<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GENTLE DENTAL SERVICE CORPORATION
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
WASHINGTON 8099 91-1577891
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
22800 SAVI RANCH PARKWAY, SUITE 206
YORBA LINDA, CALIFORNIA 92887
(714) 998-0587
(ADDRESS, TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
---------------
MICHAEL T. FIORE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GENTLE DENTAL SERVICE CORPORATION
22800 SAVI RANCH PARKWAY, SUITE 206
YORBA LINDA, CALIFORNIA 92887
(714) 998-0587
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
---------------
COPIES TO:
RICHARD J. BABCOCK, ESQ. ERIC H. SCHUNK, ESQ.
GREGORY W. PRESTON, ESQ. MILBANK, TWEED, HADLEY & MCCLOY
MCDERMOTT, WILL & EMERY 601 SOUTH FIGUEROA, 30TH FLOOR
1301 DOVE STREET, SUITE 500 LOS ANGELES, CALIFORNIA 90017
NEWPORT BEACH, CALIFORNIA 92660 (213) 892-4000
(714) 851-0633
---------------
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. [_]
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 this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock............ 4,125,000 shares $9.00 $37,125,000 $10,952
- ----------------------------------------------------------------------------------------------
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</TABLE>
(1) Includes up to 525,000 shares of Common Stock which may be sold pursuant
to the over-allotment option granted by the Registrant to the
Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, as amended.
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 9, 1998
PROSPECTUS
[LOGO]
3,600,000 SHARES
GENTLE DENTAL SERVICE CORPORATION
COMMON STOCK
Of the 3,600,000 shares of Common Stock (the "Common Stock") of Gentle Dental
Service Corporation (the "Company") offered hereby, 3,500,000 shares are being
offered by the Company and 100,000 shares are being offered by certain
shareholders of the Company (the "Selling Shareholders"). See "Principal and
Selling Shareholders." The Company will not receive any of the proceeds from
the sale of the Common Stock offered by the Selling Shareholders. The Common
Stock is quoted on the NASDAQ SmallCap Market under the symbol "GNTL" and the
Company has applied to have the Common Stock quoted under that symbol on the
NASDAQ Stock Market's National Market (the "NASDAQ National Market") upon
completion of this Offering ("Offering"). On January 7, 1998, the last reported
sale price of the Common Stock on the NASDAQ SmallCap Market was $9.42 per
share. See "Price Range of Common Stock."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE EIGHT FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
-----------
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.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
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<S> <C> <C> <C> <C>
Per Share..... $ $ $ $
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Total(3)...... $ $ $ $
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- -------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 525,000 additional shares of Common Stock solely to cover over-
allotments, if any. If such option is exercised 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 being offered severally by the Underwriters,
subject to prior sale, when, as and if issued and accepted by the Underwriters
and subject to certain conditions, including their rights to reject orders in
whole or in part. It is expected that delivery of the shares of Common Stock
will be made at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New
York, New York 10167, on or about , 1998.
BEAR, STEARNS & CO. INC.
SALOMON SMITH BARNEY
WESSELS, ARNOLD & HENDERSON
BLACK & COMPANY, INC.
The date of this Prospectus is , 1998.
<PAGE>
[Inside front cover graphic setting forth the following information:]
THE GENTLE DENTAL NETWORK
[Map of Western U.S. with illustration of Company
headquarters and dental practices, including those
relating to the Dedicated Dental Affiliation]
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT COVERING TRANSACTIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON NASDAQ IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
----------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Gentle Dental Service Corporation, a Washington
corporation ("Gentle Dental"), is a dental practice management company which
provides office space, equipment, non-clinical support personnel, information
systems and management services to general dentists and specialists. Except in
compliance with applicable law, Gentle Dental does not employ any dentists to
practice dentistry nor does it otherwise control the practice of dentistry.
Gentle Dental has entered into management agreements with numerous dental
practices including those controlled by various professional corporations (the
"Professional Corporations") which employ all dentists and other professionals
with respect to the practice of dentistry. As used in this Prospectus, the term
"Affiliated Dental Practices" means the dental practices with respect to which
Gentle Dental has (i) acquired the non-professional assets (i.e., the assets
other than patient records, payor contracts and provider contracts); and (ii)
entered into long-term contracts for the provision of comprehensive management
and administrative services. In November 1997, Gentle Dental was merged with
GMS Dental Group, Inc. ("GMS"), a California-based dental practice management
company, which resulted in the former shareholders of GMS owning approximately
59% of the then outstanding shares of the combined company (the "GMS Merger").
Gentle Dental has entered into definitive agreements to acquire all of the
outstanding capital stock of Dedicated Dental Systems, Inc. ("Dedicated
Dental") and to affiliate with certain related dental practices (such
acquisition and affiliations hereinafter collectively referred to as the
"Dedicated Dental Affiliation"). Prior to completion of this Offering, Gentle
Dental expects to affiliate with an additional dental practice (collectively
with the Dedicated Dental Affiliation, the "Pending Affiliations"). See "Recent
and Pending Affiliations." As used in this Prospectus, unless the context
otherwise requires, the "Company" shall mean (a) the combined operations of
Gentle Dental and the Affiliated Dental Practices, when used with respect to
historical information contained herein; or (b) the combined operations of
Gentle Dental, the Affiliated Dental Practices and the Pending Affiliations,
when used with respect to the current business description and information
about events that will occur after completion of this Offering. All references
herein to industry financial and statistical information are based on trade
articles and industry reports that the Company believes to be reliable,
although there can be no assurance in that regard. An investment in the Common
Stock offered hereby involves a high degree of risk, and investors should
carefully consider the information set forth under "Risk Factors."
THE COMPANY
The Company is one of the largest providers of dental practice management
services to multi-specialty dental practices in the United States. Following
the Pending Affiliations, the Company will provide management services to
dental practices at 59 locations with 205 dentists, including 49 specialists
and 581 operatories, in California, Washington, Oregon, Idaho and Hawaii. The
dentists employed by the Company's Affiliated Dental Practices provide
comprehensive general dentistry services and offer specialty dental services,
which include orthodontics, periodontics, endodontics, pedodontics,
prosthodontics, oral surgery and oral pathology. The Company's practice
management services facilitate the delivery of convenient, high quality,
comprehensive and affordable dental care to patients in a comfortable
environment. The Company seeks to build geographically dense dental practice
networks in selected markets through a combination of affiliating with existing
dental practices and selectively developing de novo offices.
The Health Care Financing Administration ("HCFA") estimates that the annual
aggregate domestic market for dental services was approximately $45.8 billion
for 1995, representing 4.6% of total health care expenditures in the United
States. Dental services expenditures grew at a compound annual growth rate of
approximately 8.6% from 1980 to 1995. According to HCFA, the size of the dental
services industry is projected to reach $79.1 billion by 2005. The Company
believes that the anticipated growth in the dental industry will be driven by
several factors including: (i) an increase in the availability and types of
dental insurance; (ii) an increasing
3
<PAGE>
demand for dental services from an aging population; (iii) the evolution of
technology which makes dental care less traumatic and, therefore, more
attractive to patients; (iv) an increased focus on preventive and cosmetic
dentistry; and (v) the growth of managed care organizations that offer dental
coverage to their members.
The U.S. general and specialty dentistry industries are highly fragmented.
The American Dental Association estimates that at December 1995, there were
approximately 150,000 dentists in 113,000 general dental practices, with single
dentist practices accounting for approximately 70% of all practices. The
Company estimates that approximately 2% of all dentists are currently
affiliated with practice management companies. Since January 1997, the number
of dentists contracting or otherwise associated with practice management
organizations has grown significantly. The Company believes that the trend
toward consolidation in the dental services industry will continue as dentists
seek to affiliate with group practice managers such as the Company due to (i)
the desire of dentists to focus on clinical aspects rather than on
administrative and regulatory aspects of their practices; (ii) the increasing
patient demands for more flexible evening and weekend hours; (iii) the
increasing demand for competitively-priced, high quality dental care at
multiple locations; (iv) the increasing desire of recent dental school
graduates to pursue alternatives to the traditional solo practice of dentistry;
and (v) the need for certifiable standards of care for patients. In order to
capitalize on these consolidation opportunities, the Company utilizes the
extensive dental industry experience of its senior management and its
significant relationships with numerous practitioners and other industry
leaders throughout the United States. The Company believes that these extensive
relationships provide a competitive advantage to the Company as it seeks
additional affiliation opportunities to further the growth of the Company's
network of Affiliated Dental Practices.
The Company's operating strategy is to provide value to Affiliated Dental
Practices through the introduction of a variety of practice enhancements. The
Company assists the Affiliated Dental Practices by providing general
administrative services and implementing Company procedures designed to
optimize staffing ratios and patient scheduling. The Company also assists the
Affiliated Dental Practices by developing and implementing targeted advertising
and marketing programs and attracting additional dentists and dental practices.
To the extent applicable, the Company provides significant managed care
expertise to the Affiliated Dental Practices. The Company believes the
implementation of these enhancements has resulted in significant revenue growth
at the Affiliated Dental Practices.
The Company's strategic objective is to maintain and expand its leadership
position in the dental practice management services industry. To achieve this
objective, the Company seeks to enter selected geographic markets and develop
locally-prominent, multi-specialty dental delivery networks that provide
gentle, high-quality, cost-effective dental care. The key elements of the
Company's strategy are to: (i) provide convenient, comprehensive dental care;
(ii) focus on quality of patient care; (iii) establish a comprehensive dental
care network through affiliations and de novo offices; (iv) achieve operational
efficiencies and enhance revenue; (v) integrate and leverage management
information systems; (vi) expand patient volume through proactive marketing;
and (vii) capitalize on managed care expertise.
The Company has recently completed a major merger and is in the process of
completing a major affiliation. On November 4, 1997, Gentle Dental was merged
with GMS, a California-based dental practice management company, which provided
management services to dental practices at 22 locations consisting of 102
dentists, including 30 specialists. Upon completion of the GMS Merger, the
former shareholders of GMS received approximately 59% of the outstanding shares
of the Company. On September 21, 1997, the Company executed definitive
agreements for the pending Dedicated Dental Affiliation, which will add
California based dental practices at 15 locations consisting of 33 dentists,
including three specialists. See "Recent and Pending Affiliations." The
Company's principal executive offices are located at 22800 Savi Ranch Parkway,
Suite 206, Yorba Linda, California, 92887, telephone number (714) 998-0587.
4
<PAGE>
THE OFFERING
Common Stock offered by the
Company.................... 3,500,000 shares
Common Stock offered by the
Selling Shareholders....... 100,000 shares
Common Stock to be
outstanding after the
Offering................... 11,178,683 shares (1)
Use of proceeds............. Net proceeds to the Company from this Offering
will be used (i) to repay existing Company debt,
of which approximately $10.0 million was
outstanding at December 31, 1997; (ii) to repay
approximately $10.1 million of debt to be
incurred in connection with the Pending
Affiliations; and (iii) for future affiliations
of dental practices, capital improvements,
working capital and general corporate purposes.
See "Use of Proceeds" and "Recent and Pending
Affiliations."
NASDAQ symbol............... GNTL
- --------
(1) Excludes an aggregate of 1,562,180 shares of Common Stock issuable upon
closing of the Pending Affiliations (subject to closing adjustments),
shares that may be issued under earn-out agreements entered into in
connection with the Company's affiliation of certain Affiliated Dental
Practices, 1,298,710 shares subject to options and warrants outstanding as
of the date of this Prospectus, and 525,000 shares that may be sold by the
Company pursuant to the Underwriters over-allotment option. See
"Underwriting." Includes 297,074 shares of Common Stock subject to
repurchase by the Company in early 1998 at an average price of $0.32 per
share if certain performance targets are not met. See "Certain
Transactions."
5
<PAGE>
SUMMARY CONSOLIDATED AND PRO FORMA FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF OFFICES)
The following consolidated financial data presents the combined results of
Gentle Dental and GMS, which were merged on November 4, 1997 in a transaction
which the Company anticipates will be accounted for as a pooling of interests.
The consolidated financial data has been derived from the Gentle Dental
Supplemental Consolidated Financial Statements and should be read in
conjunction with such statements, the notes related thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus.
The following selected pro forma financial data for the year ended December
31, 1996 and the nine month period ended September 30, 1997 are unaudited and
were prepared by management of the Company on the same basis as the audited
financial statements included elsewhere herein and, in the opinion of
management of the Company, include all adjustments necessary to present fairly
the information set forth herein and give effect to the following as if they
had occurred at the beginning of the respective periods: (i) the GMS Merger;
(ii) the conversion of all shares of preferred stock of GMS into Common Stock;
(iii) completed affiliations and the Pending Affiliations (including the effect
of all cash, Common Stock and debt issued or expected to be issued in
connection therewith); (iv) the Company's February 1997 initial public offering
(the "Initial Public Offering"); (v) this Offering; and (vi) the effect of the
amended Management Agreements with the Oregon and Washington Professional
Corporations. The summary pro forma financial data is not necessarily
indicative of the actual results of operations or financial position that would
have been achieved had such transactions been completed at the dates specified,
nor are the statements necessarily indicative of the Company's future results
of operations or financial position. The summary pro forma financial data
should be read in conjunction with the "Use of Proceeds," "Selected Pro Forma
Consolidated Financial Data," and notes related thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -----------------------------
SUPPLEMENTAL SUPPLEMENTAL
CONSOLIDATED PRO FORMA CONSOLIDATED PRO FORMA
---------------- 1996 ---------------- 1997
1995 1996 (UNAUDITED) 1996 1997 (UNAUDITED)
------- ------- ----------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Dental group net
patient service
revenue............... $ -- $ 3,701 $69,402 $ -- $19,348 $58,774
Net management fees
(support services
revenue) ............. 9,781 10,712 5,975 7,866 10,269 3,995
------- ------- ------- ------- ------- -------
Net revenues....... 9,781 14,413 75,377 7,866 29,617 62,769
Clinical salaries and
benefits.............. -- 1,493 27,552 -- 6,571 22,312
Practice non clinical
salaries and
benefits.............. 2,418 4,279 13,862 2,373 8,122 11,743
Dental supplies and
lab expenses.......... 1,633 2,830 9,254 1,648 4,424 7,709
Practice occupancy
expenses.............. 911 1,563 4,318 976 2,450 3,563
Practice selling,
general and
administrative
expenses.............. 1,311 1,805 10,563 986 3,199 8,157
Corporate selling,
general and
administrative
expenses.............. 2,153 2,998 5,134 1,562 3,845 3,845
Depreciation and
amortization.......... 482 990 3,457 700 1,295 2,422
------- ------- ------- ------- ------- -------
Total operating
expenses.......... 8,908 15,958 74,140 8,245 29,906 59,751
------- ------- ------- ------- ------- -------
Operating income
(loss)................ 873 (1,545) 1,237 (379) (289) 3,018
Interest expense,
net................... (290) (749) (726) (572) (362) (110)
Other income
(expense)............. (92) (48) 17 23 (16) (77)
------- ------- ------- ------- ------- -------
Income (loss) before
income taxes.......... 491 (2,342) 528 (928) (667) 2,831
Provision (benefit)
for income taxes...... 234 (655) 211 (228) 80 1,132
------- ------- ------- ------- ------- -------
Net income (loss)...... 257 (1,687) 317 (700) (747) 1,699
Dividends on
redeemable
convertible
preferred stock--
Series B.............. -- (240) -- -- (829) --
Accretion of
redeemable common
stock................. -- (91) (91) (80) (27) (27)
------- ------- ------- ------- ------- -------
Net income (loss)
attributable to
common stock.......... $ 257 $(2,018) $ 226 $ (780) $(1,603) $ 1,672
======= ======= ======= ======= ======= =======
Net income (loss) per
share:
Primary.............. $ 0.19 $ (0.86) $ 0.02 $ (0.53) $ (0.40) $ 0.13
Fully diluted........ 0.19 (0.86) 0.02 (0.53) (0.40) 0.13
Shares outstanding:
Primary.............. 1,380 2,355 12,877 1,485 4,005 12,877
Fully diluted........ 1,380 2,355 13,321 1,485 4,005 13,321
Selected Operating Data:
Net revenue of
Professional
Corporations.......... $16,029 $25,125 $79,626 $15,731 $38,720 $65,769
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------
PRO FORMA
AS ADJUSTED
SUPPLEMENTAL PRO FORMA (UNAUDITED)
CONSOLIDATED (UNAUDITED) (1)
------------ ----------- -----------
<S> <C> <C> <C>
Selected Consolidated Balance Sheet Data:
Cash and cash equivalents............... $ 147 $ 147 $ 9,006
Working capital......................... 4,023 834 9,693
Total assets............................ 38,634 67,345 76,204
Long-term debt and capital lease
obligations, net of current portion.... 8,612 22,442 3,756
Redeemable convertible preferred stock.. 12,072 -- --
Redeemable common stock................. 2,123 2,123 1,391
Shareholders' equity.................... $ 9,458 $33,183 $61,460
</TABLE>
- --------
(1) Reflects the issuance and sale of 3,500,000 shares of Common Stock at $8.75
per share, less related offering expenses and the reclassification on the
balance sheet of 100,000 shares of Common Stock subject to redemption to
shares of Common Stock not subject to redemption in connection with the
sale of such shares in the Offering by a Selling Shareholder.
7
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information contained in this Prospectus,
before purchasing the securities offered hereby. This Prospectus contains
forward-looking statements. Discussions containing such forward-looking
statements may be found in the material set forth hereunder, and under
"Prospectus Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Use of Proceeds," and "Business," as
well as in this Prospectus generally. These statements are based on certain
assumptions and analyses made by the Company in light of its experience and
its perception of historical trends, current conditions, expected future
developments and other factors that the Company believes are important under
the circumstances. The words "expect," "believe," "goal," "plan," "intend,"
"estimate" and similar expressions and variations thereof used in this
Prospectus are intended to specifically identify forward-looking statements.
Prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties
that actual events or results may differ materially from those discussed in
the forward-looking statements as a result of various factors, including,
without limitation, the risk factors set forth below and the matters set forth
in this Prospectus generally, many of which are beyond the control of the
Company.
EXPANSION PROGRAM
One of the Company's primary business strategies is to increase revenue and
expand the markets it serves by acquiring certain operating assets and
entering into long-term management service agreements with additional dental
practices. The Company's strategy includes growth through continued
affiliation with dental practices in areas where the Company operates and in
new markets. The success of the Company's affiliation strategy will depend on
a number of factors, including (i) regulatory requirements, (ii) the
availability of financing to fund the affiliation strategy on terms acceptable
to the Company, (iii) the ability to successfully integrate additional
dentists and dental sites, (iv) the ability to affiliate with dentists to open
new dental sites and the ability to obtain locations in suitable markets, and
(v) the ability to identify and affiliate with suitable existing dental
practices on favorable terms. Competition for such affiliations has increased
significantly in recent years and may increase further in the future due to
ongoing consolidation in the dental practice management services industry. As
a result of such competition, there may be fewer attractive affiliation
opportunities than the Company has encountered in the past, or the price of
affiliations may increase significantly. In implementing its affiliation
strategy, the Company will compete with other dental practice management
companies, some of which may have greater financial resources than the
Company. No assurances can be given that the Company will be able to complete
the affiliations necessary for its expansion plans, that such affiliations
will be on terms favorable to the Company, or that the Company will be able to
successfully integrate its business with dental practices affiliated with the
Company. Failure to complete future affiliations or to integrate dental
practices affiliated with the Company could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Recent and Pending Affiliations."
The Company may in the future enter new markets in which the Company will
have limited or no previous presence or experience. The Company's past
experience reflects initial periods in which certain dental practices within
new geographic markets contribute minimally to the Company's operating
results. Initial profitability, if any, at the regional level may be low
because of the time and capital required to develop a network of offices and
practitioners in accordance with the Company's business strategy.
The Company will devote substantial time and resources to identifying
potential affiliation targets, negotiating terms of affiliations and
integrating Affiliated Dental Practices into the Company's network, all of
which may distract management resources from the day-to-day operations of the
Company. Delays in completing affiliations could cause fluctuations in
quarterly earnings and corresponding fluctuations in the market price of the
Common Stock. Further, the Company's financial results and the market value of
the Common Stock in the
8
<PAGE>
fiscal quarters immediately following an affiliation may be adversely affected
during the period in which the Company is implementing its operating model at
new Affiliated Dental Practices. The Company intends to use its Common Stock
as part of the consideration for affiliations with additional dental
practices. There can be no assurance that fluctuations in the market price of
the Common Stock will not adversely affect the Company's ability to use its
Common Stock for affiliations. In addition, the issuance of Common Stock as
part of the purchase price of affiliations will result in dilution of the
beneficial ownership interests and voting power of the holders of Common Stock
prior to the completion of such affiliations.
LIMITED OPERATING HISTORY; OPERATING LOSSES
Gentle Dental was organized in December 1992. As of November 4, 1997, the
date of the GMS Merger, Gentle Dental provided management services to dental
practices at 21 locations. GMS began operations in October 1996 and acquired
assets and liabilities of, and entered into long-term management agreements
with, dental practices operating at 22 locations prior to the GMS Merger. The
Company, including Gentle Dental and GMS, has a limited operating history. The
Company has reported consolidated losses for the year ended December 31, 1996
and the nine months ended September 30, 1997 of $1.7 million and $747,000,
respectively. There can be no assurance that the Company will not incur losses
in future periods. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
MANAGEMENT OF GROWTH AND INTEGRATION
The Company is experiencing a period of rapid growth with a substantial
increase in the number of its Affiliated Dental Practices resulting from the
GMS Merger, the Pending Affiliations, and other identified or targeted dental
practices. See "Recent and Pending Affiliations." The Company's strategy calls
for future growth, substantially through affiliations with additional dental
practices, including through the completion of the Pending Affiliations. The
recently completed affiliations have placed, and future affiliations will
place, strains on the Company's management, operations and systems. Therefore,
the Company's ability to manage its growth and compete effectively will depend
upon its ability to hire, train and assimilate additional management and other
employees and to expand, improve and effectively utilize its operating,
management, marketing, information and financial systems to accommodate its
expanded operations. Any failure by the Company's management to anticipate,
implement and manage effectively the changes required to sustain its growth
may have a material adverse effect on its business, financial condition and
results of operations. In addition, while the Company believes that the
operations of GMS and Dedicated Dental can be effectively integrated into the
Company, failure by the Company to successfully integrate the management teams
and the operations of these companies may adversely affect its business,
financial condition and results of operations.
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 new Affiliated Dental
Practices to the Company's systems. Significant delays or expenses with regard
to this process could have a material adverse effect on the integration of
Affiliated Dental Practices and on the Company's business, financial condition
and results of operations. 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.
The integration of Affiliated Dental Practices typically requires the
implementation and centralization of purchasing, accounting, human resources,
management information systems, cash management and other systems, which may
be difficult, costly and time-consuming. There can be no assurance that the
Company will be successful in managing its combined operations as they
currently exist or upon completion of the Pending Affiliations or other
subsequent affiliations or that any additional dental practices will be
effectively and profitably integrated into the Company's network of Affiliated
Dental Practices. The Company's operating results in fiscal quarters
immediately following an affiliation may be adversely affected while the
Company attempts to complete the integration process. The Company may
encounter significant unanticipated costs or other problems associated with
the Company's integration of future affiliations into the Company's network of
Affiliated Dental
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Practices. There can be no assurance that future affiliations will not have a
material adverse effect on the Company's business, financial condition and
results of operations, particularly during the period immediately following
such affiliations.
RISKS ASSOCIATED WITH EXPANSION WITHIN EXISTING MARKETS
The Company seeks to increase revenue and profitability in existing markets
by expanding the operations of the Affiliated Dental Practices by adding more
general dentists, specialists and hygienists, by establishing dental practices
on a de novo basis, and by improving the efficiency of the Affiliated Dental
Practices. The Company's success will be dependent, in part, upon increasing
the revenue from the Affiliated Dental Practices and successfully establishing
de novo dental practices. The Company is subject to risks associated with this
growth strategy, including the risk that the Company will be unable to
successfully expand the operations of the Affiliated Dental Practices or
establish de novo dental practices or increase efficiency through its
management of Affiliated Dental Practices. In addition, establishment of de
novo offices will require significant capital expenditures by the Company to
furnish the offices with appropriate equipment materials and supplies and such
offices may be staffed with one or more dentists who have no existing patient
base and, as a result, may require the Company to make significant advertising
and marketing expenditures to attract patients on behalf of such offices.
COMPLETION OF DEDICATED DENTAL AFFILIATION
On September 21, 1997, the Company entered into definitive agreements to
acquire all of the outstanding capital stock of Dedicated Dental and to
affiliate with certain related dental practices. Dedicated Dental and its
related dental practices consist of 33 dentists employed by dental practices
in 15 locations in and around Bakersfield, California. For the year ended
December 31, 1996 and the nine months ended September 30, 1997, Dedicated
Dental and its related dental practices, on a combined basis, had dental group
net patient service revenues of approximately $15.2 million and $13.5 million,
respectively, and net income of approximately $2.7 million and $1.9 million,
respectively. Accordingly, for the year ended December 31, 1996 and the nine
months ended September 30, 1997, Dedicated Dental and its related dental
practices contributed approximately 19% and 21%, respectively, of the
Company's pro forma patient revenues during such periods, after giving effect
to the GMS Merger and the Dedicated Dental Affiliation. After giving pro forma
effect to the GMS Merger, the Dedicated Dental Affiliation, all other
completed affiliations and the Pending Affiliations the Company had net income
of $226,000 and net income of approximately $1.7 million for the year ended
December 31, 1996 and the nine months ended September 30, 1997, respectively,
whereas the Company would have incurred losses of approximately $2.6 million
and $315,000 for such periods, if the operating results of Dedicated Dental
and its related dental practices were excluded from the pro forma
calculations. The completion of the Dedicated Dental Affiliation, expected to
occur in the first quarter of 1998, is subject to the satisfaction of certain
conditions, some of which are beyond the Company's control, including the
receipt of all necessary consents and approvals of the California Department
of Corporations (the "DOC") pursuant to the California Knox-Keene Health Care
Service Plan Act of 1975 (the "Knox-Keene Act"). There can be no assurance
that such consents and approvals will be obtained or, if obtained, that the
proposed Dedicated Dental Affiliation will be completed. Failure to complete
the Dedicated Dental Affiliation could have a material adverse effect on the
Company's business, financial condition and results of operations as presented
in the pro forma financial information set forth in this Prospectus.
ADDITIONAL MANAGEMENT AND STAFFING OF DENTAL PRACTICES
A key component of the Company's operating strategy is to increase
profitability by maximizing Affiliated Dental Practice utilization through
extended hours of operation and the addition of general dentists, specialists,
hygienists, and dental assistants. Accordingly, the Company's financial
success will be dependent, in part, upon its ability to attract and retain for
the Affiliated Dental Practices a sufficient number of qualified dentists,
specialists, hygienists, and dental assistants. See "Business--Operating
Strategy." No assurance can be given that the Company will, on behalf of the
Affiliated Dental Practices, continue to be able to attract qualified
dentists, specialists and clinical staff at acceptable compensation levels, or
at all. Failure to appropriately staff
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Affiliated Dental Practices could have an adverse effect on the Company's
revenues and results of operations. The Company believes that its future
success will also depend in part upon its ability to attract and retain
qualified management personnel. Competition for such personnel is intense and
the Company competes with numerous other employers, some of which have greater
financial and other resources than the Company. There can be no assurance that
the Company will be successful in attracting and retaining such personnel.
AVAILABILITY OF FINANCING
The Company's expansion strategy has required and is expected to continue to
require substantial funding to affiliate with or establish additional dental
facilities. Moreover, the operation of the Company's network of Affiliated
Dental Practice offices requires ongoing working capital and capital
expenditures for renovation, expansion and the addition of dental equipment
and technology used to provide dental services. These requirements may 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. The Company has entered into an amended, secured credit facility
with Imperial Bank and other lenders (the "Credit Facility"). The Credit
Facility provides the Company with up to $25 million in borrowing capacity and
may be increased at the option of the Company to $30 million following
completion of an equity offering by the Company in which the Company receives
more than $20 million in net cash proceeds. The Credit Facility provides that
the aggregate amount borrowed under the Credit Facility for working capital
purposes and letter of credit obligations may not exceed $4 million, and that
remaining amounts available under the Credit Facility may be used by the
Company for permitted acquisitions and capital expenditures. The ability of
the Company to incur indebtedness under the Credit Facility is subject to
delivery of customary opinions, certificates and closing documents by the
Company. The Credit Facility contains numerous covenants including
(i) restrictions on the ability of the Company to incur indebtedness and
repurchase, or make dividends with respect to, its capital stock; and
(ii) requirements relating to maintenance of a specified net worth and
specified ratios of current assets to current liabilities, debt to cash flow
and earnings before interest expense, income taxes, depreciation, amortization
and operating lease rentals ("EBITDAR") to fixed charges. In addition, the
Credit Facility requires the Company to notify the lenders prior to making any
acquisition and to obtain the consent of the lenders prior to making (i)
certain acquisitions with purchase prices exceeding $3 million, (ii) all
acquisitions with purchase prices exceeding $5 million and (iii) capital
expenditures exceeding $5 million in any fiscal year. The Credit Facility also
requires the Company to convert to a holding company that owns no assets other
than the stock of its operating subsidiaries on or before May 31, 1998. If the
Company does not attain holding company status before May 31, 1998, the
interest rate applicable to amounts borrowed under the Credit Facility would
be increased by 0.5% and if holding company status is not attained on or
before July 31, 1998 an event of default would exist under the terms of the
Credit Facility. Prior to the completion of the GMS Merger, GMS was not in
compliance with the ratio of current assets to current liabilities set forth
in the Credit Facility; however, the Company obtained a waiver with respect to
such noncompliance and believes that, following the GMS Merger, the Company is
in compliance with such covenant. There can be no assurance that the Company
will remain in compliance with the covenants contained in the Credit Facility
and any failure to comply with such covenants could have a material adverse
effect on the Company's liquidity, business, results of operations and
financial condition. The Company expects that capital requirements over the
next several years will substantially exceed cash flow generated from
operations, the net proceeds of this Offering and borrowings available under
the Credit Facility. Additional debt or equity financing could be required to
fund the Company's growth and operations. In addition, offerings of equity
securities other than Common Stock could be required to the extent that the
Common Stock fails to maintain a market value sufficient to warrant its use
for future financing needs. There can be no assurance that the Company will be
able to obtain additional required capital on satisfactory terms, if at all.
The failure to raise the funds necessary to finance its future cash
requirements could materially adversely affect the Company's ability to pursue
its expansion strategy and its business, financial condition and results of
operations for future periods. If additional funds are raised through the
issuance of equity securities, dilution to the Company's existing stockholders
may result. If additional funds are raised through the incurrence of debt,
such debt instruments will likely contain restrictive financial, maintenance
and security covenants. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
DEPENDENCE ON AFFILIATED DENTAL PRACTICES
The Company receives fees for services provided to Affiliated Dental
Practices under management and similar agreements (the "Management
Agreements"), but does not employ dentists or control the practices of its
affiliated dentists. The Company's profitability is dependent on the revenue
and expenses of the Affiliated Dental Practices and, therefore, performance of
the Affiliated Dental Practices is essential to the Company's success. Revenue
and expenses of the Affiliated Dental Practices are
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affected by a number of factors, including the ability to attract and retain
high quality dental practitioners and other personnel, marketing, pricing,
patient visits, compensation expenses and other expenses of the Affiliated
Dental Practices. From time to time, the Company enters into or amends
Management Agreements and employment agreements, which have a material impact
on certain of these factors. The Management Agreements with the Affiliated
Dental Practices generally have 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 or increase in the expenses
of the Affiliated Dental Practices would have a material adverse effect on the
Company. Effective January 1, 1998, the Company amended Management Agreements
with the Oregon and Washington Professional Corporations to more closely
conform such Management Agreements to the form of management agreement used by
GMS in affiliating with dental practices. The Company believes, consistent with
the Company's accounting for the Affiliated Dental Practices historically
associated with GMS, that the amendment of these Management Agreements will
require the Company to consolidate the financial results of the Oregon and
Washington Professional Corporations on a prospective basis. For a discussion
of the financial impact of the amendments to the Management Agreements with the
Oregon and Washington Professional Corporations, see "Condensed Pro Forma
Consolidated Financial Data and notes related thereto, including note (b)."
GOVERNMENT REGULATION
The dental industry is regulated extensively at both the state and federal
levels. Regulatory oversight includes, but is not limited to, considerations of
fee-splitting, corporate practice of dentistry, anti-kickback and anti-referral
legislation and state insurance regulation. See "Business--Government
Regulation."
CORPORATE PRACTICE OF DENTISTRY; FEE SPLITTING. The laws of many states
prohibit dentists from splitting fees with non-dentists and prohibit non-dental
entities such as the Company from engaging in the practice of dentistry or
employing dentists to practice dentistry. The specific restrictions against the
corporate practice of dentistry as well as the interpretation of those
restrictions by state regulatory authorities vary from state to state. The
restrictions are generally designed to prohibit a non-dental entity from
controlling the professional practice of a dentist, employing dentists to
practice dentistry (or, in certain states, employing dental hygienists or
dental assistants), controlling the content of a dentist's advertising or
sharing professional fees. A number of states limit the ability of a person
other than a licensed dentist to own equipment or offices used in a dental
practice. Some of these states allow leasing of equipment and office space to a
dental practice under a bona fide lease. Some states also limit the number of
offices that may be operated by a single dentist or dental practice. The laws
of many states also prohibit dental practitioners from paying any portion of
fees received from dental services in consideration for the referral of a
patient. In addition, many states impose limits on the tasks that may be
delegated by dentists to dental assistants.
Although the Company believes that its operations comply in all material
respects with the above-described laws to which it is subject, there can be no
assurance that a review of the Company's business relationships by courts or
other regulatory authorities would not result in determinations that could
prohibit or otherwise adversely affect the operations of the Company or that
the regulatory environment will not change, requiring the Company to
reorganize, change its method of reporting revenues and other financial results
or restrict its existing or future operations. Any such change could have a
material adverse effect on the business and results of operations of the
Company. The laws regarding fee-splitting and the corporate practice of
dentistry and their interpretation vary from state to state and are enforced by
regulatory authorities with broad discretion. There can be no assurance that
the legality of the Company's business or its relationships with dentists or
Affiliated Dental Practices will not be successfully challenged or that the
enforceability of the provisions of any Management Agreement will not be
limited.
STATE AND FEDERAL FRAUD AND ABUSE, ANTI-KICKBACK AND ANTI-REFERRAL
LAWS. Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce (i) the referral of a
person for services; (ii) the furnishing or arranging for the furnishing of
items or services; or (iii) the purchase, lease or order or arranging or
recommending purchasing, leasing or ordering of any item, in each case,
reimbursable under Medicare, Medicaid or other federal and state health care
programs. These provisions apply to dental services covered under the Medicaid
program in which the Company participates. The federal government has increased
scrutiny of joint ventures and other transactions among health care providers
in an effort to reduce potential fraud and abuse related to Medicare and
Medicaid costs. Many states have similar anti-kickback laws, and in many cases
these laws apply to all types of patients, not just Medicare and Medicaid
beneficiaries.
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The applicability of these federal and state laws to transactions in the
health care industry such as those to which the Company is or may be a party
has not been the subject of judicial interpretation. There can be no assurance
that judicial or administrative authorities will not find these provisions
applicable to the Company's operations, which could have a material adverse
effect on the Company's business, financial condition or results of operations.
Under current federal law, a physician or dentist or member of his or her
immediate family is prohibited from referring Medicare or Medicaid patients to
any entity providing "designated health services" in which the physician or
dentist has an ownership or investment interest, including the physician's or
dentist's own group practice, unless an applicable exception is available. The
designated health services include the provision of clinical laboratory
services, radiology and other diagnostic services (including ultrasound
services), radiation therapy services, physical and occupational therapy
services, durable medical equipment, parenteral and enteral nutrients, certain
equipment and supplies, prosthetics, orthotics, outpatient prescription drugs,
home health services and inpatient and outpatient hospital services. A number
of states also have laws that prohibit referrals for certain services such as
x-rays by dentists if the dentist has certain enumerated financial
relationships with the entity receiving the referral, unless an exception
applies. Any future expansion of these prohibitions to other health services
could restrict the Company's ability to integrate Affiliated Dental Practices
and carry out the development of its network of Affiliated Dental Practices.
Noncompliance with, or violation of, either the anti-kickback provisions or
restrictions on referrals can result in exclusion from the Medicare and
Medicaid programs as well as civil and criminal penalties. Similar penalties
apply for violations of state law. While the Company makes every effort to
comply with the anti-kickback and anti-referral laws, a determination of
violation under these laws by the Company or its Affiliated Dental Practices
could have a material adverse effect on the Company's business, financial
condition and results of operations.
STATE INSURANCE LAWS AND REGULATIONS. In addition, there are certain
regulatory risks associated with the Company's role in negotiating and
administering managed care and capitation contracts. The application of state
insurance laws to reimbursement arrangements other than various types of fee-
for-service arrangements is an unsettled area of law and is subject to
interpretation by regulators with broad discretion. As the Company or the
Affiliated Dental Practices contract with third-party payors, including self-
insured plans, for certain non-fee-for-service arrangements, the Company or the
Affiliated Dental Practices may become subject to state insurance laws. In the
event that the Company or the dental practices are determined to be engaged in
the business of insurance, the Company or the affected practice could be
required either to seek licensure as an insurance company or to change the form
of their relationships with third-party payors and may become subject to
regulatory enforcement actions. In such event, the Company's revenues may be
adversely affected.
Dedicated Dental operates under a license issued by the DOC under the Knox-
Keene Act, which is expected to be maintained by Dedicated Dental after it
becomes a wholly-owned subsidiary of the Company following receipt of all
necessary and required consents and approvals of the DOC. See "Recent and
Pending Affiliations." The Knox-Keene Act and the regulations promulgated
thereunder subject entities which are licensed as healthcare service plans in
California to substantial regulation by the DOC. In addition, licensees under
the Knox-Keene Act are required to file periodic financial data and other
information (which generally become available to the public), maintain
substantial tangible net equity on their balance sheets and maintain adequate
levels of medical, financial and operating personnel dedicated to fulfilling
the licensee's statutory and regulatory requirements. The DOC is empowered by
law to take enforcement actions against licensees that fail to comply with such
requirements. Any significant delay in obtaining such consents and approvals or
any material non-compliance with the Knox-Keene Act and the regulations
promulgated thereunder, could have a material adverse effect on the Company's
business, financial condition and results of operations.
REFORM INITIATIVES. The United States Congress and state legislatures have
considered various types of health care reform, including comprehensive
revisions to the current health care system. It is uncertain what legislative
proposals will be adopted in the future, if any, or what actions federal or
state legislatures or third-party payors may take in anticipation of or in
response to any health care reform proposals or legislation. Health
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care reform legislation adopted by Congress or the legislatures of states in
which the Company does business, as well as changes in federal and state
regulations could have a material adverse effect on the operations of the
Company, and changes in the health care industry, such as the growth of managed
care organizations and provider networks, may result in lower payment levels
for the services of dentists within the Company's network of Affiliated Dental
Practices and lower profitability for such Affiliated Dental Practices. See
"Business--Government Regulation."
DEPENDENCE ON THIRD-PARTY PAYORS; RISKS ASSOCIATED WITH MANAGED CARE
A significant portion of the payment for services rendered by the Affiliated
Dental Practices is paid by private insurance programs. There is, and has been
in recent years, an ongoing effort by third-party and government payors to
contain and reduce health care and dental care costs, and impose lower
reimbursement rates on health care providers. Such initiatives may result in a
reduction in per-patient and per-procedure revenue from historic levels. In the
event that third-party payors are successful in obtaining lower payments for
specified services, the Company's business, financial condition and results of
operations may be materially adversely affected.
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.
Under capitated managed dental care contracts, the dentist is typically paid
a predetermined monthly capitation payment amount per patient, per month, from
the payor in exchange for providing all necessary covered services to the
patients covered under the arrangement. This arrangement shifts the risks of
utilization of such services to the dental group practice that provides the
dental services. These types of contracts pass most of the financial risk of
providing dental care, including the risk of over-utilization, from the payor
to the dentist. The Company's success will, in part, be dependent upon its
ability to negotiate contracts on behalf of the Affiliated Dental Practices,
with health maintenance organizations ("HMOs"), employer groups and other third
party payors, pursuant to which services will be provided on a risk-sharing or
capitated basis by some or all of the Affiliated Dental Practices managed by
the Company. There can be no assurance that the Company will be able to
negotiate, on behalf of the Affiliated Dental Practices, satisfactory
arrangements on a capitated or other risk-sharing basis. In addition, to the
extent that patients or enrollees covered by such arrangements require more
frequent or extensive care than is anticipated, the combined entity would incur
unanticipated costs not offset by additional revenue, which would reduce
operating margins. Health care reforms being considered at the federal and
state levels could result in a mandate that managed care patients receive
certain benefits, and no assurance can be given that the Company will be
successful in negotiating adjustments to capitation rates that will adequately
compensate the Affiliated Dental Practices for performing such procedures. Any
such reduction or elimination of earnings could have an adverse effect on the
Company's business, financial condition and operating results.
ACCOUNTING TREATMENT FOR PROFESSIONAL PRACTICE MANAGEMENT COMPANIES AND GMS
MERGER
The Emerging Issues Task Force ("EITF"), an advisory committee of the
Financial Accounting Standards Board, has recently evaluated certain matters
relating to accounting practices for professional practice management
companies, including consolidation of the financial statements of professional
practice management companies and professional associations with which such
companies have management agreements. The EITF recently reached consensus
regarding consolidation of professional associations that are controlled
through contractual agreement. Gentle Dental has not historically consolidated
the financial results of its Affiliated Dental Practices, whereas GMS has
historically consolidated the financial results of its Affiliated Dental
Practices. The Company believes its Management Agreements with the Affiliated
Dental Practices historically affiliated with
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GMS contain provisions that require the Company to report such operations on a
consolidated basis. The Company recently amended the Management Agreements
with the Oregon and Washington Professional Corporations to more closely
conform such Management Agreements to the forms of management agreement used
by GMS in affiliating with dental practices and to provide the Company with a
controlling financial interest in such Professional Corporations. The Company
believes such amended Management Agreements and increased control will require
the Company, consistent with the Company's accounting for the Affiliated
Dental Practices historically affiliated with GMS, to consolidate the
financial results of the Oregon and Washington Professional Corporations under
the EITF consensus. However, there can be no assurance that interpretations of
the EITF consensus will not require the Company to change its reporting in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--GMS Merger and Restructuring." For a discussion of the
financial impact of the amendments to the Management Agreements with the
Oregon and Washington Professional Corporations, see "Condensed Pro Forma
Consolidated Financial Data" and the notes related thereto including note (b).
The GMS Merger is expected to be accounted for by the Company by the pooling
of interests method of accounting. Under this method of accounting, the
recorded assets and liabilities of the Company and GMS will be carried forward
at the book values to the Company. Although the Company believes that the GMS
Merger will qualify for pooling-of-interests accounting treatment, there can
be no assurance that the Securities and Exchange Commission will not
successfully assert a contrary position. In such case, the purchase method of
accounting would be applicable and GMS would be the acquiror for accounting
purposes under purchase accounting. The book value of the Company's assets
would be increased to their fair values. While there would be no impact on the
Company's cash flow, this would result in higher goodwill amortization as the
excess of the purchase price over the fair value of the Company's assets would
be amortized over a period of years, which would adversely affect the
Company's future earnings and the amounts provided in the Company's
Supplemental Consolidated Financial Statements and certain pro forma data
included in this Prospectus.
COMPETITION
The Company competes with other dental practice management companies seeking
to affiliate with dental practices in the highly competitive dental practice
management industry. The Company is aware of a number of competitors
specializing in the business of providing comprehensive management services to
dental practices and there are other companies with substantial resources that
may decide to enter the industry. The market for general and specialty dental
services is highly fragmented and is characterized by large numbers of
individual practitioners and small group practices competing for individual
patients. Competition for providing dental services is highly competitive in
the markets in which the Company's network of Affiliated Dental Practices
operates and often includes practitioners who have established practices and
reputations. The Company believes that cost, location, hours of operation and
quality of dental services are the principal factors affecting competition for
patients and the Company believes that its marketing strategy is tailored to
address such competitive factors. 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 Company's network of Affiliated Dental Practices will be
able to compete effectively in the markets they serve, and an inability to do
so would materially adversely affect the Company's business, financial
condition and results of operations. See "Business--Competition."
DEPENDENCE UPON KEY PERSONNEL
The success of the Company is dependent upon the continued services of
certain of the Company's senior management team, including the Company's Co-
Chairman of the Board, Chief Executive Officer and President, Michael Fiore,
and its Co-Chairman of the Board and President of Clinical Services, Dany Tse.
The loss of services of one or both of these individuals could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that these officers will remain with the
Company or that the Company will be able to attract and retain other key
management personnel. The Company's expansion strategy requires significant
management resources to identify, negotiate and integrate Affiliated Dental
Practices. Accordingly, successful expansion and marketing of the Company's
services and the development of
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its business will depend to a large extent on the Company's ability to attract
and retain qualified management personnel and on the abilities and continued
participation of the Company's key employees. See "Management."
