANTY AND WARRANT INFORMATION
Amount of Continuing Guaranty: $____________
Number of Shares under Warrant (Guaranty Amount / $10,000 * 2,300): ____________
3
<PAGE>
EXHIBIT A
CONTINUING GUARANTY
Borrower: Mutual Health Systems, Inc.
Guarantor: ______________________________
Date: May _____, 1996
1. For valuable consideration, the undersigned ("Guarantor")
unconditionally guarantees and promises to pay to Silicon Valley Bank
("Silicon"), which has extended or may hereafter extend credit to the
borrower identified above (the "Borrower"), in lawful money of the United
States, any and all Indebtedness of Borrower to Silicon. The word
"Indebtedness" is used herein in its most comprehensive sense and includes
any and all advances, debts, obligations and liabilities of Borrower or any
one or more of them, heretofore, now, or hereafter made, incurred or
created, whether voluntary or involuntary and however arising, whether
direct or acquired by Silicon by assignment or succession, whether due or
not due, absolute or contingent, liquidated or unliquidated, determined or
undetermined, and whether Borrower may be liable individually or jointly
with others, or whether recovery upon such Indebtedness may be or hereafter
become barred by any statute of limitations, or whether such Indebtedness
may be or hereafter become otherwise unenforceable. "Indebtedness" includes
any amount Silicon receives from or on behalf of Borrower that Silicon is
required to repay at any time as a result of the insolvency, bankruptcy or
reorganization of Borrower. If more than one Guarantor executes this
Continuing Guaranty or another guaranty of Indebtedness, the liability of
such Guarantors shall be joint and several.
Notwithstanding any other provision of this Continuing Guaranty, (i)
the maximum liability of Guarantor and all other guarantors executing a
Continuing Guaranty for the benefit of Silicon shall be limited to a total
of $1,000,000 (in addition to amounts due under Paragraph 11 below); and
(ii) if Borrower receives an additional equity investment after the date of
this Continuing Guaranty yielding gross proceeds of at least $1,000,000 to
Borrower, Guarantor's liability under this Continuing Guaranty shall be
limited to $______________ (plus amounts due under Paragraph 11 below).
This Continuing Guaranty shall immediately terminate, and Guarantor shall
have no further liability to Silicon with respect thereto, if (1) Borrower
shall have repaid all amounts borrowed under the Secured Operating Line of
Credit No. 2 described in the Amended and Restated Schedule dated May ____,
1996 (the "Schedule") to Loan and Security Agreement between Silicon and
Borrower and Silicon's obligation to loan any amount with respect thereto
shall have been terminated, (2) Borrower shall have repaid an amount
sufficient to reduce the amount borrowed under the Secured Operating Line
of Credit No. 1 described in the Schedule to $1,500,000 and Silicon's
obligation to loan any amount in excess of $1,500,000 with respect thereto
shall have been terminated, and (3) there is no continuing Event of Default
under the Loan and Security Agreement.
A-1
<PAGE>
2. This is a guaranty of payment, not a guaranty of collection. It is
not necessary for Silicon to take any action to collect from Borrower or
any other person or entity prior to making demand on Guarantor.
3. This is a Continuing Guaranty relating to any Indebtedness,
including that arising under successive transactions which shall either
continue the Indebtedness or from time to time renew it after it has been
satisfied.
4. Guarantor authorizes Silicon, without notice or demand and without
affecting its liability hereunder, from time to time, either before or
after revocation hereof, to (a) renew, compromise, extend, accelerate or
otherwise change the time for payment of, or otherwise change the terms of
the Indebtedness or any part thereof, including increase or decrease of the
rate of interest thereon; (b) receive and hold security for the payment of
this Guaranty or the Indebtedness guaranteed, and exchange, enforce, waive,
release, fail to perfect, sell, or otherwise dispose of any such security;
(c) apply such security and direct the order or manner of sale thereof as
Silicon in its discretion may determine; and (d) release or substitute any
one or more of the endorsers or guarantors.
5. Guarantor waives any defense arising by reason of any disability or
other defense of Borrower, or the cessation from any cause whatsoever of
the liability of Borrower except for defenses of Borrower arising from the
wrongful acts or omissions of Silicon with respect to Borrower, or any
claim that Guarantor's obligations exceed or are more burdensome than those
of Borrower. Guarantor waives any and all defenses, claims and damages
arising from errors or omissions in Silicon's administration of the
Indebtedness guaranteed hereunder except those that affect the amount
claimed to be owed by Borrower to Silicon. Guarantor waives all
presentments, demands for performance, notices on nonperformance, protests,
notices of protest, notices of dishonor, and notices of acceptance of this
Guaranty and of the existence, creation, or incurring of new or additional
Indebtedness.
6. Guarantor acknowledges and agrees that it shall have the sole
responsibility for obtaining from Borrower such information concerning
Borrower's financial condition or business operations as Guarantor may
require, and that Silicon has no duty at any time to disclose to Guarantor
any information relating to the business operations or financial condition
of Borrower.
7. It is not necessary for Silicon to inquire into the powers of
Borrower or of the officers, directors, partners or agents acting or
purporting to act on its behalf, and any Indebtedness made or created in
reliance upon the professed exercise of such powers shall be guaranteed
hereunder.
8. Any and all rights of Guarantor under any and all debts,
liabilities and obligations owing from Borrower to Guarantor other than
amounts owed as compensation for services, including any security for and
guaranties of any such obligations, whether now existing or hereafter
arising, are hereby subordinated in right of payment to the prior payment
in full of all of the indebtedness and to all liens and security interests
of Silicon that secure the Indebtedness. No payment in respect of any such
subordinated obligations shall at any time be made to or
A-2
<PAGE>
accepted by Guarantor if at the time of such payment any Indebtedness is
outstanding. If any Event of Default has occurred, Borrower and any
assignee, trustee in bankruptcy, receiver, or any other person having
custody or control over any or all of Borrower's property are hereby
authorized and directed to pay to Silicon the entire unpaid balance of the
Indebtedness before making any payments whatsoever other than amounts owed
as compensation for services to Guarantor, whether as a creditor,
shareholder, or otherwise; and insofar as may be necessary for that
purpose, Guarantor hereby assigns and transfers to Silicon all rights to
any and all debts, liabilities and obligations owing from Borrower to
Guarantor other than amounts owed as compensation for services, including
any security for and guaranties of any such obligations, whether now
existing or hereafter arising, including without limitation any payments,
dividends or distributions out of the business or assets of Borrower. Any
amounts received by Guarantor in violation of the foregoing provisions
shall be received and held as trustee for the benefit of Silicon and shall
immediately be paid over to Silicon to be applied to the Indebtedness in
such order and sequence as Silicon shall in its sole discretion determine,
without limiting or affecting any other right or remedy which Silicon may
have hereunder or otherwise and without otherwise affecting the liability
of Guarantor hereunder. Guarantor hereby expressly waives any right to
set-off or assert any counterclaim against Borrower.
9. Silicon may, without notice to Guarantor and without affecting
Guarantor's obligations hereunder, assign the Indebtedness and this
Guaranty, in whole or in part. Guarantor agrees that Silicon may disclose
to any prospective purchaser and any purchaser of all or part of the
Indebtedness any and all information in Silicon's possession concerning
Guarantor, this Guaranty and any security for this Guaranty.
10. Guarantor agrees to pay all attorneys' fees, the allocated costs
of Silicon's in-house counsel, and all other costs and expenses which may
be incurred by Silicon in the enforcement of this Guaranty, including
without limitation all costs and necessary disbursements in any legal
action (at trial, on appeal or on review) or arbitration proceeding.
11. This Guaranty shall be governed by and construed according to the
laws of the State of Oregon.
Executed as of this ______ day of _____________, 199_.