AVAILABILITY OF DENTAL PROFESSIONALS
The Company's business is dependent on the recruitment and retention of
general dentists, specialists, hygienists and dental assistants to join the
Affiliated Dental Practices. While the Company has been successful in
assisting in recruiting and retaining such professionals for its network of
Affiliated Dental Practices, no assurances can be given that the Company will
be able to continue to do so on terms similar to its current arrangements or
on terms that are satisfactory to the Company. Substantially all dentists
practicing within the Company's network of Affiliated Dental Practices have
entered into employment or similar agreements, or independent contractor
agreements with their respective Affiliated Dental Practices. Such agreements
typically contain a noncompetition agreement following termination of the
agreement within a specified geographic area, usually a specified number of
miles from the offices of the relevant Affiliated Dental Practices. Although
the Company, in conjunction with the Affiliated Dental Practices, endeavors to
maintain and renew agreements with affiliated dentists, in the event that a
significant number of such dentists terminate or do not renew such agreements
or in the event the non-competition agreements are determined to be
unenforceable or more limited in scope than their terms, the Company's
business, financial condition and results of operations could be materially
and adversely affected.
RISKS ASSOCIATED WITH MANAGEMENT AGREEMENTS AND OTHER INTANGIBLE ASSETS
A substantial portion of the Company's assets consists of the Management
Agreements and other intangible assets. At September 30, 1997, the Company's
Supplemental Consolidated Balance Sheet reflected $38.6 million of total
assets (of which approximately $19.8 million were intangible assets) and
approximately $9.5 million in total stockholders' equity at such date.
Intangible assets will increase to approximately $46.2 million upon completion
of the Pending Affiliations, and the Company expects such amount to increase
further in the future in connection with additional dental practice
affiliations. This increase will have an adverse impact on earnings as the
intangible assets are amortized. In the event of any sale or liquidation of
the Company or a portion of its assets, there can be no assurance that the
value of the Management Agreements will be realized. In addition, the Company
continually evaluates whether events and circumstances have occurred which
indicate that any portion of the remaining amounts allocable to one or more of
the Management Agreements or other intangible assets may not be recoverable.
When factors indicate that the amount allocable to one or more of the
Management Agreements or other intangible assets should be evaluated for
possible impairment, the Company may be required to reduce the carrying value
of such Management Agreements or other intangible assets, which could have a
material adverse effect on the results of operations of the Company during the
periods in which such reduction is recognized.
The Company owns all or substantially all of the operating assets of the
Affiliated Dental Practices it manages but, except as permitted by law, does
not employ or contract with dentists, or control the provision of dental care.
Therefore, effective and continued performance of dentists providing services
for the Affiliated Dental Practices is essential to the Company's long-term
success. Because the Company derives its revenues through the Management
Agreements, any material decline in revenue by one or more Affiliated Dental
Practices could have a material adverse effect on the Company's business,
financial condition and results of operations, and any termination by one of
the Affiliated Dental Practices of a Management Agreement (which is permitted
in the event of a bankruptcy of the Company or material breach without cure by
the Company), could have such a material adverse effect. In the event of a
breach of a Management Agreement by any of the Affiliated Dental Practices,
there can be no assurance that the legal remedies available to the Company
will be adequate to compensate the Company or cover its damages resulting from
such breach. See "Business--Management Agreements."
POTENTIAL LIABILITY AND INSURANCE
In recent years, dentists have become subject to an increasing number of
lawsuits alleging malpractice and related legal theories. Due to the nature of
its business, the Company may from time to time become involved as
16
<PAGE>
a defendant in medical malpractice lawsuits brought against the Affiliated
Dental Practices or dentists employed by the Affiliated Dental 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 the
Management 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's business, financial condition and results of
operations.
GEOGRAPHIC CONCENTRATION
The Company's growth strategy contemplates affiliation with or development
of dental practices in selected geographic markets. The Company's strategy of
focused expansion within selected markets increases the risk to the Company
that adverse economic or regulatory developments in one or more of these
markets may have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company and
the Affiliated Dental Practices with which it has Management Agreements are
subject to a broad range of antitrust laws that prohibit anti-competitive
conduct, including price fixing, concerted refusals to deal and divisions of
markets. Among other things, these laws may limit the ability of the Company
to enter into Management Agreements with separate practice groups that compete
with one another in the same geographic market. In addition, these laws
prevent affiliations or acquisitions of practices that would be integrated
into existing professional groups if such affiliations or acquisitions
substantially lessen competition or tend to create a monopoly.
PUBLIC MARKET VOLATILITY
The trading price of the Company's Common Stock has in the past been and
could in the future be subject to wide fluctuations in response to quarter-to-
quarter variations in the Company's operating results, material announcements
by the Company or its competitors, governmental regulatory action, conditions
in the health care industry generally or in the dental services industry
specifically, or other events or factors, many of which are beyond the
Company's control. In addition, the stock market has experienced extreme price
and volume fluctuations which have particularly affected the market prices of
many health care services companies and which often have been unrelated to the
operating performance of such companies. The Company's operating results in
future quarters may be below the expectations of securities analysts and
investors. In such event, the price of the Common Stock would likely decline,
perhaps substantially. See "Price Range of Common Stock."
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
11,178,683 shares of Common Stock that will be outstanding following this
Offering, the 4,548,161 shares issued in the GMS Merger on November 4, 1997,
the 109,039 shares issued in the affiliation with Blue Oak Dental Group on
March 31, 1997, and the shares issuable in connection with Pending
Affiliations are or will be "restricted securities" as defined in Rule 144
promulgated under the Securities Act. All other shares are or will be freely
tradable under federal securities laws to the extent they are not held by
affiliates of the Company. Holders of of the shares eligible for
resale have agreed that they will not, without the written consent of Bear,
Stearns & Co. Inc., offer to sell, contract to sell or otherwise sell or
dispose of their shares for 180 days following this Offering. Holders of
100,000 shares of the Company's Common Stock and of warrants to purchase an
additional 336,275 shares are entitled to certain rights with respect to the
registration of such shares under the Securities Act. In addition, the Company
has agreed to file a registration statement on or prior to March 31, 1998 to
register the resale of an aggregate of 1,519,103 shares of Common Stock to be
issued upon completion of the Dedicated Dental Affiliation. The holders of
these shares
17
<PAGE>
are entitled to sell a number of shares with an aggregate market value of up to
$4 million in an underwritten public offering prior to March 31, 1998. The
Company anticipates that these shares will be issued prior to completion of
this Offering and will be sold pursuant thereto. See "Principal and Selling
Shareholders." Such holders have agreed that they will not sell, offer to sell
or otherwise transfer any of their remaining shares of Common Stock prior to
March 31, 1999. Commencing on March 31, 1999 and continuing on the last day of
each of the nine months thereafter, one-tenth of the shares registered by the
Company on behalf of such holders will be released from the foregoing
restriction and will be eligible for sale. See "Description of Capital Stock--
Registration Rights." The Company has also registered an aggregate of 934,638
shares reserved for past or future option grants under the Securities Act. See
"Description of Capital Stock" and "Shares Eligible for Future Sale."
COMMON STOCK PUT RIGHTS
A total of 183,686 shares of Common Stock issued by the Company (as well as
100,000 shares of Common Stock subject to a warrant granted to ServiceMaster
Venture Fund, L.L.C. ("ServiceMaster")) are subject to "put" rights. As of
September 30, 1997, put rights issued in connection with affiliations ("Dentist
Put Rights") cover a total of 83,686 shares of Common Stock and give the
holders the right to require the Company to repurchase the shares at prices
ranging from $13.38 to $19.62 per share. One such holder has put rights with
respect to 11,820 shares that can be exercised in varying amounts in 1998,
1999, and 2000. All other Dentist Put Rights become exercisable between January
2000 and January 2003 and expire if not exercised within 60 days of the
exercise date. The Dentist Put Rights with respect to all but 20,000 shares
will terminate if the Company completes a public offering of Common Stock at a
price greater than $20.00 per share. Pursuant to the terms of the Dentist Put
Rights, the Company could be required to repurchase 2,974 shares of Common
Stock at an aggregate purchase price of approximately $50,000 in 1998, 2,754
shares of Common Stock at an aggregate purchase price of approximately $50,000
in 1999, 40,849 shares of Common Stock at an aggregate purchase price of
approximately $576,000 in 2000, 29,681 shares of Common Stock at an aggregate
purchase price of approximately $438,000 in the year 2001, and 3,714 shares of
Common Stock at an aggregate purchase price of approximately $51,000 in each of
2002 and 2003. 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 million (a "Qualified Offering"). The put right may not be exercised
before June 21, 2001, and will expire upon the earlier of the completion of a
Qualified Offering or June 21, 2003. 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. ServiceMaster's put right with respect to 100,000 shares
will be extinguished upon the sale of such shares in the Offering. See
"Description of Capital Stock."
Shares subject to put rights are classified as "Redeemable Common Stock" on
the Company's balance sheet. If holders of Common Stock subject to put rights
elect to exercise those rights, the Company will have to pay those holders the
applicable repurchase price in cash in exchange for the delivery of the
holders' Common Stock, and such an election could have a material adverse
effect on the Company's business, financial condition and operating results.
There can be no assurance that the Company will have sufficient capital
resources to honor the outstanding put rights and the Company's use of cash to
honor outstanding put rights would also reduce funds otherwise available to the
Company for operations or obtaining Affiliated Dental Practices.
POTENTIAL ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS AND WASHINGTON LAW
The Company is authorized to issue up to 30 million shares of Preferred Stock
(the "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 current plans to issue shares of
Preferred 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."
18
<PAGE>
RECENT AND PENDING AFFILIATIONS
GMS MERGER
On November 4, 1997, the Company was merged with GMS, a California-based
dental practice management company, which provided management services to
dental practices at 22 locations consisting of 102 dentists, including
specialists. Under the terms of the GMS Merger, the Company issued to the
shareholders of GMS 4,512,377 shares of Common Stock, representing
approximately 59% of the then outstanding shares of the Company following
completion of the GMS Merger. Upon completion of the GMS Merger, the Board of
Directors and senior management of the Company were reconstituted. See
"Management."
RECENT AFFILIATIONS
Between January 1, 1995 and the completion of the GMS Merger, Gentle Dental
entered into affiliations with and acquired the non-professional assets and
certain liabilities of, and entered into long-term management agreements with,
dental practices operating at 14 locations. GMS began operations in October
1996. Prior to completion of the GMS Merger, GMS acquired assets and certain
liabilities of, and entered into long-term management agreements with, dental
practices operating at 22 locations.
DEDICATED DENTAL AFFILIATION AND OTHER PENDING AFFILIATIONS
On September 21, 1997, the Company entered into a definitive agreement
pursuant to which it has agreed to acquire all of the stock of Dedicated
Dental, which is based in Bakersfield, California and owns and operates 11
staff model dental offices pursuant to a license issued by the DOC under the
Knox-Keene Act. Under this license, Dedicated Dental is permitted to own the
dental practices and employ dentists, hygienists and other professionals as
corporate employees. The Company has also entered into three asset purchase
agreements to acquire the nonprofessional assets of related dental practices
operating at four locations in southern California. The aggregate purchase
price under these agreements is $22,750,000, consisting of $9,771,000 in cash
(reduced by any outstanding debt of Dedicated Dental at closing), $12,429,000
in shares of Common Stock (1,519,103 shares valued at $8.1818 per share, which
was the average closing price of the Common Stock for the 30 trading days
prior to the execution of the agreements), and $550,000 in estimated future
earnout payments under two of the asset purchase agreements, all subject to
certain adjustments provided for in the agreements. The Dedicated Dental
Affiliation is subject to the satisfaction of certain other conditions, some
of which are beyond the control of the Company, including approval of the DOC
under the Knox-Keene Act, and is expected to close during the first quarter of
1998. There can be no assurance that the conditions to the closing of the
Dedicated Dental Affiliation, including receipt of approval of the DOC will be
satisfied or that the affiliation will ultimately be completed. Failure to
complete the Dedicated Dental Affiliation could have a material adverse effect
on the Company's business, financial condition and results of operations as
presented in the pro forma financial data set forth in this Prospectus.
The Company has agreed that Arthur G. Kaiser, DDS, the principal shareholder
of Dedicated Dental, will be made a director of the Company effective as of
the closing of the Dedicated Dental Affiliation. Holders of shares issued in
the Dedicated Dental Affiliation will have certain registration rights and
will be subject to certain lock-up provisions. See "Description of Capital
Stock--Registration Rights."
On September 29, 1997, the Company entered into an agreement for the
acquisition of the nonprofessional assets of a dental practice located in
Sacramento, California. The purchase price is $810,000, consisting of $320,000
in cash and $490,000 in shares of Common Stock (43,077 shares valued at
$11.375 per share, which was the average closing price of Common Stock for the
10 trading days prior to the execution of the agreement). The acquisition is
expected to close in January 1998. As consideration for future affiliations,
the Company may use a combination of cash, stock, debt, seller financing and
earn-outs.
19
<PAGE>
The following table summarizes the relative contributions to the Company's
network of Affiliated Dental Practices by Gentle Dental, GMS, Dedicated Dental
and related practices, and the other Pending Affiliation described above.
<TABLE>
<CAPTION>
DEDICATED OTHER
GENTLE DENTAL PENDING
DENTAL GMS AFFILIATION AFFILIATION TOTAL
------ --- ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
Dental professionals:
General dentists.............. 53 72 30 1 156
Specialists................... 16 30 3 0 49
--- --- --- --- -------
Total dental professionals...... 69 102 33 1 205
=== === === === =======
Locations:
Dental offices................ 21 22 15 1 59
Operatories................... 185 266 124 6 581
States........................ 3 3 1 1 5
Pro forma patient level revenues
for nine months ended September
30, 1997 (in thousands)(1)..... $65,769
</TABLE>
- --------
(1) Pro forma assuming completion on January 1, 1997 of all Pending
Affiliations and all other affiliations completed by either Gentle Dental
or GMS in 1997.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the shares
of Common Stock offered by the Company hereby are estimated to be $27,545,000
million ($32,138,750 million if the Underwriters' overallotment option is
exercised in full). The Company intends to use the net proceeds from this
Offering (i) to repay existing Company debt, of which approximately $10.0
million was outstanding at December 31, 1997; (ii) to repay approximately
$10.1 million of debt to be incurred in connection with the Pending
Affiliations; and (iii) for future affiliations of dental practices, capital
improvements, working capital and general corporate purposes. See "Recent and
Pending Affiliations." The Company will not receive any proceeds from the sale
of the 100,000 shares of Common Stock by the Selling Shareholder. See
"Principal and Selling Shareholders." Outstanding amounts under the Company's
Credit Facility are subject to repayment in twelve equal consecutive quarterly
installments commencing on September 30, 1999 and amounts outstanding
thereunder bear interest at rates ranging from approximately 9.1% to 9.5% as
of December 31, 1997. The Company debt, that will be repaid with the proceeds
of the Offering was incurred to finance acquisitions made by the Company in
1997.
Although an integral part of the Company's strategy is to grow through
affiliations, and the Company is currently in discussions with several dental
practices in both its current and potential future geographic markets, no
affiliation other than the Pending Affiliations discussed above are the
subject of any definitive agreement.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the NASDAQ SmallCap Market under the symbol
GNTL. The Company has applied to have the Common Stock traded on the NASDAQ
National Market upon completion of this Offering. The following table sets
forth the high and low closing sales prices of the Common Stock, as reported
by the NASDAQ SmallCap Market, for the periods indicated:
<TABLE>
<CAPTION>
PRICE RANGE
OF COMMON
STOCK
-------------
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended December 31, 1997:
First Quarter(1)............................................ $ 5.25 $ 4.00
Second Quarter.............................................. 5.50 3.63
Third Quarter............................................... 16.50 5.13
Fourth Quarter.............................................. 16.00 8.00
Fiscal Year Ending December 31, 1998:
First Quarter (2)........................................... 10.00 9.00
</TABLE>
- --------
(1) Commencing February 13, 1997, the first day of trading of the Common
Stock.
(2) Through January 7, 1998
On January 7, 1998, the closing sale price of the Common Stock, as reported
by the NASDAQ SmallCap Market, was $9.42 per share. As of January 7, the
Company had approximately 96 holders of record of its Common Stock.
DIVIDEND POLICY
The payment of dividends is within the discretion of the Company's Board of
Directors; however, 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. In addition, the Company's Credit Facility
prohibits the payment of cash dividends.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997. Pro forma reflects (i) the GMS Merger (including the
associated restructuring and merger charge); (ii) the conversion of all shares
of preferred stock of GMS into Common Stock; (iii) completed affiliations and
the Pending Affiliations (including the effect of all cash, Common Stock and
debt issued or expected to be issued in connection therewith); (iv) the
Initial Public Offering; and (v) the effect of the amended Management
Agreements with the Oregon and Washington Professional Corporations. Pro forma
as adjusted reflects items (i) through (v) and this Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--GMS Merger and Restructuring." This table should be read in
conjunction with Gentle Dental's Supplemental Consolidated Financial
Statements and related notes thereto and pro forma data appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------
SUPPLEMENTAL PRO FORMA
CONSOLIDATED PRO FORMA AS ADJUSTED
------------ --------- -----------
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
<S> <C> <C> <C>
Current portion of debt and capital lease
obligations................................ $ 687 $ 1,051 $ 1,051
Long-term debt including capital lease
obligations less current portion........... 8,612 22,443 3,756
Redeemable Covertible Preferred Stock--
Series B................................... 12,072 -- --
Redeemable common stock 183,686 shares
issued and outstanding and 83,686 issued
and outstanding pro forma as adjusted...... 2,123 2,123 1,391
Shareholders' equity:
Preferred stock, 30,000,000 shares
authorized; no shares issued and
outstanding.............................. -- -- --
Convertible preferred stock--Series A,
395,000 shares authorized; 395,000 shares
issued and outstanding as of December 31,
1996 and September 30, 1997.............. 1 -- --
Convertible preferred stock--Series C,
5,000 shares authorized; 1,777 and 2,753
shares issued and outstanding as of
December 31, 1996 and September 30,
1997..................................... 1 -- --
Common stock, 50,000,000 shares
authorized; 7,694,711 shares issued and
outstanding actual; 9,276,649 shares
issued and outstanding pro forma; and
12,876,649 shares issued and outstanding
pro forma as adjusted(1)................. 9,546 34,751 63,028
Additional paid in capital................ 2,926 2,926 2,926
Notes receivable from shareholders........ (300) (300) (300)
Accumulated deficit....................... (2,716) (4,194) (4,194)
------- ------- -------
Total shareholders' equity................ 9,458 33,183 61,460
------- ------- -------
Total capitalization.................... $32,952 $58,800 $67,658
======= ======= =======
</TABLE>
- --------
(1) Does not include 1,255,652 shares of Common Stock subject to outstanding
options and warrants at September 30, 1997 at a weighted average exercise
price of $5.68 per share.
22
<PAGE>
CONDENSED PRO FORMA CONSOLIDATED FINANCIAL DATA
The Condensed Pro Forma Consolidated Balance Sheet and Pro Forma
Consolidated Statement of Operations Data have been prepared by the Company
based on Gentle Dental's Supplemental Consolidated Financial Statements for
the year ended December 31, 1996 and the nine month period ended September 30,
1997 and the financial statements of the entities involved in affiliations
completed during 1996 and 1997, and the Pending Affiliations. The Condensed
Pro Forma Consolidated Financial Data is based on certain assumptions and
adjustments described in the notes hereto and should be read in conjunction
therewith and in conjunction with the complete Gentle Dental Supplemental
Consolidated Financial Statements and the notes thereto, the Gentle Dental
Financial Statements and the notes thereto, the GMS Consolidated Financial
Statements and the notes thereto, the Dedicated Dental Financial Statements,
the California Dental Practice Management Company and Related Dental Offices
Financial Statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus. The following Condensed Pro Forma Consolidated Financial
Data for the year ended December 31, 1996 and the nine month period ended
September 30, 1997 are unaudited and were prepared by management of the
Company on the same basis as the audited financial statements included
elsewhere herein and, in the opinion of management of the Company, include all
adjustments necessary to present fairly the information set forth herein.
The Condensed Pro Forma Consolidated Statement of Operations Data for the
years ended December 31, 1996 and the nine month period ended September 30,
1997 give effect to the following, as if each had occurred on January 1, 1996:
(i) the GMS Merger; (ii) the conversion of all shares of preferred stock of
GMS into Common Stock; (iii) completed affiliations and the Pending
Affiliations (including the effect of all cash, common stock and debt issued
or expected to be issued in connection therewith); (iv) the Initial Public
Offering; (v) this Offering; and (vi) the effect of the amended Management
Agreements with the Oregon and Washington Professional Corporations. The
Condensed Pro Forma Consolidated Balance Sheet as of September 30, 1997 gives
effect to items (i) through (vi) and the restructuring and merger charge
recorded in connection with the GMS Merger. The Condensed Pro Forma
Consolidated Financial Data does not purport to be indicative of the combined
results of operations that actually would have occurred if the transactions
described above had been effected at the dates indicated or to project future
results of operations for any period.
23
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR AMENDED COMPLETED COMPLETED
SUPPLEMENTAL MANAGEMENT 1996 1997 PENDING
CONSOLIDATED AGREEMENTS AFFILIATIONS AFFILIATIONS AFFILIATIONS PRO FORMA OFFERING
(a) (b) SUBTOTAL (c) (d) (e) ADJUSTMENTS ADJUSTMENTS
------------ ----------- -------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dental group net
patient service
revenue.............. $ 3,701 $21,424 (v) $25,125 $13,520 $21,894 $ 8,863 $ --
Net management fees
(support service
revenue)............. 10,712 (10,712)(w) -- -- 1,464 4,511 -- --
------- ------- ------- ------- ------- ------- ------- ------
Net revenues.... 14,413 10,712 25,125 13,520 23,358 13,374 -- --
Clinical salaries and
benefits............. 1,493 9,642 (x) 11,135 5,005 9,046 2,975 (609)(f)
Practice nonclinical
salaries and
benefits............. 4,279 -- 4,279 3,571 5,275 1,214 (477)(g)
Dental supplies and
lab expenses......... 2,830 -- 2,830 1,611 3,297 1,497 19 (g)
Practice occupancy
expenses............. 1,563 -- 1,563 906 1,124 563 162 (h)
Practice selling,
general and
administrative
expenses............. 1,805 844 (y) 2,649 1,859 2,881 3,959 (785)(g)
Corporate selling,
general and
administrative
expenses............. 2,998 -- 2,998 -- -- -- 2,136 (i)
Depreciation and
amortization......... 990 79 (aa) 1,069 329 493 300 1,266 (j)
------- ------- ------- ------- ------- ------- ------- ------
Total operating
expenses............ 15,958 10,565 26,523 13,281 22,116 10,508 1,712 --
------- ------- ------- ------- ------- ------- ------- ------
Operating income
(loss).............. (1,545) 147 (1,398) 239 1,242 2,866 (1,712) --
Interest expense,
net.................. (749) -- (749) (164) (332) (94) (1,413)(k) 420(m)
1,606(n)
Other income
(expense)............ (48) -- (48) 9 (15) 149 (78)(g)
------- ------- ------- ------- ------- ------- ------- ------
Income (loss)
before income
taxes............... (2,342) 147 (2,195) 84 895 2,921 (3,203) 2,026
Provision (benefit)
for income taxes..... (655) 59 (596) 32 358 20 (413) 810(l)
------- ------- ------- ------- ------- ------- ------- ------
Net income (loss)... (1,687) 88 (1,599) 52 537 2,901 (2,790) 1,216
Dividends on
redeemable
convertible preferred
stock--Series B...... (240) -- (240) -- -- -- 240 (p) --
Accretion of
redeemable common
stock................ (91) -- (91) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------
Net income (loss)
attributable to
common stock........ $(2,018) $ 88 $(1,930) $ 52 $ 537 $ 2,901 $(2,550) $1,216
======= ======= ======= ======= ======= ======= ======= ======
Net income (loss) per
share:
Primary............. $ (0.86)
Fully diluted....... $ (0.86)
Shares outstanding:
Primary............. 2,355
Fully diluted....... 2,355
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
Dental group net
patient service
revenue.............. $69,402
Net management fees
(support service
revenue)............. 5,975
---------
Net revenues.... 75,377
Clinical salaries and
benefits............. 27,552
Practice nonclinical
salaries and
benefits............. 13,862
Dental supplies and
lab expenses......... 9,254
Practice occupancy
expenses............. 4,318
Practice selling,
general and
administrative
expenses............. 10,563
Corporate selling,
general and
administrative
expenses............. 5,134
Depreciation and
amortization......... 3,457
---------
Total operating
expenses............ 74,140
---------
Operating income
(loss).............. 1,237
Interest expense,
net.................. (726)
Other income
(expense)............ 17
---------
Income (loss)
before income
taxes............... 528
Provision (benefit)
for income taxes..... 211
---------
Net income (loss)... 317
Dividends on
redeemable
convertible preferred
stock--Series B...... --
Accretion of
redeemable common
stock................ (91)
---------
Net income (loss)
attributable to
common stock........ $ 226
=========
Net income (loss) per
share:
Primary............. $ 0.02
Fully diluted....... $ 0.02
Shares outstanding:
Primary............. 12,877
Fully diluted....... 13,321
</TABLE>
24
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR AMENDED COMPLETED
SUPPLEMENTAL MANAGEMENT 1997 PENDING
CONSOLIDATED AGREEMENTS AFFILIATIONS AFFILIATIONS PRO FORMA OFFERING PRO FORMA
(A) (B) SUBTOTAL (O) (O) ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
------------ ----------- -------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dental group net
patient service
revenue................ $19,348 $ 17,721 (v) $37,069 $11,942 $ 9,763 $ $ $58,774
Net management fees
(support service
revenue) .............. 10,269 (9,470)(w) 799 441 2,755 -- 3,995
------- -------- ------- ------- ------- ----- ------ -------
Net revenues.......... 29,617 8,251 37,868 12,383 12,518 -- -- 62,769
Clinical salaries and
benefits............... 6,571 7,757 (x) 14,328 4,928 3,403 (347)(f) 22,312
Practice nonclinical
salaries and benefits.. 8,122 -- 8,122 2,618 1,004 (1)(g) 11,743
Dental supplies and
lab.................... 4,424 -- 4,424 1,753 1,532 7,709
Practice occupancy
expenses............... 2,450 -- 2,450 608 505 3,563
Practice selling,
general and
administrative
expenses............... 3,199 494 (y) 3,693 1,398 3,789 (723)(g) 8,157
Corporate selling,
general and
administrative
expenses............... 3,845 -- 3,845 3,845
Depreciation and
amortization........... 1,295 59 (aa) 1,354 208 268 592 (j) 2,422
------- -------- ------- ------- ------- ----- ------ -------
Total operating
expenses.............. 29,906 8,310 38,216 11,513 10,501 (479) -- 59,751
------- -------- ------- ------- ------- ----- ------ -------
Operating income
(loss)................ (289) (59) (348) 870 2,017 479 -- 3,018
Interest expense, net.. (362) -- (362) (450) (102) (736)(k) 53(m) (110)
1,487(n)
Other income
(expense).............. (16) -- (16) 4 121 (186)(g) (77)
------- -------- ------- ------- ------- ----- ------ -------
Income (loss) before
income taxes.......... (667) (59) (726) 424 2,036 (443) 1,540 2,831
Provision (benefit) for
income taxes........... 80 -- 80 165 22 249 (l) 616(l) 1,132
------- -------- ------- ------- ------- ----- ------ -------
Net income (loss)..... (747) (59) (806) 259 2,014 (692) 924 1,699
Dividends on redeemable
convertible preferred
stock--Series B........ (829) -- (829) -- -- 829 (p) -- --
Accretion of redeemable
common stock........... (27) -- (27) -- -- -- -- (27)
------- -------- ------- ------- ------- ----- ------ -------
Net income (loss)
attributable to common
stock................. $(1,603) $ (59) $(1,662) $ 259 $ 2,014 $ 137 $ 924 $ 1,672
======= ======== ======= ======= ======= ===== ====== =======
Net income (loss) per
share:
Primary............... $ (0.40) $ 0.13
Fully diluted......... (0.40) $ 0.13
Weighted average shares
outstanding:
Primary............... 4,005 12,877
Fully diluted......... 4,005 13,321
</TABLE>
25
<PAGE>
CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR
AMENDED COMPLETED
SUPPLEMENTAL MANAGEMENT 1997 PENDING PRO FORMA OFFERING
CONSOLIDATED AGREEMENTS AFFILIATIONS AFFILIATIONS ADJUSTMENTS ADJUSTMENTS PRO FORMA
(a) (bb) SUBTOTAL (q) (q) (r) (s) AS ADJUSTED
------------ ----------- -------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 147 $ -- $ 147 $ 31 $ 726 $ (757) $ 8,859 $ 9,006
Accounts receivable..... 7,589 (1,800)(z) 5,789 292 1,554 (374) -- 7,261
Other current assets.... 2,126 -- 2,126 50 127 190 -- 2,493
------- ------- ------- ---- ------ ------- -------- -------
Total current assets.... 9,862 (1,800) 8,062 373 2,407 (941) 8,859 18,760
Property and equipment.. 8,424 900 9,324 486 3,154 (2,222) 10,742
Intangible assets....... 19,845 1,969 21,814 -- 94 24,290 46,198
Other long-term assets.. 503 -- 503 1 52 (52) -- 504
------- ------- ------- ---- ------ ------- -------- -------
Total assets............ $38,634 $ 1,069 $39,703 $860 $5,707 $21,075 $ 8,859 $76,204
======= ======= ======= ==== ====== ======= ======== =======
Current liabilities..... $ 5,839 $ 509 $ 6,348 $152 $2,138 $429 $ -- $ 9,067
Long-term debt and
capital lease
obligations, net of
current portion........ 8,612 560 9,172 290 1,785 11,195 (18,686) 3,756
Other long-term
liabilities............ 530 -- 530 -- -- -- -- 530
Redeemable common
stock.................. 2,123 -- 2,123 -- -- -- (732) 1,391
Redeemable preferred
stock--Series B........ 12,072 -- 12,072 -- -- (12,072)(t) --
Shareholders' equity.... 9,458 -- 9,458 418 1,784 12,072 (t) 732 61,460
(1,478)(u) 27,545
10,929
------- ------- ------- ---- ------ ------- -------- -------
Total liabilities,
redeemable stock and
shareholders' equity... $38,634 $ 1,069 $39,703 $860 $5,707 $21,075 $ 8,859 $76,204
======= ======= ======= ==== ====== ======= ======== =======
</TABLE>
26
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL DATA
The accompanying pro forma consolidated financial data presents the pro
forma financial position of the Company as of September 30, 1997 and the pro
forma results of operations for the year ended December 31, 1996 and the nine
month period ended September 30, 1997.
From January 1, 1996 through September 30, 1997, the Company acquired 16
dental practices. The accompanying Condensed Pro Forma Consolidated Balance
Sheet includes the acquired non-professional dental practice assets and
liabilities and payment of cash, issuance of Common Stock and borrowings in
connection with completed affiliations and the Pending Affiliations, as if
they had been completed on January 1, 1996.
The pro forma adjustments reflected in the Condensed Pro Forma Consolidated
Balance Sheet and Consolidated Statement of Operations are as follows:
(a) Reflects the supplemental consolidated financial position and results of
operations of Gentle Dental and GMS, adjusted to conform the accounting
methodologies of GMS to those of Gentle Dental as if the combination
occurred on January 1, 1996. Such adjustments resulted in no change in
amortization expense in 1996 and an increase of $148,000 in 1997 and in
decreases in depreciation expense of $24,000 in 1996 and $135,000 in 1997.
Additionally, such adjustments resulted in a decrease in the 1996 income
tax benefit of $10,000 and a decrease in the 1997 income tax expense of
$5,000.
(b) Reflects the net impact of: (i) adjustments to consolidate certain
previously unconsolidated financial results of the Oregon and Washington
Professional Corporations with the results of the Company, including the
impact of aggregate pre-tax losses of $576,000 and $816,000 incurred by
the Oregon and Washington Professional Corporations for the year ended
December 31, 1996 and the nine months ended September 30, 1997,
respectively, offset by (ii) reductions in clinical salaries and benefits
to give pro forma effect to the revised compensation formula included in
the amended Management Agreements. The table below summarizes the impact
of the two components on pro forma operating income:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Consolidation of Oregon and Washington
Professional Corporations ................. $(576,000) $(816,000)
Impact of Amended Management Agreements..... 802,000 816,000
Impact of Amended Management Agreement
Intangible Amortization.................... (79,000) (59,000)
--------- ---------
Net pro forma adjustment to operating income
(loss)..................................... $147,000 $ (59,000)
========= =========
</TABLE>
(c) Reflects the results of operations for Affiliated Dental Practices that
affiliated with the Company during 1996 for the period January 1, 1996
through the date of affiliation.
(d) Reflects the results of operations for Affiliated Dental Practices that
affiliated with the Company during 1997 for the period January 1, 1996
through December 31, 1996.
(e) Reflects the results of operations for dental practices to be affiliated
with the Company upon completion of the Pending Affiliations for the
period January 1, 1996 through December 31, 1996.
(f) Reflects the effect of changes in compensation paid to former dentist
owners pursuant to employment agreements that are entered into as part of
completed and pending acquisitions of non-professional dental practice net
assets and the execution of Management Agreements in connection therewith.
(g) Reflects the effect of certain expenses which are expected to be
nonrecurring and will be adjusted or eliminated in connection with
completed and pending acquisitions of non-professional dental practice net
assets and execution of Management Agreements in connection therewith.
(h) Reflects the effect of increased rents that resulted or will result upon
the execution of new lease agreements with the Company.
27
<PAGE>
(i) Reflects the effect of additional corporate office salaries, rent and
other expenses that would have been incurred by GMS had GMS been in
existence at January 1, 1996.
(j) Reflects changes in depreciation and amortization expenses associated with
the following: (i) conforming the accounting methodologies of dental
practices affiliated or to be affiliated with the Company to the Company's
accounting methodologies, and (ii) the expected amortization expense
related to the estimated intangible assets resulting from the purchase
price allocations of the Pending Affiliations.
(k) Reflects the estimated increase in interest expense that would have
resulted from borrowings under the Company's Credit Facility and from the
issuance of debt to certain of the former dentist owners in connection
with completed and pending acquisitions of certain non-professional dental
practice net assets and execution of Management Agreements in connection
therewith. The interest rate assumed was 9.2%.
(l) Reflects the change in income tax expense or income tax benefit resulting
from Completed Affiliations, the Pending Affiliations, the pro forma
affiliation adjustments, and the Offering adjustments to reflect pro forma
tax expense based upon an effective tax rate of 40% for affiliations in
accordance with staff Accounting Bulletin Topic 1-02.
(m) Reflects the estimated reduction in interest expense resulting from the
repayment of outstanding debt with a portion of the proceeds of the
Initial Public Offering.
(n) Reflects the expected reduction in interest expense resulting from the
repayment of certain outstanding debt with a portion of the proceeds of
this Offering based on the issuance of 3,500,000 shares of common stock
offered by the Company hereby at an assumed offering price of $8.75 per
share and the application of the estimated proceeds therefrom, as follows:
<TABLE>
<S> <C>
Estimated proceeds, net of related issuance costs.......... $ 27,545,000
Repayment of Credit Facility............................... (18,686,000)
------------
Net proceeds to the Company after payment of the Credit
Facility................................................ $ 8,859,000
============
</TABLE>
(o) Reflects the results of operations for Affiliated Dental Practices that
affiliated with the Company between January 1, 1997 and September 30, 1997
for the period January 1, 1997 through the date of affiliation and the
results of operations for Affiliated Dental Practices that affiliated with
the Company after September 30, 1997 and Pending Affiliations for the
period January 1, 1997 through September 30, 1997.
(p) Reflects the elimination of the dividends on shares of redeemable
preferred stock of GMS in connection with the conversion of such shares
into Common Stock as a result of the GMS Merger.
(q) Reflects certain balance sheet items for Affiliated Dental Practices that
affiliated with the Company between January 1, 1997 and December 31, 1997
and Affiliated Dental Practices that will affiliate after December 31,
1997.
(r) Reflects changes in certain balance sheet items for assets and liabilities
not acquired or assumed and debt and Common Stock issued to acquire the
remaining net assets of the dental practices affiliated or to be
affiliated after September 30, 1997.
(s) Reflects the increase in cash, the reduction of debt and the increase in
shareholders' equity resulting from this Offering.
(t) Reflects the conversion of all GMS preferred stock into Common Stock.
(u) Reflects the GMS restructuring and merger charge occurring in 1997.
(v) Reflects the consolidation of the historical patient service revenue of
the Oregon and Washington Professional Corporations with the Company.
(w) Represents the adjustment to consolidate the historical results of the
Oregon and Washington Professional Corporations with the Company. Reflects
the elimination of the net management fees historically paid by the Oregon
and Washington Professional Corporations to the Company.
28
<PAGE>
(x) Reflects the net impact of: (i) the adjustment to consolidate the
historical clinical salaries and benefits of the Oregon and Washington
Professional Corporations with the Company, and (ii) adjustments to such
clinical salaries and benefits to give pro forma effect to the revised
compensation formula included in the amended Management Agreements. The
table below summarizes the financial impact of the two components:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1996 1997
----------- -------------
<S> <C> <C>
Consolidation of Oregon and Washington
Professional Corporations.................. $10,444,000 $8,573,000
Impact of Amended Management Agreements..... (802,000) (816,000)
----------- ----------
Net pro forma adjustment to clinical
salaries and benefits...................... $ 9,642,000 $7,757,000
=========== ==========
</TABLE>
(y) Reflects the consolidation of the historical practice selling, general and
administrative expenses of the Oregon and Washington Professional
Corporations with the Company.
(z) Reflects the elimination of the $1.8 million receivable due from the
Oregon and Washington Professional Corporations which has been offset by
consideration paid under the amended Management Agreements.
(aa) Reflects the amortization expense related to the additional intangibles
recorded as a result of the purchase of certain assets of the Oregon and
Washington Professional Corporation.
(bb) Reflects the assets and liabilities of the Washington and Oregon
Professional Corporations.
29
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF OFFICES)
The following consolidated financial data presents the combined results of
Gentle Dental and GMS, which were merged on November 4, 1997 in a transaction
the Company anticipates will be accounted for as a pooling of interests. The
consolidated financial data has been derived from the Gentle Dental
Supplemental Consolidated Financial Statements and should be read in
conjunction with such statements, the notes related thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- ----------------------
1995 1996 1996 1997
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Dental group net patient service
revenue............................. $ -- $ 3,701 $ -- $19,348
Net management fees (support
services revenue) .................. 9,781 10,712 7,866 10,269
------- ------- ------- -------
Net revenues..................... 9,781 14,413 7,866 29,617
Clinical salaries and benefits....... -- 1,493 -- 6,571
Practice non clinical salaries and
benefits............................ 2,418 4,279 2,373 8,122
Dental supplies and lab expenses..... 1,633 2,830 1,648 4,424
Practice occupancy expenses.......... 911 1,563 976 2,450
Practice selling, general and
administrative expenses............. 1,311 1,805 986 3,199
Corporate selling, general and
administrative expenses............. 2,153 2,998 1,562 3,845
Depreciation and amortization........ 482 990 700 1,295
------- ------- ------- -------
Total operating expenses......... 8,908 15,958 8,245 29,906
------- ------- ------- -------
Operating income (loss).............. 873 (1,545) (379) (289)
Interest expense, net................ (290) (749) (572) (362)
Other income (expense)............... (92) (48) 23 (16)
------- ------- ------- -------
Income (loss) before income taxes.... 491 (2,342) (928) (667)
Provision (benefit) for income
taxes............................... 234 (655) (228) 80
------- ------- ------- -------
Net income (loss).................... 257 (1,687) (700) (747)
Dividends on redeemable convertible
preferred stock--Series B........... -- (240) -- (829)
Accretion of redeemable common
stock............................... -- (91) (80) (27)
------- ------- ------- -------
Net income (loss) attributable to
common stock........................ $ 257 $(2,018) $ (780) $(1,603)
======= ======= ======= =======
Net income (loss) per share:
Primary and fully diluted.......... $ 0.19 $ (0.86) $ (0.53) $ (0.40)
Weighted average shares outstanding:
Primary and fully diluted.......... 1,380 2,355 1,485 4,005
Selected Data:
Net revenue of Professional
Corporations........................ $16,029 $25,125 $15,731 $38,720
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Selected Consolidated Balance Sheet
Data:
Cash and cash equivalents.................................... $ 147
Working capital.............................................. 4,023
Total assets................................................. 38,634
Long-term debt and capital lease obligations, net of current
portion..................................................... 8,612
Redeemable convertible preferred stock....................... 12,072
Redeemable common stock...................................... 2,123
Shareholders' equity......................................... $ 9,458
</TABLE>
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Condensed Pro
Forma Consolidated Financial Data and the Audited Financial Statements and the
notes thereto included elsewhere in this Prospectus. The following discussion
contains certain forward-looking statements. The Company's results may differ
significantly from those projected in the forward-looking statements. Factors
that might cause future actual results to differ materially from the Company's
recent results or those projected in the forward-looking statements include,
but are not limited to, those discussed in the "Risk Factors" and below.
OVERVIEW
The Company manages dental practices in California, Hawaii, Idaho, Oregon
and Washington and is one of the largest providers of dental group management
services to multi-specialty dental groups in the United States. Following
completion of the Pending Affiliations, the Company will provide management
services to 59 dental offices with 205 dentists, including 49 specialists and
581 operatories.
Gentle Dental is a Washington corporation incorporated on December 14, 1992.
As of September 30, 1997, Gentle Dental provided management support services
to 21 dental offices with 69 dentists. On November 4, 1997, Gentle Dental
completed its merger with GMS, a California-based dental practice management
company, which provides management services to 22 locations consisting of 102
dentists. On September 21, 1997, the Company entered into an agreement to
acquire Dedicated Dental, a California-based company which owns and operates
11 staff model dental offices in the Bakersfield, California area. The Company
has also entered into three asset purchase agreements to acquire the assets of
four related dental practices in Southern California and one unrelated dental
practice in Northern California.
As a part of its strategy, the Company is pursuing an aggressive network
expansion plan. Prior to the GMS Merger and subsequent to its formation in
October 1996, GMS successfully affiliated with all of its Affiliated Dental
Practices, completed through 11 separate transactions including 22 locations.
The Company's integration process is intended to improve the operations of
newly-affiliated dental practices and to position them for increased patient
revenue and profit growth. The Company's objective is to affiliate with dental
practices that have a significant market position or, when combined with
existing Affiliated Dental Practices, would result in a significant market
position.
GMS MERGER AND RESTRUCTURING
As a result of the GMS Merger, which is expected to be accounted for as a
pooling of interests, the Company expects to incur costs totaling
approximately $1.8 million, most of which was expensed in the fourth quarter
of 1997. Additionally, effective January 1, 1998 the Company entered into
amended Management Agreements and related agreements with the Oregon and
Washington Professional Corporations and their respective shareholders
(collectively the "Amended Management Agreements") which restructured the
Management Agreements between the Company and such Professional Corporations
in order to conform to the structure of the management agreements used by GMS
in affiliations with dental practices.
The Company believes that the Amended Management Agreements more closely
align the incentives of the Oregon and Washington Professional Corporations
with the Company's objectives. The Amended Management Agreements, among other
things (i) in exchange for certain cash payments, stock options and earn out
consideration as described below, reduce dental practitioners' compensation
which is calculated as a percentage of net patient service revenue;
(ii) provide for a management fee payable to the Company which includes
reimbursement of expenses incurred by the Company in performance of its
obligations, a fixed fee equal to 15% of net revenue and an additional fee
which is calculated under a formula based on a percentage of the adjusted
revenues of the Oregon and Washington Professional Corporations; and
(iii) transfer ownership interests in certain tangible and intangible assets
of the Oregon and Washington Professional Corporations to the Company.
31
<PAGE>
Under current accounting pronouncements and standards, the Company believes
that the Amended Management Agreements provide the Company with a controlling
financial interest in the Oregon and Washington Professional Corporations and
require the Company to consolidate the financial results of these Professional
Corporations on a prospective basis.
As consideration for entering into the Amended Management Agreements, the
Company has agreed to pay to the Oregon and one of the Washington Professional
Corporations or certain of their respective designated dental practitioners,
in the aggregate, the following: (i) approximately $1.8 million in cash offset
by approximately $1.8 million of Company receivables previously due from such
Oregon and Washington Professional Corporations; (ii) the right to receive an
aggregate of either $575,000 cash in 18 equal monthly installments or options
to acquire 230,000 shares of Common Stock at an exercise price of $8.375 per
share, subject to five year vesting plus options to acquire an aggregate of
110,000 shares of Common Stock exercisable at $8.375 per share, subject to
five year vesting; and (iii) future cash or options subject to five year
vesting in amounts to be determined according to a formula based upon the
operating revenues of such Oregon and Washington Professional Corporations for
fiscal years ending December 31, 1998 and 1999. The Company has recorded
intangible assets of approximately $2.0 million in the fourth quarter of 1997,
which resulted from the Amended Management Agreements.
Gentle Dental has not historically consolidated the financial results of its
Affiliated Dental Practices, whereas GMS has historically consolidated the
financial results of its Affiliated Dental Practices. The Oregon and
Washington Professional Corporations incurred pre-tax losses of $576,000 and
$816,000 for the twelve months ended December 31, 1996 and the nine months
ended September 30, 1997, respectively. The preceding Condensed Pro Forma
Consolidated Financial Data reflects the effect of the Amended Management
Agreements, including consolidating the operating results of the Oregon and
Washington Professional Corporations. However, had the Amended Management
Agreements been in effect, the pre-tax income for the Oregon and Washington
Professional Corporations would have been $226,000 and $0 for the twelve
months ended December 31, 1996 and the nine months ended September 30, 1997,
respectively. Accordingly, the Company's net income for such periods, on a pro
forma basis adjusted for the effects of the Amended Management Agreements, is
not materially different from the historic results for such periods. See note
(b) to the "Condensed Pro Forma Consolidated Financial Data" for a more
detailed discussion of the impact of the Amended Management Agreements on the
net income of the Company for such periods.