----------------------------------------
By
------------------------------------
Its
------------------------------------
A-3
<PAGE>
Address for notices to Silicon:
SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, CA 95054
Address for notices to Guarantor:
- ---------------------------------
- ---------------------------------
- ---------------------------------
A-4
<PAGE>
EXHIBIT B
THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE LAWS.
THEY MAY NOT BE EXERCISED, SOLD, OFFERED FOR SALE, ASSIGNED, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS REGISTERED UNDER SUCH ACT AND
APPLICABLE STATE LAWS, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR
THE HOLDER SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
NO. W-____ ___________ SHARES
WARRANT
TO PURCHASE SHARES OF COMMON STOCK OF
MUTUAL HEALTH SYSTEMS, INC.
For value received, Mutual Health Systems, Inc., a Washington
corporation (the "Company"), grants to _____________ (the "Holder"), the
right, subject to the terms of this Warrant, to purchase until the
Expiration Date, as defined below, at $3.75 per share (the "Basic Exercise
Price"), the number of shares of fully paid and nonassessable Class A
Voting Common Stock of the Company set forth above.
SECTION 1. DEFINITIONS.
As used in this Warrant, unless the context otherwise requires:
1.1 "BASIC EXERCISE PRICE" means the price at which each Warrant Share
may be purchased upon exercise of this Warrant as stated in the first
sentence of this Warrant.
1.2 "COMMON STOCK" means shares of the Class A Voting Common Stock of
the Company.
1.3 "EXERCISE DATE" means the date when this Warrant is exercised, in
whole or in part, in the manner indicated in Sections 2.1 and 2.2.
1.4 "EXERCISE PRICE" means the Basic Exercise Price; provided,
however, that if an adjustment is required under Section 7 of this Warrant,
then the "Exercise Price" means, after each such adjustment, the price at
which each Warrant Share may be purchased upon exercise of this Warrant
immediately after the last such adjustment.
1.5 "EXPIRATION DATE" means May 31, 2001.
B-1
<PAGE>
1.6 "HOLDER" means the Initial Holder or, upon transfer of this
Warrant by the Initial Holder (or a subsequent Holder) in accordance with
the limitations set forth in Section 8 of this Warrant, a permitted
transferee.
1.7 "SECURITIES ACT" means the Securities Act of 1933, as amended from
time to time, and all rules and regulations promulgated thereunder, or any
act, rules or regulations which replace the Securities Act or any such
rules and regulations.
1.8 "WARRANT" means this Warrant and each previously executed and
canceled Warrant, if any, for which this Warrant has been exchanged.
1.9 "WARRANT SHARES" means any shares of Common Stock issued or
subject to issuance upon exercise of this Warrant or upon exchange of a
Warrant Share for Warrant Shares of different denominations (and any shares
received in respect of such shares as a result of a corporate stock split,
stock dividend or other similar corporate recapitalization).
SECTION 2. DURATION AND EXERCISE OF WARRANT.
2.1 DURATION. Subject to the provisions of this Warrant, this Warrant
may be exercised at any time and from time to time until the Expiration
Date. After the Expiration Date this Warrant shall become void, and all
rights to purchase Warrant Shares hereunder shall thereupon cease.
2.2 METHOD OF EXERCISE. This Warrant may be exercised by the Holder,
in whole or in part, by (i) surrendering to the Company payment in full of
the Exercise Price for the Warrant Shares, and (ii) executing and
delivering to the Secretary of the Company a written notice of exercise.
Upon compliance with this Section 2.2, the Holder shall be deemed to be the
holder of record of the Warrant Shares.
2.3 CERTIFICATES. As soon as practicable after the exercise,
certificates for the Warrant Shares shall be delivered to the Holder.