PRO FORMA RESULTS OF OPERATIONS
The following discussion of pro forma results of operations is provided for
comparison of the Company's Pro Forma Consolidated Statement of Operations for
the year ended December 31, 1996 and the nine months ended September 30, 1997,
giving effect to the following, as if each had occurred on January 1, 1996:
(i) the GMS Merger, including the restructuring and merger charge related
thereto; (ii) the conversion of all shares of preferred stock of GMS into
Common Stock; (iii) completed affiliations and the Pending Affiliations,
including the effect of all cash, Common Stock and debt issued or expected to
be issued in connection therewith; (iv) the Initial Public Offering; (v) this
Offering; and (vi) the effect of the Amended Management Agreements. The pro
forma consolidated financial data is intended for informational purposes only
and is not necessarily indicative of the Company's future financial position,
future results of operations or what would have occurred had the events
described in the pro forma consolidated financial data occurred at the
beginning of the respective periods presented below.
32
<PAGE>
The following table of summary pro forma consolidated financial data is
intended for informational purposes only. The following information should be
read in conjunction with the Condensed Pro Forma Consolidated Financial Data,
the financial statements and supplemental financial statements and notes
thereto found elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS
ENDED
PRO FORMA SEPTEMBER 30,
1996 1997
------------- -------------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C> <C> <C>
Net revenues.................................... $75,377 100.0% $62,769 100.0%
Practice operating expenses..................... 65,549 87.0 53,484 85.2
Corporate selling, general and administrative
expenses....................................... 5,134 6.8 3,845 6.1
Depreciation and amortization................... 3,457 4.6 2,422 3.9
Operating income................................ 1,237 1.6 3,018 4.8
Net income attributable to common stock......... 226 0.3 $ 1,672 2.7
</TABLE>
Practice Operating Expenses. Practice operating expenses decreased from
87.0% of net revenues for the year ended December 31, 1996 to 85.2% of net
revenues for the nine months ended September 30, 1997. The decrease in
practice operating expenses as a percent of revenues is due to a lower cost
structure of dental practices to be affiliated with the Company pursuant to
the Pending Affiliations.
Corporate Selling, General and Administrative Expenses. Corporate selling,
general and administrative expenses decreased from 6.8% of net revenues to
6.1% of net revenues. This decrease was the result of economies of scale
realized through the centralization of dental practice management.
Depreciation and Amortization. Depreciation and amortization decreased from
4.6% of net revenues to 3.9% of net revenues. This decrease was primarily
attributable to the Affiliated Dental Practices that affiliated with the
Company in 1996 and 1997 having lower depreciation as a percentage of net
revenue.
Net Income Attributable to Common Stock. Net income increased from 0.3% of
net revenues for the year ended December 31, 1996 to 2.7% for the nine months
ended September 30, 1997. This increase in net income is attributable to
economies of scale realized through the centralization of dental practice
management and a decrease in interest expense associated with the net
repayment of outstanding debt.
SUPPLEMENTAL CONSOLIDATED RESULTS OF OPERATIONS
The following discussion of supplemented consolidated results of operations
is provided for comparison of the Company's Supplemental Consolidated
Statement of Operations for certain historical periods. The Company reports
dental group net patient revenue and associated clinical salaries and benefits
in those instances where the Company meets certain specific EITF consolidation
requirements. In those instances where the specific requirements are not met,
the Company reports net management fees revenue, and does not record any
associated clinical salaries and benefits expense. To provide a more
meaningful comparison, the following discussion compares expenses to the total
of dental group net patient service revenue of consolidated and unconsolidated
dental practices.
NINE MONTHS ENDED SEPTEMBER 30, 1997 SUPPLEMENTAL STATEMENT OF OPERATIONS
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 STATEMENT OF OPERATIONS
Dental Group Net Patient Service Revenue and Net Management Fees (Support
Service Revenue). Dental group net patient revenue increased from zero for the
nine months ended September 30, 1996 to $19.3 million for the nine months
ended September 30, 1997. This growth is directly attributable to five
affiliations completed
33
<PAGE>
during the three months ended December 31, 1996 and four affiliations
completed during the nine months ended September 30, 1997, representing a
total of twenty clinical locations. These affiliations have Management
Agreements that meet the requirements for consolidation of the related
Affiliated Dental Practices' with the Company's revenues and expenses.
Net management fee revenue represents management services to certain
unconsolidated Affiliated Dental Practices, covering twenty-one clinical
locations as of September 30, 1997. Support service revenue increased 30.5%
from $7.9 million for the nine months ended September 30, 1996 to $10.3
million for the nine months ended September 30, 1997. This growth was
primarily a result of three affiliations completed in 1997. Also,
approximately 15.0% of the increase in support services revenue is
attributable to increases in the percentages of patient revenue payable under
the Management Agreements with the Washington and Oregon Professional
Corporations from 50.0% to 51.0% and 50.0% to 53.0%, respectively.
Clinical Salaries and Benefits. Clinical salaries and benefits costs include
all patient service provider staff compensation and related payroll costs at
the dental facilities, including dentists and hygienists with the consolidated
Affiliated Dental Practices. Clinical salaries and benefits increased from
zero for the nine months ended September 30, 1996 to $6.6 million for the nine
months ended September 30, 1997, representing 34.0% of dental group net
patient revenue. The increase is due to the inclusion of salaries and benefits
attributable to the seven affiliations completed during 1997 that were
accounted for on a consolidated basis.
Practice Nonclinical Salaries and Benefits. Practice nonclinical salaries
and benefits costs include all staff compensation and related payroll costs at
the dental facilities other than dentists and hygienists. Total nonclinical
salary costs increased 242% from $2.4 million for the nine months ended
September 30, 1996 to $8.1 million for the nine months ended September 30,
1997. This increase was primarily attributable to the addition of Affiliated
Dental Practices in affiliations completed during the three months ended
December 31, 1996 and the nine months ended September 30, 1997. If all Company
revenue had been reported at the dental group net patient revenue level,
practice nonclinical salaries and benefits as a percentage of total revenue
for the nine months ended September 30, 1996 and 1997 would have been 15.1%
and 21.0%, respectively. The increase is attributable to the consolidated
Affiliated Dental Practices that affiliated with the Company in late 1996 and
1997. For consolidated Affiliated Dental Practices, practice nonclinical
salaries and benefits includes dental assistant personnel. For non-
consolidated Affiliated Dental Practices, dental assistant costs are excluded
from this cost category, as those costs are the responsibility of the
Professional Corporations.
Dental Supplies and Lab Costs. Total dental supplies and lab costs increased
168% from $1.6 million for the nine months ended September 30, 1996 to $4.4
million for the nine months ended September 30, 1997. If all Company revenue
had been recorded at the dental group net patient service revenue, dental
supplies and lab costs as a percentage of total revenue for the nine months
ended September 30, 1996 and 1997 would have been 10.5% and 11.4%,
respectively. The increase of 0.9% is attributed to the new practices added in
late 1996 and 1997 which had a higher dental supply usage and lab costs than
the Company's base operations.
Practice Occupancy. Practice occupancy expenses increased 151% from $976,000
for the nine months ended September 30, 1996 to $2.5 million for the nine
months ended September 30, 1997. This increase in occupancy expenses is
primarily attributable to the addition of Affiliated Dental Practices in
affiliations completed during the three months ended December 31, 1996 and the
nine months ended September 30, 1997. If all Company revenue had been recorded
at the dental group net patient service revenue level, practice occupancy cost
as a percentage of total revenue for the nine months ended September 30, 1996
and 1997 would have been 6.2% and 6.3%, respectively. The slight increase in
comparable costs was due to higher rent at these Affiliated Dental Practices
as a percentage of revenue.
Practice Selling, General and Administrative Expenses. These costs include
general office, advertising, professional services (excluding dentistry),
travel and entertainment, local taxes, insurance, and other miscellaneous
costs at the clinical office level. Practice selling, general and
administrative expenses increased
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224% from $986,000 for the nine months ended September 30, 1996 to $3.2 million
for the nine months ended September 30, 1997. If all Company revenue had been
recorded at the dental group net patient service revenue level, practice
selling, general and administrative expenses as a percentage of total revenue
for the nine months ended September 30, 1996 and 1997 would have been 6.3% and
8.3%, respectively. The Affiliated Dental Practices that affiliated with the
Company in late 1996 and 1997 contributed to the increase in this percentage.
Corporate Selling, General and Administrative Expenses. Total corporate
selling, general and administrative expenses increased 146% from $1.6 million
for the nine months ended September 30, 1996 to $3.8 million for the nine
months ended September 30, 1997. If all Company revenue had been recorded at
the dental group net patient service revenue level, corporate selling, general
and administrative expenses as a percentage of total revenue for the nine
months ended September 30, 1996 and 1997 would have been 9.9% and 9.9%,
respectively.
Depreciation and Amortization. Total depreciation and amortization expense
for the nine months ended September 30, 1996 and 1997 were $700,000 and
$1.3 million, respectively. The increase was primarily due to the Affiliated
Dental Practices that affiliated with the Company in late 1996 and 1997.
Interest Expense. Total interest expense decreased 36.7% from $572,000 for
the nine months ended September 30, 1996 to $362,000 for the nine months ended
September 30, 1997. This decrease in interest expense resulted from the
repayment by the Company of $4.4 million under its various bank loan
arrangements with the proceeds from the Initial Public Offering partly offset
by additional debt incurred to complete additional affiliations in 1997.
Provision (Benefit) for Income Taxes. For the nine months ended September 30,
1996, the Company recognized a tax benefit resulting from its taxable loss for
the period. For the nine months ended September 30, 1997, prior to the pooling
of interests, Gentle Dental reported tax expense of $219,000 on $448,000 of
pretax income. The effective tax rate of 48.9% was higher than the statutory
rate due to Gentle Dental utilizing a tax-free merger structure for certain
dental practice affiliations. As a result, the amortization of certain
intangible assets reduced earnings but was not deductible for tax purposes.
This reported tax expense was offset by a tax benefit of $139,000 reported by
GMS for the same period. Accordingly, on a consolidated basis, the Company
incurred a tax expense of $80,000 on a net loss before taxes of $667,000 for
the nine months ended September 30, 1997.
YEAR ENDED DECEMBER 31, 1996 STATEMENT OF OPERATIONS COMPARED TO YEAR ENDED
DECEMBER 31, 1995 STATEMENT OF OPERATIONS
Dental Group Net Patient Service Revenue and Net Management Fees (Support
Services Revenue). Dental group net patient revenue increased from zero for the
year ended December 31, 1995 to $3.7 million for the year ended December 31,
1996. This growth was directly attributed to five affiliations completed during
the three months ended December 31, 1996, representing eleven clinical
locations. These affiliations have Management Agreements that meet the
requirements for consolidation of the revenues and expenses of the Affiliated
Dental Practices and the Company.
Support services revenue represents management services to certain
unconsolidated Affiliated Dental Practices. Support services revenues increased
9.5% from $9.8 million for the year ended December 31, 1995 to $10.7 million
for the year ended December 31, 1996. This increase is attributable to a 33.7%
increase in total patient level revenue recognized at the Professional
Corporations, which was partially offset by the reduction in the percentage of
revenue payable to the Company under the support services agreements from 61%
of patient revenue in 1995 to 50% of patient revenue in 1996.
Total patient level revenue increased from $16 million for the year ended
December 31, 1995 to $25.1 million for the year ended December 31, 1996. The
increase is primarily due to the Affiliated Dental Practices that affiliated
with the Company in 1996.
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Clinical Salaries and Benefits. Clinical salaries and benefits costs include
all patient service provider staff compensation and related payroll costs at
the dental facilities, including dentists, and hygienists associated with the
consolidated Affiliated Dental Practices. Clinical salaries and benefits
increased from zero for the year ended December 31, 1995 to $1.5 million for
the year ended December 31, 1996, representing 40.3% of dental group net
patient revenue. The increase is due to the addition of five Affiliated Dental
Practices that are accounted for on a consolidated basis.
Practice Nonclinical Salaries and Benefits. Practice nonclinical salaries
and benefits costs include all staff compensation and related payroll costs at
the dental office other than dentists and hygienists. Total nonclinical salary
costs increased 76.9% from $2.4 million for the year ended December 31, 1995
to $4.3 million for the year ended December 31, 1996. If all Company revenue
had been reported at the dental group net patient revenue level, practice
nonclinical salaries and benefits as a percentage of total revenue for the
year ended December 31, 1995 and 1996 would have been 15.1% and 17.1%,
respectively. The increase is attributable to the consolidated Affiliated
Dental Practices that affiliated with the Company in 1996. For consolidated
Affiliated Dental Practices, practice nonclinical salaries and benefits
includes dental assistant personnel. For non-consolidated Affiliated Dental
Practices, dental assistant costs are excluded from this cost category, as
those costs are the responsibility of the Affiliated Dental Practices.
Dental Supplies and Lab Costs. Total dental supplies and lab costs increased
73.3% from $1.6 million for the year ended December 31, 1995 to $2.8 million
for the year ended December 31, 1996. This increase is primarily attributable
to the addition of Affiliated Dental Practices in affiliations completed
during 1996. If all Company revenue had been recorded at the dental group net
patient service revenue level, dental supplies and lab costs as a percentage
of total revenue for the years ended December 31, 1995 and 1996 would have
been 10.2% and 11.3%, respectively. The increase was due to a higher cost
ratio of the Affiliated Dental Practices that affiliated with the Company in
1996 relative to the historic cost ratio of the Company.
Practice Occupancy. Practice occupancy expenses increased 71.2% from
$911,000 for the year ended December 31, 1995 to $1.6 million for the year
ended December 31, 1996. This increase in occupancy expenses is also
attributable to the addition of new Affiliated Dental Practices from
affiliations completed during 1996. If all Company revenue had been recorded
at the dental group net patient service revenue level, practice occupancy cost
as a percentage total revenue for the years ended December 31, 1995 and 1996
would have been 5.7% and 6.2%, respectively.
Practice Selling, General and Administrative Expenses. These costs include
general office, advertising, professional services (excluding dentistry),
travel and entertainment, local taxes, insurance, and other miscellaneous
costs at the clinical branch level. Practice selling, general and
administrative expenses increased 37.7% from $1.3 million for the year ended
December 31, 1995 to $1.8 million for the year ended December 31, 1996. If all
Company revenue had been recorded at the dental group net patient service
revenue level, practice selling, general and administrative cost as a
percentage of total revenue for the years ended December 31, 1995 and 1996
would have been 8.2% and 6.2%, respectively.
Corporate Selling, General and Administrative Expenses. Total corporate
selling, general and administrative expenses increased 39.2% from $2.2 million
for the year ended December 31, 1995 to $3.0 million for the year ended
December 31, 1996. If all Company revenue had been recorded at the dental
group net patient service revenue level, practice selling, general and
administrative cost as a percentage of total revenue for the years ended
December 31, 1995 and 1996 would have been 13.4% and 11.9%, respectively. The
decline as a percentage of revenue was attributable to economies of scale
resulting from the addition of Affiliated Dental Practices.
Depreciation and Amortization. Total depreciation and amortization expense
for the years ended December 31, 1995 and 1996 were $482,000 and $990,000,
respectively. The increase was primarily due to the Affiliated Dental
Practices that affiliated with the Company in 1996.
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Interest Expense. The increase in interest expense from $290,000 for the
year ended December 31, 1995 to $749,000 for the year ended December 31, 1996
partially reflects the increase in additional short-term and long-term
borrowings as a result of several purchases of dental practice assets.
Additionally, in consideration for guaranteeing the Company's line of credit,
the Company issued to certain of its officers, directors, and shareholders
warrants to purchase 115,000 shares of the Common Stock. The estimated fair
value of the warrants was $232,000 and was fully amortized as interest expense
during 1996.
Provision (Benefit) for Income Taxes. For the year ended December 31, 1995,
the Company's effective tax rate was 47.7%. For the year ended December 31,
1996, prior to the pooling of interests, Gentle Dental reported a tax benefit
of $345,000 on a pretax loss of $1.3 million. This reported tax benefit was
increased by a tax benefit of $310,000 reported by GMS for the same period.
Accordingly on a pooled basis, the Company reported a tax benefit of $655,000
on a net loss before taxes of $2.3 million for the year ended December 31,
1996.
LIQUIDITY AND CAPITAL RESOURCES
On November 4, 1997, Gentle Dental merged with GMS in a transaction intended
to be accounted for as a pooling of interests. Gentle Dental issued 4,512,377
shares of Common Stock in exchange for substantially all outstanding capital
stock of GMS. Of the Common Stock issued, 297,074 shares are subject to
repurchase by the Company at an average price of $0.32 per share if the
Company does not achieve specified performance targets for 1997. The Company
does not expect to meet the 1997 targets and anticipates that the shares will
be repurchased during 1998. After giving effect to the Pending Affiliations
described below, the Company expects that the GMS shareholders will hold
approximately 47.5% of the outstanding shares of the Company.
In November 1997, the Company entered into an agreement to acquire Dedicated
Dental and to affiliate with certain related dental practices. Consideration
for the Dedicated Dental Affiliation consists of $9.8 million in cash and
1,519,103 shares of Common Stock valued at approximately $13.0 million. The
closing of the Dedicated Dental Affiliation is subject to satisfaction of
certain conditions, including receipt of the approval of the DOC. There can be
no assurance that these conditions will be satisfied or that the Dedicated
Dental Affiliation will be completed. Additionally, the Company has announced
a pending affiliation of a dental practice in Sacramento, California. The
aggregate consideration for such affiliation is $810,000, consisting of
$320,000 in cash and 43,077 shares of Common Stock. These affiliations will be
accounted for as purchases.
On October 31, 1997, GMS purchased the assets of two additional dental
practices for $2.9 million in cash, a $160,000 promissory note, 180 shares of
its preferred stock, warrants to purchase 125,000 shares of its common stock,
of which 50,000 are subject to earnout provisions, and the assumption of
$245,000 of debt. Immediately prior to the consummation of the GMS Merger,
shares of preferred stock were converted into shares of GMS common stock and
upon consummation of the GMS Merger the warrants were converted into warrants
to purchase 55,636 shares of Common Stock. The aggregate purchase price for
such acquisitions was approximately $3.6 million and will be allocated to the
fair value of assets acquired, including the management agreements.
The Company's Credit Facility provides for a maximum credit line of $25
million, which may be increased at the option of the Company to $30 million
following completion of an equity offering by the Company in which the Company
receives at least $20 million in net cash proceeds.The Company intends to use
the Credit Facility for working capital requirements, to purchase non-
professional dental practice assets of additional dental practices that the
Company may seek to affiliate with, and to purchase operating assets for
existing Affiliated Dental Practices. The Credit Facility provides that
aggregate amounts borrowed under the Credit Facility for working capital
purposes and letter of credit obligations may not exceed $4 million, and that
remaining amounts available under the Credit Facility may be used by the
Company for permitted acquisitions and capital expenditures. The ability of
the Company to incur indebtedness under the Credit Facility is subject to
delivery of customary opinions, certificates and closing documents by the
Company. The revolving feature of the Credit Facility expires on September 30,
1999, at which time it will convert into a three year term loan to be repaid
in 12 equal quarterly installments. Principal amounts owed under the Credit
Facility bear interest, at the Company's option and dependent upon the
Company's leverage ratio, of (i) up to 1.0% over prime or (ii) up to 3.25%
above LIBOR. The Credit Facility requires the Company to pay an unused
commitment fee in the amount of 0.50% per annum or 0.375% per annum, depending
on the Company's leverage ratio, on the average daily amount by
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which the bank commitment under the Credit Facility exceeds the aggregate
amount of all loans then outstanding. The Credit Facility contains several
covenants including (i) restrictions on the ability of the Company to incur
indebtedness and repurchase, or make dividends with respect to, its capital
stock; and (ii) requirements relating to maintenance of a specified net worth
and specified ratios of current assets to current liabilities, debt to cash
flow and EBITDAR to fixed charges. In addition, the Credit Facility requires
the Company to notify the lenders prior to making any acquisition and to
obtain the consent of the lenders prior to making (i) certain acquisitions
with purchase prices exceeding $3 million, (ii) all acquisitions with purchase
prices exceeding $5 million and (iii) capital expenditures exceeding $5
million in any fiscal year. The Credit Facility also requires the Company to
convert to a holding company that owns no assets other than the stock of its
operating subsidiaries on or before May 31, 1998. If the Company does not
attain holding company status on or before May 31, 1998, the interest rate
applicable to amounts borrowed under the Credit Facility would be increased by
0.5% and if holding company status is not attained on or before July 31, 1998
an event of default would exist under the terms of the Credit Facility. The
Company's obligations under the Credit Facility are guaranteed by each of the
subsidiaries of the Company. The obligations of the Company under the Credit
Facility and the subsidiaries under the guarantees are secured by a security
interest in the equipment, fixtures, inventory, receivables, subsidiary stock,
certain debt instruments, accounts and general intangibles of each of such
entities.
Assuming the GMS Merger had occurred at September 30, 1997, the outstanding
balance under the Credit Facility would have been $4.3 million. Assuming that
the GMS Merger, the Dedicated Dental Affiliation, the other Pending
Affiliation and two affiliations completed after September 30, 1997 had been
completed at September 30, 1997, the pro forma outstanding balance under the
Credit Facility would have been $18.7 million. Upon the completion of this
Offering, the Company intends to apply $18.7 million of the net proceeds to
the repayment of outstanding indebtedness of the Company under the Credit
Facility.
On June 21, 1996, ServiceMaster purchased 100,000 shares of the Common Stock
and a warrant to purchase an additional 100,000 shares at $7.50 per share for
total consideration of $1 million. ServiceMaster has the right to require the
Company to repurchase any or all of the 100,000 shares initially purchased and
any or all shares acquired upon exercise of the 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 with net proceeds to Company of at least
$10 million. The purchase price under the put right is equal to 20 times the
Company's average adjusted net income per share for the two most recent fiscal
years preceding ServiceMaster's exercise of the put.
The holders of the Dentist Put Rights issued by the Company in connection
with affiliations with dental practices have the right to require the Company
to repurchase an aggregate of 83,686 shares of Common Stock for an aggregate
of $1,216,000. Such rights are exercisable by the holders thereof at various
dates between 1998 and 2003. The rights as to all but 20,000 of the shares of
Common Stock will terminate if the Company completes a public offering of
Common Stock with a price that is greater than $20 per share. See "Risk
Factors--Common Stock Put Rights" and note (9) to the Gentle Dental
Supplemental Consolidated Financial Statements.
The Company funded capital expenditures of $1.2 million, $873,000 and $1.3
million for the years ended December 31, 1995, December 31, 1996 and the nine
months ended September 30, 1997, respectively. Such expenditures were
primarily related to the purchase of furniture and equipment, certain
information systems and tenant improvements. Cash paid for acquisitions was
$1.1 million, $7.3 million and $7.7 million for the years ended December 31,
1995, December 31, 1996 and the nine months ended September 30, 1997,
respectively. Such expenditures consisted primarily of cash paid in connection
with affiliation transactions, when completed, as well as cash paid pursuant
to related earn outs. In connection with certain completed affiliation
transactions the Company has agreed to pay to the sellers certain future
consideration in the form of cash and stock. The amount of future
consideration payable by the Company under earn outs is generally computed
based upon financial performance of the Affiliated Dental Practices during
certain specified periods.
The Company has in the past, and may in the future, issue promissory notes
to sellers of dental practice assets in connection with the affiliation
transactions with dental practices. At September 30, 1997, the Company had
approximately $3,710,000 in aggregate principal amount of such promissory
notes outstanding. Such notes generally require the Company to make quarterly
or monthly installments of principal. Certain of such notes require the
Company to make periodic balloon payments of principal amounts thereof. One
such note requires the Company to make a $500,000 lump sum payment in July
1999, a $2,083,179 lump sum payment in July 2002, and, in the event that
specified performance targets are attained by certain dental practices, a
payment of up to $2,800,000 in October 2002 (or such earlier date on which the
performance targets are achieved).
The Company plans to fund working capital requirements, acquisition of the
non-professional assets of additional dental practices the Company may seek to
affiliate with, and purchase of additional operating assets for the existing
practices with a combination of borrowings under the Credit Facility, issuance
of Common Stock and notes to purchase nonprofessional assets of Affiliated
Dental Practices, cash flow from operations and proceeds, if any, from future
offerings of Common Stock. 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.
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BUSINESS
OVERVIEW
The Company is one of the largest providers of dental practice management
services to multi-specialty dental practices in the United States. Following
the Pending Affiliations, the Company will provide management services to
dental practices at 59 dental offices with 205 dentists, including 49
specialists, and 581 operatories in selected markets in California,
Washington, Oregon, Idaho and Hawaii. The dentists employed through the
Company's network of Affiliated Dental Practices provide comprehensive general
dentistry services and offer specialty dental services, which include
orthodontics, periodontics, endodontics, pedodontics, prosthodontics, oral
surgery and oral pathology. The Company's practice management services
facilitate the delivery of convenient, high quality, comprehensive and
affordable dental care to patients in a comfortable environment. The Company
seeks to build geographically dense dental practice networks in selected
markets through a combination of affiliating with existing dental practices
and selectively developing de novo offices.
The Company is pursuing an aggressive expansion strategy. The Company's
operating strategy is to provide value to Affiliated Dental Practices through
the introduction of a variety of practice enhancements. The Company assists
the Affiliated Dental Practices by providing general administrative services
and implementing established Company procedures designed to optimize staffing
ratios and patient scheduling. The Company also assists the Affiliated Dental
Practices by increasing utilization of specialists through effective cross-
referral programs among the Affiliated Dental Practices which capture
specialty dental service revenues previously referred to outside practices,
developing and implementing targeted advertising and marketing programs, and
attracting additional dentists and dental practices. To the extent applicable,
the Company provides significant managed care expertise to the Affiliated
Dental Practices. The Company believes the implementation of these
enhancements has resulted in significant revenue growth at the Affiliated
Dental Practices.
The Company has recently established a clinical services council (the
"Clinical Services Council") comprised of leading dental practitioners within
the Company's network of Affiliated Dental Practice. The Clinical Services
Council will work with Affiliated Dental Practices to establish and implement
procedures and protocols for the purpose of maintaining high quality dental
care. The Company provides educational services and a training program
covering non-clinical aspects of the dental practices. The Company also
provides a management information system that combines commercially available
software with customized, proprietary software of the Company. The Company
believes that its enhanced system provides a competitive advantage by allowing
the Company to effectively manage a large geographically diverse network of
dental practices from a centralized base. As of December 31, 1997, the
Company's basic management information system was in place at approximately
91% of the locations within the Affiliated Dental Practices network. The
Company intends to install its basic management information system at
Dedicated Dental and at each dental practice with which it affiliates.
The Company has recently completed a major merger and is in the process of
completing a major affiliation. On November 4, 1997, Gentle Dental merged with
GMS, a California-based dental practice management company, which provided
management services to dental practices at 22 locations consisting of 102
dentists, including 30 specialists. Upon completion of the GMS Merger, the
former shareholders of GMS received approximately 59% of the then outstanding
shares of the Company. On September 21, 1997, the Company executed definitive
agreements for the pending Dedicated Dental Affiliation, which will add
management services affiliations with respect to California based dental
practices at 15 locations consisting of 33 dentists, including three
specialists. See "Recent and Pending Affiliations."
DENTAL SERVICES INDUSTRY
HCFA estimates that the annual aggregate domestic market for dental services
was approximately $45.8 billion for 1995, representing 4.6% of total health
care expenditures in the United States. Dental services expenditures grew at a
compound annual growth rate of approximately 8.6% from 1980 to 1995. According
to HCFA, the size of the dental services industry is projected to reach $79.1
billion by 2005. The Company
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believes that the anticipated growth in the dental industry will be driven by
several factors including: (i) an increase in the availability and types of
dental insurance; (ii) an increasing demand for dental services from an aging
population; (iii) the evolution of technology which makes dental care less
traumatic and, therefore, more attractive to patients; (iv) an increased focus
on preventive and cosmetic dentistry; and (v) the growth of managed care
organizations that offer dental coverage to their members.
The market for dental services in the United States consists of both general
and specialty dentistry services. General dentistry services include
preventive and diagnostic procedures such as cleanings, examinations and
x-rays and restorative treatments such as fillings of cavities, gum therapy
and crowns. Specialty dentistry services include orthodontics, periodontics,
endodontics, pedodontics, prosthodontics, oral surgery, and oral pathology.
Dental care services in the United States are generally delivered through a
fragmented system of local providers, primarily individual or small group
practices. According to the American Dental Association 1995 Survey of Dental
Practice there were approximately 150,000 actively practicing dental
professionals in the United States, approximately 70% of whom practiced alone.
The Company estimates that approximately 2% of general and specialty
practitioners are affiliated with practice management companies.
According to industry sources, approximately 30% of the estimated 117
million people covered by dental benefits in 1995 were enrolled in managed
dental care programs, including preferred provider organizations ("PPO") and
dental HMOs. Enrollment in dental HMOs, according to the National Association
of Dental Plans, is estimated to have grown from 7.8 million in 1990 to 23.8
million in 1995.
The Company believes that the trend toward consolidation in the dental
services industry will continue as dentists seek to affiliate with group
practice managers such as the Company due to (i) the desire of dentists to
focus on clinical aspects rather than on administrative and regulatory aspects
of their practices; (ii) the increasing patient demands for more flexible
evening and weekend hours; (iii) the increasing demand for competitively-
priced, high quality dental care at multiple locations; (iv) the increasing
desire of recent dental school graduates to pursue alternatives to the
traditional solo practice of dentistry and (v) the need for certifiable
standards of care for patients.
OPERATING STRATEGY
The Company's strategic objective is to maintain and expand its leadership
position in the dental practice management industry. To achieve this
objective, the Company seeks to enter selected geographic markets and develop
locally prominent, multi-specialty dental delivery networks that provide
gentle, high quality, cost-effective dental care. The key elements of the
Company's strategy are as follows:
PROVIDE CONVENIENT, COMPREHENSIVE DENTAL CARE. The Affiliated Dental
Practices within the Company's network provide patients with customer-
friendly, comprehensive and cost-effective dental care which is made available
at convenient times and locations. Because the Company's Affiliated Dental
Practices generally include both general practitioners and on-staff
specialists who can provide dental services such as orthodontics,
periodontics, endodontics, pedodontics, prosthodontics, oral pathology and
oral surgery, patients can rely on the Company's network of Affiliated Dental
Practices that are generally structured to serve comprehensive dental care
needs. By offering extended office hours and conveniently located offices,
patients are offered a dental care environment that makes it easier to
schedule and keep appointments. The Company also provides flexible payment
options in an effort to reduce patient financial burdens.
FOCUS ON QUALITY OF PATIENT CARE. The Company has and continues to refine
procedures, training and systems designed to ensure optimum patient care. The
Company seeks to improve clinical outcomes through its Clinical Services
Council which works directly with the affiliated network dentists to: (i)
institute quality assurance and utilization review programs, (ii) develop and
implement continuing education and training
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programs for dental professionals, (iii) design and implement treatment
protocols, developed in cooperation with dental practitioners, (iv) evaluate
new techniques and technologies, (v) monitor treatment outcomes, and
(vi) reduce patient fear of dental procedures. Additionally, the Company seeks
to affiliate with dentists and specialists who are committed to delivering
high quality dental care.
ESTABLISH A COMPREHENSIVE DENTAL CARE NETWORK. The Company's strategy is to
increase the number of Affiliated Dental Practices by entering into management
contracts with and acquiring the non-professional assets of dental groups and
practices in selected markets. The Company's objective is to affiliate with
dental groups and practices that have a significant market position or, when
combined with existing Affiliated Dental Practices, would result in a
significant market position. The Company also intends to selectively establish
de novo dental offices in the markets in which the Company operates, in order
to augment its market presence. The Company believes that the establishment of
significant positions in the markets it serves will result in economies of
scale. Following each new affiliation with a dental practice, the Company
works closely with the professionals and staff in order to achieve network
integration and provide patients with convenient dental treatment.
ACHIEVE OPERATIONAL EFFICIENCIES AND ENHANCE REVENUE. The Company believes
it achieves operating efficiencies through the establishment of (i)
centralized management and administrative functions, such as marketing,
payroll, accounts payable, general accounting and human resources services for
the Affiliated Dental Practices; and (ii) on-site functions such as patient
scheduling and billing and collections at each dental office or on a regional
basis. The Company also enhances dental practice revenues by providing
services and establishing procedures designed to optimize staff ratios and
patient scheduling, capture specialty revenue, develop and implement targeted
advertising and marketing programs, attract new dentists to join the
affiliated practices, and utilize its management information system to more
effectively support the Company's network of Affiliated Dental Practices. The
Company believes that its network configuration provides leverage in
negotiating with third-party payors and dental supply vendors to receive
structured payments and contract terms that are more favorable than those
typically available to individual and small group practitioners. The addition
of specialists such as orthodontists and oral surgeons who serve multiple
offices within the Company's affiliated network generally allows the Company
to capture incremental revenue from the higher fees commanded by specialty
services.
INTEGRATE AND LEVERAGE MANAGEMENT INFORMATION SYSTEMS. The Company's
management information system utilizes commercially available software, which
has been enhanced by proprietary software of the Company. This management
information system allows the Company to more effectively enhance the
Affiliated Dental Practices. The system is designed to assist each Affiliated
Dental Practice in optimizing staffing ratios, patient scheduling, identifying
and reducing unfinished patient treatment programs, maximizing billing and
collection efforts, and actively monitoring the performance of managed care
and other third party contracts. The Company believes that its management
information system provides a distinct competitive advantage by allowing the
Company to effectively service a diverse network of dental practices from a
centralized base. As of December 31, 1997, the Company's basic management
information system was in place at approximately 91% of the locations within
the Affiliated Dental Practices network.
EXPAND PATIENT VOLUME THROUGH PROACTIVE MARKETING. The Company seeks to
assist the Affiliated Dental Practices to increase patient volume by focusing
on patient satisfaction and targeting existing and new patients through radio,
direct mail, print advertising and other retail marketing programs. The
Company tailors its advertising to local markets, based upon demographic
characteristics of each market and the brand name recognition of the
Affiliated Dental Practices in the respective markets. The Affiliated Dental
Practices support this marketing program by offering convenient hours and
locations for the dental practices, providing comprehensive dental care
services such as same-day emergency care, introducing or expanding specialty
services at the dental practices, and utilizing the Company's management
information system to identify and reduce incomplete patient treatments. The
Company's objective is to leverage its existing advertising programs to
generate revenue as it expands within its selected markets.
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CAPITALIZE ON MANAGED CARE EXPERTISE. The Company assists the Affiliated
Dental Practices by supplementing their fee-for-service business with selected
managed care contracts. The Company believes that selected managed care
contracts offer an attractive and profitable source of incremental revenue for
the Affiliated Dental Practices and the Company. The Company believes that the
financial and clinical data generated by the Company's management information
system enables the Company to negotiate managed care contracts under terms
favorable to the Company and its dental practice network. Additionally, the
Company utilizes its management information system to actively monitor
utilization of patient groups covered by the managed care plans. The Company
believes that its expertise in managed care represents a competitive
advantage, given the increasing market share of managed care payors in the
dental care sector.
DENTAL PRACTICE NETWORK
Following completion of the Pending Affiliations, the Company will provide
comprehensive management services to a dental practice network which employs
205 dentists, including 49 specialists, practicing out of 59 dental offices
and 581 operatories located in the geographic markets set forth below.
<TABLE>
<CAPTION>
LOCATION DENTISTS(1) OFFICES OPERATORIES
-------- ----------- ------- -----------
<S> <C> <C> <C>
Northern California............................ 74 15 175
Southern California(2)......................... 40 16 137
Portland, Oregon Area.......................... 50 13 109
Seattle, Washington Area....................... 13 7 64
Hawaii......................................... 14 6 55
Idaho.......................................... 14 2 41
--- --- ---
Total...................................... 205 59 581
=== === ===
</TABLE>
- --------
(1) Includes 46 specialists at current dental practices and three additional
specialists after giving effect to the Pending Affiliations. See "Recent
and Pending Affiliations."
(2) Includes the 15 dental offices that will be affiliated upon completion of
the Dedicated Dental Affiliation.
EXPANSION STRATEGY
As a part of its strategy, the Company is pursuing an aggressive network
expansion plan. The Company believes that it has significant opportunities to
affiliate with additional dental practices resulting from (i) favorable
industry characteristics, (ii) the professional and business relationships of
the Company's senior management, and (iii) the Company's strong name
recognition.
The U.S. general and specialty dentistry industries are highly fragmented.
The American Dental Association estimates that at December 1995, there were
approximately 150,000 dentists in 113,000 general dental practices, with
single dentist practices accounting for approximately 70% of all practices.
The Company estimates that approximately 2% of all dentists are currently
affiliated with practice management companies. Since January 1997, the number
of dentists contracting or otherwise associated with practice management
organizations has grown significantly. The Company believes that the use of
dental practice management companies will continue to grow rapidly, resulting
in significant consolidation opportunities for the Company and other practice
management organizations. In order to capitalize on these consolidation
opportunities, the Company utilizes the extensive dental industry experience
of its senior management and its significant relationships with numerous
practitioners and other industry leaders throughout the United States. The
Company believes that these extensive relationships provide a competitive
advantage to the Company as it seeks additional affiliation opportunities to
further the growth of the Company's network of Affiliated Dental Practices.
The Company intends to continue to offer numerous significant benefits and
value-added services to attract dentists and specialty practitioners to its
affiliated provider network. Specific value-added services provided by
42
<PAGE>
the Company include billing, reimbursement and collections services, payroll
and staffing, patient scheduling, advertising and marketing, product supply
management and equipment maintenance, dentists recruitment and capital
resources. Additional benefits to practitioners include clinical leadership
and excellence, quality of care standards and continuing education, and
financial benefits including equity compensation, earn-outs and performance
bonuses. The Company believes that it will continue to be successful in
attracting dentists for the Affiliated Dental Practices by providing these
services and benefits. Furthermore, the Company believes that its name
recognition is and will continue to be attractive to practitioners from an
affiliation standpoint. As a result, the Company believes it will have greater
consolidation opportunities.
The Company uses a range of evaluation criteria in selecting affiliation
candidates, including (i) number of practitioners and compensation; (ii)
patient base; (iii) quality of care; (iv) operating statistics, including
number of operatories, patient visits and revenue per chair; (v) historical
operating results and financial condition; (vi) general versus specialty
revenue mix; (vii) payor mix; (viii) location; (ix) market demographics and
competition; (x) advertising expenditures; (xi) reputation within the local
community; (xii) non-professional staffing requirements; and (xiii) condition
of facilities and equipment including information systems. The Company intends
to target individual and group practitioners, as well as local and regional
consolidators. As consideration for future affiliations, the Company may use a
combination of cash, stock, seller financing and earn-outs.
Upon a new affiliation with a dental practice, the Company's integration
process may include (i) centralization of certain management and
administrative functions, (ii) access to the expertise of regional management
personnel, (iii) integration of management information systems, (iv)
initiation of quality assurance and peer review programs, (v) development of
advertising and marketing programs, (vi) managing payroll and staffing, (vii)
reviewing quality of care and staff utilization, and (viii) modification of
scheduling procedures. Such integration is intended to improve the operations
of the dental practices and to position them for increased patient revenue and
profit growth. The Company will also continue its strategy of establishing de
novo dental offices in selected markets to augment existing market presence.
SERVICES AND OPERATIONS
The Company provides comprehensive management services with respect to all
of the operations of its network of Affiliated Dental Practices, other than
the provision of dental treatment. The Company employs all non-clinical
personnel at the dental practices.
ADMINISTRATIVE. The Company provides administrative services to the
Affiliated Dental Practices, including staffing, education and training,
billing and collections, patient scheduling, patient treatment follow-up,
financial reporting and analysis, productivity reporting and analysis, cash
management, group purchasing, inventory management, payroll processing,
employee benefits administration, advertising production and other marketing
support. The Company also assists in professional recruiting and provides
support for dental practice affiliations, new site development and other
capital requirements. The Company believes the dentists at the Affiliated
Dental Practices benefit from the support provided by the Company and that
these services substantially reduce the amount of time they are otherwise
required to devote to administrative matters, thereby enabling network
dentists to dedicate more time to the growth of their professional practices.
Through economies of scale, the Company is able to provide these services at a
lower cost than could be obtained by any of the Affiliated Dental Practices
individually. In addition, because of its size and purchasing power, the
Company has been able to negotiate discounts on, among other things, dental
and office supplies, health and malpractice insurance and equipment.
STAFFING AND SCHEDULING. The Company provides management services that are
designed to optimize staffing ratios and patient scheduling at the dental
practices within the Company's network. The Company provides analysis and
advice with respect to the optimal number of general dentists, specialist
dentists, dental assistants and hygienists at each dental practice in an
effort to provide high levels of quality care and patient confidence while
practicing at a heightened level of efficiency. In addition, the Company
assists dental practices
43
<PAGE>
with their scheduling in order to maximize efficiency and minimize delays in
treatment. The Company also assists each Affiliated Dental Practice, to the
extent necessary, with respect to expanding office hours, optimizing the flow
of patients through the offices and assisting dentists in the more efficient
use of dental assistants and hygienists.
ADVERTISING AND MARKETING. The Company assists the Affiliated Dental
Practices in developing and implementing targeted advertising and marketing
programs. The Company's marketing programs, which include patient educational
and patient recall prevention programs at selected dental practices, are
focused on the retention and reactivation of existing patients. In addition,
the Company also uses external marketing programs such as direct mail and
yellow page advertising that are designed to identify the convenience of
individual locations, payment plans and service hours, and the high standards
of care at the practices in an attempt to attract new patients.
DENTIST AFFILIATION. In order to continue the Company's growth, the Company
seeks to enter into Management Agreements with dental practices that employ
dentists who become affiliated with the Company. The Company believes that its
affiliation structure allows many dentists to reduce the financial constraints
associated with having a significant portion of their net worth invested in
their practices. Further, the Company believes that the practice of dentistry
within its network allows dentists to focus almost exclusively on practicing
dentistry by avoiding the burden of non-clinical administrative and management
responsibilities. An affiliation with the Company offers dentists the
additional advantages of employee benefits such as health insurance and
continuing education.
QUALITY ASSURANCE. The clinical management procedures and treatment
protocols for the Affiliated Dental Practices within the Company's network
vary from region to region. Under the guidance of the Company's recently
formed Clinical Services Council, key dentists in each region will review and
determine these procedures and treatment protocols. The Company intends to
work closely with the dentists and hygienists at the Affiliated Dental
Practices to develop and implement these procedures and protocols, as well as
business and administrative standards under which dental services are provided
in order to create a heightened clinical environment for the Affiliated Dental
Practices to enhance patient care and clinical outcomes. Included among the
procedures and protocols to be determined by the Clinical Services Council are
treatment planning, diagnostic screening, radiographic records, record
keeping, specialty referrals and dental hygiene protocols. As part of the
Affiliated Dental Practices' clinical enhancement program, the Company intends
to assist in providing quality assurance, peer review and utilization review
programs.
TRAINING AND EDUCATION. Staff and practice development programs are an
integral part of the Company's operating strategy. The Company's programs are
designed to (i) motivate the staff to achieve optimum performance goals, (ii)
improve the level of patient satisfaction, and (iii) improve the Company's
ability to attract and retain qualified personnel. The Company believes that
its programs collectively have increased referrals from patients, and have
increased treatment acceptance rates. The Company provides the Affiliated
Dental Practices with consulting and educational services. These services
include a training program covering non-clinical aspects of the practice,
together with specific training designed for the efficient and effective use
of the Company's management information system. Specifically, the Company's
training programs provide professionals and Company employees at the dental
practices with access to guidelines for addressing questions and concerns of
prospective and existing patients, techniques for explaining treatment
procedures and length of treatment, parameters for establishing appropriate
financial arrangements with patients, and a systematic approach to monitoring
the success of each area of training.
MANAGEMENT INFORMATION SYSTEM. Management believes that access to accurate,
relevant and timely financial and operating information is a key element of
its practice management services. The Company's management information system
is a combination of commercially available software with proprietary
44
<PAGE>
enhancements, and is designed to increase the efficiency and productivity of
dental practices by enabling the Company and the dental practices to cost-
effectively monitor the key business and professional operating aspects. The
Company's basic management system is in place at approximately 91% of the
locations within the Affiliated Dental Practice network. The Company intends
to implement its basic management system at Dedicated Dental and at each
dental practice with which it affiliates. The system allows the dental
practices to identify, track and schedule the patient treatment process,
thereby reducing unfinished patient treatment programs which correspondingly
increases practice revenues. The system also contains features designed to
maximize billing and collection efforts, and to actively monitor the
performance of managed care contracts. The management information system
functions to optimize the practitioner's time through computerized scheduling.
The Company believes that its enhanced management information system provides
a critical competitive advantage, in that it allows the Company to more
effectively manage a geographically diverse network of dental practices from a
centralized base. The current proprietary software enhancements, together with
its capacity to develop future enhancements, uniquely positions the Company
for future expansion of its Affiliated Dental Practice management network. The
Company believes this system has increased the productivity of the existing
Affiliated Dental Practices that have implemented it.
MANAGEMENT AGREEMENTS
The Company has entered into Management Agreements with the Affiliated
Dental Practices under which the Company is the exclusive administrator of all
non-clinical aspects of the dental practices conducted by the Affiliated
Dental Practices, providing facilities, equipment, staffing, management
support and other ancillary services. Under the Management Agreements the
Company (i) provides all facilities and equipment used by the Affiliated
Dental Practices; (ii) bills and collects all receivables on behalf of the
Affiliated Dental Practices; (iii) purchases and provides all supplies; (iv)
provides all clerical, accounting, payroll, human resources, computer and
other non-dental support services and personnel; (v) supervises and maintains
custody of all business records; (vi) provides management information reports;
(vii) provides market research and plans and implements marketing and
advertising programs; (viii) negotiates contracts on behalf of the Affiliated
Dental Practices with managed care payors or other third parties; and (ix)
assists in the recruitment of dentists.