2.4 SECURITIES ACT COMPLIANCE. Unless the Warrant Shares shall have
been registered under the Securities Act, as a condition of its delivery of
certificates for the Warrant Shares, the Company may require the Holder to
deliver to the Company, in writing, representations regarding the Holder's
status as an accredited investor, sophistication, investment intent,
acquisition for Holder's own account and such other matters as are
reasonable and customary for purchasers of securities in an unregistered
private offering. The Company may place conspicuously upon each certificate
representing the Warrant Shares a legend substantially in the following
form, the terms of which are hereby agreed to by the Holder (including any
transferee):
THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES
LAWS. THEY MAY NOT BE OFFERED, SOLD, ASSIGNED, PLEDGED,
B-2
<PAGE>
HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS
REGISTERED UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER SATISFACTORY TO THE COMPANY
THAT REGISTRATION IS NOT REQUIRED.
SECTION 3. VALIDITY AND RESERVATION OF WARRANT SHARES.
The Company represents that all shares of Common Stock issued upon
exercise of this Warrant will be validly issued, fully paid and
nonassessable. The Company agrees that, as long as this Warrant may be
exercised, the Company will have authorized and reserved for issuance upon
exercise of this Warrant a sufficient number of Warrant Shares to provide
for exercise in full of this Warrant.
SECTION 4. FRACTIONAL SHARES.
No fractional Warrant Shares shall be issued upon the exercise of this
Warrant, and the number of Warrant Shares to be issued shall be rounded to
the nearest whole number.
SECTION 5. LIMITED RIGHTS OF WARRANT HOLDER.
The Holder shall not, solely by virtue of being the Holder of this
Warrant, have any of the rights of a holder of Common Stock of the Company,
either at law or equity, until this Warrant shall have been exercised.
SECTION 6. LOSS OF WARRANT.
Upon receipt by the Company of satisfactory evidence of the loss,
theft, destruction or mutilation of this Warrant and either (in the case of
loss, theft or destruction) reasonable indemnification and a bond
satisfactory to the Company if requested by the Company or (in the case of
mutilation) the surrender of this Warrant for cancellation, the Company
will execute and deliver to the Holder, without charge, a new warrant of
like denomination.
SECTION 7. ADJUSTMENT OF WARRANT SHARES.
The number, class and Exercise Price per share of securities for which
this Warrant may be exercised are subject to adjustment from time to time
upon the happening of certain events as hereinafter provided:
7.1 STOCK SPLIT OR COMBINATION. If the outstanding shares of the
Company's Common Stock are divided into a greater number of shares, the
number of shares of Common Stock purchasable upon the exercise of this
Warrant shall be proportionately increased and the Exercise Price per share
shall be proportionately reduced and, conversely, if the outstanding shares
of Common Stock are combined into a smaller number of shares of Common
Stock, the number of shares of Common Stock purchasable upon the exercise
of this Warrant shall be
B-3
<PAGE>
proportionately reduced and the Exercise Price per share shall be
proportionately increased. The increases and reductions provided for in
this Section 7.1 shall be made with the intent and, as nearly as
practicable, the effect that neither the percentage of the total equity of
the Company obtainable on exercise of this Warrant nor the aggregate price
payable for such percentage shall be affected by any event described in
this Section 7.1.
7.2 MERGER, REORGANIZATION, DISTRIBUTIONS, ETC. In the event of any
change in the outstanding Common Stock through merger, consolidation,
reclassification, reorganization, partial or complete liquidation or other
change in the capital structure of the Company, or in the event the Company
shall declare a distribution to holders of Common Stock payable in
securities of other persons, evidences of indebtedness issued by the
Company or other persons, assets (excluding cash dividends) or options or
rights, then, as a condition of such change in capital structure or
distribution, appropriate and adequate provision shall be made so that the
holder of this Warrant will have the right thereafter to receive upon the
exercise of this Warrant the kind and amount of shares of stock or other
securities or property to which it would have been entitled if, immediately
prior to such change in capital structure or distribution, it had held the
number of shares of Common Stock obtainable upon the exercise of this
Warrant. In any such case, appropriate adjustment shall be made in the
application of the provisions set forth herein with respect to the rights
and interests thereafter of the Holder, to the end that the provisions set
forth herein shall thereafter be applicable, as nearly as reasonably may
be, in relation to any shares of stock or other property thereafter
deliverable upon the exercise of this Warrant.
SECTION 8. TRANSFER OF WARRANT.
This Warrant may not be sold, transferred or otherwise disposed of
except (a) by an individual Holder upon death, or (b) to a transferee that
the Company reasonably believes is an "accredited investor" as defined
under the Securities Act in a transfer that complies with all applicable
federal and state securities laws.
SECTION 9. MISCELLANEOUS.
9.1 NOTICE. Notice or demand pursuant to this Warrant to be given or
made by the Holder to or on the Company shall be sufficiently given, made
or served, if in writing and delivered personally or by facsimile (except
for legal process) or if sent by certified or registered mail, or overnight
delivery service, postage prepaid, addressed, until another address is
designated in writing by the Company, as follows:
Mutual Health Systems, Inc.
900 Washington Street, Suite 1100
Vancouver, WA 98660
Attention: President
Any notice or demand authorized pursuant to this Warrant to be given or
made by the Company to or on the Holder shall be given to the Holder by
facsimile, certified or registered mail, or
B-4
<PAGE>
overnight delivery service, postage prepaid, addressed to the Holder's last
known address as it shall appear on the books of the Company, until another
address is designated in writing.
9.2 APPLICABLE LAW. The validity, interpretation and performance of
this Warrant shall be governed by the laws of the State of Washington,
exclusive of choice of law rules.
9.3 HEADINGS. The Article headings herein are for convenience only and
are not part of this Warrant and shall not affect the interpretation
thereof.
Dated: May 31, 1996.
MUTUAL HEALTH SYSTEMS, INC.
By:
------------------------------------
Dany Y. Tse, President
B-5
<PAGE>
EXHIBIT C
ACCREDITED INVESTOR DEFINITION
"Accredited investor" shall mean any person who comes within any of
the following categories, or who the issuer reasonably believes comes
within any of the following categories, at the time of the sale o the
securities to that person:
(1) Any bank as defined in section 3(a)(2) of the Act, or any savings
and loan association or other institution as defined in section 3(a)(5)(A)
of the Act whether acting in its individual or fiduciary capacity; any
broker or dealer registered pursuant to section 15 of the Securities
Exchange Act of 1934; any insurance company as defined in section 2(13) of
the Act; any investment company registered under the Investment Company Act
of 1940 or a business development company as defined in section 2(a)(48) of
that Act; any Small Business Investment Company licensed by the U.S. Small
Business Administration under section 301(c) or (d) of the Small Business
Investment Act of 1958; any plan established and maintained by a state, its
political subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such plan has
total assets in excess of $5,000,000; any employee benefit plan within the
meaning of the Employee Retirement Income Security Act of 1974 if the
investment decision is made by a plan fiduciary, as defined in section
3(21) of such act, which is either a bank, savings and loan association,
insurance company, or registered investment adviser, or if the employee
benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons that
are accredited investors;
(2) Any private business development company as defined in section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer
of the securities being offered or sold, or any director, executive
officer, or general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that
person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current
year;
(7) Any trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the securities offered, whose
purchase is directed by a sophisticated person as described in s
230.506(b)(2)(ii); and
(8) Any entity in which all of the equity owners are accredited
investors.
C-1
EXHIBIT 11.1
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
STATEMENT SHOWING CALCULATIONS OF EARNINGS (LOSS) PER SHARE <F1>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
1993 1994 1995 1995 1996
------------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 1,032 1,152 1,333 1,262 1,466
Weighted average number of common
stock equivalent shares from
exercise of stock options and
warrants issued before July 1,
1995 (using the modified treasury
stock method) -- 17 84 94 --<F2>
Weighted average number of common
stock equivalent shares from
exercise of stock options and
warrants issued after July 1,
1995 (using the modified treasury
stock method) 272 284 280 323 186
------------- ------------ ------------- -------------- -------------
Shares used in per share calculation 1,304 1,452 1,697 1,679 1,651
============= ============ ============= ============== =============
Net income (loss) $ 243 $ 404 $ 257 $ 238 $ (384)
Accretion of mandatorily redeemable
common stock -- -- -- -- (69)
Modified treasury stock adjustments
to net income 305 162 147 98 17
------------- ------------ ------------- -------------- -------------
Net income (loss) applicable to
common stock $ 548 $ 566 $ 404 $ 336 $ (436)
============= ============ ============= ============== =============
Net income (loss) per share $ 0.42 $ 0.39 $ 0.24 $ 0.20 $ (0.26)
- ----------------------
<FN>
<F1> Gives effect to a one-for-two reverse split of the Company's common
stock to be executed before the completion of the proposed initial
public offering of the Company's common stock.