Under the Management Agreements, the Affiliated Dental Practices 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 Affiliated Dental Practices are exclusively in
control of all aspects of the practice of dentistry and the delivery of dental
services.
As compensation for all services provided under the Management Agreements,
the Company receives service fees from the Affiliated Dental Practices. Under
a typical Management Agreement, the Company will receive a service fee equal
to reimbursement of expenses incurred by the Company in the performance of its
obligations under the Management Agreement, plus an additional fee equal to a
percentage ranging from 15% to 30% of the net revenues of each Affiliated
Dental Practice, after allowances for contractual adjustments and bad debts.
Under certain of the Management Agreements, the Company is also entitled to
receive a bonus based upon achieving certain performance objectives.
Additionally, one Management Agreement provides for a flat fee of 53% of the
net revenues of the Affiliated Dental Practice. The fees under this Management
Agreement increase annually at the rate of 1% to a maximum of 55%. In
addition, Management Agreements to be entered into with dental practices
related to Dedicated Dental provide for flat fees ranging from 57% to 71% of
the net revenues of the practices. The service fees are collected by the
Company on an ongoing basis out of the cash collections of the Affiliated
Dental Practices, or under certain Management Agreements, out of receivables
assigned to the Company by the Affiliated Dental Practices.
The Management Agreements each have an initial term of 40 years with
automatic extensions ranging from five years to ten years thereafter, unless
either party gives notice before the end of the term. The Management
Agreements are not subject to early termination by the Affiliated Dental
Practices unless (i) the Company is the
45
<PAGE>
subject of bankruptcy proceedings, or (ii) the Company materially breaches the
Management Agreement and does not cure the breach following notice. Certain of
the Management Agreements have additional termination events, including: (i)
refusal to comply with the decisions of the joint operating committee, (ii)
failure to pay the management fee, and (iii) a material change in the law.
GOVERNMENT REGULATION
GENERAL. The practice of dentistry is regulated extensively at both the
state and federal level. Regulatory oversight includes, but is not limited to,
considerations of fee-splitting, corporate practice of dentistry, anti-
kickback and anti-referral legislation and state insurance regulation.
Every state imposes licensing and other requirements on individual dentists
and dental facilities and services. In addition, federal and state laws
regulate HMOs and other managed care organizations for which dentists may be
providers. In connection with its operations in existing markets and expansion
into new markets, the Company may become subject to compliance with additional
laws, regulations and interpretations or enforcements thereof. The ability of
the Company to operate profitably will depend in part upon the Company and its
Affiliated Dental Practices obtaining and maintaining all necessary licenses,
certifications and other approvals and operating in compliance with applicable
health care regulations.
Dental practices must meet federal, state and local regulatory standards in
the areas of safety and health. Historically, these standards have not had any
material adverse effect on the operations of the Affiliated Dental Practices.
The Company believes that the Company and the Affiliated Dental Practices are
in compliance in all material respects with all applicable federal, state and
local laws and regulations relating to safety and health.
CORPORATE PRACTICE OF DENTISTRY; FEE SPLITTING. The laws of many states
prohibit by statute or under common law dentists from splitting fees with non-
dentists and prohibit non-dental entities such as the Company from engaging in
the practice of dentistry or employing dentists to practice dentistry. The
specific restrictions against the corporate practice of dentistry as well as
the interpretation of those restrictions by state regulatory authorities vary
from state to state. The restrictions are generally designed to prohibit a
non-dental entity from controlling the professional practice of a dentist,
employing dentists to practice dentistry (or, in certain states, employing
dental hygienists or dental assistants), controlling the content of a
dentist's advertising or sharing professional fees. A number of states limit
the ability of a person other than a licensed dentist to own equipment or
offices used in a dental practice. Some of these states allow leasing of
equipment and office space to a dental practice under a bona fide lease. Some
states also prohibit a dentist from operating more than two dental offices.
The laws of many states also prohibit dental practitioners from paying any
portion of fees received for dental services in consideration for the referral
of a patient. In addition, many states impose limits on the tasks that may be
delegated by dentists to dental assistants.
The Company provides management and administration services to dental
practices, and believes that the fees the Company charges for those services
are consistent with the laws and regulations of the jurisdictions in which it
operates.The Company does not control the clinical aspects of the practice of
dentistry or, employ dentists to practice dentistry, except as permitted by
law. Moreover, in states in which it is prohibited, the Company does not
employ dental hygienists or dental assistants. Although the Company believes
that its operations comply in all material respects with the above-described
laws to which it is subject, there can be no assurance that a review of the
Company's business relationships by courts or other regulatory authorities
would not result in determinations that could prohibit or otherwise adversely
affect the operations of the Company or that the regulatory environment will
not change, requiring the Company to reorganize or restrict its existing or
future operations.
The laws regarding fee-splitting and the corporate practice of dentistry and
their interpretation vary from state to state and are enforced by regulatory
authorities with broad discretion. There can be no assurance that the legality
of the Company's business or its relationships with dentists or Affiliated
Dental Practices will not be successfully challenged or that the
enforceability of the provisions of any Management Agreement will not be
46
<PAGE>
limited. The laws and regulations of certain states in which the Company may
seek to expand may require the Company to change the form of the Company's
relationships with Affiliated Dental Practices in such states in a manner
which may restrict the Company's operations or the way in which providers may
be paid or may prevent the Company from acquiring the non-dental assets of
such practices or managing dental practices in such states. Similarly, there
can be no assurance that the laws and regulations of the states in which the
Company presently maintains operations will not change or be interpreted in
the future either to restrict or adversely affect the Company's existing or
future relationships with the Company's Affiliated Dental Practices. Any
change in the Company's relationships with its Affiliated Dental Practices
resulting from the interpretation of corporate practice of dentistry and fee-
splitting statutes and regulations could have a material adverse effect on the
Company's business and results of operations.
ANTI-KICKBACK AND ANTI-REFERRAL LEGISLATION. Federal and many states laws
prohibit the offer, payment, solicitation or receipt of any form of
remuneration in return for, or in order to induce (i) the referral of a person
for services; (ii) the furnishing or arranging for the furnishing of items or
services; or (iii) the purchase, lease or order or arranging or recommending
purchasing, leasing or ordering of any item, in each case, reimbursable under
Medicare, Medicaid or other federal and state health care programs. These
provisions apply to dental services covered under the Medicaid program in
which the Company participates. The federal government has increased scrutiny
of joint ventures and other transactions among health care providers in an
effort to reduce potential fraud and abuse related to Medicare and Medicaid
costs. Many states have similar anti-kickback laws, and in many cases these
laws apply to all types of patients, not just Medicare and Medicaid
beneficiaries.
The applicability of these federal and state laws to transactions in the
health care industry such as those to which the Company is or may be a party
has not been the subject of judicial interpretation. There can be no assurance
that judicial or administrative authorities will not find these provisions
applicable to the Company's operations, which could have a material adverse
effect on the Company's business. Under current federal law, a physician or
dentist or member of his or her immediate family is prohibited from referring
Medicare or Medicaid patients to any entity providing "designated health
services" in which the physician or dentist has an ownership or investment
interest, including the physician's or dentist's own group practice, unless
such an applicable exception is available. The designated health services
include the provision of clinical laboratory services, radiology and other
diagnostic services (including ultrasound services), radiation therapy
services, physical and occupational therapy services, durable medical
equipment, parenteral and enteral nutrients, certain equipment and supplies,
prosthesis, orthotics, outpatient prescription drugs, home health services and
inpatient and outpatient hospital services. A number of states also have laws
that prohibit referrals for certain services such as x-rays by dentists if the
dentist has certain enumerated financial relationships with the entity
receiving the referral, unless an exception applies. Any future expansion of
these prohibitions to other health services could restrict the Company's
ability to integrate dental practices and carry out the development of the
Company's network of Affiliated Dental Practices.
Noncompliance with, or violation of, either the anti-kickback provisions or
restrictions on referrals can result in exclusion from the Medicare and
Medicaid programs as well as civil and criminal penalties. Similar penalties
apply for violations of state law. While the Company makes every effort to
comply with the anti-kickback and anti-referral laws a determination of
violation of these laws by the Company or its Affiliated Dental Practices
could have a material adverse effect on the Company's business, financial
condition and results of operations.
STATE INSURANCE REGULATION. In addition, there are certain regulatory risks
associated with the Company's role in negotiating and administering managed
care and capitation contracts. The application of state insurance laws to
reimbursement arrangements other than various types of fee-for-service
arrangements is an unsettled area of law and is subject to interpretation by
regulators with broad discretion. As the Company or its Affiliated Dental
Practices contract with third-party payors, including self-insured plans, for
certain non-fee-for-service arrangements, the Company or the Affiliated Dental
Practice may become subject to state insurance laws. In the event that the
Company or the Affiliated Dental Practices are determined to be engaged in the
business of
47
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insurance, such parties could be required either to seek licensure as an
insurance company or to change the form of their relationships with third-
party payors and may become subject to regulatory enforcement actions. In such
event, the Company's revenues may be adversely affected.
Dedicated Dental operates under a license issued by the DOC under the Knox-
Keene Act, which is expected to be maintained by Dedicated Dental after it
becomes a wholly-owned subsidiary of the Company. See "Recent and Pending
Affiliations." The Knox-Keene Act and the regulations promulgated thereunder
subject entities which are licensed as healthcare service plans in California
to substantial regulation by the DOC. In addition, licensees under the Knox-
Keene Act are required to file periodic financial data and other information
(which generally become available to the public), maintain substantial
tangible net equity on their balance sheets and maintain adequate levels of
medical, financial and operating personnel dedicated to fulfilling the
licensee's statutory and regulatory requirements. The DOC is empowered by law
to take enforcement actions against licensees that fail to comply with such
requirements. Any material non-compliance with the Knox-Keene Act and the
regulations promulgated thereunder could have a material adverse effect on the
Company's business, financial condition and results of operations.
HEALTH CARE REFORM PROPOSALS. The United States Congress and state
legislatures have considered various types of health care reform, including
comprehensive revisions to the current health care system. It is uncertain
what legislative proposals will be adopted in the future, if any, or what
actions federal or state legislatures or third-party payors may take in
anticipation of or in response to any health care reform proposals or
legislation. Health care reform legislation adopted by Congress or the
legislatures of states in which the Company does business, as well as changes
in federal and state regulations could have a material adverse effect on the
operations of the Company, and changes in the health care industry, such as
the growth of managed care organizations and provider networks, may result in
lower payment levels for the services of dentists within the Company's network
of Affiliated Dental Practices and lower profitability of such affiliated
practices.
REGULATORY COMPLIANCE. The Company regularly monitors developments in laws
and regulations relating to dentistry. The Company may be required to modify
its agreements, operations or marketing from time to time in response to
changes in the business, statutory and regulatory environments. The Company
plans to structure all of its agreements, operations and marketing in
accordance with applicable law, although there can be no assurance that its
arrangements will not be successfully challenged or that the required changes
may not have a material adverse effect on operations or profitability.
COMPETITION
The Company competes with other dental practice management companies seeking
to affiliate with dental practices in the highly competitive dental practice
management industry. The Company believes that the industry will become more
competitive as it continues to develop. Key factors of competition between
dental practice management companies currently include acquisition methods and
models, the reputations of the dental practices within dental care networks,
the scope of services provided by dental care networks, management experience
and expertise, the sophistication of management information, accounting,
finance and other systems, and network operating methods. The Company believes
that it effectively competes in each of these areas. See "Risk Factors--
Competition."
INSURANCE
The Company carries comprehensive liability, fire, and extended coverage
insurance. The Affiliated Dental Practices carry professional liability and
general liability insurance. Such insurance coverages are expanded to include
all additional practices that the Company develops or affiliates, with policy
specifications, insured limits, and deductibles customarily carried for
similar dental practices.
SERVICE MARK
The Company's network of Affiliated Dental Practices in Oregon and
Washington is operated and marketed under the name Gentle Dental. Other
affiliated practices may or may not use the Gentle Dental name depending
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upon each affiliated 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's predecessor acquired title to the
federal registration of this service mark as originally issued on October 26,
1982. As part of the purchase, the seller was granted an exclusive personal
license ("License") to use the mark for the sale of dental services in
practices owned or controlled by the seller in the Boston, Massachusetts,
Baltimore, Maryland, and Washington, D.C. metropolitan areas for a period
equal to the lesser of the seller's "natural life" or the 10 year period
ending 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 entity that commenced use of the Gentle Dental mark before October
26, 1982, may have rights to the mark in its geographic market superior to the
Company's rights. The Company has been advised by counsel that, subject to the
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, provided that the Company asserts its rights in a timely
manner and has not otherwise acquiesced to the use of the conflicting mark.
Given the costs and inherent uncertainties of service mark litigation, there
can be no assurance that the Company can successfully enforce its service mark
rights in any particular market.
LEGAL PROCEEDINGS
Neither the Company nor the Affiliated Dental Practices are currently
subject to any material litigation nor, to the Company's knowledge, is any
material litigation threatened against the Company or the Affiliated Dental
Practices other than routine litigation arising in the ordinary course of
business, some of which are expected to be covered by liability insurance and
all of which collectively are not expected to have a material adverse effect
on the Company's business, financial condition or results of operations.
EMPLOYEES
At December 31, 1997, the Company had 606 full-time employees, including 237
dental assistants directly employed by the Company, and 100 part-time
employees and the Affiliated Dental Practices had a total of 404 employees,
including 125 general dentistry practitioners, 46 specialists, 117 dental
hygienists, and 116 dental assistants. Approximately 36 clerical personnel and
dental assistants employed by one of the Professional Corporations are subject
to a collective bargaining agreement that expires in January 1999. Management
believes it maintains good relationships with its employees.
PROPERTIES
The dental practice and business offices in the Company's network are
generally leased from various parties pursuant to leases with remaining terms
ranging from one to 17 years. One dental office, in Everett, Washington, is
leased on a month-to-month basis; however, the Company believes that
alternative space is readily available in this area at comparable rates and on
comparable terms. 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 Yorba Linda, California and
the Company also maintains executive offices in leased office space in
Vancouver, Washington. In connection with the amendment of the Management
Agreements with Oregon and Washington Professional Corporations, the Company
acquired an office building located in Hazeleale, Washington. Such office
building is occupied by one of the Company's Affiliated Dental Practices.
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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>
Michael T. Fiore........ 43 Co-Chairman of the Board, Chief Executive Officer and President
Dany Y. Tse, DMD........ 47 Co-Chairman of the Board and President of Clinical Services Council
Grant M. Sadler......... 51 Vice Chairman of the Board
L. Theodore Van Eerden.. 42 Executive Vice President, Chief Development Officer and Director
Norman R. Huffaker...... 51 Chief Financial Officer
Gerald R. Aaron, DDS.... 51 Director
Kenneth D. Hooten....... 34 Director
Paul H. Keckley......... 48 Director
Craig W. Wong, DMD...... 42 Director
Steven R. Bull, DDS..... 47 Director
Robert Finzi............ 44 Director
Kathleen D. La Porte.... 36 Director
H. Wayne Posey.......... 59 Director
Arthur G. Kaiser, DDS... 53 Director designee
</TABLE>
Michael T. Fiore. Mr. Fiore has served as Co-Chairman of the Board, Chief
Executive Officer and President of the Company since November 1997. Before
joining the Company in November 1997, Mr. Fiore was the Chief Executive
Officer, President and a director of GMS from April 1997 to October 1997. From
1986 to March 1996, Mr. Fiore served in various management positions at Salick
Health Care, Inc., a provider of diagnostic and therapeutic services to
patients with catastrophic illness, principally in the areas of cancer and
kidney failure, including serving as a director, Executive Vice President and
Chief Operating Officer, and as President of its principal subsidiary,
Comprehensive Cancer Centers, Inc.
Dany Y. Tse, DMD. Dr. Tse has served as Co-Chairman of the Board and
President of Clinical Services Council since November 1997. Dr. Tse served as
Chairman of the Board since December 1996 and, as President and Chief
Executive Officer of the Company from March 1996 until November 1997. He
previously served as Chairman of the Board from inception in December 1992 to
March 1996. Dr. Tse is a licensed dentist in Oregon and Washington.
Grant M. Sadler. Mr. Sadler has been Vice-Chairman of the Board since
November 1997. Prior to joining the Company in November 1997, Mr. Sadler
founded and served as the Chief Executive Officer, President and Secretary of
GMS from its inception in October 1996 to April 1997, at which time he vacated
those positions and assumed the position of Chairman of the Board and served
in that capacity until November 1997. Prior to GMS, Mr. Sadler served as
President of Group Management Services, Inc., a dental group consulting
practice formed by Mr. Sadler in 1991.
L. Theodore Van Eerden. Mr. Van Eerden has served as Executive Vice
President, Chief Development Officer and as a director since November 1997. He
served as Chief Financial Officer from March 1996 until November 1997. Before
joining 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. Prior to Medical SafeTec, Inc., Mr. Van Eerden served
in various positions with ServiceMaster focusing on mergers and acquisitions.
50
<PAGE>
Norman R. Huffaker. Mr. Huffaker has served as Chief Financial Officer of
the Company since November 1997. Prior to joining the Company in November
1997, Mr. Huffaker served as Chief Financial Officer of GMS from December 1996
to November 1997. Mr. Huffaker previously served as Vice President of Finance
for Community Dental Services, Inc. (SmileCare Dental Group), an Irvine,
California based dental HMO and staff model practice company.
Gerald R. Aaron, DDS. Dr. Aaron has been a director of the Company since
December 1996. He has been certified as a pediatric dentist since 1976 and has
been employed since 1991 by the Professional Corporation in Washington.
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. Following the sale of shares
of Common Stock by ServiceMaster pursuant to this Offering, director Hooten
has indicated his intent to resign from the Board of Directors.
Paul H. Keckley. Mr. Keckley has been a director of the Company since
December 1996. Since 1994, he has been Vice President Strategic Development at
PhyCor, Inc. Mr. Keckley previously served as a director of PhyCor, Inc., and
from 1985 to 1994 he was President of The Keckley Group, a market research and
strategic planning firm for hospitals, health systems, medical practices, and
health maintenance organizations.
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 1986. Dr. Wong serves as the
Chief of the Department of Oral and Maxillofacial Surgery for the Affiliated
Dental Practices in Oregon and Washington. Dr. Wong also serves as Section
Chief of Oral and Maxillofacial Surgery for the Veterans Administration
Medical Center in Portland, Oregon.
Steven R. Bull, DDS. Dr. Bull has been a director of the Company since
November 1997 and served as a director of GMS from December 1996 until the GMS
Merger. Since 1994, Dr. Bull has served as Senior Vice President of Public and
Professional Services for Delta Dental Plan of California. In this capacity,
Dr. Bull is responsible for coordinating the implementation of dental policy,
providing professional liaison with the dental provider community, and
recommending dental policy to the Delta California Dental Policy Committee and
Board of Directors. Dr. Bull has previously served as Senior Vice President of
PMI Dental Health Plan, and as Dental Director of Safeguard Health Plans.
Robert Finzi. Mr. Finzi has been a director of the Company since November
1997 and served as a director of GMS from October 1996 until the GMS Merger.
Since May 1991, Mr. Finzi has been a Vice President of the Sprout Group, a
division of DLJ Capital Corporation, which is the managing general partner of
Sprout Capital VII, L.P. and Sprout Growth II, L.P., and an affiliate of
Donaldson, Lufkin & Jenrette Securities Corporation. Mr. Finzi is also a
general partner of the general partner of a series of investment funds managed
by the Sprout Group and a limited partner of the general partner of ML Venture
Partners II, L.P. From 1984 to 1991, Mr. Finzi was a Vice President of Merrill
Lynch Venture Capital. Mr. Finzi serves on the board of directors of The
Cerplex Group and six privately held companies.
Kathleen D. La Porte. Ms. La Porte has been a director of the Company since
November 1997 and served as a director of GMS from October 1996 until the GMS
Merger. From January 1993 to the present, Ms. La Porte has been affiliated
with the Sprout Group, a division of DLJ Capital Corporation, which is the
managing general partner of Sprout Capital VII, L.P. and Sprout Growth II,
L.P. and an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation.
Ms. La Porte has served as a general partner of the Sprout Group since
December 1993. From August 1987 to January 1993, Ms. La Porte was a principal
at Asset Management Company, a venture capital firm focused on early stage
health care and technology investments. Ms. La Porte currently serves on the
board of directors of FemRx, Hall Kinion, Onyx Pharmaceuticals and Lynx
Therapeutics and two privately held companies.
51
<PAGE>
H. Wayne Posey. Mr. Posey has been a director of the Company since November
1997 and served as a director of GMS from December 1996 until the GMS Merger.
Since its inception in 1994, Mr. Posey has served as President, Chief
Executive Officer, director, and a member of the executive committee of
ProMedCo. Mr. Posey was a healthcare consultant from 1975 until 1994, most
recently as the principal in charge of the healthcare services division of
McCaslin & Company, P.C., a public accounting and consulting company in Fort
Worth, Texas.
Arthur G. Kaiser, DDS. The Company has agreed that Dr. Kaiser will be made a
director of the Company effective as of the closing of the Dedicated Dental
Affiliation. Dr. Kaiser has been the President and a director of Dedicated
Dental since December of 1986. Dr. Kaiser is a licensed dentist in California.
CLASSIFIED BOARD
The Company's Restated Articles of Incorporation provide for three classes
of directors. Directors Fiore, Finzi, Posey and Bull have been appointed to
Class II and will serve until the meeting of shareholders in 1998; directors
Sadler and Van Eerden have been appointed to serve with directors Tse and
Aaron in Class III until the meeting of shareholders in 1999; and director La
Porte has been appointed to serve with directors Hooten, Keckley, and Wong in
Class I until the annual meeting of shareholders in 2000. 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.
While directors Sadler and Van Eerden have been appointed to Class III and
director La Porte has been appointed to Class I, their service for the
remaining one and two years of their terms must be approved at the Company's
1998 Annual Shareholder's Meeting because they were appointed by the Board of
Directors to fill vacancies. Following the completion of the Dedicated Dental
Affiliation, director designee Kaiser will be appointed to serve on the Board
of Directors. Director Hooten has indicated his intention to resign from the
Board of Directors following the sale of shares of Common Stock by
ServiceMaster pursuant to this Offering.
BOARD COMMITTEES
The Board of Directors maintains an Executive Committee, an Audit Committee
and a Compensation Committee. The Executive Committee, consisting of directors
Finzi, Fiore, La Porte, Van Eerden and Tse, has all of the authority of the
Board of Directors except as limited by applicable law. The Audit Committee,
consisting of directors Bull, La Porte and Posey, oversees actions taken by
the Company's independent auditors, and reviews the Company's internal audit
controls. The Compensation Committee, consisting of directors Finzi, Keckley
and Posey, reviews the compensation levels of the Company's employees and
makes recommendations to the Company's board regarding 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 January
1997, Mr. Keckley was granted a 10-year stock option for 2,000 shares with an
exercise price of $5.00 per share and in August 1997, Mr. Keckley was granted
a 10-year stock option for 5,000 shares with an exercise price of $8.02 per
share. In the GMS Merger, 10-year stock options previously granted by GMS to
each of Dr. Bull and Mr. Posey in December 1996 were converted into options
for 11,127 shares of Common Stock each at an exercise price of $0.45 per
share.
52
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE. The following table sets forth compensation
information for each person who served as chief executive officer of the
Company in 1997 and all other current executive officers of the Company,
(collectively, the "Named Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- ------------
OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED COMPENSATION
--------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Michael T. Fiore............ 1997 $ 37,500 $50,000 -- $2,000(1)
Co-Chairman of the Board, 1996 $ -- $ -- -- $ --
Chief Executive Officer and
President (2)(3)
Dany Y. Tse, DMD............ 1997 $212,887 $83,000 125,000(5) $ --
Co-Chairman of the Board, 1996 $187,313 $ -- -- $3,339(6)
President of Clinical
Services Council (4)
Grant M. Sadler............. 1997 $ 29,166 $15,000 -- $ --
Vice Chairman of the
Board(2)(7) 1996 $ -- $ -- -- $ --
L. Theodore Van Eerden...... 1997 $122,994 $60,000 101,000(8) $ --
Executive Vice President 1996 $ 77,500 $ -- 37,500 $ --
Chief Development Officer
Norman R. Huffaker.......... 1997 $ 23,334 $25,000 44,508(10) $ --
Chief Financial Officer
(2)(9) 1996 $ -- $ -- -- $ --
</TABLE>
- --------
(1) Consists of auto allowances from November 4, 1997 (the effective date of
the GMS Merger).
(2) Amounts shown reflect compensation earned from November 4, 1997 (the
effective date of the GMS Merger) through December 31, 1997.
(3) Mr. Fiore's annual base compensation is currently $225,000. At December
31, 1997, Mr. Fiore held 333,818 shares of Common Stock as unvested
restricted stock. At December 31, 1997, the value of these shares, net of
the amount paid for the shares, was $2,770,908. See "Certain
Transactions."
(4) Dr. Tse served as President and Chief Executive Officer of the Company
until November 4, 1997.
(5) Includes options for 50,000 shares repriced at the time of the Initial
Public Offering in February 1997.
(6) Consists of matching contributions made by the Company to the Company's
401(k) Plan.
(7) Mr. Sadler's annual base compensation is currently $175,000. At December
31, 1997, Mr. Sadler held 303,162 shares of unvested restricted stock. At
December 31, 1997, the value of these shares, net of the amount paid for
the shares, was $2,622,630. See "Certain Transactions."
(8) Includes options for 37,500 shares originally granted in 1996 and repriced
at the time of the Initial Public Offering.
(9) Mr. Huffaker's annual base compensation is currently $140,000.
(10) Consists of options to purchase 100,000 shares of GMS Common Stock
granted to Mr. Huffaker by GMS on December 4, 1996, which were converted
into options to purchase 44,508 shares of Common Stock in connection with
the GMS Merger on November 4, 1997.
53
<PAGE>
STOCK OPTIONS GRANTED IN FISCAL 1997. The following table sets forth
information concerning stock options granted to the Named Officers during
1997:
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF OPTIONS
SHARES GRANTED TO
UNDERLYING EMPLOYEES
OPTIONS DURING EXERCISE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR PER SHARE DATE
---- ---------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Michael T. Fiore(1)..... -- -- -- --
Dany Y. Tse, DMD........ 31,000(2) 6.1% $ 5.50 1/29/02
50,000(2)(3) 9.8% $ 5.50 7/26/05
44,000(4) 8.6% $4.125 4/9/02
Grant M. Sadler......... -- -- -- --
L. Theodore Van Eerden.. 63,500(5) 12.5% $ 5.00 1/29/07
25,000(3)(5) 4.9% $ 5.00 3/19/06
12,500(3)(5) 2.5% $ 5.00 5/31/06
Norman R. Huffaker...... 22,254(6) 4.4% $ 0.45 12/4/06
22,254(7) 4.4% $ 0.45 12/4/06
</TABLE>
- --------
(1) Does not include options for 333,816 shares of Common Stock (on a post-GMS
Merger basis) granted to Mr. Fiore by GMS and exercised on April 1, 1997,
prior to the GMS Merger. See "Certain Transactions."
(2) This option was fully exercisable at the time of grant.
(3) Although this option was originally granted prior to 1997, it was repriced
at the time of the Initial Public Offering in February 1997.
(4) This option becomes exercisable for 20 percent of the shares on each of
the first five anniversaries of April 9, 1997, the grant date.
(5) This option becomes exercisable for 20 percent of the shares on each of
the first five anniversaries of the grant date, which is ten years prior
to the expiration date shown in the table.
(6) This option becomes exercisable for 25 percent of the shares on each of
the first four anniversaries of December 4, 1996, the date of original
grant by GMS.
(7) This option will become exercisable for one-half of the shares if, among
other things, the Company's EBITDA (excluding CEO salary and related
expense) for 1997 exceeds $6,298,000, and will become exercisable for a
portion of that half of the shares if such EBITDA exceeds $4,723,500. This
option will become exercisable for the second half of the shares if, among
other things, the Company's EBITDA (excluding CEO salary and related
expense) for 1998 exceeds $16,911,000, and will become exercisable for a
portion of that half of the shares if such EBITDA exceeds $12,683,250. To
the extent the performance targets are not met, this option will be
forfeited.
54
<PAGE>
AGGREGATED OPTION EXERCISES. No options were exercised by the Named Officers
during 1997. The following table sets forth certain information concerning the
number of shares covered by both exercisable and unexercisable stock options
as of December 31, 1997. 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, 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF
SUBJECT TO UNEXERCISED IN-THE-MONEY OPTIONS
NAME OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
---- -------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael T. Fiore(2)........ -- -- -- --
Dany Y. Tse, DMD........... 81,000 44,000 $708,750 $385,000
Grant M. Sadler............ -- -- -- --
L. Theodore Van Eerden..... 7,500 93,500 $ 65,625 $818,125
Norman R. Huffaker......... 5,563 38,945 -- $340,769
</TABLE>
- --------
(1) Based on price of $8.75 per share on December 31, 1997.
(2) Does not include options for 333,816 shares of Common Stock (on a post-GMS
Merger basis) granted to Mr. Fiore by GMS and exercised on April 1, 1997,
prior to the GMS Merger. See "Certain Transactions."
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 the Company's key employees and the award of nonqualified
stock options, stock appreciation rights, bonus rights, and other incentive
grants to the Company's directors, officers, employees, and other key
contributors, including key employees of the Affiliated Dental Practices. The
total number of shares of Common Stock that may be issued under the Plan will
not exceed 1,000,000. At December 31, 1997, 87,962 shares had been issued
under the Plan, options for 559,050 shares were outstanding under the Plan,
and 352,488 shares remained available for future grants under the Plan. At
December 31, 1997, options granted under GMS stock option plans covering
110,600 shares of Common Stock were also outstanding.
The Plan is administered by the Compensation Committee of 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
another committee of the Board of Directors or to a senior executive officer
of the Company, or both.
The purchase price of Common Stock issued upon exercise of stock options
granted under the Plan must not be less than 85% of 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 issued upon
exercise of incentive stock options granted under the Plan must not be less
than 100% of 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.
55
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into certain employment agreements with its
executive officers under which the annual base salaries of Mr. Fiore, Dr. Tse,
Mr. Sadler, Mr. Van Eerden, and Mr. Huffaker for the fiscal year 1998 are
$225,000, $243,000, $175,000, $140,000, and $140,000, respectively. The
executive officers are also entitled to participate in bonus plans maintained
or established by the Company. The employment agreements for Dr. Tse and Mr.
Van Eerden provide for terms through April 30, 2002, and the employment
agreement for Mr. Fiore provides for a term through July 31, 1999, during
which they may not be terminated without cause. Mr. Fiore, Dr. Tse, Mr.
Sadler, Mr. Van Eerden and Mr. Huffaker are entitled to continuation of their
base salaries (for Mr. Fiore and Dr. Tse in part under consulting
arrangements) for 18 months, three years, nine months, 12 months and nine
months, respectively, if their employment is terminated by the Company without
cause or if they voluntarily terminate their employment for good reason. In
addition, if Mr. Fiore's employment is terminated by the Company without cause
before April 1, 2001, he is entitled to be retained by the Company as a
consultant for a number of months equal to one-half of the number of months
between the termination date and April 1, 2001.
CERTAIN TRANSACTIONS
Outstanding stock of the Oregon and Washington Professional Corporations is
owned in whole or in part by Dany Y. Tse, Craig W. Wong and Gerald R. Aaron.
The Company is a party to Management Agreements with these Professional
Corporations pursuant to which the Company earns a significant portion of its
revenues. Effective January 1, 1998, the Company entered into agreements to
amend these Management Agreements to conform them to the existing management
agreements of Affiliated Dental Practices historically affiliated with GMS and
to increase the Company's control over the Oregon and Washington Professional
Corporations. As consideration for entering into the amended Management
Agreements, the Company has agreed to pay to the Oregon and one of the
Washington Professional Corporations or certain of their respective designated
dental practitioners, in the aggregate, the following: (i) approximately $1.8
million in cash offset by approximately $1.8 million of Company receivables
due from such Oregon and Washington Professional Corporations; (ii) the right
to receive an aggregate of either $575,000 in cash in 18 equal monthly
installments or options to acquire 230,000 shares of Common Stock at an
exercise price of $8.375 per share, subject to five year vesting, plus options
to acquire an aggregate of 110,000 shares of Common Stock exercisable at
$8.375 per share, subject to five year vesting; and (iii) future cash or
options subject to five year vesting in amounts to be determined according to
a formula based upon the operating revenues of such Oregon and Washington
Professional Corporations for fiscal years ending December 31, 1998 and 1999.
The Company has recorded intangible assets of approximately $2.0 million in
the fourth quarter of 1997, which resulted from the Amended Management
Agreements. The Company believes that these amendments will require the
Company to consolidate the financial results of the Oregon and Washington
Professional Corporations. See "Business--Management Agreements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--GMS Merger and Restructuring."
On May 31, 1996, the Company executed a modification of its former loan and
security agreement with Silicon Valley Bank (the "Modification"). In
connection with the Modification, 14 officers, directors, and shareholders of
the Company including Dr. Tse, Dr. Wong and Mr. Van Eerden, provided
continuing personal guarantees on $1,000,000 of the Company's indebtedness to
Silicon Valley Bank in connection with a $1,000,000 increase in availability
under such credit facility. In consideration for the personal guarantees, 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.
All of these guarantees terminated in February 1997 upon the repayment of the
loan.
The above-described transactions with related parties were on terms the
Company's Board of Directors believed to be fair to the Company and no less
favorable to the Company than terms that could have been
56
<PAGE>
obtained from an unrelated party. Future transactions between the Company and
Affiliated Dental Practices controlled by officers, directors, and principal
shareholders of the Company will be carried out pursuant to a related party
transaction policy adopted by the Company's Board of Directors. The policy
provides that any transaction between the Company and (i) an officer,
director, or principal shareholder of the Company or (ii) any entity that is
controlled by officers, directors, or principal shareholders of the Company
must be approved by at least a majority of the Company's directors who do not
have an interest in the transaction. The terms of such transactions must be no
less favorable to the Company than those that are generally available from
unaffiliated third parties.
On April 1, 1997, Mr. Fiore was granted stock options by GMS exercisable for
750,000 shares of GMS Common Stock at an aggregate exercise price of $150,000.
On the same date, Mr. Fiore exercised the options for all such shares. The
exercise price was paid in the form of a secured promissory note in the
principal amount of $150,000 which bears annual interest at the rate of 6.84%
compounded annually. All unpaid principal and accrued interest becomes due and
payable to the Company on March 31, 2001. In the GMS Merger, the shares
purchased on exercise of Mr. Fiore's options were converted into 333,816
shares of Common Stock. Of these shares, 300,434 shares are subject to a four
year vesting schedule under which 25% of the shares vest on April 1, 1998 and
the remaining shares vest in equal amounts over the next 36 months. All
unvested shares are subject to repurchase by the Company at $0.45 per share
upon termination of Mr. Fiore's service to the Company for any reason. Of the
remaining 33,382 shares of Common Stock held by Mr. Fiore, one half are
subject to repurchase by the Company at $0.45 per share if, among other
things, the Company's EBITDA (excluding CEO salary and related expense) for
1997 does not exceed $4,723,500, and a portion of that one half will be
subject to repurchase if such EBITDA does not exceed $6,298,000. The second
half of the remaining shares are subject to repurchase by the Company at the
same price if, among other things, the Company's EBITDA (excluding CEO salary
and related expense) for 1998 does not exceed $12,683,250, and a portion of
the second half will be subject to repurchase if such EBITDA does not exceed
$16,911,000.
In 1996, Mr. Sadler purchased from GMS 888,681 shares of GMS Common Stock
for $88,868. The purchase price was paid in part in the form of secured
promissory note in the principal amount of $87,911, which bears interest at
the rate of 6.84%, compounded annually. All unpaid principal and accrued
interest on such promissory note becomes due and payable on August 31, 2000.
In the GMS Merger, the foregoing shares were converted into 395,541 shares of
Common Stock. Of these shares, 175,031 shares are subject to a four year
vesting schedule under which one fourth of the shares vested immediately upon
issuance another one fourth on October 11, 1997 and the remaining shares vest
in equal amounts over the next 36 months thereafter. All unvested shares are
subject to repurchase by the Company at $0.225 per share upon termination of
Mr. Sadler's service to the Company for any reason. In addition, 110,255
shares of Common Stock held by Mr. Sadler are subject to repurchase by the
Company at $0.225 per share if, among other things, the Company's EBITDA
(excluding CEO salary and related expense) for 1997 does not exceed
$4,723,500, and a portion of those shares will be subject to repurchase if
such EBITDA does not exceed $6,298,000. Another 110,255 shares are subject to
repurchase by the Company at the same price if, among other things, the
Company's EBITDA (excluding CEO salary and related expense) for 1998 does not
exceed $12,683,250, and a portion of those shares will be subject to
repurchase if such EBITDA does not exceed $16,911,000.
An additional 340,255 shares of Common Stock held by certain other former
GMS shareholders (including 42,060 shares held by Sprout Capital VII and
certain related entities are also subject to repurchase by the Company at an
average price of $0.37 per share ($.45 per share for Sprout Capital VII and
certain related entities). One half of the shares are subject to repurchase
if, among other things, the Company's EBITDA (excluding CEO salary and related
expense) for 1997 does not exceed $4,723,500, and a portion of that half will
be subject to repurchase if such EBITDA does not exceed $6,298,000. The second
half of the shares are subject to repurchase if, among other things, the
Company's EBITDA (excluding CEO salary and related expense) for 1998 does not
exceed $12,683,250, and a portion of the second half will be subject to
repurchase if such EBITDA does not exceed $16,911,000.
57
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership, as of December 31, 1997, 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, (iv) all directors and executive officers as a
group, and (v) the Selling Shareholders. 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 SHARES -----------------
BENEFICIALLY TO BE BEFORE AFTER
NAME AND ADDRESS(1) OWNED SOLD(2) OFFERING OFFERING
------------------- ------------ ------- -------- --------
<S> <C> <C> <C> <C>
Sprout Capital VII L.P. and certain
related entities (3).................. 1,649,562 -- 21.5% 14.8%
3000 Sand Hill Road
Bldg. 3, Suite 170
Menlo Park, CA 94025
Accel V L.P. and certain related
entities (4).......................... 524,708 -- 6.8% 4.7%
c/o Accel Partners
428 University Avenue
Palo Alto, CA 94301
Bessemer Venture Partners GMS.......... 393,530 -- 5.1% 3.5%
83 Walnut Street
Wellesley Hills, MA 02181
ServiceMaster Venture Fund L.L.C. (5).. 200,000 100,000 2.6% *%
One ServiceMaster Way
Downers Grove, IL 60515
Michael T. Fiore (6)................... 356,772 -- 4.7% 3.2%
Dany Y. Tse, DMD (7)................... 620,500 -- 8.1% 5.6%
Grant M. Sadler (8).................... 395,541 -- 5.2% 3.5%
L. Theodore Van Eerden (9)............. 23,075 -- *% *%
Norman R. Huffaker (10)................ 5,564 -- *% *%
Gerald R. Aaron, DDS (11).............. 9,584 -- *% *%
Kenneth D. Hooten (12)................. 200,000 -- 2.6% *%
Paul H. Keckley (13)................... 400 -- *% *%
Craig W. Wong, DMD (14)................ 89,500 -- 1.2% *%
Steven R. Bull, DDS (15)............... 2,782 -- *% *%
Wayne Posey (15)....................... 29,017 -- *% *%
Robert Finzi (16)...................... 1,649,562 -- 21.5% 14.8%
Kathleen D. La Porte (16).............. 1,649,562 -- 21.5% 14.8%
All directors and officers as a group
(13 persons) (16)(17)................. 3,382,297 -- 42.6% 29.6%
</TABLE>
- --------
* Less than one percent
(1) Unless otherwise indicated the address of each of the shareholders listed
in the table is: c/o Gentle Dental Service Corporation, 22800 Savi Ranch
Parkway, Suite 206, Yorba Linda, California, 92887.
(2) Following completion of the Dedicated Dental Acquisition, which is
expected to occur prior to completion of this Offering, Dr. Kaiser and
Robert Newman will acquire 1,519,103 shares of Common Stock (subject to
final closing adjustments). A portion of these shares with an aggregate
market value of up to $4 million will be included in and sold pursuant to
this Offering.
(3) Consists of the following shares: 793,600 shares held by Sprout Capital
VII L.P. ("Sprout"); 164,956 held by DLJ First ESC L.L.C. ("DLJ First");
648,797 shares held by Sprout Growth II, L.P. ("Sprout
58
<PAGE>
Growth"), 9,218 shares held by the Sprout CEO Fund, L.P. ("Sprout CEO");
and 32,991 shares held byDLJ Capital Corporation ("DLJ Capital"). DLJ
Capital is the managing of each of Sprout CEO, Sprout Growth and Sprout
Capital VII and has voting and investment control over the shares held by
each of those three shareholders. DLJ LBO Plans Management Corporation is
the manager of DLJ First and has voting and investment control over the
shares held by DLJ First.
(4) Consists of the following shares: 422,914 shares held by Accel V L.P.
("A5"); 56,669 shares held by Accel Internet/Strategic Technology Fund
L.P. ("AISTF"); 25,186 shares held by Accel Investors '96 L.P. ("AI96");
11,544 shares held by Ellmore C. Patterson Partners ("ECPP"); and 8,395
shares held by Accel Keiretsu V L.P. ("AK5") (A5, AISTF, AI96, ECPP, AK5
and A5A collectively, the "Accel Entities"). Arthur C. Patterson, ACP
Family Partnership L.P., James R. Swartz, James W. Breyer, The Breyer
1995 Trust dated 10/4/95, Eugene D. Hill, Swartz Family Partnership L.P.,
Luke B. Evnin, and G. Carter Sednaoui share control of the Accel Entities
and disclaim beneficial ownership except to the extent of their
respective pecuniary interests.
(5) Includes 100,000 shares subject to an exercisable warrant. ServiceMaster
Venture Fund L.L.C. is a subsidiary of the ServiceMaster Company Limited
Partnership, which in turn is a subsidiary of ServiceMaster Limited
Partnership, a NYSE-listed limited partnership.
(6) Includes 16,691 shares subject to repurchase by the Company in January
1998 and 16,691 shares subject to repurchase by the Company in January
1999, all at $0.45 per share, if certain performance targets are not met.
See "Certain Transactions."
(7) Includes 81,000 shares subject to exercisable options, 34,500 shares
subject to an exercisable warrant and 3,500 shares held by Dr. Tse's
wife.
(8) Includes 110,255 shares subject to repurchase by the Company in January
1998 and 110,255 shares subject to repurchase by the Company in January
1999, all at $0.225 per share, if certain performance targets are not
met. Also includes 170,169 shares subject to repurchase by the Company at
a price of $0.225 per share, which rights lapse at a rate of 2,431 shares
per month until October 31, 2000, at which time the Company's rights will
have lapsed as to all such 170,169 shares. See "Certain Transactions."
(9) Includes 20,200 shares subject to options exercisable within 60 days
after December 31, 1997 and 2,875 shares subject to an exercisable
warrant.
(10) Includes 5,564 shares subject to an option exercisable within 60 days
after December 31, 1997.
(11) Includes 7,334 shares subject to options exercisable within 60 days after
December 31, 1997.
(12) Includes 200,000 shares beneficially owned by ServiceMaster Venture Fund
L.L.C. ("ServiceMaster Venture Fund"). Mr. Hooten, as a Vice President of
The ServiceMaster Company, which manages ServiceMaster Venture Fund, may
be deemed to share voting and dispositive power with respect to such
shares. Mr. Hooten disclaims beneficial ownership of these shares.
(13) Includes 400 shares subject to an option exercisable within 60 days after
December 31, 1997.
(14) Includes 1,600 shares subject to an exercisable option and 6,900 shares
subject to an exercisable warrant.
(15) Includes 2,782 shares subject to options exercisable within 60 days after
December 31, 1997.
(16) Includes 1,649,562 shares beneficially owned by Sprout Capital VII, L.P.
and certain related entities. Mr. Finzi and Ms. La Porte, as members,
partners or as general or limited partners of such partners of entities
within this group, may be deemed to share voting and dispositive power
with respect to such shares. Mr. Finzi and Ms. La Porte each disclaims
beneficial ownership of these shares.
(17) Includes 121,662 shares subject to options exercisable within 60 days
after December 31, 1997, 144,275 shares subject to exercisable warrants
and 253,892 shares subject to repurchase by the Company if certain
performance targets are not met.
59
<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 December 31, 1997, 7,678,683 shares of Common Stock were
outstanding, held of record by approximately 96 shareholders. After this
Offering, 11,178,683 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, along with
holders of any Preferred Stock with a right of participation, 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 December 31, 1997, 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 December 31, 1997, there were warrants outstanding to purchase an
aggregate of 640,435 shares of Common Stock, 189,160 of which have an exercise
price of $7.86 per share, 219,333 of which have an exercise price of $7.50 per
share, 150,000 of which have an exercise price of $6.00 per share, and 81,942
of which have an exercise price of $3.93 per share. Warrants to purchase
119,333 shares expire in May 2001, warrants to purchase 100,000 shares expire
in December 2001, warrants to purchase 150,000 shares expire in February 2002,
warrants to purchase 133,524 expire on the later of (i) July 2004 or (ii) 90
days after the closing of the first public offering by the Company after
October 31, 1997, warrants to purchase 55,636 expire on the later of
(i) October 2004 or (ii) 90 days after the closing of the first public
offering by the Company after October 31, 1997, and warrants to purchase
81,942 shares expire in October 2001. Warrants for 150,000 shares issued to
the underwriters in the Company's initial public offering do not become
exercisable until February 12, 1998. Warrants for 22,254 shares at $7.86 per
share become exercisable only if certain performance conditions are met by one
Affiliated Dental Practice.
PUT RIGHTS
In connection with dental practice affiliations 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 affiliations. As of December 31,
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<PAGE>
1997, these put rights cover a total of 83,686 shares of Common Stock and give
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 11,820 shares that can be exercised in varying amounts in 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 greater
than $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 million ("Qualified Offering"). The put right may not
be exercised before June 21, 2001, and will expire upon the earlier of the
completion of a Qualified Offering or June 21, 2003. 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. ServiceMaster's put right with respect
to 100,000 shares will be extinguished upon the sale of such shares in the
Offering. 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 336,275 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. The shares subject to
registration rights include 95,000 shares to be sold in this offering by
ServiceMaster. 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 holders of the 1,519,103 shares of Company Common Stock (subject to
final closing adjustments) to be issued upon completion of the Dedicated
Dental Affiliation (the "Dedicated Rights Holders") will also have certain
registration rights. 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 Dedicated Rights Holders will be 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. In the Dedicated
Dental merger agreement, the Company agreed that Dr. Kaiser and the other
shareholder of Dedicated Dental would be able to sell a number of shares of
Common Stock with an aggregate market value of up to $4 million in an
underwritten offering prior to March 31, 1998. The Company anticipates that
these shares will be issued prior to completion of this Offering and will be
sold pursuant thereto. See "Principal and Selling Shareholders." In addition,
the Company has agreed to file a registration statement by March 31, 1998 to
register all of the shares held by the Dedicated Rights Holders for resale in
ordinary market transactions and to maintain that registration statement until
March 31, 2000. The Dedicated Rights Holders are not required to bear any
expenses incurred by the Company in connection with registering their shares,
other than payment of their respective underwriting fees, discounts, and
brokerage commissions relating to the sale of their shares.
Except for the $4 million of Common Stock described in the foregoing
paragraph, the Dedicated Rights Holders have agreed that they will not sell,
offer to sell or otherwise transfer any of the shares discussed in the
foregoing paragraph until March 31, 1999. On March 31, 1999, and on the last
day of each of the next nine months, one-tenth of these shares will be
released from the lock-up restriction and will be eligible for sale.
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<PAGE>
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 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 or otherwise 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.
62
<PAGE>
WASHINGTON ANTITAKEOVER STATUTE
Washington law contains provisions relating to "significant business
transactions" that may have the effect of delaying or discouraging a hostile
takeover of the Company. Chapter 23B.19 of the Washington Business Corporation
Act (the "Statute") applies to all Washington corporations that have a class
of voting stock registered under section 12 or section 15 of the Exchange Act.
The Statute 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 directors) for a period of five years
after such person or affiliated group becomes an Acquiring Person. The
prohibited transactions include, among others, a merger with, disposition of
assets to, or issuance or redemption of stock to or from, the Acquiring
Person, or allowing the Acquiring Person to receive any disproportionate
benefit as a shareholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is TranSecurities
International, Inc., Spokane, Washington.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, there will be 11,178,683 shares of Common
Stock outstanding. Of these shares, the 4,548,161 shares issued in the GMS
Merger on November 4, 1997, the 109,039 shares issued in the affiliation with
Blue Oak Dental Group on March 31, 1997, and the shares issuable in connection
with the Pending Affiliations are or will be "restricted securities" as
defined in Rule 144 promulgated under the Securities Act. All other shares are
or will be eligible for sale to the public without restriction under the
Securities Act, except for any shares held by affiliates of the Company, which
will be subject to certain resale limitations of Rule 144. However, certain
directors, executive officers and shareholders of the Company 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 180 days after
the date of this Prospectus without the prior written consent of Bear, Stearns
& Co. Inc. These persons hold shares of Common Stock that are otherwise
eligible for resale.
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 one year 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 112,145 shares
immediately after the 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. 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 two years is
entitled to sell such shares under Rule 144 without regard to any of the
limitations described above.
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.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company, the Selling Shareholders, Bear, Stearns & Co. Inc., Smith Barney
Inc., Wessels, Arnold & Henderson, L.L.C. and Black & Company, Inc. as
Representatives, each of the Underwriters named below has severally agreed to
purchase from the Company and the Selling Shareholders, and the Company and
the Selling Shareholders have agreed to sell to the Underwriters, the
respective number of shares of Common Stock set forth opposite its respective
name.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Bear, Stearns & Co. Inc...............................................
Smith Barney Inc. ....................................................
Wessels, Arnold & Henderson, L.L.C. ..................................
Black & Company, Inc. ................................................
---
Total...............................................................
===
</TABLE>
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus, and at such price less a concession not in excess of $ per
share of Common Stock to certain other dealers who are members of the National
Association of Securities Dealers, Inc. The Underwriters may allow, and such
dealers may reallow concessions not in excess of $ per share to certain
other dealers. After the public offering, the offering price and other selling
terms may be changed by the Underwriters.
The Underwriters have been granted a 30-day allotment option to purchase
from the Company up to 525,000 additional shares of Common Stock at the public
offering price less the underwriting discount. If the Underwriters exercise
such over-allotment option, then each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage thereof as the number of shares of Common Stock to be purchased by
it as shown in the above table bears to the 3,600,000 shares of Common Stock
offered hereby. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of the shares of Common Stock
offered hereby.
The Company, its directors, officers, and certain shareholders have agreed
that, without the prior written consent of Bear, Stearns & Co. Inc., they will
not directly or indirectly offer to sell, sell, transfer, assign or otherwise
dispose of shares of Common Stock or any securities convertible or
exchangeable therefor, for a period of 180 days after the date of this
Prospectus. These restrictions will be applicable to any shares acquired by
any of those persons in this Offering or otherwise during the 180 day lockup
period.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters and controlling persons, if any,
against certain civil liabilities, including liabilities under the Securities
Act, or will contribute to payments that the Underwriters or any such
controlling persons may be required to make in respect thereof.
In order to facilitate the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the Common Stock during and after the Offering.
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<PAGE>
Specifically, the Underwriters may over-allot or otherwise create a short
position in the Common Stock for their own account by selling more shares of
Common Stock than have been sold to them by the Company and the Selling
Shareholders. The Underwriters may elect to cover any such short position by
purchasing shares of Common Stock in the open market or by exercising the
over-allotment option granted to the Underwriters. In addition, such persons
may stabilize or maintain the price of the Common Stock by bidding for or
purchasing shares of Common Stock in the open market and may impose penalty
bids, under which selling concessions allowed to syndicate members or other
broker-dealers participating in the Offering are reclaimed if shares of Common
Stock previously distributed in the Offering are repurchased in connection
with stabilizing transactions or otherwise. The effect of these transactions
may be to stabilize or maintain the market price of the Common Stock at a
level above that which might otherwise prevail in the open market. The
imposition of a penalty bid may also affect the price of the Common Stock to
the extent that it discourages resales thereof. No representation is made as
to the magnitude or effect of any such stabilization or other transactions.
Such transactions may be effected on the NASDAQ National Market and, if
commenced, may be discontinued at any time.
In connection with this Offering, certain Underwriters and selling group
members or their respective affiliates who are qualified market makers on the
Nasdaq National Market may engage in passive market making transactions in the
Common Stock of the Company on the Nasdaq National Market in accordance with
Rule 103 of Regulation M under the Exchange Act. Passive market makers must
comply with applicable volume and price limitations and must be identified as
such. In general, a passive market maker must display its bid at a price in
excess of the highest independent bid for such security; if all independent
bids are lowered below the passive market maker's bid, however, such bid must
then be lowered when certain purchase limits are exceeded.
Black & Company, Inc. acted as one of the representatives of the
underwriters in the Initial Public Offering and, as partial consideration for
services provided in connection therewith, the Company issued a warrant to
Black & Company, Inc. to purchase up to 82,500 shares of Common Stock at an
exercise price of $6.00 per share. This warrant is exercisable for a period of
four years commencing in February 1998. In addition, Black & Company, Inc.
received a nonaccountable expense allowance in the amount of $37,500.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by McDermott, Will & Emery, Newport Beach,
California. Certain legal matters in connection with this Offering will be
passed upon for the Underwriters by Milbank, Tweed, Hadley & McCloy, Los
Angeles, California. McDermott, Will & Emery has from time to time represented
certain of the Underwriters in connection with unrelated legal matters.
EXPERTS
The financial statements of Gentle Dental Service Corporation as of
September 30, 1997 and December 31, 1996 and December 31, 1995, and for the
nine-month period ended September 30, 1997 and for the years ended December
31, 1996 and 1995 included in this Prospectus and Registration Statement 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 GMS Dental Group, Inc. as of December 31, 1996
and September 30, 1997, and for the periods from October 11, 1996 (inception)
to December 31, 1996 and the nine months ended September 30, 1997 have been
included herein and in the Registration Statement in reliance upon the reports
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firms as experts in
accounting and auditing.
The financial statements of Dedicated Dental Systems, Inc. as of September
30, 1997 and December 31, 1995, and for the nine-month period ended September
30, 1997 and for the year ended December 31, 1995
65
<PAGE>
included in this Prospectus and Registration Statement 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 Dedicated Dental Systems, Inc. as of and for the
year ended December 31, 1996 appearing in this Prospectus and Registration
Statement and have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
The financial statements of California Dental Practice Management Company
and Related Dental Offices as of September 30, 1997 and December 31, 1996 and
1995, and for the nine-month period ended September 30, 1997 and for the years
ended December 31, 1996 and 1995 included in this Prospectus and Registration
Statement 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 Supplemental Consolidated Financial Statements of Gentle Dental Service
Corporation as of December 31, 1996 and September 30, 1997 and for the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997
have been included herein and in the Registration Statement in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
On November 14, 1997, the Company dismissed Price Waterhouse LLP as its
principal accountants and engaged KPMG Peat Marwick LLP as its new principal
accountants. 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 Price Waterhouse LLP on the Company's financial
statements for the two most recent fiscal years preceding their dismissal.
Through the date of the change in accountants, there were no disagreements
with Price Waterhouse 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.
Prior to the Merger, KPMG Peat Marwick LLP served as the principal
accountants for GMS. Other than in connection with the Merger, before engaging
KPMG Peat Marwick LLP as its new independent accountants, the Company did not
previously consult with them regarding any matters related to the application
of accounting principles or the type of audit opinion that might be rendered
on the Company's financial statements.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). The Registration Statement, of which this
Prospectus is a part, as well as such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's Regional Offices located at 7 World Trade Center, New York,
New York 10048 and Northwest Atrium, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission also maintains a
Worldwide Web site (address: http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission.
The Company has filed with the Commission a Registration Statement on Form
SB-2, including amendments thereto, under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules
66
<PAGE>
thereto. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit or incorporated by reference to the Registration Statement
of which this Prospectus forms a part, each such statement being qualified in
all respects by such reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. Copies of the
Registration Statement and the exhibits and schedules thereto may be inspected,
without charge, at the offices of the Commission, or obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENTLE DENTAL SERVICE CORPORATION
Report of Price Waterhouse LLP........................................... F-2
Balance Sheet as of December 31, 1995 and 1996, and September 30, 1997... F-3
Statement of Operations for the years ended December 31, 1995 and 1996
and for the nine month periods ended September 30, 1996 and 1997........ F-4
Statement of Changes in Redeemable Common Stock and Nonredeemable
Shareholders' Equity for the years ended December 31, 1995 and 1996, and
for the nine month period ended September 30, 1997...................... F-5
Statement of Cash Flows for the years ended December 31, 1995 and 1996,
and for the nine month periods ended September 30, 1996 and 1997........ F-6
Notes to Financial Statements............................................ F-7
GMS DENTAL GROUP, INC.
Report of KPMG Peat Marwick LLP.......................................... F-24
Consolidated Balance Sheets as of December 31, 1996 and September 30,
1997.................................................................... F-25
Consolidated Statements of Operations for the periods from October 11,
1996 (inception) to December 31, 1996 and the nine months ended
September 30, 1997...................................................... F-26
Consolidated Statements of Stockholders' Deficit for the periods from
October 11, 1996 (inception) to December 31, 1996 and the nine months
ended September 30, 1997................................................ F-27
Consolidated Statements of Cash Flows for the periods from October 11,
1996 (inception) to December 31, 1996 and the nine months ended
September 30, 1997...................................................... F-28
Notes to Consolidated Financial Statements............................... F-29
DEDICATED DENTAL SYSTEMS, INC.
Report of Price Waterhouse LLP........................................... F-43
Report of Ernst & Young LLP.............................................. F-44
Balance Sheet as of December 31, 1995 and 1996, and September 30, 1997... F-45
Statement of Income and Retained Earnings for the years ended December
31, 1995 and 1996 and for the nine months ended September 30, 1997...... F-46
Statement of Cash Flows for the years ended December 31, 1995 and 1996,
and for the nine months ended
September 30, 1997...................................................... F-47
CALIFORNIA DENTAL PRACTICE MANAGEMENT AND RELATED OFFICES
Report of Price Waterhouse LLP........................................... F-55
Balance Sheet as of December 31, 1995 and 1996, and September 30, 1997... F-56
Statement of Operations for the years ended December 31, 1995 and 1996
and for the nine months ended
September 30, 1997...................................................... F-57
Statement of Changes in Capital for the years ended December 31, 1995 and
1996, and for the nine months ended September 30, 1997.................. F-58
Statement of Cash Flows for the years ended December 31, 1995 and 1996,
and for the nine months ended
September 30, 1997...................................................... F-59
GENTLE DENTAL SERVICE CORPORATION SUPPLEMENTAL CONSOLIDATED FINANCIAL
STATEMENTS
Report of KPMG Peat Marwick LLP.......................................... F-66
Supplemental Consolidated Balance Sheets as of December 31, 1996 and
September 30, 1997...................................................... F-67
Supplemental Consolidated Statements of Operations for the years ended
December 31, 1995 and 1996 and for the nine month period ended September
30, 1997................................................................ F-68
Supplemental Consolidated Statement of Shareholders' Equity for the years
ended December 31, 1995 and 1996 and the nine months ended September 30,
1997.................................................................... F-69
Supplemental Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1996 and for the nine month period ending
September 30, 1997...................................................... F-71
Notes to Supplemental Consolidated Financial Statements.................. F-74
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Gentle Dental Service
Corporation
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 1996
and September 30, 1997, and the results of its operations and its cash flows
for the years ended December 31, 1995 and 1996 and for the nine month periods
ended September 30, 1996 and 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As disclosed in Note 10 to the financial statements, the Company has certain
related party transactions.
Price Waterhouse LLP
Portland, Oregon
October 21, 1997 except for the
first paragraph of Note 12 which
is as of November 6, 1997 and
the last paragraph of Note 12
which is as of December 7, 1997
F-2
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
BALANCE SHEET
DECEMBER 31, 1995 AND 1996, AND SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 689 $ 229 $ 79
Accounts receivable, net..................... 2,247 3,007 2,742
Receivables from affiliates.................. 597 1,197 1,603
Income taxes receivable...................... 174 169 134
Supplies..................................... 286 363 476
Prepaid expenses and other current assets.... 291 734 520
------- ------- -------
Total current assets....................... 4,284 5,699 5,554
Property and equipment, net.................... 3,654 4,164 4,911
Intangible assets, net......................... 2,058 3,225 5,549
Other assets................................... 428 68 54
------- ------- -------
Total assets............................... $10,424 $13,156 $16,068
======= ======= =======
LIABILITIES, REDEEMABLE COMMON STOCK AND
NONREDEEMABLE SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 271 $ 1,256 $ 787
Accrued payroll and payroll related
obligations................................. 432 364 785
Other accrued liabilities.................... 673 806 630
Short-term borrowings........................ 1,049 2,097 --
Current portion of long-term debt and capital
lease obligations........................... 473 917 441
------- ------- -------
Total current liabilities.................. 2,898 5,440 2,643
Deferred rent.................................. 83 88 112
Deferred income taxes.......................... 187 3 237
Long-term debt, less current portion........... 2,310 1,822 577
Capital lease obligations, less current
portion....................................... 423 441 314
------- ------- -------
Total liabilities.......................... 5,901 7,794 3,883
------- ------- -------
Commitments and contingencies..................
Redeemable common stock, no par value, 57,551,
190,302 and 183,686 shares issued and
outstanding, respectively..................... 711 2,199 2,123
------- ------- -------
Nonredeemable shareholders' equity:
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, 1,351,579 and
2,971,772 shares issued and outstanding,
respectively................................ 2,795 2,888 9,543
Shareholder note receivable.................. (40) -- --
Additional paid-in capital................... 152 446 488
Retained earnings (deficit).................. 905 (171) 31
------- ------- -------
Total nonredeemable shareholders' equity... 3,812 3,163 10,062
------- ------- -------
Total liabilities, redeemable common stock
and nonredeemable shareholders' equity.... $10,424 $13,156 $16,068
======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Support services revenue from
affiliates....................... $ 9,781 $ 10,712 $ 7,866 $ 10,269
Operating expenses:
Practice nonclinical salaries
and benefits................... 2,418 3,148 2,373 2,712
Dental supplies and lab
expenses....................... 1,633 2,332 1,648 2,219
Practice occupancy expenses..... 911 1,298 976 1,248
Practice selling, general and
administrative expenses........ 1,311 1,336 986 1,040
Corporate selling, general and
administrative expenses........ 2,153 2,372 1,562 1,820
Depreciation and amortization... 482 853 700 699
--------- --------- --------- ---------
Total operating expenses...... 8,908 11,339 8,245 9,738
--------- --------- --------- ---------
Operating income (loss)....... 873 (627) (379) 531
--------- --------- --------- ---------
Nonoperating income (expenses):
Interest expense................ (290) (742) (572) (135)
Other income (expense), net..... (92) 39 23 52
--------- --------- --------- ---------
Nonoperating expense, net....... (382) (703) (550) (83)
--------- --------- --------- ---------
Income (loss) before income
taxes............................ 491 (1,330) (928) 448
Provision (benefit) for income
taxes............................ 234 (345) (228) 219
--------- --------- --------- ---------
Net income (loss)................. 257 (985) (700) 229
Accretion of redeemable common
stock............................ -- (91) (80) (27)
--------- --------- --------- ---------
Net income (loss) attributable to
common stock..................... $ 257 $ (1,076) $ (780) $ 202
========= ========= ========= =========
Primary earnings (loss) per
share............................ $ .19 $ (.71) $ (.53) $ .07
========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding.... 1,379,960 1,524,484 1,484,498 3,287,874
========= ========= ========= =========
Fully diluted earnings (loss) per
share............................ $ .19 $ (.71) $ (.53) $ .06
========= ========= ========= =========
Weighted average fully diluted
shares outstanding............... 1,379,960 1,524,484 1,484,498 2,951,139
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
STATEMENT OF CHANGES IN REDEEMABLE COMMON STOCK AND
NONREDEEMABLE SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NONREDEEMABLE SHAREHOLDERS' EQUITY
REDEEMABLE SHAREHOLDER ADDITIONAL RETAINED
COMMON STOCK COMMON STOCK NOTE PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL (DEFICIT)
------- ------ --------- ------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... -- $ -- 1,154,250 $ 533 $-- $-- $ 735
Issuance of stock
pursuant to Stock
Incentive Plan......... -- -- 20,112 201 -- -- --
Common stock issued in
connection with:
Clinic Acquisitions.... 57,551 711 28,456 387 -- -- --
Private placement, net
of offering costs..... -- -- 169,327 1,634 -- -- --
Promissory note from
shareholder........... -- -- 4,000 40 (40) -- --
Stock options granted to
non-employees.......... -- -- -- -- -- 152 --
Repurchase of common
stock.................. -- -- (10,000) -- -- -- --
Distributions to
shareholders........... -- -- -- -- -- -- (87)
Net income.............. -- -- -- -- -- -- 257
------- ------ --------- ------ ---- ---- -----
Balance, December 31,
1995................... 57,551 711 1,366,145 2,795 (40) 152 905
Common stock and
warrants issued in
connection with:
Clinic acquisitions.... 38,994 530 4,934 67 -- -- --
Private placement, net
of offering costs..... 100,000 957 -- -- -- -- --
Exercise of put rights.. (6,243) (90) -- -- -- -- --
Stock warrants issued
related to debt
financing.............. -- -- -- -- -- 9 --
Exercise of stock
options................ -- -- 2,000 2 -- -- --
Stock options granted to
non-employees.......... -- -- -- -- -- 52 --
Stock warrants issued
related to line of
credit guarantees...... -- -- -- -- -- 233 --
Accretion of put
rights................. -- 91 -- -- -- -- (91)
Repurchase of common
stock.................. -- -- (24,000) (1) -- -- --
Common stock granted to
non-employees.......... -- -- 2,500 25 -- -- --
Proceeds from note
receivable............. -- -- -- -- 40 -- --
Net loss................ -- -- -- -- -- -- (985)
------- ------ --------- ------ ---- ---- -----
Balance, December 31,
1996................... 190,302 2,199 1,351,579 2,888 -- 446 (171)
Common stock issued in
connection with:
Clinic acquisitions.... -- -- 109,039 475 -- -- --
Public offering, net of
offering costs........ -- -- 1,500,000 6,125 -- -- --
Employee purchase
plan.................. -- -- 1,054 5 -- -- --
Exercise of put rights.. (6,616) (103) -- -- -- -- --
Exercise of stock
options................ -- -- 10,100 50 -- -- --
Stock options granted to
non-employees.......... -- -- -- -- -- 42 --
Accretion of put
rights................. -- 27 -- -- -- -- (27)
Net income.............. -- -- -- -- -- -- 229
------- ------ --------- ------ ---- ---- -----
Balance, September 30,
1997................... 183,686 $2,123 2,971,772 $9,543 $-- $488 $ 31
======= ====== ========= ====== ==== ==== =====
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
------- ------ ------ -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ 257 $ (985) $ (700) $ 229
Adjustments to reconcile change in net cash
provided by (used in) operating activities:
Depreciation and amortization............... 482 853 596 699
Loss on disposal of assets.................. 86 63 61 36
Stock options granted to non-employees...... 152 52 38 42
Stock issued for fees and compensation...... -- 25 25 --
Amortization of warrants.................... -- 242 201 --
Deferred income taxes....................... 71 (156) (56) 212
Deferred rent............................... -- 5 5 24
Changes in certain assets and liabilities,
net of acquisitions:
Accounts receivable, net.................... 349 (976) (255) 574
Receivables from affiliates................. (2,476) (562) (416) (493)
Income taxes receivable..................... (225) 5 (137) 35
Supplies.................................... (165) (49) (50) (113)
Prepaid expenses and other current assets... (11) (37) (337) (221)
Other assets................................ (79) 53 30 13
Accounts payable............................ 88 965 415 (469)
Accrued liabilities......................... 686 371 (54) (131)
------- ------ ------ -------
Net cash provided by (used in) operating
activities................................ (785) (131) (634) 699
------- ------ ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment,
excluding acquisitions..................... (1,251) (748) (532) (1,199)
Proceeds from sale of property and
equipment.................................. -- -- -- 22
Cash paid for acquisitions, including other
direct costs, net of cash acquired......... (1,073) (667) (667) (1,483)
Dental clinic acquisitions prepayments...... (309) -- -- --
------- ------ ------ -------
Net cash used in investing activities...... (2,633) (1,415) (1,199) (2,660)
------- ------ ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES,
EXCLUDING ACQUISITIONS:
Net proceeds from short-term borrowings..... 916 1,048 1,048 (2,097)
Proceeds from issuance of notes payable..... 2,703 466 465 --
Payments of notes payable................... (1,264) (602) (407) (2,444)
Payments of capital lease obligations....... (26) (277) (241) (182)
Proceeds from issuance of common stock...... 1,835 1,000 1,000 7,505
Common stock issuance costs................. -- (500) (43) (918)
Proceeds from note receivable............... -- 40 40 --
Exercise of put rights...................... -- (90) (90) (103)
Distribution to shareholders................ (87) -- -- --
Exercise of stock options................... -- -- -- 50
Other....................................... -- 1 2 --
------- ------ ------ -------
Net cash provided by financing activities.. 4,077 1,086 1,774 1,811
------- ------ ------ -------
Increase (decrease) in cash and cash
equivalents................................. 659 (460) (59) (150)
Cash and cash equivalents, beginning of
period...................................... 30 689 689 229
------- ------ ------ -------
Cash and cash equivalents, end of period..... $ 689 $ 229 $ 630 $ 79
======= ====== ====== =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
(1) ORGANIZATION AND 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,
Washington, and California. The Company provides management support to four
professional corporations under long-term support services agreements: Gentle
Dental of Oregon, P.C.; Tse, Saiget, Watanabe & McClure, Inc., P.S., a.k.a.,
Gentle Dental of Washington, P.C.; Arena Dental Corporation, a California
Professional Corporation; and Dany Tse, P.C. (together, the "PCs"). 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 PCs in exchange for support services fees.
On February 13, 1997, the Company completed its initial public offering of
1,500,000 shares of no par value common stock (the "Offering"). The price per
share in the Offering was $5.00, resulting in gross offering proceeds of
$7,500. The Company received net proceeds of approximately $6,125, net of
underwriters' discount and total offering expenses. Concurrent with the
receipt of the net proceeds, the Company utilized $4,426 to repay all
outstanding principal under the Company's various bank loan arrangements (see
note 5). No significant gain or loss resulted in connection with the debt
extinguishment.
On February 13, 1997 (the offering date), the Company repriced all employee
stock options outstanding to the Offering price of $5 per share (except for
certain stock options held by the Company's chief executive officer, which
were repriced at 110% of the Offering price). All other terms with respect to
such options were maintained. The Company did not recognize compensation
expense related to the repricing of the employee stock options as the adjusted
exercise price was not below the fair value of the common stock as of the
repricing date.
Revenues
Revenues consist primarily of support services fees charged to the PCs 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>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
------- -------- ------- -------
<S> <C> <C> <C> <C>
PC dental revenue, net of provisions for
contractual adjustments and
doubtful accounts........................ $16,029 $ 21,424 $15,731 $19,020
Less amounts retained by the PCs.......... (6,248) (10,712) (7,866) (9,103)
Adjustments to allowance for doubtful
accounts................................. -- -- -- 230
Retail sales.............................. -- -- -- 122
------- -------- ------- -------
Support services revenue from affiliates.. $ 9,781 $ 10,712 $ 7,865 $10,269
======= ======== ======= =======
</TABLE>
F-7
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS)
(1) ORGANIZATION AND 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.
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest paid................................... $ 290 $ 489 $ 180 $ 129
Income taxes paid (received).................... 350 (159) -- (28)
Supplemental schedule of noncash investing and
financing activities:
Capital lease obligations related to the
leasing of fixed assets...................... 534 275 275 --
Issuance of common stock in exchange for
shareholder note............................. 40 -- -- --
Accretion of put rights....................... -- 91 80 27
Acquisition of tangible assets from related
parties:
Liabilities assumed or issued................. 2,093 -- -- --
Tangible assets acquired...................... 2,093 -- -- --
Acquisition of clinics from unrelated parties:
Intangible assets............................. 2,012 1,335 1,335 2,480
Liabilities assumed or issued................. 453 148 148 893
Common stock issued in connection with
acquisitions................................. 1,098 597 597 475
Dental clinic acquisition prepayments......... -- 309 309 --
Tangible assets acquired, excluding cash...... 611 386 386 371
</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
PCs. The Company has recorded an allowance for contractual adjustments and
doubtful accounts of $782, $187, $963, and $701 at December 31, 1995 and 1996,
and September 30, 1996 and 1997, respectively. 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. The allowance for doubtful
accounts and contractual adjustments are estimated based on past collection
performance.
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.
Prepaid expenses and other current assets
Prepaid and other current assets primarily represent miscellaneous
receivables, prepaid rent, and deferred acquisition costs. Such deferred
acquisition costs were $64 and $178 as of December 31, 1996 and September 30,
1997, respectively. Such costs were not significant at December 31, 1995.
Also, at December 31, 1996, included within prepaid expenses was $457 in
deferred offering costs associated with the initial Public Offering completed
in February 1997.
F-8
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred and expenditures for additions and
betterments are capitalized. Depreciation of property and equipment is
calculated using the straight-line method over estimated useful lives which
range from 3 to 15 years.
Intangible assets
Intangible assets result primarily from the excess of cost over the fair
value of net tangible assets purchased in acquisitions. Such intangibles
relate primarily to noncompetition covenants and support services agreements.
Intangibles relating to support services agreements consist of the costs of
purchasing the rights to provide management support services to dental
practices 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.
Intangible assets are amortized on the straight-line method over their
estimated useful lives, 5 years for organizational costs, 25 years for support
services agreements and other acquired intangibles, and 40 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 discounted
cash flows. No write-down for impairment loss was recorded for the years ended
December 31, 1995 and 1996, or for the nine months ended September 30, 1996
and 1997.
Income taxes
Prior to 1995, the Company elected to be treated as a Subchapter 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
Subchapter S corporation status and elected C corporation status under the
Internal Revenue Code for tax purposes, and for financial reporting purposes
adopted Statement of Accounting Standards No. 109, "Accounting for Income
Taxes." (see note 7).
Accounting for impairment of long-lived assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 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.
F-9
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 approximate fair value as of
December 31, 1995 and 1996, and September 30, 1997.
Accounting estimates
The preparation of the Company's 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
reported periods. Actual results may differ from these estimates.
Reclassifications
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with the 1997 financial statement presentations. Such
reclassifications had no effect on the Company's previously reported results
of operations or financial position.
Primary and fully diluted earnings per share
Primary and fully diluted earnings per share are based on the weighted
average number of common and common equivalent shares outstanding during the
periods presented. The computation of fully diluted earnings per share assumes
the exercise of contingent stock warrants and options. The computation of
fully diluted earnings per share was anti-dilutive for the years ended
December 31, 1995 and 1996, and for the nine months ended September 30, 1996;
therefore, such fully diluted earnings per share amounts equal the primary
earnings per share amounts.
New accounting pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS 128
"Earnings Per Share." In accordance with this pronouncement, the Company will
adopt the new standard for periods ending after December 15, 1997. Management
does not expect the adoption of this pronouncement to have a significant
effect on reported earnings per share information.
The Emerging Issues Task Force of the Financial Accounting Standards Board
is currently evaluating certain matters relating to the physician practice
management industry, which the Company expects will include a review of the
consolidation of professional corporation revenues and the accounting for
business combinations. The Company is unable to predict the impact, if any,
that this review may have on the Company's acquisition strategy, allocation of
purchase price related to acquisitions, and amortization life assigned to
acquired intangible assets.
F-10
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
(2) ACQUISITIONS
On January 2, 1995, the Company purchased from Gentle Dental of Oregon, P.C.
and Tse, Saiget, Watanabe & McClure, Inc., P.S., a.k.a., Gentle Dental of
Washington, P.C. the net accounts receivable of those PCs totaling $2,093 in
exchange for interest-only promissory notes payable on December 31, 1995. The
principal portion of the promissory notes issued to the PCs by the Company was
satisfied via reductions to the Company's receivables from those PCs.
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 $2,346 for the seven acquired clinics includes $982
paid in cash, $1,098 in redeemable and nonredeemable common stock, and
$175,000 in promissory notes. In addition, the Company paid $91 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 these shares, 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
(see note 8).
In 1996, the Company acquired substantially all of the assets of four
clinics, including cash, accounts receivable, supplies and fixed assets, net
of the assumption of certain liabilities. The total purchase price of $1,601
for the four acquired clinics included $944 in cash, $597 in redeemable and
nonredeemable common stock and a promissory note for $28. In addition, the
Company paid for closing costs of $32 which have been included in the total
purchase price. The Company issued a total of 43,928 shares relating to those
acquisitions. Such shares were valued at $13.60 per share. Common stock values
reflect the estimated fair value on the date of acquisition.
In 1997, the Company acquired substantially all of the assets of three
clinics, including cash, accounts receivable, supplies and fixed assets, net
of the assumption of certain liabilities. The total purchase price of $2,738
for the three acquired clinics included $1,483 in cash, $475 in common stock,
$532 in promissory notes and the assumption of long-term liabilities for $248.
In addition, the Company paid for closing costs of $33 which have been
included in the total purchase price. The Company issued a total of 109,039
shares of stock in conjunction with these acquisitions. Such shares were
valued at $4.36 per share. The common stock values reflect the estimated fair
value on the dates of the acquisitions. Additionally, one acquisition during
1997 is subject to future possible earn-out payments in which the Company will
issue a maximum of 160,689 shares of common stock if certain operating results
are achieved as outlined in the purchase agreement.
The results of operations for these acquisitions have been included in the
financial statements of the Company since the dates of acquisitions. The
following pro forma information has been prepared assuming that the 1996 and
1997 acquisitions had occurred at the beginning of each period presented. The
pro forma information includes adjustments to give effect to amortization of
goodwill, interest expense on acquisition debt and certain other adjustments,
together with related income tax effects. The pro forma financial information
is not necessarily indicative of the results of operations as they would have
been had the transaction been effected on the assumed dates, nor are they
necessarily indicative of future operating results.
F-11
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(2) ACQUISITIONS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Support services revenue.......................... $13,182 $11,172
======= =======
Net income (loss)................................. $ (831) $ 289
======= =======
Fully Diluted earnings (loss) per share........... $ (.51) $ .09
======= =======
</TABLE>
(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------ ------- -------------
<S> <C> <C> <C>
Dental equipment............................ $2,319 $ 2,542 $ 2,805
Computer equipment.......................... 482 831 1,251
Office equipment, furniture and fixtures.... 503 540 640
Vehicles.................................... 20 20 32
Leasehold improvements...................... 762 1,313 1,785
------ ------- -------
4,086 5,246 6,513
Less accumulated depreciation and
amortization............................... (432) (1,082) (1,602)
------ ------- -------
$3,654 $ 4,164 $ 4,911
====== ======= =======
</TABLE>
At December 31, 1995 and 1996, and September 30, 1997, property and equipment
include $553, $762 and $916, respectively, of equipment held under capital
leases with related accumulated amortization aggregating $56, $194, and $276,
respectively.
(4) INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Support services agreements.................... $2,013 $3,325 $5,805
Trademarks..................................... 50 50 50
Organizational costs........................... 70 70 70
------ ------ ------
2,133 3,445 5,925
Less accumulated amortization.................. (75) (220) (376)
------ ------ ------
$2,058 $3,225 $5,549
====== ====== ======
</TABLE>
F-12
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS)
(5) BORROWINGS
Short-term borrowings
At December 31, 1996 the Company had a total of $2,097 outstanding under two
bank operating lines of credit with a bank secured by substantially all assets
of the Company. In February 1997, the entire outstanding amount was fully
repaid from the net proceeds from the Offering (see Note 1).
As of September 30, 1997 the Company has a line of credit secured by
substantially all of the Company's accounts receivable. Borrowings under the
line bear interest at prime plus 1% (9.5% at September 30, 1997). The Company
may borrow from the credit line a maximum of $1,850 and limited to a borrowing
base calculated at 75% of the Company's eligible accounts receivable. There
are no amounts outstanding under the credit line at September 30, 1997. The
Company must pay a commitment fee of 1/2% per annum of the average daily
portion of the $1,850 available. The credit line agreement includes provisions
for maintaining certain financial covenants including debt service coverage
ratio, current ratio, debt to tangible net worth ratio, minimum tangible net
worth, and restrictions on payment of cash dividends. The Company is in
compliance with these covenants at September 30, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Long-term debt
Note payable to bank due in monthly instalments of
principal
and interest at prime plus 1.25%, paid during
1997............................................. $ 938 $ 667 $ --
Notes payable to bank with interest-only payments
for the
first 12 months at prime plus 1.5%, paid during
1997............................................. 1,684 1,699 --
Unsecured note payable, due in monthly instalments
of principal and
interest at 10.47% commencing on June 30, 1996,
maturing November 2003........................... -- 140 130
Note payable due in monthly instalments of
principal and interest at 9.99%, collateralized
by a vehicle, maturing June 2000................. 15 14 12
Unsecured note payable, due in monthly instalments
of principal and interest at 9.5% commencing on
March 31, 1997, maturing October 2001............ -- -- 116
Unsecured note payable, due in monthly instalments
of principal and interest at 10.5% commencing on
March 31, 1997, maturing December 2002........... -- -- 163
Unsecured note payable, due in quarterly
instalments of principal and
interest at 8.25% commencing on March 19, 1997,
maturing March 2002.............................. -- -- 117
Unsecured note payable, due in quarterly
instalments of principal and
interest at 8.5% commencing on July 31, 1997,
maturing June 2002............................... -- -- 100
Various unsecured notes payable, due in monthly
instalments of principal and interest varying
from 9.38% to 10.75%, maturing through March
1999............................................. 62 70 96
------ ------ -----
2,699 2,590 734
Less current portion.............................. 389 768 157
------ ------ -----
$2,310 $1,822 $ 577
====== ====== =====
</TABLE>
F-13
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
(5) BORROWINGS (CONTINUED)
Scheduled maturities of long-term debt at September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................................. $157
1999................................................................. 175
2000................................................................. 131
2001................................................................. 137
2002................................................................. 97
Thereafter........................................................... 37
----
$734
====
</TABLE>
Capital lease obligations
The Company has entered into certain capital lease obligations related to
the acquisition of dental and computer equipment. The leases, which are
secured by the equipment, bear interest at rates ranging from 7%- 15% and
require monthly payments of principal and interest.
Future minimum payments under the Company's capital lease obligations at
September 30, 1997 are summarized as follows:
<TABLE>
<S> <C>
1998................................................................ $346
1999................................................................ 178
2000................................................................ 160
2001................................................................ 18
----
702
Less portion representing interest.................................. 104
----
598
Less current portion................................................ 284
----
$314
====
</TABLE>
(6) EMPLOYEE BENEFIT PLANS
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 have been
made. 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 $49, $55 and $45, for the years ended December 31,
1995 and 1996, and for the nine months ended September 30, 1996, respectively.
Effective January 1, 1997, the plan was amended to eliminate the
nondiscretionary contribution provisions.
Effective May 1, 1997, the Company also adopted the Employee Stock Purchase
Plan covering 200,000 shares of the Company's common stock. All full-time
employees of the Company can purchase common stock under the plan through
payroll withholding at a 10% discount of the market price of the stock on the
last day of each calendar quarter.
F-14
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS)
(7) INCOME TAXES
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
----- ------ ------- ------
<S> <C> <C> <C> <C>
Current:
Federal..................................... $ 147 $ (175) $ (173) $ 7
State....................................... 16 (14) 0
----- ------ ------- ------
163 (189) (173) 7
----- ------ ------- ------
Deferred:
Federal..................................... 65 (143) (35) 197
State....................................... 6 (13) (20) 15
----- ------ ------- ------
71 (156) (55) 212
----- ------ ------- ------
Total provision (benefit)..................... $ 234 $ (345) $ (228) $ 219
===== ====== ======= ======
</TABLE>
The provision for income taxes for the year ended December 31, 1995 includes
the recognition of a cumulative net deferred tax liability of $25 associated
with the termination of the Company's Subchapter S corporation status on
January 1, 1995.
Deferred tax assets (liabilities) are comprised of the following components:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Property and equipment.......................... $ (141) $ (379) $(380)
Intangibles..................................... (6) (12) (8)
Cash versus accrual reporting for tax purposes--
long-term...................................... (40) (38) (38)
Net operating loss carryforward................. -- 417 180
Other........................................... -- 9 9
------ ------ -----
Net long-term deferred tax liability............ $ (187) $ (3) $(237)
====== ====== =====
Cash versus accrual reporting for tax purposes--
current........................................ $ (20) $ (30) $ (28)
Accrued payroll related costs................... 75 57 48
Accrued bonus................................... -- -- 29
------ ------ -----
Net current deferred tax assets, included in
prepaid and other current assets............... $ 55 $ 27 $ 49
====== ====== =====
</TABLE>
F-15
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(7) INCOME TAXES (CONTINUED)
The effective tax rate differed from the U.S. statutory federal tax rate due
to the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------- ----------------
1995 1996 1996 1997
------ ------ ------- ------
<S> <C> <C> <C> <C>
Statutory federal rate....................... 34.0% (34.0)% (34.0)% 34.0%
State taxes, net of federal benefit.......... 2.3 (3.2) (3.5) 2.2
Non-deductible intangible and other permanent
differences................................. 6.3 11.3 12.9 10.8
Other, including cumulative effect from the
termination of Subchapter S corporation
status in 1995.............................. 5.1 -- -- 1.9
----- ------ ------- ------
Effective tax rate........................... 47.7% (25.9)% (24.6)% 48.9%
===== ====== ======= ======
</TABLE>
(8) REDEEMABLE COMMON STOCK AND NONREDEEMABLE SHAREHOLDERS' EQUITY
Redeemable common stock
In connection with certain acquisitions, the Company granted "put rights" to
certain shareholders that may require the Company to redeem up to 96,545
shares of its common stock at a redemption price ranging from $13.38 to $19.62
per share. If all shareholders with such "put rights" exercise their options,
the Company would be required to repurchase the above shares of common stock
for $1,409. The redemption periods began April 1, 1996 and continue through
January 4, 2003. If the shareholder does not place a redemption request during
the redemption period, the "put right" will expire on the stated expiration
date. "Put rights" for all but 20,000 shares terminate in the event of the
Company successfully completing a public offering at a price of at least
$20.00 per share. The Company redeemed 6,243 shares of redeemable common stock
for $90 during 1996 and redeemed 6,616 shares for $103 during 1997.
The shares of common stock subject to the "put rights" are reported on the
balance sheet as redeemable common stock. Such shares have been recorded at
their fair value as of the dates of acquisition, inclusive of accretion during
the year ended December 31, 1996 and nine months ended September 30, 1997. The
Company records accretion on a ratable basis over the redemption period of the
respective stock. Such accretion for the year ended December 31, 1996, and the
nine month periods ended September 30, 1996 and 1997 was $91, $80 and $27,
respectively. Accretion in prior years was insignificant.
Such common stock at September 30, 1997 is redeemable as follows:
<TABLE>
<CAPTION>
NUMBER OF REDEMPTION REDEMPTION
SHARES AMOUNT PRICE RANGE
--------- ---------- ------------
<S> <C> <C> <C>
1998....................................... 2,974 $ 50 $16.82
1999....................................... 2,754 50 13.38-18.16
2000....................................... 40,849 576 13.60-19.62
2001....................................... 29,681 438 13.60-18.80
2002....................................... 3,714 51 13.60
Thereafter................................. 3,714 51 13.60
------ ------
83,686 $1,216
====== ======
</TABLE>
F-16
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 (IN THOUSANDS EXCEPT
SHARE AND PER SHARE AMOUNTS)
(8) REDEEMABLE COMMON STOCK AND NONREDEEMABLE SHAREHOLDERS' EQUITY (CONTINUED)
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 $43) were $957. The net proceeds allocated to common
stock aggregated $732. The stock warrants were recorded at their estimated
fair value of $225 and are entitled to certain "piggyback" registration
rights. The stock warrants expire on December 14, 2001; no stock warrants have
been exercised to date.
In connection with the private placement, the shareholder received certain
"put rights" which are exercisable after June 21, 2001 but no later than June
21, 2003 if the Company has not completed a public offering of its common
stock by June 21, 2001 at a price of at least $22.00 per share and with net
proceeds to the Company of at least $10,000. The per share price applicable to
the "put rights" is 20 times the Company's average adjusted net income per
share for the two most recent fiscal years preceding the exercise of the
rights. As of September 30, 1997, the Company has not recorded any accretion
related to the above "put rights."
Preferred stock
Preferred stock may be issued by the Board of Directors with preferences to
be determined at the time of issuance. Through September 30, 1997, none of the
30,000,000 authorized shares of the Company's preferred stock has been issued
or is outstanding.
Stock warrants issued in conjunction with debt issuance
In May 1996 the Company issued warrants to purchase 4,333 shares of the
Company's common stock at $7.50 per share to a lender in connection with a
line of credit. The stock warrants were valued at $9 and have been recorded as
debt issuance costs and additional paid-in-capital. The estimated fair value
of the stock warrants was amortized over the six-month term of the line of
credit. Such amortization expense has been included in interest expense in the
statement of operations. The stock warrants expire on May 31, 2001 and carry
certain "piggyback" registration rights. The stock warrants have not been
exercised to date.
In addition, in May 1996, the Company issued to certain directors, officers,
and shareholders of the Company warrants to purchase 115,000 shares of the
Company's common stock at $7.50 per share in consideration for guaranteeing a
total of $1,000 on a line-of-credit which is no longer available and has been
fully repaid. The estimated fair value of the stock warrants of $233 was
amortized over the six-month term of the line of credit. Such amortization
expense has been included in interest expense in the statement of operations.
All stock warrants expire in May 2001 and no such stock warrants have been
exercised to date.
F-17
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
(9) STOCK INCENTIVE PLAN
The Board of Directors adopted a Stock Incentive Plan ("the Plan"), as
amended during 1996. The Plan provides for issuance of up to 1,000,000 shares
of common stock in connection with various stock grants, awards and sales
granted under such plan to employees and nonemployees (primarily key PC
personnel). The Plan authorizes the grant of incentive stock options, non-
statutory stock options, stock appreciation rights or bonus rights; award of
stock bonuses; and/or sale of restricted stock. The exercise price for
incentive stock options may not be less than 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 and expire ten years
from the original grant date.
Stock options issued to nonemployees, including dental professionals
employed by the affiliated PC's, have been recorded at their estimated fair
market value and are being expensed over their respective vesting lives of up
to five years. Total compensation expense recorded for the years ended
December 31, 1995 and 1996, and the nine months ended September 30, 1996 and
1997 was $152, $52, $38 and $42, respectively.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
During 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock Based Compensation," which defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of
their employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost related to stock options issued to
employees under these plans using the method of accounting prescribed by the
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." Entities electing to remain with the accounting in APB
25 must make pro forma disclosures of net income and earnings per share, as if
the fair value based method of accounting defined in this Statement had been
applied.