<F2> Excluded because their effect is anti-dilutive.
</FN>
</TABLE>
EXHIBIT 16.1
Securities and Exchange Commission
Washington, D.C. 20549
RE: Mutual Health Systems, Inc. (to be changed to Gentle Dental Service
Corporation) (the Company)
Dear Sirs:
We have reviewed the disclosures made by the Company under the heading
"Experts" presented in the Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, as filed with the Commission
on October 4, 1996. This confirms that we agree with the statements
included in the "Experts" section with respect to the change in the
Company's accountants and this firm.
MOSS ADAMS LLP
Vancouver, Washington
October 4, 1996
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated March 31, 1996,
except as to Note 13, which is dated as of October 3, 1996, relating to the
financial statements of Gentle Dental Service Corporation, our report dated
September 17, 1996 relating to the financial statements of Scott Campbell,
DDS, P.S., and our report dated September 17, 1996 relating to the
financial statements of Peter A. Vermeulen, D.D.S., P.S., which reports
appear in such Prospectus. We also consent to the references to us under
the heading "Experts" in such Prospectus.
Price Waterhouse LLP
Portland, Oregon
October 4, 1996
EXHIBIT 23.3
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors and Stockholders of
Mutual Health Systems, Inc. (to be changed to
Gentle Dental Service Corporation)
We consent to the use in this Registration Statement on Form SB-2 of our
report dated February 14, 1995 relating to the statements of operations,
redeemable common stock and nonredeemable shareholders' equity and cash
flows of Gentle Dental Service Corporation.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
MOSS ADAMS LLP
Vancouver, Washington
October 4, 1996
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MUTUAL HEALTH SYSTEMS, INC. FOR THE YEARS ENDED DECEMBER 31, 1994 AND
1995 AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1995 DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1994 DEC-31-1995 JUN-30-1995 JUN-30-1996
<CASH> 0 688,518 0 1,132,337
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 2,036,654 0 2,455,586
<ALLOWANCES> 0 992,851 0 1,025,459
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 0 1,348,566 0 1,938,300
<PP&E> 0 3,654,101 0 4,133,347
<DEPRECIATION> 0 431,574 0 686,287
<TOTAL-ASSETS> 0 10,213,694 0 13,044,758
<CURRENT-LIABILITIES> 0 2,770,386 0 4,187,232
<BONDS> 0 0 0 0
0 710,694 0 1,883,638
0 0 0 0
<COMMON> 0 2,947,200 0 3,066,485
<OTHER-SE> 0 864,651 0 903,699
<TOTAL-LIABILITY-AND-EQUITY> 0 10,213,694 0 13,044,758
<SALES> 2,731,403 9,781,077 4,836,916 5,156,605
<TOTAL-REVENUES> 2,731,403 9,781,077 4,836,916 5,156,605
<CGS> 0 0 0 0
<TOTAL-COSTS> 2,100,067 8,908,434 4,341,128 5,368,211
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 16,217 382,310 40,208 218,144
<INCOME-PRETAX> 615,119 490,333 455,580 (429,750)
<INCOME-TAX> 0 233,826 217,266 (46,246)
<INCOME-CONTINUING> 615,119 256,507 238,314 (383,504)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 615,119 256,507 238,314 (383,504)
<EPS-PRIMARY> .39 .24 .20 (.26)
<EPS-DILUTED> 0 0 0 0
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