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during the years ended December 31,
1995 and 1996 and the nine months ended September 30, 1996 and 1997. The 1995
and 1996 options were valued using the minimum value pricing model as
prescribed by SFAS 123 for nonpublic companies. The options issued subsequent
to the Company's 1997 initial public offering have been valued using the
Black-Scholes pricing model as prescribed by SFAS 123. The following weighted
average assumptions have been used for grants of stock options:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- ----------------
1995 1996 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Risk free interest rate.................. 6.5% 6.5% 6.5% 6.4%
Expected dividend yield.................. -- % -- % -- % -- %
Expected lives........................... 5 years 5 years 5 years 5 years
Expected volatility...................... N/A N/A N/A 60%
</TABLE>
F-18
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 (IN THOUSANDS EXCEPT
SHARE AND PER SHARE AMOUNTS)
(9) STOCK INCENTIVE PLAN (CONTINUED)
Options were assumed to be exercised over the five-year expected life for
the purpose of this valuation. Adjustments are made for options forfeited
prior to vesting. The total value of options granted was calculated in the
following amounts, which would be amortized on the straight-line basis over
the vesting period of the options:
<TABLE>
<S> <C>
Year ended December 31, 1995...................................... $ 334
Year ended December 31, 1996...................................... 301
Nine months ended September 30, 1996.............................. 301
Nine months ended September 30, 1997.............................. 1,219
</TABLE>
If the Company had accounted for stock options issued to employees in
accordance with SFAS 123, the Company's net income attributable to common
stock and pro forma net income per share would have been reported as follows:
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
---- ------- --------- --------
<S> <C> <C> <C> <C>
As reported................................... $257 $(1,076) $ (780) $ 229
Pro Forma..................................... 222 (1,156) (851) 18
</TABLE>
PRO FORMA NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
----- ------- --------- --------
<S> <C> <C> <C> <C>
As reported--primary......................... $0.19 $(0.71) $ (0.51) $ 0.07
Pro Forma--primary........................... 0.16 (0.76) (0.55) 0.01
As reported--fully diluted................... 0.19 (0.71) (0.51) 0.06
Pro Forma--fully diluted..................... 0.16 (0.76) (0.55) 0.01
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosures for
1995 and 1996 and for the nine months ended September 30, 1996 and 1997 are
not likely to be representative of the effects on reported net income (loss)
and net income (loss) per common equivalent share for future years, because
options vest over several years and additional awards generally are made each
year.
F-19
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(9) STOCK INCENTIVE PLAN (CONTINUED)
The following summary presents the options granted and outstanding as of
September 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF SHARES EXERCISE
EMPLOYEE NONEMPLOYEE TOTAL PRICE
-------- ----------- -------- --------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1994..... 110,000 -- 110,000 $4.52
Granted.......................... 136,000 72,750 208,750 5.91
Canceled......................... (31,000) (5,000) (36,000) 6.56
-------- ------- -------- -----
Outstanding, December 31, 1995..... 215,000 67,750 282,750 5.47
Granted.......................... 134,250 12,000 146,250 5.16
Exercised........................ (2,000) -- (2,000) .80
Canceled......................... (96,549) (5,833) (102,382) 8.19
-------- ------- -------- -----
Outstanding, December 31, 1996..... 250,701 73,917 324,618 5.52
Granted.......................... 382,000 -- 382,000 5.46
Exercised........................ (10,100) -- (10,100) 5.00
Canceled......................... (110,101) (13,667) (123,768) 5.17
-------- ------- -------- -----
Outstanding, September 30, 1997.... 512,500 60,250 572,750 $5.62
======== ======= ======== =====
</TABLE>
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options at September 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS WEIGHTED AVERAGE
EXERCISE ------------------------------------- CONTRACTUAL LIFE
PRICE OUTSTANDING EXERCISABLE REMAINING
-------- ----------- ----------- ----------------
<S> <C> <C> <C>
$ .20 15,250 15,250 7.82 years
4.13 45,500 -- 7.01
5.00 318,000 57,900 8.63
5.50 81,000 81,000 6.08
8.02 68,000 1,000 9.90
10.00 45,000 27,672 7.61
</TABLE>
F-20
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS)
(10) TRANSACTIONS WITH AFFILIATES
Major customers
The Company currently derives substantially all of its revenue from the PCs,
with which it has support services agreements. The Company and three of the
PCs are related through common ownership of certain shareholders.
Support services agreements
The Company provides management support services to the PCs 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 PCs and have been developed and revised as necessary based
on the Company's services and operating needs. The support services agreements
were amended such that support services revenue is based upon the following
percentage of net PC revenue:
<TABLE>
<CAPTION>
DANY TSE,
P.C. WASHINGTON OREGON CALIFORNIA
--------- ---------- ------ ----------
<S> <C> <C> <C> <C>
1997.................................. 53% 51% 53% 53%
1998.................................. 54% 52% 54% 54%
1999.................................. 55% 53% 55% 55%
2000.................................. 56% 54% 55% 55%
2001, and thereafter.................. 56% 55% 55% 55%
</TABLE>
Office lease
The Company leases office space for $4 per month from Gentle Dental of
Washington, PC (see note 1) on a month-to-month basis. Lease expense
aggregated approximately $50 for each of the years ended December 31, 1995 and
1996, and $37 for each of the nine months ended September 30, 1996 and 1997.
Receivables from affiliates
Affiliate receivables consist primarily of amounts owed to the Company by
the PCs to reimburse the Company for payment of the PCs' payroll and other
direct costs, net of amounts due to the PCs related to the acquisitions and
the PCs' share of revenues. The Company also transacts various other business
with the PCs, including short-term operating advances.
F-21
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(11) COMMITMENTS AND CONTINGENT LIABILITIES
Operating leases
The Company has entered into operating lease agreements for dental service
locations, office space and parking. Rental expense, including month-to-month
rentals, for the years ended December 31, 1995, 1996 and the nine months ended
September 30, 1996 and 1997 was $837, $1,256, $864 and $1,147, respectively.
Management expects to renew or replace leases as they expire. Following is a
summary of scheduled future minimum lease payments, including assumed leases:
<TABLE>
<S> <C>
1998.............................................................. $ 1,569
1999.............................................................. 1,522
2000.............................................................. 1,301
2001.............................................................. 1,029
2002.............................................................. 910
Thereafter........................................................ 4,316
-------
$10,647
=======
</TABLE>
Pending acquisitions
On September 21, 1997, the Company entered into a merger agreement pursuant
to which it has agreed to acquire all of the stock of Dedicated Dental
Systems, Inc. ("DDS"), which is based in Bakersfield, California and owns and
operates 11 staff-model dental offices pursuant to a Knox-Keene license from
the state of California. At the same time, the Company entered into three
asset purchase agreements to acquire the non-professional assets of four
related dental offices in Southern California. The aggregate purchase price
under these agreements is $22,750, consisting of $9,771 in cash, $12,429 in
shares of Company common stock (1,519,103 shares valued at $8.1818 per share,
which was the average closing price of Company common stock for the 30 trading
days prior to the execution of the agreements), and $550 in estimated future
earnout payments under two of the asset purchase agreements, all subject to
certain adjustments provided for in the agreements. The acquisition is subject
to California Knox-Keene regulatory approval, among other contingencies, and
is expected to close in the first quarter of 1998.
On September 29, 1997, the Company entered into an agreement for the
acquisition of the nonprofessional assets of a dental practice located in
Sacramento, California. The purchase price is $810, consisting of $320 in cash
and $490 in shares of Company common stock (43,077 shares valued at $11.375
per share, which was the average closing price of Company common stock for the
10 trading days prior to the execution of the agreement). The acquisition is
expected to close in January 1998.
F-22
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS)
(12) SUBSEQUENT EVENT
On November 4, 1997, the Company completed its merger with GMS Dental Group,
Inc. ("GMS"), a privately held corporation, with the Company as the surviving
corporation. The merger is being accounted for as a pooling of interests.
Under the terms of the merger agreement, the Company issued 4,548,161 shares
of its Common stock representing approximately 59% of the outstanding stock of
the merged company, to the former shareholders of GMS. A total of 297,074 of
the shares issued in the merger are subject to repurchase by the Company at an
average price of $0.32 per share if certain performance targets for 1997 are
not achieved. These targets are not expected to be met and the shares are
anticipated to be purchased during 1998.
Upon completion of the DDS acquisition discussed in note 11, and after the
foregoing repurchase of the shares discussed above, the shares issued to GMS
shareholders will represent approximately 47.5% of the total outstanding
common stock. Prior to the merger, GMS was a dental practice management
company based in Yorba Linda, California providing management support services
to 22 dental offices with approximately 100 dentists in California, Idaho and
Hawaii.
The consolidated financial statements for the periods prior to the
combination will be restated to include the accounts and results of operations
of GMS when financial statements are prepared for the period including the
date of the merger.
The results of operations previously reported by the separate enterprises
and the combined amount are summarized below:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
------ ------- -------- ---------
<S> <C> <C> <C> <C>
Net Sales:
GMS--patient service................ $ -- $ 3,701 $ -- $ 19,348
The GDS--management fee............. 9,781 10,712 7,866 10,269
------ ------- -------- ---------
Combined sales........................ 9,781 $14,413 $ 7,866 $ 29,617
====== ======= ======== =========
Net income (loss) attributed to common
stock:
GMS................................. $ -- $ (957) $ -- $ (1,814)
The GDS............................. 257 (1,076) (780) 202
------ ------- -------- ---------
Combined net income (loss)............ $ 257 $(2,033) $ (780) $ (1,612)
====== ======= ======== =========
</TABLE>
Adjustments to conform GMS's method of accounting for amortization of
intangible assets with that of the Company will reduce net income for the
years ended December 31, 1995 and 1996 and the nine months ended September 30,
1997 by approximately $0, $0, and $148.
There were no significant transactions between GMS and GDS prior to the
combination.
In December 1997, the Company and the Oregon and Washington professional
corporations signed letters of intent to restructure the management agreements
with those professional corporations. The Company will pay consideration of
$1.8 million, to be offset by its receivable from the professional
corporations for $1.8 million, cash of $575,000 to be paid over a term of 18
months, or options to acquire 230,000 shares of common stock at an exercise
price of $8.38 per share, and 1.5% of the increase in revenue in 1998 and
1999, in exchange for revised management agreements which provide the company
with a controlling financial interest in the operation of the practices.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GMS Dental Group, Inc.:
We have audited the accompanying consolidated balance sheets of GMS Dental
Group, Inc. and subsidiaries as of December 31, 1996 and September 30, 1997
and the related consolidated statements of operations, stockholders' deficit
and cash flows for the period from October 11, 1996 (inception) through
December 31, 1996 and the nine-month period ended September 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GMS Dental
Group, Inc. and subsidiaries as of December 31, 1996 and September 30, 1997
and the results of their operations and their cash flows for the period from
October 11, 1996 through December 31, 1996 and for the nine months ended
September 30, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Orange County, California
November 14, 1997
F-24
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 1,991 $ 68
Accounts receivable, net of allowances of approximately
$1,519 and $2,278 in
1996 and 1997, respectively (note 7)...................... 1,819 3,244
Dental supplies............................................ 191 359
Prepaid and other current assets........................... 143 637
------- -------
Total current assets..................................... 4,144 4,308
------- -------
Property and equipment, (notes 5 and 7)...................... 1,578 3,354
Intangible assets, net of accumulated amortization of $61 and
$227 in 1996 and 1997, respectively......................... 7,105 14,444
Other assets (note 6)........................................ 399 454
------- -------
Total assets............................................. $13,226 $22,560
======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable........................................... $ 394 $ 441
Accrued salaries, wages and benefits....................... 669 1,293
Accrued expenses and other current liabilities............. 861 1,216
Current maturities of notes payable and obligations under
capital leases (notes 7 and 12)........................... 207 246
------- -------
Total current liabilities................................ 2,131 3,196
------- -------
Long-term liabilities:
Obligations under capital leases, net of current portion
(note 12)................................................. 131 327
Long-term debt, net of current portion (note 7)............ -- 7,394
Other long-term liabilities................................ -- 181
------- -------
Total long-term liabilities.............................. 131 7,902
------- -------
Total liabilities........................................ 2,262 11,098
------- -------
Redeemable convertible preferred stock--Series B, $.001 par
value; authorized
9,270,000 shares; issued and outstanding 6,180,000 and
6,287,142 shares in 1996
and 1997, respectively...................................... 11,055 12,072
------- -------
Stockholders' deficit (notes 7, 8 and 9):
Convertible preferred stock--Series A, $.001 par value;
authorized 395,000
shares; issued and outstanding 395,000 shares in 1996 and
1997...................................................... 1 1
Convertible preferred stock--Series C, $.001 par value;
authorized 5,000 shares; issued and outstanding 1,777 and
2,753 shares in 1996 and 1997, respectively............... 1 1
Common stock, $.001 par value; authorized 14,500,000
shares; issued and outstanding 1,864,901 and 2,614,901
shares in 1996 and 1997, respectively..................... 2 3
Additional paid-in capital................................. 997 2,438
Notes receivable from stockholders......................... (136) (300)
Accumulated deficit........................................ (956) (2,753)
------- -------
Total stockholders' deficit.............................. (91) (610)
Commitments and contingencies (notes 8, 11 and 12)
Subsequent events (note 13)..................................
------- -------
Total liabilities, redeemable convertible preferred stock
and stockholders' deficit............................... $13,226 $22,560
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIODS FROM OCTOBER 11, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996 AND THE
NINE-MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Dental group net patient service revenue (note 7)........ $ 3,701 $ 19,348
--------- ---------
Operating expenses:
Clinical salaries and benefits......................... 1,493 6,571
Practice nonclinical salaries and benefits............. 1,131 5,410
Dental supplies and lab expenses....................... 498 2,205
Practice occupancy expenses............................ 265 1,202
Practice selling, general and administrative expenses.. 469 2,159
Corporate selling, general and administrative
expenses.............................................. 626 2,025
Depreciation and amortization.......................... 161 583
--------- ---------
4,643 20,155
--------- ---------
Operating loss....................................... (942) (807)
Nonoperating expenses:
Interest expense, net.................................. (7) (227)
Loss on investment in joint venture.................... (87) (68)
--------- ---------
Loss before income tax benefit....................... (1,036) (1,102)
Income tax benefit....................................... 320 134
--------- ---------
Net loss............................................. (716) (968)
Dividends on redeemable convertible preferred stock...... (240) (829)
--------- ---------
Net loss attributable to common stockholders......... $ (956) $ (1,797)
========= =========
Net loss per common share................................ $ (.51) $ (.76)
========= =========
Weighted-average number of common shares outstanding..... 1,864,901 2,367,648
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
PERIODS FROM OCTOBER 11, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
AND THE NINE-MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SHARES OF SHARES OF
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE NOTES
PREFERRED PREFERRED PREFERRED PREFERRED SHARES OF ADDITIONAL RECEIVABLE
STOCK-- STOCK-- STOCK-- STOCK-- COMMON COMMON PAID-IN FROM ACCUMULATED
SERIES A SERIES A SERIES C SERIES C STOCK STOCK CAPITAL STOCKHOLDERS DEFICIT
----------- ----------- ----------- ----------- --------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October
11, 1996....... -- $-- -- $-- -- $-- $ -- $ -- $ --
Initial issuance
of common stock
in exchange for
note
receivable..... -- -- -- -- 1,367,201 1 136 (136) --
Common stock
issued for
acquisitions... -- -- -- -- 497,700 1 99 -- --
Convertible
preferred
stock-- Series
A issued for
acquisitions... 395,000 1 -- -- -- -- 295 -- --
Convertible
preferred
stock-- Series
C issued for
acquisitions... -- -- 1,777 1 -- -- 1,733 -- --
Issuance costs
for redeemable
convertible
preferred
stock--Series
B.............. -- -- -- -- -- -- (1,266) -- --
Dividends on
redeemable
convertible
preferred
stock--Series
B.............. -- -- -- -- -- -- -- -- (240)
Net loss........ -- -- -- -- -- -- -- -- (716)
------- ---- ----- ---- --------- ---- ------- ----- -------
Balance,
December 31,
1996........... 395,000 1 1,777 1 1,864,901 2 997 (136) (956)
Issuance of
common stock
upon exercise
of stock
options in
exchange for
note
receivable..... -- -- -- -- 750,000 1 150 (150) --
Interest accrued
on note
receivable..... -- -- -- -- -- -- -- (14) --
Shares reserved
under earnout
agreement...... -- -- -- -- -- -- 314 -- --
Issuance of
common stock
warrants for
acquisition.... -- -- -- -- -- -- 1 -- --
Convertible
preferred
stock-- Series
C issued for
acquisitions... -- -- 976 -- -- -- 976 -- --
Dividends on
redeemable
convertible
preferred
stock--Series
B.............. -- -- -- -- -- -- -- (829)
Net loss........ -- -- -- -- -- -- -- -- (968)
------- ---- ----- ---- --------- ---- ------- ----- -------
Balance,
September 30,
1997........... 395,000 $ 1 2,753 $ 1 2,614,901 $ 3 $ 2,438 $(300) $(2,753)
======= ==== ===== ==== ========= ==== ======= ===== =======
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT
-------------
<S> <C>
Balance, October
11, 1996....... $ --
Initial issuance
of common stock
in exchange for
note
receivable..... 1
Common stock
issued for
acquisitions... 100
Convertible
preferred
stock-- Series
A issued for
acquisitions... 296
Convertible
preferred
stock-- Series
C issued for
acquisitions... 1,734
Issuance costs
for redeemable
convertible
preferred
stock--Series
B.............. (1,266)
Dividends on
redeemable
convertible
preferred
stock--Series
B.............. (240)
Net loss........ (716)
-------------
Balance,
December 31,
1996........... (91)
Issuance of
common stock
upon exercise
of stock
options in
exchange for
note
receivable..... 1
Interest accrued
on note
receivable..... (14)
Shares reserved
under earnout
agreement...... 314
Issuance of
common stock
warrants for
acquisition.... 1
Convertible
preferred
stock-- Series
C issued for
acquisitions... 976
Dividends on
redeemable
convertible
preferred
stock--Series
B.............. (829)
Net loss........ (968)
-------------
Balance,
September 30,
1997........... $ (610)
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS FROM OCTOBER 11, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996 AND THE
NINE-MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (716) $ (968)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization............................. 161 583
Loss on investment in joint venture....................... 87 68
Change in assets and liabilities, net of the effect of
acquisitions:
Decrease (increase) in accounts receivable............... (21) 159
Decrease in dental supplies.............................. 1 126
(Increase) decrease in prepaid expenses and other
current assets.......................................... 89 (460)
Increase in other assets................................. (7) (123)
Decrease in accounts payable............................. (619) (55)
Increase in accrued salaries, wages and benefits......... 526 624
Increase in accrued expenses and other current
liabilities............................................. 576 67
Increase (decrease) in other liabilities................. (328) 182
------ ------
Net cash (used in) provided by operating activities..... (251) 203
------ ------
Cash flows from investing activities:
Purchases of property and equipment....................... (125) (138)
Cash paid for investment in joint venture................. (75) --
Cash paid for organization costs.......................... (5) --
Cash paid for acquisition of dental practices............. (6,601) (6,178)
------ ------
Net cash used in investing activities................... (6,806) (6,316)
------ ------
Cash flows from financing activities:
Payment of deferred financing costs....................... (150) --
Proceeds from the issuance of redeemable convertible
preferred stock--Series B, net of costs.................. 9,550 188
Proceeds from the issuance of common stock................ 1 1
Proceeds from issuance of debt............................ -- 4,300
Repayment of debt......................................... (353) (299)
------ ------
Net cash provided by financing activities............... 9,048 4,190
------ ------
Increase (decrease) in cash and cash equivalents........ 1,991 (1,923)
Cash and cash equivalents, beginning of period............. -- 1,991
------ ------
Cash and cash equivalents, end of period................... $1,991 $ 68
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest ................................................. $ -- $ 212
Supplemental Schedule of Noncash Investing and Financing
Activities:
Issuance of convertible preferred stock--Series A to
founders and to purchase the predecessor companies....... $ 295 $ --
Issuance of redeemable convertible preferred stock--Series
B to investment banker for services...................... 314 --
Issuance of convertible preferred stock--Series C to
purchase dental practices................................ 1,733 976
Notes payable issued to purchase dental practice.......... -- 3,214
Shares reserved under earnout agreements.................. -- 315
Issuance of common stock warrants to purchase dental
practice................................................. -- 1
Issuance of common stock to founders and to purchase the
predecessor companies.................................... 235 --
Issuance of notes receivable to stockholders for purchase
of common stock.......................................... 136 150
Interest accrued on notes receivable from stockholders.... -- 14
Purchases of equipment under capital lease agreements..... 550 414
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
(1) DESCRIPTION OF BUSINESS
GMS Dental Group, Inc. and subsidiaries (GMS or the Company), is a Delaware
corporation engaged in managing dental groups. The Company, through its wholly
owned subsidiaries, acquires the net assets of and manages dental groups under
long-term service agreements with the affiliated dental groups. The Company
was incorporated on March 19, 1996 and commenced operations on October 11,
1996 at which time the Company completed its first acquisitions. Therefore,
the Company has a limited operating history.
(2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation/Basis of Consolidation
The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of the Company and its wholly
owned subsidiaries and the affiliated professional dental group practices. The
Company's subsidiaries acquire the operating assets and assume certain
liabilities of the dental groups and account for the Company's management
activities with the dental groups under the Company's long-term service
agreements. Because of corporate practice of medicine laws in the states in
which the Company operates, the Company does not own dental practices, but
instead enters into exclusive long-term management services agreements with
the dental groups. The Company designates a majority shareholder or other
owner of the dental group as its nominee. Additionally, advisory boards are
established which govern the activities of the dental practices. The Company
appoints a majority of the advisory board members. Through the management
services agreements and its control of the advisory board and nominee
shareholders of the dental practices, the Company has exclusive authority over
the decision making related to all major ongoing operations of the underlying
dental groups with the exception of the professional aspects of dentistry
practice as required by applicable state law. Under the management services
agreements, the Company establishes annual operating and capital budgets for
the dental groups and compensation guidelines for the licensed dental
professionals. The Company consolidates the operating results and accounts of
the dental groups since the Company has control over the operations of the
dental practices.
The Company has a 50% equity investment in Celebration Dental Services L.C.,
a Florida limited liability company, which is accounted for on the equity
basis of accounting.
Dental Group Net Patient Service Revenue
Dental group net patient service revenue represents the revenue of the
dental groups reported at the estimated realizable amounts from patients,
third-party payors and others for services rendered, net of contractual
adjustments.
Cash and Cash Equivalents
The Company considers all highly liquid investments in debt instruments with
an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable principally represent receivables from patients and
other third-party payors for dental services provided by the dental groups.
Amounts are recorded net of contractual allowances.
F-29
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Dental Supplies
Dental supplies represent disposable supplies and instruments used in
delivering dental services to patients. The supplies are recorded at the lower
of cost or market (net realizable value).
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is recorded using the straight-line method over five to seven years,
their estimated useful lives of the assets. Leasehold improvements are
amortized on the straight-line method over the shorter of the lease term or
the estimated useful life.
Equipment held under capital leases are stated at the present value of
minimum lease payments at the inception of the lease and is amortized on a
straight-line basis over the shorter of the lease term or the estimated useful
life of the asset. Amortization of assets subject to capital leases is
included in depreciation expense.
Intangible Assets
Intangible assets consist primarily of management service agreements and are
amortized on a straight-line basis over the period of the agreements, which is
40 years. Amortization expense for the periods ended December 31, 1996 and
September 30, 1997 was $61 and $166, respectively.
Long-Lived Assets
The Company requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment charge is
recorded when the estimated undiscounted cash flows from such assets is
insufficient to recover the cost of the long-lived asset.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes, under which deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Certain prior years amounts have been reclassified to conform with the
current year presentation.
F-30
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share." In accordance with this pronouncement, the Company
will adopt the new standard for periods ending after December 15, 1997.
Management does not expect the adoption of this pronouncement to have a
significant effect on reported earnings (loss) per share information.
The Emerging Issues Task Force of the Financial Accounting Standards Board
recently evaluated certain matters relating to the physician practice
management industry (EITF issue number 97-2) and reached a consensus on the
criteria for establishing a controlling financial interest in a physician
practice, the appropriateness of accounting for a transaction between a
physician practice management company and a physician practice as a business
combination, and the appropriateness of accounting for such transactions using
the pooling-of-interests method of accounting. The accompanying financial
statements are prepared in conformity with the consensus reached in EITF 97-2.
The Company is unable to predict the impact, if any, that this review may have
on its future acquisition strategy.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation." Under SFAS 123, the Company may elect to recognize stock-
based compensation expense based on the fair value of the awards or continue
to account for stock-based compensation under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and disclose in the
financial statements the effects of SFAS 123 as if the recognition provisions
were adopted. Effective October 11, 1996 (inception), GMS elected to account
for stock-based compensation under Accounting Principles Board Opinion No. 25
(APB 25).
(3) ACQUISITIONS
During the period ended December 31, 1996, the Company acquired Group
Management Service, Inc. which owned a 50% investment in Celebration Dental
Service, L.C. (Celebration), a Florida dental limited liability company. Group
Management Service, Inc. also owned the rights to purchase 100% of the net
assets of five dental practices. Subsequent to the purchase of Group
Management Service, Inc. GMS Dental Group, through its wholly owned
subsidiaries, acquired certain operating assets and assumed certain
liabilities of the five dental practices. During the period ended September
30, 1997, the Company acquired the net assets of four additional dental
practices. These acquisitions have been accounted for under the purchase
method of accounting and, accordingly, the assets and liabilities of the
acquired dental practices were recorded at their estimated fair values at the
dates of acquisition. The operating results of these acquisitions have been
included in the financial statements of the Company since the dates of
acquisition.
F-31
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
The cost of acquisitions in excess of the identified fair value of assets
and liabilities has been allocated primarily to management service agreements.
Summary information concerning the acquisitions during 1996 follow:
<TABLE>
<S> <C>
Accounts receivable, net.......................................... $ 1,798
Dental supplies................................................... 192
Prepaid expenses and other current assets......................... 232
Property and equipment............................................ 1,544
Other assets...................................................... 261
Liabilities assumed............................................... (2,005)
Deferred tax liability............................................ (320)
Management service agreements and other intangible assets......... 7,166
-------
8,868
Less fair value of common stock issued............................ 100
Less fair value of convertible preferred stock--Series A issued... 295
Less fair value of convertible preferred stock--Series C issued... 1,733
Less deferred purchase price (payable in cash).................... 139
-------
Cash purchase price, net of cash acquired....................... $ 6,601
=======
Summary information concerning the acquisitions during 1997 are as follows:
Accounts receivable, net.......................................... $ 1,584
Dental supplies................................................... 294
Prepaid expenses and other current assets......................... 34
Property and equipment............................................ 1,641
Liabilities assumed............................................... (239)
Deferred tax liability............................................ (134)
Management service agreements and other intangible assets......... 7,504
-------
10,684
Less notes payable to sellers..................................... 3,214
Less fair value of convertible preferred stock--Series C shares
issued and reserved for issuance................................. 1,291
Less common stock warrants issued................................. 1
-------
Cash purchase price, net of cash acquired....................... $ 6,178
=======
</TABLE>
The following unaudited pro forma summary for the nine month period ended
September 30, 1997 presents the condensed consolidated results of operations
as if the 1997 acquisitions discussed above had occurred as of January 1,
1997. These pro forma results have been prepared for comparative purposes only
and are not necessarily indicative of what the actual results of operations
would have been had the acquisitions been made as of that date, nor does it
purport to represent future operations of the Company:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Pro forma:
Dental Group net patient service revenue......................... $27,582
Net loss......................................................... (766)
=======
Net loss per common share........................................ $ (.32)
=======
</TABLE>
F-32
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
The fair value of the stock issued was determined by the Company based upon
an analysis of the value of the operating assets and liabilities being
acquired using projected discounted cash flows and the negotiation process
between the Company and the sellers. Under the purchase agreements, the
purchase price is adjustable by the Company for a period between six months
and one year after the closing of the transactions in order to finalize the
fair values of the assets acquired and liabilities assumed.
In connection with the acquisition of four of the dental groups, the Company
is contingently obligated to pay additional consideration, depending on the
achievement of certain financial results, as defined by the purchase
agreements. During 1997, the Company accrued $314 for the portion of 1997
earnouts which the Company expects to pay in common stock.
(4) RECEIVABLES SOLD WITH RECOURSE
Prior to October 11, 1996, one of the acquired practices sold certain of its
receivables to a financial institution with recourse. Under the terms of these
transactions, the practice received 97% of the face value of each receivable.
Additionally, as collateral for these receivables, the practice was required
to maintain a cash balance at the financial institution of approximately 10%
of the outstanding receivables. The recourse provisions require the Company to
repurchase any receivable which becomes more than 150 days delinquent.
The outstanding balance of receivables sold with recourse was approximately
$261 and are included in accounts receivable in the accompanying consolidated
balance sheets at December 31, 1996. As of September 30, 1997, the Company no
longer sells its receivables.
(5) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Dental equipment............................................. $ 786 $2,100
Computer equipment........................................... 267 477
Furniture, fixtures, and equipment........................... 188 312
Leasehold improvements....................................... 370 915
Buildings.................................................... 48 48
Land......................................................... 10 10
------ ------
Total property and equipment............................... 1,669 3,862
Less accumulated depreciation................................ (91) (508)
------ ------
Property and equipment, net................................ $1,578 $3,354
====== ======
</TABLE>
(6) INVESTMENT IN JOINT VENTURE
The Company is a 50% owner in a joint venture with Private Medical Care,
Inc., a subsidiary of Delta Dental, Inc., in a dental practice located in
Celebration, Florida. The initial investment by the Company consisted of $75
in cash and $150 of contributed assets.
F-33
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
(7) LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
---- ------
<S> <C> <C>
Term note, bearing interest at 9.75%; monthly principal and
interest payments of $5; due October 17, 1997 with a balloon
payment of $12; secured by mortgage.......................... $ 56 $ 12
Credit facility, bearing interest at 3.25% in excess of LIBOR
rate (9.1% at September 30, 1997)............................ 48 4,300
Subordinated note payable, discounted at 8% annual interest,
payable in annual installments of principle and interest
beginning December 31, 1997 through January 2002............. -- 696
Senior subordinated note payable, discounted at 8% annual
interest. Payable in 60 monthly installments of $14,
beginning August 1, 1997 through July 2002................... -- 667
Senior subordinated note payable, discounted at 8% annual
interest; balloon payment of $500 due July 1999.............. -- 432
Senior subordinated note payable, discounted at 8% annual
interest; balloon payment of $2,083 due July 2002............ -- 1,419
---- ------
104 7,526
Less current portion.......................................... 104 132
---- ------
$-- $7,394
==== ======
</TABLE>
As of September 30, 1997, the aggregate maturities of long-term debt for
each of the next five years are as follows:
<TABLE>
<S> <C>
1998.................................. $ 132
1999.................................. 1,711
2000.................................. 1,574
2001.................................. 1,898
2002.................................. 2,211
Thereafter............................ --
------
$7,526
======
</TABLE>
The Company has obtained a credit facility from a bank in the amount of
$10 million. The proceeds of the credit facility are available for working
capital needs and to finance acquisitions approved by the bank. Principal
amounts owed under the credit facility bear interest up to 1% above the prime
rate or up to 3.25% above LIBOR, dependent on the Company's leverage ratio.
The outstanding balance on this facility as of September 30, 1997 was $4.3
million. As of September 30, 1997, the Company was in violation of certain
covenants for which it obtained a waiver from the bank.
On October 11, 1998, the credit facility will convert from a revolving
facility to a three-year loan. The term loan will provide for 12 equal
quarterly payments of principal and interest. The obligations under this
credit agreement are secured by a first-priority security interest in favor of
the bank in all revenue of the Company and its subsidiaries. The Company must
meet certain ratios defined by the bank credit agreement.
In connection with this credit facility, the Company issued a warrant to the
bank to purchase up to 184,103 shares of the Company's common stock at a price
of $1.75 per share. The warrant expires in October 2001.
F-34
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
(8) STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (NOTE 13)
The Company has two classes of stock: common stock and preferred stock. As
of September 30, 1997, preferred stock consists of three series: convertible
preferred stock--Series A, redeemable convertible preferred stock--Series B
and convertible preferred stock--Series C. The preferences, privileges and
restrictions granted or imposed on the preferred stock are as follows:
Common Stock
Upon formation of the Company, GMS Dental Group, Inc. issued an aggregate
1,367,201 shares of its common stock at a purchase price of $.10 per share to
the founders of the Company. 605,000 of these shares are subject to a three-
year vesting schedule whereby one-quarter of the shares vested upon issuance
and one-quarter of the shares will vest on October 11, 1997. The remaining
shares vest on a monthly basis during the remaining thirty-six months.
572,700 shares issued to certain other stockholders, which were issued at a
price of $.20 per share, and 762,201 shares out of the 1,367,201 shares issued
to the founders, are subject to a right of repurchase, at cost, in favor of
the Company that expires upon the earlier of (1) the achievement by the
Company of certain performance milestones over a two-year period or (2) nine
years and nine months from the date of issuance.
Dividends
The holders of the Series B convertible redeemable preferred stock will be
entitled to receive dividends in preference to any dividend on the Series A
convertible preferred stock, the Series C convertible preferred stock and the
common stock, at a rate of 10% per annum of the per share purchase price of
the Series B convertible redeemable preferred stock, which dividend rate will
be $.175 per share of Series B convertible redeemable preferred stock. The
dividends payable to the holders of the Series B convertible redeemable
preferred stock are cumulative and are payable upon the earlier of conversion
of such shares into common stock, the initial public offering of the Company's
securities, a liquidation of the Company or an acquisition of the Company or
substantially all of its assets. Accumulated undeclared dividends as of
September 30, 1997 totaled $1,069.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Series B convertible redeemable preferred stock are
entitled to receive $1.75 per share, plus all accrued but unpaid dividends on
such shares, prior to and in preference to any distributions made to holders
of the Series A convertible preferred stock, the Series C convertible
preferred stock or the common stock. The holders of Series A and Series C
convertible preferred stock are then entitled to $0.748 per share and $1,000
per share, respectively, plus an amount equal to all declared but unpaid
dividends on each such share. After payment of the preference amounts to the
holders of the Series A and Series C convertible preferred stock, any
remaining assets or property distributable upon such liquidation, dissolution
or winding up will be divided pro rata among the holders of the Series B
convertible redeemable preferred and the common stock on an as-converted
basis. At September 30, 1997, the Company has 6,287,142, 395,000 and 2,753
shares outstanding of Series B convertible redeemable preferred stock, Series
A convertible preferred stock and Series C convertible preferred stock,
respectively.
F-35
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Redemption Rights
After October 11, 2001, any or all of the holders of the Series B
convertible redeemable preferred stock shall have the right to the extent
permitted by law and by the Company's Loan Agreement with Imperial Bank, to
require the Company to repurchase all or any part of such holder's shares of
such series of preferred stock by payment of an amount per share equal to the
liquidation preference amount, together with any accumulated but unpaid
dividends on such redeemed shares. The Series A and Series C convertible
preferred stock are not redeemable.
Conversion Rights
The holders of shares of Series A convertible preferred stock and Series B
convertible redeemable preferred stock have the right to convert such shares
at any time into common stock of the Company. The initial conversion rate will
be on a 1-to-1 basis and will be subject to adjustment for anti-dilution
(including, but not limited to, adjustments to the conversion rates in the
event the Company issues common stock or securities convertible into or
exercisable for common stock at a price per share less than the conversion
price for such series of preferred stock). Each share of Series A convertible
preferred stock and Series B convertible redeemable preferred stock
automatically will be converted into common stock, at the then applicable
conversion rate, upon the closing of a firm commitment underwritten public
offering of the Company's common stock at a price per share not less than $10
and for a total offering price of not less than $30 million or upon the
written consent of the holders of at least a majority of the Series A
convertible preferred stock and Series B convertible redeemable preferred
stock, voting together as a class.
Each share of Series C convertible preferred stock automatically shall be
converted into common stock, at a ratio equal to $1,000 divided by the Series
C conversion price (as defined below), upon earlier of (i) the closing of a
firm commitment underwritten public offering of the Company's common stock or
(ii) the acquisition of the Company (by merger, stock purchase, sale of assets
or otherwise) for a purchase price in excess of an amount equal to four times
the aggregate liquidation preferences of all the then outstanding shares of
preferred stock of the Company. For purposes of automatic conversion upon the
closing of a public offering as described above, the Series C conversion price
shall be 75% of the price per share of common stock at which such shares are
sold to the public in the public offering. For purposes of automatic
conversion upon the acquisition of the Company as described above, the Series
C conversion price shall be 75% of the price per share of common stock paid in
such acquisition. The price per share of common stock will be determined by
dividing the total consideration to be received by the Company's stockholders
as a result of such acquisition by the number of shares of common stock then
outstanding on an as-converted basis (including the approximate number of
shares of common stock issuable upon conversion of the Series C convertible
preferred stock upon such acquisition).
Voting Rights
The holders of the Series A and Series B preferred stock shall be entitled
to the number of votes equal to the number of shares of common stock then
issuable upon conversion of such shares. The holders of the Series C preferred
stock shall be entitled to a number of votes equal to 5% of the total voting
power of the outstanding voting securities.
Registration Rights
The Company has granted to the holders of shares of Series A and Series B
convertible preferred stock certain registration rights pursuant to an
Investor Rights Agreement. Pursuant to the Investor Rights Agreement,
F-36
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
holders of Series A and Series B convertible preferred stock will have the
right to demand one registration and will have an unlimited number of
"piggyback" registrations. In addition, the holders of the Series A and
Series B convertible preferred stock will be entitled to two demand
registrations per year on Form S-3, so long as such registrations are not less
than $500. The Company will bear registration expenses (exclusive of
underwriting discounts and commissions) of the one demand registration and all
"piggyback" registrations. Expenses of registration on Form S-3 will be borne
pro rata by the holders participating in such registration. Registration
rights will terminate on the earlier of (i) five years after an initial public
offering of the Company's common stock or (ii), with respect to a particular
holder of less than 200,000 shares, upon such a public offering if such holder
may sell all of such holders' registrable securities pursuant to Rule 144
during any 90-day period.
Rights of First Offer
Each purchaser of Series B convertible redeemable preferred stock who
continues to hold at least 25% of such purchaser's original investment or a
transferee who acquires at least 400,000 shares of the Series B convertible
redeemable preferred stock (a Major Investor) will have a right of first offer
to purchase its pro rata share of offerings of new securities of the Company
(other than (i) securities issued to certain employees, directors, consultants
and vendors of the Company, (ii) shares of the Company's capital stock issued
in connection with the acquisition of dental practices and (iii) securities
issued in connection with the Company's business relationships up to 1% of the
then outstanding common stock on an as-converted basis). The right of first
offer will terminate upon an initial public offering of the Company's common
stock.
Redeemable Preferred Stock Activity
The following summary presents the changes in the redeemable convertible
preferred stock--Series B:
<TABLE>
<CAPTION>
SHARES AMOUNT
--------- -------
(in
000s)
<S> <C> <C>
Issued in connection with private placement............... 6,180,000 $10,815
Dividends accumulated..................................... -- 240
--------- -------
Balance, December 31, 1996................................ 6,180,000 11,055
Issued in connection with private placement............... 107,142 188
Dividends accumulated..................................... -- 829
--------- -------
Balance, September 30, 1997............................... 6,287,142 $12,072
========= =======
</TABLE>
Warrants
In connection with the acquisition of the net assets of a dental practice in
1997, the Company issued warrants to purchase 300,000 shares of common stock
at $3.50 per share. The warrants were recorded at their estimated fair value
of $1 and expire in 2004.
As described in note 7, in 1996 the Company issued a warrant to the bank to
purchase up to 184,103 shares of common stock at a price of $1.75 per share.
The warrant expires in October 2001. None of the warrants have been exercised
to date.
(9) STOCK OPTIONS
As of December 31, 1996 and September 30, 1997, GMS had two stock-based
option plans, as described below and has elected to apply the opinion of APB
Opinion No. 25 and related interpretations in accounting for its plans.
Management believes that options have been issued at fair value at the date of
grant. Accordingly, no compensation expense has been recognized for those
plans in the consolidated statement of operations.
F-37
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
The 1996 stock plans, the Performance Stock Option Plan and the Stock Option
Plan, authorize the Board or one or more committees which the Board may
appoint from among its members (the Committee) to grant options and rights to
purchase common stock to employees only under the "Performance" plan and to
employees, directors and consultants under the stock option plan. Options
granted under the 1996 stock plans may be either "incentive stock options" as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, or
nonstatutory stock options, as determined by the Board or the Committee. The
exercise price of options granted under the 1996 stock plans is to be equal to
the fair market value of GMS common stock on the date of grant. Options vest
at a minimum of 20% per year from the date of grant. Options are exercisable
for no longer than ten years. A total of 1,152,600 shares of common stock has
been reserved for issuance under the 1996 stock plans. As of September 30,
1997, options to purchase a total of 998,500 shares of the Company's common
stock have been granted under the 1996 stock plans.
The following tables summarize GMS' option activity:
<TABLE>
<CAPTION>
PERIOD FROM OCTOBER
11, 1996
(INCEPTION) THROUGH NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------- -------------------
EXERCISE EXERCISE
PRICE PRICE
RANGE RANGE
NUMBER PER NUMBER PER
OF OPTIONS OPTION OF OPTIONS OPTION
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding beginning of period........ -- $-- 190,000 $ .20
Granted during period.................. 190,000 .20 808,500 .20-.30
Exercised during period................ -- -- 750,000 .20
------- ---- ------- --------
Outstanding, end of period........... 190,000 $.20 248,500 $.20-.30
======= ==== ======= ========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -----------------------------------
WEIGHTED-AVERAGE
RANGE OF REMAINING
EXERCISE NUMBER OUTSTANDING CONTRACTUAL LIFE WEIGHTED-AVERAGE NUMBER EXERCISABLE WEIGHTED-AVERAGE
PRICES SEPTEMBER 30, 1997 (IN YEARS) EXERCISE PRICE SEPTEMBER 30, 1997 EXERCISE PRICE
- -------- ------------------ ---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
$.20-.30 248,500 9.15 $.21 2,500 $.20
======== =========== ========== ========== =========== ==========
</TABLE>
The following table presents pro forma information as if GMS recorded
compensation cost using the fair value of the issued stock options using the
minimum value valuation model:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Net loss:
As reported............................................... $(716) $(968)
Assumed stock compensation cost........................... (1) (1)
----- -----
Pro forma, adjusted..................................... $(717) $(969)
===== =====
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method and the following assumptions:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Risk-free interest rate.................................. 6.4% 6.4%
Option term in years..................................... 7 years 4 years
Stock dividend yield..................................... -- --
Volatility............................................... -- --
======= =======
</TABLE>
F-38
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
(10) INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
1996
----------------------
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
U.S. Federal......................................... $ -- $(287) $(287)
State and local...................................... 8 (41) (33)
----- ----- -----
$ 8 $(328) $(320)
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
U.S. Federal......................................... $ -- $(121) $(121)
State and local...................................... 4 (17) (13)
----- ----- -----
$ 4 $(138) $(134)
===== ===== =====
</TABLE>
Income tax benefit differed from the amount computed by applying the U.S.
Federal income tax rate of 35% to loss before income tax benefit as a result of
the following:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Computed "expected" tax (benefit)............................ $(352) $(386)
Increase (reduction) in income taxes resulting from:
State income taxes, net of Federal income tax benefit...... (47) (46)
Amortization of nondeductible goodwill and other
nondeductible items....................................... 13 30
Valuation allowance for deferred tax assets allocated to
income tax expense........................................ 75 265
Other...................................................... (9) 3
----- -----
$(320) $(134)
===== =====
</TABLE>
F-39
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
1996 1997
----- -------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts.......................... $ 618 $ 857
Net operating loss carryforwards......................... 230 825
Compensated absences, principally due to accrual for
financial reporting purposes............................ 57 95
Intangible assets, principally due to differences in
amortization and capitalized cost....................... -- 239
State taxes.............................................. 3 5
----- -------
Total gross deferred tax assets........................ 908 2,021
Less valuation allowance................................. (75) (339)
----- -------
Deferred tax assets, net of valuation allowance........ 833 1,682
----- -------
Deferred tax liabilities:
Accounts receivable...................................... (759) (1,535)
Plant and equipment, principally due to differences in
depreciation and capitalized cost....................... (65) (81)
Intangible assets, principally due to accrual for
financial reporting purposes............................ (9) (64)
Other.................................................... -- (2)
----- -------
Deferred tax liabilities............................... (833) (1,682)
----- -------
Net deferred tax asset................................. $ -- $ --
===== =======
</TABLE>
(11) MALPRACTICE INSURANCE
The dental groups' dentists are insured with respect to dentistry
malpractice risks on a claims-made basis. There are known claims and incidents
that may result in the assertion of additional claims, as well as claims from
unknown incidents that may be asserted arising from services provided to
patients. Management is not aware of any claims against the Company or its
affiliated groups which might have a material impact on the Company's
financial position or results of operations.
(12) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has primarily entered into operating leases of commercial
property. Commercial properties under operating leases mostly include space
required to perform dental services and space for administrative facilities.
Lease expense for dental office space and administrative office space for the
periods ended December 31, 1996 and September 30, 1997 was $175 and $1,255,
respectively.
F-40
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
The future minimum lease payments under capital leases and noncancelable
operating leases with remaining terms of one or more years consist of the
following at September 30, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C>
1998....................................................... $ 168 $1,327
1999....................................................... 142 1,214
2000....................................................... 114 1,123
2001....................................................... 74 1,044
2002....................................................... 50 892
Thereafter................................................. -- 4,035
----- ------
Total minimum lease obligation........................... 548 $9,635
======
Less portion attributable to interest...................... (107)
-----
Obligations under capital leases......................... 441
Less current portion....................................... (114)
-----
$ 327
=====
</TABLE>
Included in dental equipment and furniture, fixtures and equipment are
assets under capital lease with an original cost of $964 and accumulated
amortization of $151 at September 30, 1997.
Litigation
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
(13) SUBSEQUENT EVENTS
On November 4, 1997, the Company completed a merger with Gentle Dental
Service Corporation (GDSC) in a transaction that will be accounted for as a
pooling of interests. Immediately prior to the merger, substantially all
outstanding shares of the Series A, Series B and Series C convertible
preferred stock were converted into shares of GMS common stock. GMS
stockholders received 4,512,377 shares of GDSC common stock in exchange for
all of the then outstanding shares of GMS common stock. A total of 297,074 of
the shares issued in the merger are subject to repurchase by GDSC at an
average price of $0.32 per share if certain performance targets for 1997 are
not achieved. These targets are not expected to be met and the shares are
anticipated to be purchased during 1998.
F-41
<PAGE>
GMS DENTAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
The results of operations previously reported by the separate enterprises
and the combined amount are summarized below:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- -----------------
1995 1996 1997
------ ------- -----------------
<S> <C> <C> <C>
Net revenue:
GMS--patient service................... $ -- $ 3,701 $19,348
GDSC--support services fee............. 9,781 10,712 10,269
------ ------- -------
Combined................................. 9,781 $14,413 $29,617
====== ======= =======
Net income (loss):
GMS.................................... $ -- $ (716) $ (968)
GDSC................................... 257 (985) 229
Adjustments to conform accounting
policies, net of tax.................. -- 14 (8)
------ ------- -------
Combined................................. $ 257 $(1,687) $ (747)
====== ======= =======
</TABLE>
Adjustments to conform GMS's method of accounting for amortization of
intangible assets with that of GDSC will reduce net income for the years ended
December 31, 1995 and 1996 and the nine months ended September 30, 1997 by
approximately $0, $0, and $148, respectively, and adjustments to conform GMS's
method of accounting for depreciation of property and equipment with that of
GDSC, will increase net income for the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1997 by approximately $0, $13, and
$124, respectively.
There were no significant transactions between GMS and GDSC prior to the
combination.
During October 1997, the Company acquired substantially all of the assets of
two dental practices, one located in Idaho Falls, Idaho and the other with two
offices in San Francisco and Daly City, California for a combined purchase
price of approximately $3,600. The purchase price consists of approximately
$2,920 in cash, $180 in convertible preferred stock--Series C, and warrants
valued at approximately $5. Additional consideration may be paid subject to
earn-out agreements.
F-42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
November 17, 1997
To the Shareholders and Board of Directors of
Dedicated Dental Systems, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income and retained earnings and of cash flows present fairly, in all material
respects, the financial position of Dedicated Dental Systems, Inc. at December
31, 1995 and September 30, 1997, and the results of its operations and its
cash flows for the year ended December 31, 1995 and for the nine months ended
September 30, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above. The financial statements of Dedicated Dental
Systems, Inc. for the year ended December 31, 1996 were audited by other
independent accountants whose report dated April 25, 1997 expressed an
unqualified opinion on those statements.
As disclosed in Note 6 to the financial statements, the Company has certain
related party transactions.
As disclosed in Note 7 to the financial statements, during September 1997,
the Company signed a definitive merger agreement pursuant to which all of its
outstanding shares of common stock will be acquired by Gentle Dental Service
Corporation, a publicly-traded Washington corporation.
Price Waterhouse LLP
F-43
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Dedicated Dental Systems, Inc.
We have audited the accompanying balance sheet of Dedicated Dental Systems,
Inc. as of December 31, 1996, and the related statements of income and
retained earnings, and cash flows for the year then ended. 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dedicated Dental Systems,
Inc. at December 31, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Los Angeles, California
April 25, 1997
F-44
<PAGE>
DEDICATED DENTAL SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1995 AND 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 21,213 $ 371,974 $ 680,176
Receivables, net.......................... 372,664 644,357 1,058,722
Prepaid expenses and other current
assets................................... 71,581 80,062 89,805
--------- ---------- ----------
Total current assets........................ 465,458 1,096,393 1,828,703
Equipment and leasehold improvements, net
(Note 2)................................... 385,014 836,299 1,114,691
Intangibles and other assets................ 15,144 43,504 94,935
Certificate of deposit--restricted (Note
1)......................................... 50,000 50,000 50,000
--------- ---------- ----------
Total assets................................ $ 915,616 $2,026,196 $3,088,329
========= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 56,764 $ 129,649 $ 294,151
Accrued expenses.......................... 196,003 230,427 267,087
Unearned premium revenue (Note 1)......... 154,569 247,469 227,439
Current maturities of long-term debt...... 39,851 187,403 301,463
--------- ---------- ----------
Total current liabilities................... 447,187 794,948 1,090,140
--------- ---------- ----------
Long-term debt, less current maturities
(Note 4)................................... 104,612 149,564 635,876
--------- ---------- ----------
Commitments and contingencies (Notes 5 and
6)
Shareholders' equity:
Common stock, no par value:
Authorized, 1,000, 500,000 and 500,000
shares, respectively
Issued and outstanding, 100, 100,100 and
100,100 shares, respectively............. 104,903 104,903 104,903
Retained earnings......................... 715,282 1,661,333 1,800,629
--------- ---------- ----------
820,185 1,766,236 1,905,532
Receivable from related party (Note 6).... (456,368) (684,552) (543,219)
--------- ---------- ----------
Total shareholders' equity.................. 363,817 1,081,684 1,362,313
--------- ---------- ----------
Total liabilities and shareholders' equity.. $ 915,616 $2,026,196 $3,088,329
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-45
<PAGE>
DEDICATED DENTAL SYSTEMS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Revenue:
Fee for service revenue................. $5,208,168 $6,703,555 $ 7,353,348
Premiums................................ 1,574,997 2,101,208 2,284,186
Other................................... 2,682 58,642 125,681
---------- ---------- -----------
Total operating revenue................... 6,785,847 8,863,405 9,763,215
---------- ---------- -----------
Expenses:
Practice Clinical salaries.............. 2,353,013 2,974,562 3,403,331
Practice non-clinical salaries and
benefits............................... 454,515 678,379 667,042
Dental Supplies and lab expenses........ 751,302 879,097 1,020,950
Practice occupancy expenses............. 240,160 319,701 364,132
Practice selling, general and
administrative expenses................ 998,423 1,055,269 1,054,784
Corporate--selling, general and
administrative expenses................ 1,063,572 1,469,323 1,597,852
Depreciation and amortization........... 75,898 122,814 171,546
---------- ---------- -----------
Total operating expenses.............. 5,936,883 7,499,145 8,279,637
---------- ---------- -----------
Operating income.......................... 848,964 1,364,260 1,483,578
Interest income........................... 6,975 14,266 20,315
Interest expense.......................... (9,415) (7,800) (46,740)
---------- ---------- -----------
Net income before state income taxes...... 846,524 1,370,726 1,457,153
Provision for state income taxes.......... 15,161 20,560 21,857
---------- ---------- -----------
Net income................................ 831,363 1,350,166 1,435,296
Retained earnings at beginning of period.. 413,919 715,282 1,661,333
Distribution to shareholders.............. (530,000) (404,115) (1,296,000)
---------- ---------- -----------
Retained earnings at end of period........ $ 715,282 $1,661,333 $ 1,800,629
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-46
<PAGE>
DEDICATED DENTAL SYSTEMS, INC.
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................ $ 831,363 $1,350,166 $ 1,435,296
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 75,898 122,814 171,546
Changes in assets and liabilities, net
of amounts purchased in acquisitions:
Receivables........................... (112,070) (191,693) (414,365)
Prepaid expenses and other assets..... (42,057) (2,137) (9,743)
Accounts payable...................... (14,105) 72,885 164,502
Accrued expenses and unearned premium
revenue.............................. 83,780 127,324 16,630
--------- ---------- -----------
Net cash provided by operating
activities............................... 822,809 1,479,359 1,363,866
--------- ---------- -----------
INVESTING ACTIVITIES:
Purchase of equipment and leasehold
improvements, net of amounts purchased in
acquisitions............................. (93,040) (378,865) (301,369)
Cash paid for acquisition................. (109,000) (60,000) (200,000)
--------- ---------- -----------
Net cash used in investing activities..... (202,040) (438,865) (501,369)
--------- ---------- -----------
FINANCING ACTIVITIES:
Proceeds from notes payable............... 100,000 -- 882,000
Principal payments on notes payable....... (40,640) (148,549) (281,628)
(Increase) decrease in receivable from
related party............................ (228,184) (228,184) 141,333
Cash distributions to shareholders........ (530,000) (313,000) (1,296,000)
--------- ---------- -----------
Net cash used in financing activities..... (698,824) (689,733) (554,295)
--------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents.............................. (78,055) 350,761 308,202
Cash and cash equivalents at beginning of
period................................... 99,268 21,213 371,974
--------- ---------- -----------
Cash and cash equivalents at end of
period................................... $ 21,213 $ 371,974 $ 680,176
========= ========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-47
<PAGE>
DEDICATED DENTAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Dedicated Dental Systems, Inc. (the "Company") was formed in 1985 as a
California S-corporation licensed as a health maintenance organization ("HMO")
under the Knox-Keene Health Care Service Plan Act (the "Knox-Keene Act"). The
Company delivers managed dental care services through its dental practice
offices to enrolled individuals, subscriber groups, individuals covered by the
State of California Denti-Cal program, and individuals covered under fee for
service plans.
Business and regulatory environment
The Company is licensed by the Department of Corporations of the State of
California (the "DOC"). As of September 30, 1997 DOC regulations require the
Company to maintain a minimum tangible net equity of $888,599. In addition,
the Commissioner of Corporations requires the Company to maintain a deposit of
$50,000 pursuant to the Knox-Keene Act. The deposit is comprised of a
certificate of deposit held by a trustee and is included in certificate of
deposit--restricted in the accompanying balance sheet. Interest earned on the
funds accrues to the Company and is not restricted as to use.
Statement of cash flows
The Company considers short-term investments which are highly-liquid, are
readily converted into cash and have original maturities of fewer than three
months to be cash equivalents for purposes of cash flows. For the years ended
December 31, 1995 and 1996 and the nine months ended September 30, 1997, the
Company paid interest of $9,415, $7,800 and $46,740, respectively, and paid
state franchise taxes of $12,161, $10,826 and $13,900, respectively.
Concentrations of credit risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of premiums receivable.
Concentrations of credit risk with respect to receivables are limited due to
the large number of individuals and employer groups comprising the Company's
customer base.
Fair value of financial instruments
The Company's balance sheet includes the following financial instruments:
cash and cash equivalents, receivables, accounts payable and long-term
obligations. The Company considers the carrying amounts of current assets and
liabilities in the financial statements to approximate the fair value for
these financial instruments because of the relatively short period of time
between origination of the instruments and their expected realization. The
Company believes the carrying value of all the long-term obligations
approximates the fair value of such obligations.
Equipment and leasehold improvements
Equipment and leasehold improvements are stated at cost; replacements and
major improvements are capitalized, while repairs and maintenance are charged
to expense as incurred. Upon sale or retirement of equipment and leasehold
improvements, the cost and related accumulated depreciation and amortization
are eliminated from the accounts. Any resulting gains and losses are included
in the determination of net income. Equipment is depreciated using the
straight-line method for financial reporting purposes over five years.
F-48
<PAGE>
DEDICATED DENTAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Leasehold improvements are amortized using the straight-line method over the
shorter of the useful life or the term of the lease.
Effective January 1, 1996, the Company changed its method of computing
depreciation for financial reporting purposes from an accelerated method to
the straight-line method. The change was made because management believes the
new method is a better method for matching costs with revenues. The effect of
such change has been retroactively applied to prior periods.
Other assets
Other assets consist primarily of capitalized loan fees incurred upon
issuing debt related to the purchase of property.
Intangibles
Intangibles represent the unamortized excess of the cost of acquiring dental
practices over the fair values of such dental practices' net tangible assets
at the dates of acquisition. Such intangibles are amortized on a straight-line
basis over 30 years.
Income taxes
The Company operates under Subchapter S of the Internal Revenue Code, and
consequently, is not subject to federal income tax. The shareholders include
the Company's income in their own income for federal income tax purposes. For
California franchise tax purposes, the Company is subject to taxes at a rate
of 1.5 percent of taxable income.
Shareholders' equity
In February 1996, the Company's Board of Directors approved an amendment to
the Company's Certificate of Incorporation increasing the number of authorized
shares of common stock from 1,000 to 500,000. In May 1996, the Company issued
an additional 100,000 shares to its two shareholders.
Accounting for impairment of long-lived assets and for long-lived assets to
be disposed of
The Company accounts for the impairment and disposition of long-lived assets
in accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." In accordance with SFAS No. 121, long-lived assets to be
held are reviewed for events or changes in circumstances which indicate that
their carrying value may not be recoverable. The Company has determined that
no long-lived assets are impaired at September 30, 1997.
Revenue recognition and health care services
Prepaid dental care premiums from enrolled groups and individuals are
reported as revenue in the month in which enrollees are entitled to receive
dental care. Premiums received prior to such period are recorded as unearned
premium revenue. Fee for services and other revenues consist of professional
fees and are reported at the estimated realizable amounts from patients,
third-party payors and others for services rendered.
Dental care expenses are recorded as incurred. Substantially all of the
dental care services are provided at the dental practice offices. Dental care
expenses are comprised of dentist and dental staff salaries, supplies, and
other dental office related costs.
F-49
<PAGE>
DEDICATED DENTAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Medical malpractice liability insurance
The Company maintains claims-made basis professional liability insurance
coverage of $1,000,000 per incident and $1,000,000 in the aggregate on an
annual basis. Claims-made coverage covers only those claims reported during
the policy period. The Company expects to renew its existing policies and to
be able to continue to obtain coverage in future years.
Use of estimates in preparation of financial statements
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 these estimates. Principal
areas requiring the use of estimates include determination of allowances for
doubtful accounts receivable, dental claims and accruals, professional and
general liabilities, and certain other reserves.
Reclassifications
Certain reclassifications have been made to the December 31, 1996 financial
statements to conform with financial statement presentation for the nine
months ended September 30, 1997. These reclassifications have no effect on
previously reported results of operations or shareholders' equity.
(2) ACQUISITIONS
In August 1995, the Company purchased a dental practice, including
equipment, leasehold improvements, supplies and accounts receivable. The total
purchase price was $109,000, including $9,000 which was allocated to
intangibles. The practice was acquired for cash, and has been accounted for
using the purchase method of accounting. The results of operations of the
practice are included in the Company's financial statements from the date of
purchase.
On November 1, 1996, the Company purchased a dental practice, including
equipment and leasehold improvements, supplies and accounts receivable. The
total purchase price was $60,000, including $25,000 which was allocated to
intangibles. The acquisition was accounted for as a purchase transaction.
On November 15, 1996, the Company purchased a dental practice, including
equipment and leasehold improvements, supplies, and accounts receivable. The
total purchase price was $325,000, including $10,000 which was allocated to
intangibles. The acquisition was financed through the issuance of a note
payable to seller. The acquisition was accounted for as a purchase
transaction.
On March 1, 1997, the Company purchased a dental practice including
equipment and leasehold improvements, supplies, and accounts receivable for
$400,000. The purchase price included payment of $200,000 at closing, $50,000
due on April 15, 1997, $50,000 due on June 1, 1997, and $100,000 due on
January 1, 1998. Interest on the unpaid balance is payable at 6 percent per
annum. The acquisition was accounted for as a purchase transaction.
F-50
<PAGE>
DEDICATED DENTAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(2) ACQUISITIONS (CONTINUED)
The following unaudited pro forma information represents the results of the
Company as if all of the acquisitions had occurred at the beginning of each
period presented, after giving effect to amortization of intangibles acquired,
increased interest expense for notes issued related to the acquisitions and
increased state income taxes:
<TABLE>
<CAPTION>
1996 1997
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Operating revenue....................................... $10,557,488 $9,840,382
----------- ----------
Net income.............................................. $ 1,669,224 $1,427,971
----------- ----------
</TABLE>
(3) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The following table summarizes the components of equipment and leasehold
improvements at December 31, 1995 and 1996 and nine months ended September 30,
1997:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
--------- ---------- -------------
<S> <C> <C> <C>
Equipment................................ $ 691,496 $ 947,145 $1,282,224
Leasehold improvements................... 81,048 227,711 510,740
Construction in progress................. -- 170,235 --
--------- ---------- ----------
772,544 1,345,091 1,792,964
Less accumulated depreciation and
amortization............................ (387,530) (508,792) (678,273)
--------- ---------- ----------
$ 385,014 $ 836,299 $1,114,691
========= ========== ==========
</TABLE>
F-51
<PAGE>
DEDICATED DENTAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
-------- --------- -------------
<S> <C> <C> <C>
Note payable to bank, principal and
interest payments of $2,108 due monthly
through July 5, 2000, interest at 9.65%... $ 96,283 $ -- $ --
Note payable to bank for various equipment
loans, principal and interest payments of
$7,290 due monthly through November 5,
1998, interest ranging from 7.6 percent to
10.95%.................................... 48,180 -- --
Note payable to seller (see Note 2),
principal and interest payments of $5,000
due monthly through July 1, 2000,
principal and interest payments of $75,000
due January 1, 1997 and April 1, 1997,
interest at 8.5%.......................... -- 321,211 145,459
Note payable to bank, principal and
interest payments of $376 due monthly
through December 1, 2000, interest at
9.5%...................................... -- 15,756 12,713
Note payable to seller (see Note 2), due
January 1, 1998, interest
at 6%..................................... -- -- 100,000
Note payable to bank, principal and
interest payments of $9,374 due monthly
through January 15, 2002, interest at
9.25%..................................... -- -- 346,667
Note payable to bank, principal and
interest payments of $8,505 due monthly
through June 15, 2002, interest at 9.5%... -- -- 332,500
-------- --------- ---------
144,463 336,967 937,339
Less current maturities.................... (39,851) (187,403) (301,463)
-------- --------- ---------
$104,612 $ 149,564 $ 635,876
======== ========= =========
</TABLE>
F-52
<PAGE>
DEDICATED DENTAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997
Maturities of long-term debt at September 30, 1997 are summarized as
follows:
<TABLE>
<S> <C>
1997............................................................. $ 50,436
1998............................................................. 304,149
1999............................................................. 208,826
2000............................................................. 186,589
2001............................................................. 150,000
2002............................................................. 37,339
--------
$937,339
========
</TABLE>
(5) COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment for its corporate and dental
practice offices under various noncancelable operating leases. See Note 6 for
related party leases. Future minimum lease payments due to unrelated parties
are summarized as follows:
<TABLE>
<S> <C>
1997............................................................. $ 31,143
1998............................................................. 102,133
1999............................................................. 90,574
2000............................................................. 86,976
2001............................................................. 50,484
Thereafter....................................................... 64,414
--------
$425,724
========
</TABLE>
Rental expense totaled $91,881, $112,400 and $113,438 for the years ended
December 31, 1995 and 1996 and the nine months ended September 30, 1997,
respectively.
In September 1997, the Company signed a definitive merger agreement pursuant
to which all of its outstanding shares of common stock will be acquired by
Gentle Dental Service Corporation, a publicly-traded Washington Corporation.
This sale is part of a larger transaction entered into by the Company's
shareholders in which both the Company and DPM and related dental offices will
be sold for consideration of approximately $22,750,000, paid partially in cash
and partially in stock. The accompanying financial statements do not reflect
any effects of this transaction.
(6) RELATED PARTY TRANSACTIONS
California Dental Practice Management Company ("DPM"), an entity owned by
the shareholders of the Company, provides accounting, human resource and
dental office operations services to the Company for $8,000 per month under a
management agreement ("Management Agreement"). The agreement was amended
effective September 1, 1996 and the monthly allocation was reduced to $5,600
per month. The amended agreement expires December 31, 2001.
The Company paid certain operating expenses of DPM from 1994 through April
1997 aggregating $760,613. In 1997, DPM began repaying the amount due. The
receivable from related party relating to this transaction is included in the
balance sheet as a reduction of shareholders' equity.
F-53
<PAGE>
DEDICATED DENTAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997
The Company leases the following dental practice offices from DPM: Rosedale
Dental Practice located in Bakersfield, California Dental Center located in
Bakersfield, San Dimas Orthodontic Center located in Bakersfield, Delano
Family Dentistry located in Delano, and Lake Isabella Family Dentistry located
in Lake Isabella. The leases require aggregate monthly payments of up to
$20,500 and expire at various dates through February 2007. Rental expense,
aggregating $256,753, $174,500 and $166,500 for the years ended
December 31, 1995 and 1996 and the nine months ended September 30, 1997,
respectively, and are included in dental care expenses.
Future minimum lease payments under lease agreements with DPM and the
shareholders at September 30, 1997 are summarized as follows:
<TABLE>
<S> <C>
1997........................................................... $ 61,500
1998........................................................... 246,000
1999........................................................... 210,000
2000........................................................... 210,000
2001........................................................... 210,000
Thereafter .................................................... 714,500
----------
$1,652,000
==========
</TABLE>
F-54
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
November 17, 1997
To the Partners of
California Dental Practice Management Company
and Related Dental Offices
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of changes in capital and of cash flows
present fairly, in all material respects, the financial position of California
Dental Practice Management Company and Related Dental Offices ("the Company")
at December 31, 1995 and 1996 and September 30, 1997 and the results of their
operations and their cash flows for the years ended December 31, 1995 and 1996
and for the nine months ended September 30, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the management of California Dental Practice Management
Company and Related Dental Offices; 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 disclosed in Note 4 to the financial statements, California Dental
Practice Management Company and Related Dental Offices have certain related
party transactions.
As disclosed in Note 5 to the financial statements, California Dental
Practice Management and Related Dental Offices during September 1997 have
signed definitive agreements to sell most of their operating assets, except
land and buildings, to Gentle Dental Service Corporation, a publicly-traded
Washington Corporation.
Price Waterhouse LLP
F-55
<PAGE>
CALIFORNIA DENTAL PRACTICE MANAGEMENT COMPANY AND RELATED DENTAL OFFICES
BALANCE SHEET
DECEMBER 31, 1995 AND 1996, AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 33,360 $ 51,939 $ 46,236
Account receivable, net (Note 1)............. 382,868 281,665 277,043
Supplies..................................... -- 20,990 24,527
Prepaid expenses and other current assets
(Note 1).................................... 3,996 15,604 11,800
---------- ---------- ----------
Total current assets....................... 420,224 370,198 359,606
Property and equipment, net (Note 2)........... 2,126,360 2,058,867 1,931,839
Other assets (Note 1).......................... 16,836 5,121 2,576
---------- ---------- ----------
Total assets............................... $2,563,420 $2,434,186 $2,294,021
========== ========== ==========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C> <C>
Current liabilities:
Accounts payable............................. $ 97,434 $ 125,162 $ 89,200
Accrued liabilities.......................... 54,644 60,121 64,951
Due to affiliates (Note 4)................... 439,919 658,365 522,076
Unearned rental income (Note 4).............. -- 16,358 --
Current portion of long-term debt and capital
lease obligations (Note 3).................. 160,664 142,421 177,373
---------- ---------- ----------
Total current liabilities.................. 752,661 1,002,427 853,600
Long-term debt, less current portion (Note 3).. 997,500 855,082 1,089,575
---------- ---------- ----------
Total liabilities.......................... 1,750,161 1,857,509 1,943,175
Commitments and contingent liabilities (Note 5)
Capital........................................ 813,259 576,677 350,846
---------- ---------- ----------
Total liabilities and partners' capital.... $2,563,420 $2,434,186 $2,294,021
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-56
<PAGE>
CALIFORNIA DENTAL PRACTICE MANAGEMENT COMPANY AND RELATED DENTAL OFFICES
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND NINE MONTHS ENDED SEPTEMBER 30,
1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Dental practice revenue................... $5,667,309 $6,347,066 $3,725,292
Management services revenue from
affiliates............................... 108,872 163,187 133,140
---------- ---------- ----------
5,776,181 6,510,253 3,858,432
Practice clinical salaries and benefits... 2,163,387 2,395,454 1,405,286
Practice non-clinical salaries and
benefits................................. 453,444 459,436 277,967
Dental supplies and lab expenses.......... 469,934 514,649 427,576
Practice occupancy expense................ 212,581 200,974 109,348
Practice selling, general and
administrative expenses.................. 320,545 419,429 383,280
Corporate selling, general and
administrative expenses.................. 905,092 899,016 647,199
Depreciation and amortization............. 149,121 132,632 78,498
---------- ---------- ----------
Total operating expenses.................. 4,674,104 5,021,590 3,329,154
---------- ---------- ----------
Operating income.......................... 1,102,077 1,488,663 529,278
Nonoperating income (expense):
Interest expense, net................... (102,651) (86,769) (70,789)
Other income, net....................... 380,657 149,203 121,858
---------- ---------- ----------
278,006 62,434 51,069
---------- ---------- ----------
Net income................................ $1,380,083 $1,551,097 $ 580,347
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-57
<PAGE>
CALIFORNIA DENTAL PRACTICE MANAGEMENT COMPANY AND RELATED DENTAL OFFICES
STATEMENT OF CHANGES IN CAPITAL
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND NINE MONTHS ENDED SEPTEMBER 30,
1997
<TABLE>
<CAPTION>
CAPITAL
-----------
<S> <C>
Balance at December 31, 1994....................................... $ 725,451
Net income....................................................... 1,452,083
Distributions to owners ......................................... (1,632,782)
Contributions from owners........................................ 268,507
-----------
Balance at December 31, 1995....................................... 813,259
Net income....................................................... 1,551,097
Distributions to owners.......................................... (1,924,125)
Contributions from owners........................................ 136,446
-----------
Balance at December 31, 1996....................................... 576,677
Net income....................................................... 580,347
Distributions to owners.......................................... (806,178)
-----------
Balance at September 30, 1997...................................... $ 350,846
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-58
<PAGE>
CALIFORNIA DENTAL PRACTICE MANAGEMENT COMPANY AND RELATED DENTAL OFFICES
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND NINE MONTHS ENDED SEPTEMBER 30,
1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 1,452,083 $ 1,551,097 $ 580,347
Adjustments to reconcile change in net
cash used in operating activities:
Depreciation and amortization......... 114,621 132,633 78,498
Loss on disposition of equipment...... -- 70,460 33,789
Changes in certain assets and
liabilities:
Accounts receivable, net.............. (27,347) 101,203 4,622
Supplies.............................. -- (20,990) (3,537)
Prepaid expenses and other current
assets............................... (3,996) (11,608) (15,696)
Other assets.......................... 33,251 11,715 2,545
Accounts payable...................... (2,087) 27,728 (35,962)
Accrued liabilities................... 4,644 5,477 4,830
Unearned rental income................ -- 16,358 (16,358)
Due to affiliates..................... 211,735 218,446 (136,289)
----------- ----------- ---------
Net cash used in operating
activities......................... 1,782,904 2,102,519 496,789
----------- ----------- ---------
Cash flows from investing activities:
Purchase of property and equipment...... (368,707) (44,485) (38,119)
----------- ----------- ---------
Net cash used in investing
activities......................... (368,707) (44,485) (38,119)
----------- ----------- ---------
Cash flows from financing activities:
Proceeds from notes payable............. 273,986 -- 657,750
Payments on notes payable............... (158,863) (160,661) (388,305)
Cash contributions by owners............ 157,665 45,331 --
Distributions to owners................. (1,632,782) (1,924,125) (733,818)
----------- ----------- ---------
Net cash provided by financing
activities......................... (1,359,994) (2,039,455) (464,373)
----------- ----------- ---------
Increase (decrease) in cash and cash
equivalents.............................. 54,203 18,579 (5,703)
Cash and cash equivalents, beginning of
year..................................... (20,843) 33,360 51,939
----------- ----------- ---------
Cash and cash equivalents, end of year.... $ 33,360 $ 51,939 $ 46,236
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-59
<PAGE>
CALIFORNIA DENTAL PRACTICE MANAGEMENT COMPANY AND RELATED DENTAL OFFICES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996, AND SEPTEMBER 30, 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
California Dental Practice Management Company and Related Dental Offices
(the "Company") collectively include certain accounts of California Dental
Practice Management Company ("DPM") (a partnership which provides management
services to affiliated dental practices), Indio Dental Clinic (a dental office
wholly owned by the majority owner of DPM), and five dental offices (Ming & H,
Crosstown, Wasco, Rosedale, and Valley) owned by various practicing dentists.
As a combined entity, the Company provides dental services to patients, bills
and collects patient receivables related to the foregoing six dental offices,
and provides administrative support services to dental offices owned by an
affiliated company, Dedicated Dental Systems, Inc. (DDS). All of the Company's
operations are in Southern California.
The Company and DDS, a corporation which owns and operates dental offices
and provides managed healthcare insurance, are related through common
ownership. The Company and its affiliates structure their business enterprises
to comply with state regulatory mandates requiring dentistry practices to be
owned and operated by state-licensed dentists.
In November 1996 the Valley dental office was purchased by DDS. In February
1997 the Company opened a dental practice, Wasco, through a joint effort with
the owner of the Crosstown dental office. In March 1997 the Rosedale dental
office was purchased by DDS.
Principles of combination
The accompanying combined financial statements include certain accounts of
DPM and the dental offices noted above. The entities have been combined for
financial reporting purposes because DPM manages the dental practices and
receives 51% of the net profits therefrom in exchange for its management
services. In addition, DPM and each of the dental offices have entered into
agreements to sell most of their assets to Gentle Dental Service Corporation
(see Note 5). Intercompany transactions and balances including those related
to the management services have been eliminated.
Revenues
Revenues consist primarily of dental services charged to patients, net of
provisions for contractual adjustments and doubtful accounts. Management
services revenue consists of support services charged to affiliated dental
offices and laboratories. Such revenues are recognized when earned.
Statement of cash flows
Cash equivalents consist of highly liquid investments with maturities at the
date of purchase of ninety days or less. During 1995 and 1996, the Company
received non-cash capital contributions of land and buildings of $110,842 and
$91,115, respectively. During 1997, DPM distributed assets of $72,310 to its
owners. These transactions have been excluded from the accompanying statement
of cash flows. For the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1997, the Company paid interest of $102,672,
$86,769 and $77,115, respectively. As DPM is a partnership and the Related
Dental Offices are sole proprietorships, all income tax liabilities are
attributed to the individual owners.
F-60
<PAGE>
CALIFORNIA DENTAL PRACTICE MANAGEMENT COMPANY AND RELATED DENTAL OFFICES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996, AND SEPTEMBER 30, 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts receivable and allowances for contractual adjustments
Accounts receivable principally represent receivables from patients or
dental group insurance carriers for dental services provided by the dental
offices. The Company has recorded an allowance for contractual adjustments of
$195,835, $132,170 and $189,687 at December 31, 1995 and 1996 and September
30, 1997, respectively. 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.
Supplies
Supplies consist primarily of operatory dental supplies stored at the DPM
office and at one of the dental offices. Supplies are stated at the lower of
cost (first-in, first-out basis) or market. Supplies are expensed when they
are delivered to the dental offices for consumption.
Prepaid expenses and other current assets
Prepaid expenses and other current assets consist primarily of prepaid
insurance premiums and prepaid property taxes.
Property and equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expense as incurred and expenditures for additions and
betterments are capitalized. Depreciation of property and equipment is
calculated using the straight-line method over estimated useful lives which
range from 5 to 25 years.
Other assets
Other assets primarily consist of capitalized loan fees incurred upon
issuing debt related to the purchase of property.
Affiliate payables
Affiliate payables consist primarily of amounts owed for payments made by
DDS since 1994 on behalf of the Company related to a consulting agreement. The
payable is partially offset by receivables from DDS related to services
provided to DDS by DPM.
Income taxes
DPM is a partnership under provisions of the Internal Revenue Code. The
Related Dental Offices are sole proprietorships, and as such, the income or
losses of DPM and the Related Dental Offices are attributable to their owners
in their individual tax returns.
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
F-61
<PAGE>
CALIFORNIA DENTAL PRACTICE MANAGEMENT COMPANY AND RELATED DENTAL OFFICES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996, AND SEPTEMBER 30, 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1996 and September 30, 1997.
Accounting estimates
The preparation of the Company's 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
reported periods. Actual results may differ from these estimates.
(2) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
Land and buildings...................... $1,895,430 $1,994,884 $1,994,700
Dental equipment, furniture and
fixtures............................... 533,529 525,662 387,895
Computer equipment...................... 87,845 87,845 87,845
Vehicles................................ 24,617 24,617 24,617
Leasehold improvements.................. 328,374 238,578 196,571
---------- ---------- ----------
2,869,795 2,871,586 2,691,628
Less accumulated depreciation and
amortization........................... (743,435) (812,719) (759,789)
---------- ---------- ----------
$2,126,360 $2,058,867 $1,931,839
========== ========== ==========
</TABLE>
F-62
<PAGE>
CALIFORNIA DENTAL PRACTICE MANAGEMENT COMPANY AND RELATED DENTAL OFFICES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996, AND SEPTEMBER 30, 1997
(3) LONG-TERM DEBT
The Company has obtained notes from various banks to finance the purchase of
property and equipment and to finance operations. In addition, the Company has
issued notes payable to individuals related to the purchase of dental offices
in prior years. Long-term debt balances are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
---------- --------- -------------
<S> <C> <C> <C>
Note payable to bank with interest-only
payments until maturity at prime plus
1.25% (8.5% at December 31, 1996),
collateralized by real property,
maturing July 2000...................... $ 210,000 $ 174,000 $ 147,000
Note payable to bank due in monthly
instalments of principal and interest at
11%, secured by a vehicle, maturing
February 1998........................... 11,078 6,154 2,462
Note payable to bank due in equal monthly
instalments of principal and interest at
prime plus 2% (10.25% at December 31,
1996), maturing April 2000.............. 49,818 38,744 29,994
Note payable to bank due in monthly
instalments of $2,894 for principal and
interest at 8.65% through February 1998,
secured by real property with the
remainder due March 1998................ 248,415 234,637 223,496
Notes payable to bank due in monthly
instalments of principal and interest at
prime plus 1.25% (8.5% at December 31,
1996), maturing December 1996........... 25,000 -- --
Mortgage payable to bank due in monthly
instalments of principal and interest at
8.35%, secured by real property,
maturing June 1996 (see Note 4--Building
Partnership)............................ 248,121 232,807 220,786
Note payable to bank, due in monthly
instalments of principal and interest at
9.65%, secured by real property,
maturing September 2002................. -- -- 188,145
Various unsecured notes payable due in
monthly instalments of principal and
interest at interest rates ranging from
8% to 9%................................ 365,732 311,161 455,065
---------- --------- ----------
1,158,164 997,503 1,266,948
Less current portion..................... (160,664) (142,421) (177,373)
---------- --------- ----------
$ 997,500 $ 855,082 $1,089,575
========== ========= ==========
</TABLE>
F-63
<PAGE>
CALIFORNIA DENTAL PRACTICE MANAGEMENT COMPANY AND RELATED DENTAL OFFICES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996, AND SEPTEMBER 30, 1997
(3) LONG-TERM DEBT (CONTINUED)
Scheduled maturities of long-term debt at September 30, 1997 are as follows:
<TABLE>
<S> <C>
1997........................................................... $ 45,035
1998........................................................... 389,018
1999........................................................... 161,465
2000........................................................... 170,324
2001........................................................... 110,024
Thereafter..................................................... 391,082
----------
$1,266,948
==========
</TABLE>
(4) TRANSACTIONS WITH AFFILIATES
Management services
DPM provides accounting, human resources and dental office operations
services to DDS under a management agreement. The amended management agreement
expires December 31, 2001. The revenue related to these services is included
in management services revenues. In addition, DPM purchases dental supplies in
bulk and sells these supplies to its affiliated dental offices at cost.
During 1995, 1996 and 1997, DPM leased the following dental practice offices
to DDS: California Dental Center, Rosedale Dental Practice and San Dimas
Orthodontic Center located in Bakersfield, California, Delano Family Dentistry
located in Delano, California, and Lake Isabella Family Dentistry located in
Lake Isabella, California. In addition, in 1996 the owners contributed a
dental practice office located in Arvin, California to the Company, which the
Company began leasing to DDS in 1997. The leases call for aggregate monthly
payments to DPM of up to $20,500 and expire at various dates through February
2007. Future minimum lease payments to be received from DDS under these
operating leases at September 30, 1997 are summarized as follows:
<TABLE>
<S> <C>
1997........................................................... $ 61,500
1998........................................................... 246,000
1999........................................................... 210,000
2000........................................................... 210,000
2001........................................................... 210,000
Thereafter..................................................... 714,500
----------
$1,652,000
==========
</TABLE>
Rental income of $256,753, $174,500 and $166,500 is included in other income
for the years ended December 31, 1995 and 1996 and the nine months ended
September 30, 1997, respectively.
Payables to affiliates
DDS has paid certain operating expenses from 1994 through April 1997
aggregating $760,613 relating to a consulting agreement on behalf of DPM.
During 1997, the Company began repaying this balance. Accordingly, payables to
DDS of $456,368, $684,552 and $522,076 as of December 31, 1995 and 1996 and
September 30, 1997, respectively, are included on the balance sheet as a
component of the payable to affiliates. This balance is net of receivables
from affiliates for management services and dental supplies (See Note 6).
F-64
<PAGE>
CALIFORNIA DENTAL PRACTICE MANAGEMENT COMPANY AND RELATED DENTAL OFFICES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996, AND SEPTEMBER 30, 1997
(4) TRANSACTIONS WITH AFFILIATES (CONTINUED)
Building Partnership
The Company co-owns a building which houses San Dimas Orthodontic Clinic, an
orthodontic practice owned by DDS. The building was financed through the
issuance of a long-term loan from a bank to a partnership which includes the
owners of California Dental Practice Management Company. According to the
terms of the building partnership, the Company is responsible for 44.52% of
the mortgage payment and common area charges relating to the building. The
total mortgage balance was $557,325, $522,927 and $495,814 at December 31,
1995, 1996 and September 30, 1997, respectively; accordingly, the Company's
obligation for the mortgage aggregated $248,121, $232,807 and $220,786 at
December 31, 1995 and 1996 and September 30, 1997, respectively (see Note 3).
(5) COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases certain of its dental practice offices. These leases
range in terms from five to ten years. Rent expense, including month-to-month
rentals, for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1997 aggregated $167,075, $154,304 and $52,428,
respectively.
Management expects to renew or replace leases that expire. Following is a
summary of scheduled future minimum lease payments:
<TABLE>
<S> <C>
1997............................................................. $ 20,061
1998............................................................. 80,904
1999............................................................. 85,128
2000............................................................. 86,088
2001............................................................. 49,344
Thereafter....................................................... 236,310
--------
$557,835
========
</TABLE>
In September 1997 the Company signed definitive agreements to sell all of
its assets, except for its land and buildings with a net book value of
$1,724,700 and certain assets of DPM related to dental offices not included in
these combined financial statements, to Gentle Dental Service Corporation, a
publicly traded Washington Corporation. This sale is part of a larger
transaction entered into by the owners of the Company in which both DPM, the
dental offices and DDS will be sold for an aggregate consideration of
approximately $22,750,000, paid partially in cash and partially in common
stock of Gentle Dental Service Corporation. The accompanying financial
statements do not reflect the effects of this transaction.
F-65
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Gentle Dental Service Corporation:
We have audited the combination of the accompanying supplemental
consolidated balance sheets of Gentle Dental Service Corporation and
subsidiaries as of December 31, 1996 and September 30, 1997, and the related
supplemental consolidated statements of operations, shareholders' equity and
cash flows for each of the years in the two year period ended December 31,
1996 and for the nine-month period ended September 30, 1997. These
supplemental consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
supplemental consolidated financial statements based on our audits. We did not
audit the consolidated balance sheets of Gentle Dental Service Corporation as
of December 31, 1996 and September 30, 1997 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the two year period ended period December 31, 1996 and for the nine-
month period ended September 30, 1997, which statements reflect total assets
constituting 50% and 42% at December 31, 1996 and September 30, 1997,
respectively, of the related supplemental consolidated financial statement
totals, and which reflect net income constituting 100% of the related
supplemental consolidated financial statement totals for the year ended
December 31, 1995, net losses constituting approximately $985,000 of the
related supplemental consolidated financial statement totals for the year
ended December 31, 1996 and net income constituting $229,000 of the related
supplemental consolidated financial statement totals for the nine-month period
ended September 30, 1997. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates
to data included for Gentle Dental Service Corporation, is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The supplemental consolidated financial statements give retroactive effect
to the merger of Gentle Dental Service Corporation and GMS Dental Group, Inc.
on November 4, 1997, which has been accounted for as a pooling-of-interests as
described in Note 3 to the supplemental consolidated financial statements.
Generally accepted accounting principles proscribe giving effect to a
completed business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation.
However, they will become the historical consolidated financial statements of
Gentle Dental Service Corporation and subsidiaries after the financial
statements covering the date of consummation of the business combination are
issued.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Gentle Dental Service Corporation and subsidiaries as of December 31, 1996 and
September 30, 1997 and the results of their operations and cash flows for each
of the years in the two year period ended December 31, 1996 and for the nine-
month period ended September 30, 1997 in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
KPMG Peat Marwick LLP
Orange County, California
November 14, 1997, except as to the second
paragraph of note 15, which is as of
January 7, 1998 and the fourth
paragraph of note 15, which is as of December 8, 1997
F-66
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 2,220 $ 147
Accounts receivable, net of allowances of approximately
$1,706 and $2,979 in 1996 and 1997, respectively (note
8)........................................................ 4,826 5,986
Receivables from affiliates................................ 1,197 1,603
Income taxes receivable.................................... 169 134
Supplies................................................... 554 835
Prepaid and other current assets........................... 877 1,157
------- -------
Total current assets..................................... 9,843 9,862
------- -------
Property and equipment, net (notes 5 and 8).................. 5,766 8,424
Intangible assets, net of accumulated amortization (note 6).. 10,330 19,845
Other assets................................................. 457 503
------- -------
Total assets............................................. $26,396 $38,634
======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND COMMON
STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 1,650 $ 1,228
Accrued payroll and payroll related costs.................. 1,033 2,078
Other current liabilities.................................. 1,667 1,846
Current portion of long-term debt and capital lease
obligations............................................... 1,124 687
Short-term borrowings...................................... 2,097 --
------- -------
Total current liabilities................................ 7,571 5,839
------- -------
Long-term liabilities:
Obligations under capital leases, net of current portion... 572 641
Long-term debt, net of current portion..................... 1,822 7,971
Other long-term liabilities................................ 91 530
------- -------
Total long-term liabilities.............................. 2,485 9,142
------- -------
Total liabilities........................................ 10,056 14,981
------- -------
Redeemable convertible preferred stock--Series B, $.001 par
value, 9,270,000 shares authorized; 6,180,000 and 6,287,142
shares issued and outstanding in 1996 and 1997,
respectively................................................ 11,055 12,072
Redeemable common stock, no par value, 190,302 and 183,686
shares issued and outstanding in 1996 and 1997,
respectively................................................ 2,199 2,123
Shareholders' equity (notes 8, 9 and 10):
Preferred stock, 30,000,000 shares authorized, no shares
issued and outstanding.................................... -- --
Convertible preferred stock--Series A, $.001 par value;
395,000 shares authorized; 395,000 shares issued and
outstanding in 1996 and 1997.............................. 1 1
Convertible preferred stock--Series C, $.001 par value;
5,000 shares authorized; 1,777 and 2,753 shares issued and
outstanding in 1996 and 1997, respectively................ 1 1
Common stock, no par value, 50,000,000 shares authorized,
2,181,627 and 4,135,638 shares issued and outstanding in
1996 and 1997, respectively............................... 2,890 9,546
Additional paid-in capital................................. 1,443 2,926
Notes receivable from stockholders......................... (136) (300)
Accumulated deficit........................................ (1,113) (2,716)
------- -------
Total shareholders' equity............................... 3,086 9,458
Commitments and contingencies (notes 9, 13 and 14)...........
Subsequent events (note 15)..................................
------- -------
Total liabilities, redeemable convertible preferred and
common stock and shareholders' equity................... $26,396 $38,634
======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-67
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE NINE-MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Dental group net patient service revenue............ $ -- $ 3,701 $19,348
Net management fees (support service revenue) ...... 9,781 10,712 10,269
------ ------- -------
Net revenues........................................ 9,781 14,413 29,617
Costs and expenses:
Clinical salaries and benefits.................... -- 1,493 6,571
Practice nonclinical salaries and benefits........ 2,418 4,279 8,122
Dental supplies and lab expenses.................. 1,633 2,830 4,424
Practice occupancy expenses....................... 911 1,563 2,450
Practice selling, general and administrative
expenses......................................... 1,311 1,805 3,199
Corporate selling, general and administrative
expenses......................................... 2,153 2,998 3,845
Depreciation and amortization..................... 482 990 1,295
------ ------- -------
Operating income (loss)......................... 873 (1,545) (289)
Nonoperating income (expense):
Interest expense, net............................. (290) (749) (362)
Other income (expense)............................ (92) (48) (16)
------ ------- -------
(382) (797) (378)
------ ------- -------
Income (loss) before income taxes............... 491 (2,342) (667)
Provision (benefit) for income taxes................ 234 (655) 80
------ ------- -------
Net income (loss)............................... 257 (1,687) (747)
Dividends on redeemable convertible preferred
stock--Series B.................................... -- (240) (829)
Accretion of redeemable common stock................ -- (91) (27)
------ ------- -------
Net income (loss) attributable to common stock.. $ 257 $(2,018) $(1,603)
====== ======= =======
Primary and fully diluted earnings (loss) per
share.............................................. $ .19 $ (.86) $ (.40)
====== ======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-68
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE NINE-MONTHS ENDED SEPTEMBER 30,
1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SHARES OF SHARES OF
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE NOTES
PREFERRED PREFERRED PREFERRED PREFERRED SHARES OF ADDITIONAL RECEIVABLE ACCUMULATED
STOCK-- STOCK-- STOCK-- STOCK-- COMMON COMMON PAID-IN FROM EARNINGS
SERIES A SERIES A SERIES C SERIES C STOCK STOCK CAPITAL SHAREHOLDERS (DEFICIT)
----------- ----------- ----------- ----------- --------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December
31, 1994........ -- -- -- -- 1,154,250 $ 533 -- -- 735
Issuance of
common stock in
exchange for
note
receivable...... -- -- -- -- 4,000 40 -- (40) --
Issuance of
common stock
pursuant to
stock incentive
plan............ -- -- -- -- 20,112 201 -- -- --
Issuance of
common stock in
connection with
acquisitions.... -- -- -- -- 28,456 387 -- -- --
Issuance of
common stock in
connection with
private
placement, net
of offering
costs........... -- -- -- -- 169,327 1,634 -- -- --
Options granted
to non-
employees....... -- -- -- -- -- -- 152 -- --
Repurchases of
common stock.... -- -- -- -- (10,000) -- -- -- --
Distributions to
shareholders.... -- -- -- -- -- -- -- -- (87)
Net income...... -- -- -- -- -- -- -- -- 257
--- --- --- --- --------- ------ --- --- ---
Balance at
December 31,
1995............ -- -- -- -- 1,366,145 $2,795 152 (40) 905
=== === === === ========= ====== === === ===
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance December
31, 1994........ 1,268
Issuance of
common stock in
exchange for
note
receivable...... --
Issuance of
common stock
pursuant to
stock incentive
plan............ 201
Issuance of
common stock in
connection with
acquisitions.... 387
Issuance of
common stock in
connection with
private
placement, net
of offering
costs........... 1,634
Options granted
to non-
employees....... 152
Repurchases of
common stock.... --
Distributions to
shareholders.... (87)
Net income...... 257
-----
Balance at
December 31,
1995............ 3,812
=====
</TABLE>
See accompanying notes to supplemented consolidated financial statements.
F-69
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE NINE-MONTHS ENDED SEPTEMBER 30,
1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SHARES OF SHARES OF
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE NOTES
PREFERRED PREFERRED PREFERRED PREFERRED SHARES OF ADDITIONAL RECEIVABLE ACCUMULATED
STOCK-- STOCK-- STOCK-- STOCK-- COMMON COMMON PAID-IN FROM EARNINGS
SERIES A SERIES A SERIES C SERIES C STOCK STOCK CAPITAL SHAREHOLDERS (DEFICIT)
----------- ----------- ----------- ----------- --------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December
31, 1995........ -- -- -- -- 1,366,145 2,795 152 (40) 905
Issuance of
common stock in
exchange for
notes
receivable...... -- -- -- -- 608,527 1 136 (136) --
Redeemable
convertible
preferred
stock--Series B
issuance costs.. -- -- -- -- -- -- (1,266) -- --
Stock warrants
issued related
to debt
financing....... -- -- -- -- -- -- 9 -- --
Exercise of
stock options... -- -- -- -- 2,000 2 -- -- --
Common stock
issued for
acquisitions.... -- -- -- -- 226,455 68 99 -- --
Convertible
preferred
stock--Series A
issued for
acquisitions.... 395 1 -- -- -- -- 295 -- --
Convertible
preferred
stock--Series C
issued for
acquisitions.... -- -- 1,777 1 -- -- 1,733 -- --
Stock options
granted to
nonemployees.... -- -- -- -- -- -- 52 -- --
Stock warrants
issued related
to line of
credit
guarantees...... -- -- -- -- -- -- 233 -- --
Accretion of put
rights.......... -- -- -- -- -- -- -- -- (91)
Repurchase of
common stock.... -- -- -- -- (24,000) (1) -- -- --
Common stock
granted to
nonemployees.... -- -- -- -- 2,500 25 -- -- --
Proceeds from
note
receivable...... -- -- -- -- -- -- -- 40 --
Dividends on
redeemable
convertible
preferred
stock--Series
B............... -- -- -- -- -- -- -- -- (240)
Net loss........ -- -- -- -- -- -- -- -- (1,687)
--- --- ----- --- --------- ----- ------ ---- ------
Balance December
31, 1996........ 395 1 1,777 1 2,181,627 2,890 1,443 (136) (1,113)
Common stock
issued for
Acquisitions.... -- -- -- -- 109,039 475 -- -- --
Convertible
preferred
stock--Series C
issued for
acquisitions.... -- -- 976 -- -- -- 976 -- --
Common stock
issued for
Public offering,
net of offering
costs........... -- -- -- -- 1,500,000 6,125 -- -- --
Common stock
issued for
Employee
purchase plan... -- -- -- -- 1,054 5 -- -- --
Common stock
issued for
Exercise of
stock options... -- -- -- -- 10,100 50 -- -- --
Common stock
issued for stock
options granted
to non-
employees....... -- -- -- -- -- -- 42 -- --
Accretion of put
rights.......... -- -- -- -- -- -- -- -- (27)
Common stock
issued pursuant
to options for
notes
receivable...... -- -- -- -- 333,818 1 150 (150) --
Interest accrued
on notes
receivable...... -- -- -- -- -- -- -- (14) --
Shares reserved
on earnout
agreement....... -- -- -- -- -- -- 314 -- --
Issuance of
common stock
warrants for
acquisition..... -- -- -- -- -- -- 1 -- --
Dividends on
redeemable
convertible
preferred
stock--Series
B............... -- -- -- -- -- -- -- -- (829)
Net loss........ -- -- -- -- -- -- -- -- (747)
--- --- ----- --- --------- ----- ------ ---- ------
Balance at
September 30,
1997............ 395 1 2,753 1 4,135,638 9,546 2,926 (300) (2,716)
=== === ===== === ========= ===== ====== ==== ======
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance December
31, 1995........ 3,812
Issuance of
common stock in
exchange for
notes
receivable...... 1
Redeemable
convertible
preferred
stock--Series B
issuance costs.. (1,266)
Stock warrants
issued related
to debt
financing....... 9
Exercise of
stock options... 2
Common stock
issued for
acquisitions.... 167
Convertible
preferred
stock--Series A
issued for
acquisitions.... 296
Convertible
preferred
stock--Series C
issued for
acquisitions.... 1,734
Stock options
granted to
nonemployees.... 52
Stock warrants
issued related
to line of
credit
guarantees...... 233
Accretion of put
rights.......... (91)
Repurchase of
common stock.... (1)
Common stock
granted to
nonemployees.... 25
Proceeds from
note
receivable...... 40
Dividends on
redeemable
convertible
preferred
stock--Series
B............... (240)
Net loss........ (1,687)
------
Balance December
31, 1996........ 3,086
Common stock
issued for
Acquisitions.... 475
Convertible
preferred
stock--Series C
issued for
acquisitions.... 976
Common stock
issued for
Public offering,
net of offering
costs........... 6,125
Common stock
issued for
Employee
purchase plan... 5
Common stock
issued for
Exercise of
stock options... 50
Common stock
issued for stock
options granted
to non-
employees....... 42
Accretion of put
rights.......... (27)
Common stock
issued pursuant
to options for
notes
receivable...... 1
Interest accrued
on notes
receivable...... (14)
Shares reserved
on earnout
agreement....... 314
Issuance of
common stock
warrants for
acquisition..... 1
Dividends on
redeemable
convertible
preferred
stock--Series
B............... (829)
Net loss........ (747)
------
Balance at
September 30,
1997............ 9,458
======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-70
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE NINE-MONTH PERIOD ENDING SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 257 (1,687) (747)
Adjustments to reconcile change in net cash (used in)
provided by operating activities:
Depreciation and amortization....................... 482 990 1,295
Loss on disposal of assets.......................... 86 63 36
Loss on investment in joint venture................. -- 87 68
Stock options granted to nonemployees............... 152 52 42
Stock issued for fees and compensation.............. -- 25 --
Amortization of warrants............................ -- 242 --
Deferred income taxes............................... 71 (146) 207
Deferred rent....................................... -- 5 24
Change in assets and liabilities, net of the effect
of acquisitions:
Accounts receivable, net........................... 349 (997) 733
Receivables from affiliates........................ (2,476) (562) (493)
Income taxes receivable............................ (225) 5 35
Supplies........................................... (165) (48) 13
Prepaid expenses and other current assets.......... (11) 52 (681)
Other assets....................................... (79) 46 (110)
Accounts payable................................... 88 346 (524)
Accrued liabilities................................ 686 1,145 1,004
------- ------ ------
Net cash (used in) provided by operating
activities........................................ (785) (382) 902
------- ------ ------
Cash flows from investing activities:
Purchase of property and equipment................... (1,251) (873) (1,337)
Proceeds from sale of property and equipment......... -- -- 22
Cash paid for investment in joint venture............ -- (75) --
Cash paid for organization costs..................... -- (5) --
Cash paid for acquisitions, including other direct
costs, net of cash acquired......................... (1,073) (7,268) (7,661)
Dental clinic acquisition prepayments................ (309) -- --
------- ------ ------
Net cash used in investing activities.............. (2,633) (8,221) (8,976)
------- ------ ------
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-71
<PAGE>
GENTLE DENTAL SERVICES CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds (payments) on short-term borrowings.... $ 916 1,048 (2,097)
Proceeds from issuance of long-term debt............ 2,703 466 4,300
Payments on long-term debt and obligations under
capital leases..................................... (1,290) (1,232) (2,925)
Payments of deferred financing costs................ -- (150) --
Proceeds from issuance of common stock and preferred
stock.............................................. 1,835 10,551 7,694
Common stock issuance costs......................... -- (500) (918)
Proceeds from note receivable....................... -- 40 --
Distributions to shareholders....................... (87) -- --
Exercise of put rights.............................. -- (90) (103)
Exercise of options................................. -- -- 50
Other............................................... -- 1 --
------- ------ ------
Net cash provided by financing activities......... 4,077 10,134 6,001
------- ------ ------
Increase (decrease) in cash and cash equivalents.. 659 1,531 (2,073)
Cash and cash equivalents, beginning of period........ 30 689 2,220
------- ------ ------
Cash and cash equivalents, end of period.............. $ 689 2,220 147
======= ====== ======
Supplemental disclosure of cash flow information:
Cash paid during period:
Interest paid..................................... $ 290 489 341
Income taxes paid (received)...................... 350 (159) (28)
======= ====== ======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-72
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Supplemental schedule of noncash investing and financing
activities:
Purchases of property and equipment under capital lease
agreements............................................. $ 534 $ 825 $ 414
Issuance of notes receivable to shareholders for
purchase of common stock............................... 40 136 150
Interest accrued on notes receivable from shareholders.. -- -- 14
Accretion of put rights................................. -- 91 27
Issuance of common stock to founders and to purchase the
predecessor companies.................................. -- 530 --
Issuance of redeemable convertible preferred stock--
Series B to investment bankers for services............ -- 314 --
Issuance of convertible preferred stock--Series C to
purchase dental practices.............................. -- 1,734 976
Notes payable issued to purchase dental practices....... -- -- 3,214
Shares reserved for earnout agreements.................. -- -- 314
Issuance of notes receivable to shareholders for common
stock.................................................. -- 136 164
====== ====== ======
Acquisition of tangible assets from related parties:
Liabilities assumed or issued........................... $2,093 $ -- $ --
Tangible assets acquired................................ 2,093 -- --
====== ====== ======
Acquisition of clinics from unrelated parties:
Intangible assets....................................... $2,012 $1,335 $2,480
Liabilities assumed or issued........................... 453 148 893
Common stock issued in connection with acquisitions..... 1,098 597 475
Dental clinic acquisition prepayments................... -- 309 --
====== ====== ======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-73
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) ORGANIZATION
Gentle Dental Service Corporation (GDS or the Company), incorporated on
December 14, 1992, is a Washington corporation. The Company, as part of a
multi-specialty dental care delivery network, provides support services to
dental professional corporations (PC's) under long-term service agreements.
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.
On February 13, 1997, the Company completed its initial public offering of
1,500,000 shares of no par value common stock (the "Offering"). The price per
share in the Offering was $5.00, resulting in gross offering proceeds of
$7,500,000. The Company received net proceeds of approximately $6,125,000, net
of underwriters' discount and total offering expenses. Concurrent with the
receipt of the net proceeds, the company utilized $4,426,000 to repay certain
outstanding principal under the Company's various bank loan arrangements (see
note 8). No significant gain or loss resulted in connection with the debt
extinguishment.
The Board of Directors granted certain officers of the Company the authority
to reprice employee stock options to the offering price at the date this price
was determinable. All other terms with respect to such options were
maintained. On February 12, 1997 (the offering date), the Company repriced all
employee stock options outstanding to the offering price of $5 per share
(except for certain stock options held by the Company's chief executive
officer, which were repriced at 110% of the offering price). The Company did
not recognize compensation expense related to the repricing of the employee
stock options as the adjusted exercise price was not below the Company's
quoted fair value as of the repricing date.
(2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation/Basis of Consolidation
The supplemental consolidated financial statements include the accounts of
GDS and its subsidiaries. All significant intercompany transactions and
accounts have been eliminated. As described more fully in Note 3, on November
4, 1997, GDS merged with GMS Dental Group, Inc. (GMS), with former
stockholders of GMS owning 59% of the combined company upon completion of the
merger. These supplemental consolidated financial statements have been
prepared following the pooling-of-interests method of accounting and reflect
the combined financial position and operating results of GDS and GMS for all
periods presented. Upon issuance of financial statements covering the period
which includes the date of the merger, these supplemental consolidated
financial statements will become the historical financial statements of the
Company.
Corporate practice of medicine laws in the states in which the Company
operates prohibit the Company from owning dental practices, instead the
Company enters into exclusive long-term service agreements with the dental
groups. The Company has two primary types of contractual arrangements with the
dental groups. The first type of arrangement involves the provision of
management services to the dental groups under long-term service agreements
where the Company has no control over the activities of the dental groups, and
accordingly, does not consolidate the accounts of the dental groups. See
related discussion of the amended management agreements at note 15.
The second type of arrangement involves the purchase of the operating assets
and management services agreements and the assumption of certain liabilities
of dental groups where the Company has control of the dental groups
activities. The Company retains the right to designate a majority shareholder
or other owner of the dental group as its nominee and an advisory board is
established which governs the activities of the dental groups, of which the
Company retains the right to appoint a majority of the advisory board members.
Through the
F-74
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
management services agreement and its control of the advisory board and
nominee shareholders of the dental practices, the Company has exclusive
authority over the decision making related to all major ongoing operations of
the underlying dental group with the exception of the professional aspects of
the dentistry practice as required by applicable state law. Under the
management services agreement, the Company establishes annual operating and
capital budgets for the dental groups and compensation guidelines for the
licensed dental professionals. The Company consolidates the accounts of the
dental groups since the Company has control over the operations of the dental
practices.
The Company has a 50% equity investment in Celebration Dental Services
L.L.C., a Florida limited liability company, which is accounted for on the
equity basis of accounting.
Net Revenues
Revenues consist primarily of dental group net patient revenue and net
management fees. Dental group net patient revenue represents the revenue of
the dental groups reported at the estimated net realizable amounts from
patients, third party payors and others for services rendered, net of
contractual adjustments. Net management fees represents amounts charged to the
unconsolidated dental groups based on an agreed-upon percentage of dental
group revenues under management services agreements, net of provisions for
contractual adjustments and doubtful accounts. The components of net revenues
are as follow:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- -----------------
1995 1996 1997
------- -------- -----------------
<S> <C> <C> <C>
PC dental revenue, net of provisions for
contractual adjustments and doubtful
accounts................................. $16,029 $ 21,424 $19,020
Less amounts retained by the PCs.......... (6,248) (10,712) (9,103)
Adjustments to allowance for doubtful
accounts................................. -- -- 230
Retail sales.............................. -- -- 122
------- -------- -------
Support services revenue from affiliates.. 9,781 10,712 10,269
Dental group net patient service revenue.. -- 3,701 19,348
------- -------- -------
Net revenues............................. $ 9,781 $ 14,413 $29,617
======= ======== =======
</TABLE>
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Accounts Receivable and Allowances for Contractual Adjustments and Doubtful
Accounts
Accounts receivable principally represent receivables from patients and
dental group insurance carriers for dental services provided by the related
PC's and are recorded net of contractual allowances. 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.
Affiliate Receivables
Affiliate receivables consist primarily of amounts owed to the Company from
the PCs to reimburse the Company for payment of the PCs' payroll and other
direct costs, net of amounts due to the PCs related to the acquisitions and
the PCs' share of revenues.
Supplies
Supplies consist primarily of disposable dental supplies and instruments
stored at the clinics. Supplies are stated at the lower of cost (first-in,
first-out basis) or market (net realizable value).
Property and Equipment
Property and equipment are stated at cost net of accumulated depreciation
and amortization. Expenditures for maintenance and repairs are charged to
expense as incurred and expenditures for additions and betterments are
capitalized. Depreciation of property and equipment is recorded using the
straight-line method over the shorter of the related lease term or the
estimated useful lives which range from 3 to 15 years.
F-75
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Equipment held under capital leases are stated at the present value of
minimum lease payments at the inception of the lease and is amortized on a
straight-line basis over the shorter of the lease term or the estimated useful
life of the asset. Amortization of assets subject to capital leases is
included in depreciation expense.
Intangible Assets
Intangible assets result primarily from the excess of cost over the fair
value of net tangible assets purchased in acquisitions. Such intangibles
relate primarily to noncompetition covenants, support services agreements and
management services agreements. Intangibles relating to support services
agreements and management agreements consist of the costs of purchasing the
rights to provide management support services to dental practices over the
initial noncancelable 40-year terms of the related 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 and other ancillary services. The
agreements are noncancelable except for performance defaults.
Intangible assets are amortized on the straight-line method over their
estimated useful lives, 5 years for organizational costs, 25 years for support
services agreements and management services agreements and other acquired
intangibles, and 40 years for trademarks.
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 intangibles 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 discounted
cash flows. No write-down for impairment loss was recorded for the years ended
December 31, 1995 and 1996 and the nine-month ended September 30, 1997.
Fair Value of Financial Assets and Liabilities
The Company estimates the fair value of its monetary 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, 1996 and September 30, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Net 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 (using the treasury stock method). Common stock equivalents are
excluded from the computation if their effect is anti-
F-76
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
dilutive. The number of primary and fully diluted weighted average common and
common equivalent shares utilized for the years ended December 31, 1995 and
1996 were 1,379,960 and 2,354,533, respectively. For the nine months ended
September 30, 1997, the number of primary and fully diluted weighted average
common and common equivalent shares utilized were 4,004,955.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share." In accordance with this pronouncement, the Company
will adopt the new standard for periods ending after December 15, 1997. The
adoption of this pronouncement will not have an effect on reported earnings
(loss) per share information.
The Emerging Issues Task Force of the Financial Accounting Standards Board
recently evaluated certain matters relating to the physician practice
management industry (EITF issue number 97-2) and reached a consensus on the
criteria for establishing a controlling financial interest in a physician
practice, the appropriateness of accounting for a transaction between a
physician practice management company and a physician practice as a business
combination, and the appropriateness of accounting for such transactions using
the pooling-of-interests method of accounting. The accompanying financial
statements are prepared in conformity with the consensus reached in EITF 97-2.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation." Under SFAS 123, the Company may elect to recognize stock-
based compensation expense based on the fair value of the awards or continue
to account for stock-based compensation under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and disclose in the
financial statements the effects of SFAS 123 as if the recognition provisions
were adopted. Effective October 11, 1996 (inception), GMS elected to account
for stock-based compensation under Accounting Principles Board Opinion No. 25
(APB 25).
(3) BUSINESS COMBINATIONS, ACQUISITIONS AND RESTRUCTURING
On November 4, 1997, GMS merged into GDS to form the Company. In connection
with the merger transaction, substantially all of the issued and outstanding
shares of GMS common stock were converted into 4,512,377 shares of common
stock of the Company. Immediately prior to the consummation of the merger,
substantially all of the issued and outstanding preferred stock of GMS was
converted to common stock pursuant to the merger. A holder of GMS preferred
stock has notified the Company of his intent to dissent with respect to the
conversion of such shares into 35,784 shares of Company Common Stock. If such
shareholder ultimately pursues his "dissenter rights" the Company will be
required to pay such shareholder cash consideration in an amount determined by
an independent appraisal, in lieu of Company Common Stock.
The merger has been accounted for using the pooling-of-interests method of
accounting. Accordingly, the historical financial statements for the periods
prior to the completion of the combination have been restated as though the
companies had been combined. The restated financial statements have been
adjusted to conform the differing accounting policies of the separate
companies. Such differences related primarily to the use of different lives in
computing depreciation of equipment and amortization of intangible assets.
Furthermore, the presentation of support services revenue (management fees)
has been revised to reflect the dental group net patient service revenue of
unconsolidated dental practices less amounts retained by the unconsolidated
dental groups. Management believes this presentation facilitates the
comparison with the operations of dental practices which are consolidated.
F-77
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
All fees and expenses associated with the merger and the estimated costs of
executing the Company's restructuring plan as a result of the Merger have not
been reflected in the supplemental consolidated statements of operations, but
will be reflected in the Company's consolidated statement of operations for the
quarter ended December 31, 1997. Such fees and expenses are currently estimated
to be approximately $1.8 million of which $264 represents direct transaction
costs, with the remainder representing estimated expenses related to activities
such as restructuring corporate functions and reducing personnel.
The calculation of net income per common and common equivalent share for each
period presented reflects the issuance of 0.44509 of a share of the Company's
common stock for each share of GMS common stock used in such calculation.
Separate and combined results of GDS and GMSC are as follows:
<TABLE>
<CAPTION>
ADJUSTMENTS AND
GMS GDS RECLASSIFICATIONS TOTAL
------- ------- ----------------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Net patient revenues........... $ -- $ -- $ --
Management fees................ -- 9,781 9,781
------- ------- --- -------
$ -- $ 9,781 -- $ 9,781
======= ======= === =======
Net income..................... $ -- $ 257 -- $ 257
======= ======= === =======
Year ended December 31, 1996:
Net patient revenues........... $ 3,701 $ -- $ 3,701
Management fees................ -- 10,712 10,712
------- ------- --- -------
$ 3,701 $10,712 $14,413
======= ======= === =======
Net loss....................... $ (716) $ (985) $14 $(1,687)
======= ======= === =======
Nine-months ended September 30,
1997:
Net patient revenues........... $19,348 $ -- $19,348
Management fees................ -- 10,269 10,269
------- ------- --- -------
$19,348 $10,269 $29,617
======= ======= === =======
Net (loss) income.............. $ (968) $ 229 $(8) $ (747)
======= ======= === =======
</TABLE>
On January 2, 1995, the Company purchased from the PCs the net accounts
receivable of PCs totaling $2,093 in exchange for interest-only promissory
notes payable on December 31, 1995. The principal portion of the promissory
notes issued to the Company was satisfied via reductions to the Company's
receivables from the PCs.
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 assumption of certain liabilities. The total
purchase price of $2,346 for the seven acquired clinics included $982 paid in
cash, $1,098 in redeemable and nonredeemable common stock, and $175 in
promissory notes. In addition, the Company paid $91 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. 20,000
such shares were valued by management at $10.00 per share for one acquisition
in January 1995 and 66,007 shares were valued at $13.60 per share for the
remaining acquisitions. These common stock amounts 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.
F-78
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Outstanding promissory notes issued related to the acquisitions at December
31, 1995 totaled $120, consisting of $57 included in short-term borrowings and
subsequently paid in January 1996 and $63 included in long-term and due in
monthly installments 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 nine dental
practices, including cash, accounts receivable, supplies and fixed assets, net
of the assumption of certain liabilities. The total purchase price of $10,469
for the nine acquired dental practices included $7,684 in cash, $2,725 in
redeemable and nonredeemable preferred and common stock and a promissory note
for $28. In addition, the Company paid for closing costs of $32 which have
been included in the total purchase price. The Company issued a total of
43,928 shares relating to those acquisitions.
In 1997, the Company acquired substantially all of the assets of seven
dental practices, including cash, accounts receivable, supplies and fixed
assets, net of the assumption of certain liabilities. The total purchase price
of $13,455 for the seven acquired dental practices included $7,661 in cash,
$1,767 in redeemable and nonredeemable preferred and common stock, $3,746 in
promissory notes and the assumption of long-term liabilities for $248. In
addition, the Company paid for closing costs of $33 which have been included
in the total purchase price. The Company issued a total of 109,000 shares of
stock valued at $4.36 per share and 133,527 warrants to purchase common stock
at $7.86 per share in conjunction with these acquisitions. The stock and
warrants amounts reflect the estimated fair market value on the dates of the
acquisitions.
The above acquisitions in 1995, 1996 and 1997 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 and management services
agreements are being amortized over 25 years using the straight-line method.
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 summary presents the condensed
consolidated results of operations as if the 1996 and 1997 acquisitions
discussed above had occurred as of January 1, 1996. These pro forma results
have been prepared for comparative purposes only and are not necessarily
indicative of what the actual results of operations would have been had the
acquisitions been made as of those dates, nor does it purport to represent
future operations of the Company:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
<S> <C> <C>
Pro forma:
Revenue, net.................................. $62,003 50,251
Net loss...................................... (1,010) (547)
------- ------
Net loss per share............................ $ (.25) (.14)
======= ======
</TABLE>
The fair value of the stock issued by GMS was determined by GMS based upon
an analysis of the value of the operating assets and liabilities being
acquired using projected discounted cash flows and the negotiation process
between GMS and the sellers. Under certain purchase agreements, the purchase
price is adjustable by the Company for a period between six months and one
year after the closing of the transaction in order to finalize the fair values
of the assets acquired and liabilities assumed.
F-79
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In connection with the acquisition of two of the dental groups, the Company
is contingently obligated to pay additional consideration, depending on the
achievement of certain financial results, as defined by the purchase
agreements. During 1997, the Company accrued $314 for the portion of 1997
earnouts which the Company expects to pay in shares of common stock.
(4) RECEIVABLES SOLD WITH RECOURSE
Prior to October 11, 1996, one of the acquired practices sold certain of its
receivables to a financial institution with recourse. Under the terms of these
transactions, the practice received 97% of the face value of each receivable.
Additionally, as collateral on these receivables, the practice was required to
maintain a cash balance at the financial institution of approximately 10% of
the outstanding receivables. The recourse provisions require the Company to
repurchase any receivable which becomes more than 150 days delinquent.
The outstanding balance of receivables sold with recourse was approximately
$261,000 at December 31, 1996. As of September 30, 1997, the Company no longer
sells its receivables.
(5) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------- ------
<S> <C> <C>
Dental equipment............................................ $ 3,328 4,905
Computer equipment.......................................... 1,098 1,728
Furniture, fixtures, and equipment.......................... 728 952
Leasehold improvements...................................... 1,681 2,700
Vehicles.................................................... 22 32
Buildings................................................... 48 48
Land........................................................ 10 10
------- ------
Total property and equipment.............................. 6,915 10,375
Less accumulated depreciation and amortization.............. (1,149) (1,951)
------- ------
Property and equipment, net............................... $ 5,766 8,424
======= ======
</TABLE>
At December 31, 1996 and September 30, 1997, property and equipment include
assets under capital leases with an original cost of $1,262 and $1,880 and
accumulated amortization of $235 and $427, respectively.
(6) INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Management services agreements.................... $ 7,105 14,671
Support services agreements....................... 3,325 5,805
Trademarks........................................ 50 50
Organizational costs.............................. 75 75
Other............................................. 56 143
------- ------
10,611 20,744
Less accumulated amortization..................... (281) (899)
------- ------
$10,330 19,845
======= ======
</TABLE>
F-80
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(7) INVESTMENT IN JOINT VENTURE
The Company is a 50% owner in a joint venture with Private Medical Care,
Inc., a subsidiary of Delta Dental, Inc., in a dental practice located in
Celebration, Florida. The initial investment by the Company consisted of $75
in cash and $150 of contributed assets.
(8) DEBT
Short-Term Borrowings
At December 31, 1996, the Company had a total of $2,097 outstanding under
two bank operating lines of credit with a bank secured by substantially all
assets of the Company. In February 1997, the entire outstanding amount was
fully repaid from the net proceeds from the Offering (see Note 1).
As of September 30, 1997, the Company has a line of credit secured by
substantially all of GDS's accounts receivable. Borrowings under the line bear
interest at prime plus 1% (9.5% at September 30, 1997). The Company may borrow
from the credit line a maximum of $1,850 limited to a borrowing base
calculated at 75% of the Company's eligible accounts receivable. There are no
amounts outstanding under the credit line at September 30, 1997.
The Company must pay a commitment fee of .5% per annum of the average daily
portion of the $1,850 available. The credit line agreement includes provisions
for maintaining certain financial covenants including debt service coverage
ratio, current ratio, debt to intangible net worth ratio, minimum tangible net
worth, and restrictions on payment of cash dividends. The Company is in
compliance with these covenants at September 30, 1997.
The Company has obtained a credit facility from a bank in the amount of
$10,000. The proceeds of the credit facility are available for working capital
needs and to finance acquisitions approved by the bank. Principal amounts owed
under the credit facility bear interest up to 1% above the prime rate or up to
3.25% above LIBOR, at the Company's option, dependent on the Company's
leverage ratio. The outstanding balance on this facility as of September 30,
1997 was $4,300. As of September 30, 1997, the Company was in violation of
certain covenants for which it has obtained a waiver from the bank.
On October 11, 1998, the credit facility will convert from a revolving
facility to a three-year loan. The term loan will provide for 12 equal
quarterly payments of principal and interest. The obligations under this
credit agreement are secured by a security interest in favor of the bank in
all assets of the Company and its subsidiaries. The Company must meet certain
ratios defined by the bank credit agreement.
In connection with this credit facility, the Company issued a warrant to the
bank to purchase up to 81,942 shares of the Company's common stock at a price
of $3.93 per share. The warrant expires in October 2001.
F-81
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Long-term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Secured notes payable, bearing interest at rates ranging from
9.75% to 9.99%; monthly principal and interest payments of $5;
maturing at various dates through June 2000; secured by
mortgage....................................................... $ 70 $ 24
Credit facility, bearing interest at 3.25% in excess of LIBOR
rate (9.1% at September 30, 1997).............................. 48 4,300
Subordinated note payable, bearing interest at 8%, payable in
annual installments beginning December 31, 1997 through January
2002........................................................... -- 696
Senior subordinated note payable, discounted at 8%; annual
interest payable in 60 monthly installments of $14, beginning
August 1, 1997 through July 2002............................... -- 667
Senior subordinated note payable, discounted at 8%; annual
interest; balloon payment of $500 due in July 1999............. -- 432
Senior subordinated note payable, discounted at 8%; annual
interest; balloon payment of $2,083 payable in July 2002....... -- 1,419
Note payable to bank due in monthly installments of principal
and interest at prime plus 1.25%, paid during 1997............. 667 --
Notes payable to bank with interest-only payments for the first
12 months at prime plus 1.5%, paid during 1997................. 1,699 --
Various unsecured notes payable, due in monthly installments of
principal and interest at rates ranging from 8.25% to 10.75%,
maturing through November 2003................................. 210 722
------ ------
2,694 8,260
Less current portion............................................ 872 289
------ ------
$1,822 $7,971
====== ======
</TABLE>
At September 30, 1997, the aggregate maturities of long-term debt for each
of the next five years are as follows:
<TABLE>
<S> <C>
1998.................................................................. $ 289
1999.................................................................. 1,886
2000.................................................................. 1,705
2001.................................................................. 2,035
2002.................................................................. 2,308
Thereafter............................................................ 37
------
$8,260
======
</TABLE>
F-82
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(9) REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK AND SHAREHOLDERS' EQUITY
The Company has two classes of stock: common stock and preferred stock. As
of September 30, 1997, Preferred stock consists of convertible preferred
stock--Series A, redeemable convertible preferred stock--Series B and
convertible preferred stock--Series C. Common stock consists of redeemable
common stock and non redeemable common stock. The redeemable convertible
preferred stock--Series B, including dividends, and the convertible preferred
stock--Series A and C, were converted to common stock on November 4, 1997
prior to the GMS merger.
Common Stock
Upon formation of the Company, GMS Dental Group, Inc. issued an aggregate
608,527 shares of its common stock at a purchase price of $.23 per share to
the founders of the Company. 269,279 of these shares are subject to a three-
year vesting schedule whereby one-quarter of the shares vested upon issuance
and one-quarter of the shares will vest on October 11, 1997. The remaining
shares vest on a monthly basis during the remaining thirty-six months.
254,903 shares issued to certain other stockholders, which were issued at a
price of $.45 per share, and 339,248 shares out of the 608,527 shares issued
to the founders, are subject to a right of repurchase, at cost, in favor of
the Company that expires upon the earlier of (1) the achievement by the
Company of certain performance milestones over a two-year period or (2) nine
years and nine months from the date of issuance.
Redeemable Preferred and Common Stock
The following summary presents the changes in the redeemable convertible
preferred stock--Series B and redeemable common stock:
<TABLE>
<CAPTION>
SHARES OF
REDEEMABLE REDEEMABLE
CONVERTIBLE CONVERTIBLE SHARES OF
PREFERRED PREFERRED REDEEMABLE REDEEMABLE
STOCK-- STOCK-- COMMON COMMON
SERIES B SERIES B STOCK STOCK
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994... -- $ -- -- $ --
Issued in connection with
acquisitions................ -- -- 57,551 711
--------- ------- ------- ------
Balance, December 31, 1995... -- -- 57,551 711
Issued in connection with
private placement........... 6,180,000 10,815 100,000 957
Issued in connection with
acquisitions................ -- -- 38,994 530
Accretion of put rights...... -- -- -- 91
Exercise of put rights....... -- -- (6,243) (90)
Dividend on redeemable
convertible preferred
stock--Series B............. -- 240 -- --
--------- ------- ------- ------
Balance, December 31, 1996... 6,180,000 11,055 190,302 2,199
--------- ------- ------- ------
Issued in connection with
private placement........... 107,142 188 -- --
Dividend on redeemable
convertible preferred
stock--Series B............. -- 829 -- --
Accretion of put rights...... -- -- -- 27
Exercise of put rights....... -- -- (6,616) (103)
--------- ------- ------- ------
Balance, September 30, 1997.. 6,287,142 $12,072 183,686 $2,123
========= ======= ======= ======
</TABLE>
F-83
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Dividends
The holders of the Series B redeemable convertible preferred stock will be
entitled to receive dividends in preference to any dividend on the Series A or
Series C convertible preferred stock and the common stock, at a rate of 10%
per annum of the per share purchase price of the Series B redeemable
convertible preferred stock, which dividend rate will be $.175 per share of
Series B redeemable convertible preferred stock. The dividends payable to the
holders of the Series B redeemable convertible preferred stock are cumulative
and are payable upon the earlier of conversion of such shares into common
stock, the initial public offering of the Company's securities, a liquidation
of the Company or an acquisition of the Company or substantially all of its
assets. Accumulated undeclared dividends as of September 30, 1997 totaled
$1,069.
Liquidation Preference
The holders of the Series B redeemable convertible preferred stock are
entitled to liquidation preferences followed by the holders of the Series A
and Series C convertible preferred stock.
Redemption Rights
After October 11, 2001, any or all of the holders of the Series B redeemable
convertible preferred stock shall have the right to the extent permitted by
law and by the Company's Loan Agreement with Imperial Bank, to require the
Company to repurchase all or any part of such holder's shares of such series
of preferred stock by payment of an amount per share equal to the liquidation
preference amount, together with any accumulated but unpaid dividends on such
redeemed shares. The Series A and Series C convertible preferred stock are not
redeemable.
Conversion Rights
The holders of shares of Series A convertible preferred stock and Series B
redeemable convertible preferred stock have the right to convert such shares
at any time into common stock of the Company. The initial conversion rate will
be on a 1-to-1 basis and will be subject to adjustment for anti-dilution
(including, but not limited to, adjustments to the conversion rates in the
event the Company issues common stock or securities convertible into or
exercisable for common stock at a price per share less than the conversion
price or such series of preferred stock). Each share of Series A convertible
preferred stock and Series B redeemable convertible preferred stock
automatically will be converted into common stock, at the then applicable
conversion rate, upon the written consent of the holders of at least a
majority of the Series A convertible preferred stock and Series B redeemable
convertible preferred stock, voting together as a class.
Each share of Series C convertible preferred stock automatically shall be
converted into common stock, at a ratio equal to $1,000 divided by the Series
C conversion price (as defined below), upon the earlier of (i) the closing of
a firm commitment underwritten public offering of the Company's common stock
or (ii) the acquisition of the Company (by merger, stock purchase, sale of
assets or otherwise) for a purchase price in excess of an amount equal to four
times the aggregate liquidation preferences of all the then outstanding shares
of preferred stock of the Company. For purposes of automatic conversion upon
the closing of a public offering as described above, the Series C conversion
price shall be 75% of the price per share of common stock at which such shares
are sold to the public in the public offering. For purposes of automatic
conversion upon the acquisition of the Company as described above, the Series
C conversion price shall be 75% of the price per share of common stock paid in
such acquisition. The price per share of common stock will be determined by
dividing the total consideration to be received by the Company's shareholders
as a result of such acquisition by the number of shares of common stock then
outstanding on an as-converted basis (including the approximate number
F-84
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
of shares of common stock issuable upon conversion of the Series C convertible
preferred stock upon such acquisition).
Voting Rights
The holders of the Series A and Series B preferred stock shall be entitled
to the number of votes equal to the number of shares of common stock then
issuable upon conversion of such shares. The holders of the Series C preferred
stock shall be entitled to a number of votes equal to 5% of the total voting
power of all outstanding voting securities.
Rights of First Offer
Each purchaser of Series B redeemable convertible preferred stock who
continues to hold at least 25% of such purchaser's original investment or a
transferee who acquires at least 400,000 shares of the Series B redeemable
convertible preferred stock (a Major Investor) will have a right of first
offer to purchase its pro rata share of offerings of new securities of the
Company (other than (i) securities issued to certain employees, directors,
consultants and vendors of the Company, (ii) shares of the Company's capital
stock issued in connection with the acquisition of dental practices and (iii)
securities issued in connection with the Company's business relationships up
to 1% of the then outstanding common stock on an as-converted basis). The
right of first offer will terminate upon an initial public offering of the
Company's common stock.
Redeemable Common Stock
In connection with certain acquisitions, the Company granted "put rights" to
certain shareholders that may require the Company to redeem up to 96,545
shares of its common stock at a redemption price ranging from $13.38 to $19.62
per share. If all shareholders with such "put rights" exercise their options,
the Company would be required to repurchase the above shares of common stock
for $1,409. The redemption periods began April 1, 1996 and continue through
January 4, 2003. If the shareholder does not place a redemption request during
the redemption period, the "put right" will expire on the stated expiration
date. "Put rights" for all but 20,000 shares terminate in the event of the
Company successfully completing a public offering at a price of at least
$20.00 per share. The Company redeemed 6,243 shares of redeemable common stock
for $90 during 1996 and 6,616 shares for $103 during 1997.
The shares of common stock subject to the "put rights" are reported on the
balance sheet as redeemable common stock. Such shares have been recorded at
their fair value as of the dates of acquisition, inclusive of accretion during
the year ended December 31, 1996 and nine months ended September 30, 1997. The
Company records accretion on a ratable basis over the redemption period of the
respective stock. Such accretion for the year ended December 31, 1996 and the
nine months ended September 30, 1997 was $91 and $27, respectively. Accretion
in prior years was insignificant.
Such common stock at September 30, 1997 is redeemable as follows:
<TABLE>
<CAPTION>
NUMBER OF REDEMPTION REDEMPTION
SHARES AMOUNT PRICE RANGE
--------- ---------- ------------
<S> <C> <C> <C>
1998....................................... 2,974 $ 50 $ 16.82
1999....................................... 2,754 50 13.38-18.16
2000....................................... 40,849 576 13.60-19.62
2001....................................... 29,681 438 13.60-18.80
2002....................................... 3,714 51 13.60
Thereafter................................. 3,714 51 13.60
------ ------
83,686 $1,216
====== ======
</TABLE>
F-85
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Private Placement of Redeemable Common Stock and Warrants
In June 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 $43) were $957. The net proceeds allocated to common
stock aggregated $732. The stock warrants were recorded at their estimated
fair value of $225 and are entitled to certain "piggyback" registration
rights. The stock warrants expire on December 14, 2001; no stock warrants have
been exercised to date.
In connection with the private placement, the shareholder received certain
"put rights" which are exercisable after June 21, 2001 but no later than June
21, 2003 if the Company has not completed a public offering of its common
stock by June 21, 2001 at a price of at least $22.00 per share and with net
proceeds to the Company of at least $10,000. The per share price applicable to
the "put rights" is 20 times the Company's average adjusted net income per
share for the two most recent fiscal years preceding the exercise of the
rights. As of September 30, 1997, the Company has not recorded any accretion
related to the above "put rights."
Preferred Stock
Preferred stock may be issued by the Board of Directors with preferences to
be determined at the time of issuance. Through September 30, 1997, none of the
30,000,000 authorized shares of the Company's preferred stock has been issued
or is outstanding.
Stock Warrants Issued in Conjunction with Debt Issuance and Acquisitions
In May 1996 the Company issued warrants to purchase 4,333 shares of the
Company's common stock at $7.50 per share to a lender in connection with a
line of credit agreement. The stock warrants were valued at $9 and have been
recorded as debt issuance costs and additional paid-in capital. The estimated
fair value of the stock warrants was amortized over the six-month term of the
line of credit. Such amortization expense has been included in interest
expense in the statement of operations. The stock warrants expire on May 31,
2001 and carry certain "piggyback" registration rights. The stock warrants
have not been exercised to date.
In addition, in May 1996, the Company issued to certain directors, officers
and shareholders of the Company warrants to purchase 115,000 shares of the
Company's common stock at $7.50 per share in consideration for guaranteeing a
total of $1,000 on a line-of-credit which is no longer available and has been
fully repaid. The estimated fair value of the stock warrants of $233 was
amortized over the six-month term of the line of credit. Such amortization
expense has been included in interest expense in the statement of operations.
All stock warrants expire in May 2001 and no such stock warrants have been
exercised to date.
In connection with the Company's $10 million credit facility, a warrant was
issued entitling the bank to purchase up to 81,942 shares of the Company's
common stock at a price of $3.93 per share. The warrants were recorded at
their estimated fair market value of $1 and expire in October 2001.
In connection with the acquisition of the net assets of a dental practice,
the Company issued warrants to purchase 133,527 shares of common stock at
$7.86 per share. The warrants expire in 2004; no such stock warrants have been
exercised to date.
F-86
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(10) STOCK OPTIONS
The Board of Directors adopted a Stock Incentive Plan (the Plan), as amended
during 1996. The Plan provides for issuance of up to 1,000,000 shares of
common stock in connection with various stock grants, awards and sales granted
under such plan to employees and nonemployees (primarily key dental group
personnel). The Plan authorizes the grant of incentive stock options,
nonstatutory 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 and expire ten years
from the original grant date.
Stock options issued to nonemployees have been recorded at their estimated
fair market value and are being expensed over their respective vesting lives
of up to five years. Total compensation expense recorded for the years ended
December 31, 1995 and 1996 and the nine-months ended September 30, 1997 was
$152, $52 and $42, respectively.
Statement of Financial Accounting Standards No. 123 (SFAS 123)
During 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock Based Compensation," which defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of
their employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost related to stock options issued to
employees under these plans using the method of accounting prescribed by the
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees." Entities electing to remain with the accounting in APB
25 must make pro forma disclosures of net income and earnings per share, as if
the fair value based method of accounting defined in this Statement had been
applied.
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during the years ended December 31,
1995 and 1996 and the nine months ended September 30, 1997. The 1995 and 1996
options were valued using the minimum value pricing model as prescribed by
SFAS 123 for nonpublic companies. The options issued subsequent to the
Company's 1997 initial public offering have been valued using the Black-
Scholes pricing model as prescribed by SFAS 123. The following weighted
average assumptions have been used for grants of stock options:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
---------------- -----------------
1995 1996 1997
------- ------- -----------------
<S> <C> <C> <C>
Risk free interest rate.................. 6.5% 6.5% 6.4%
Expected dividend yield.................. -- -- --
Expected lives........................... 5 years 5 years 5 years
Expected volatility...................... N/A N/A 60%
======= ======= =======
</TABLE>
F-87
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Options were assumed to be exercised over the five-year expected life for
the purpose of this valuation. Adjustments are made for options forfeited
prior to vesting. The total value of options granted was computed as the
following approximate amounts, which would be amortized on the straight-line
basis over the vesting period of the options:
<TABLE>
<S> <C>
Year ended December 31, 1995....................................... $ 334
Year ended December 31, 1996....................................... 301
Nine months ended September 30, 1997............................... 1,219
</TABLE>
If the Company had accounted for stock options issued to employees in
accordance with SFAS 123, the Company's net income attributable to common
stock and pro forma net income per share would have been reported as follows:
Net income (loss) attributable to common stock:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
----------- -----------------
1995 1996 1997
---- ------ -----------------
<S> <C> <C> <C>
As reported................................. $257 (1,687) (747)
Pro forma................................... 222 (1,767) (817)
==== ====== ====
</TABLE>
Pro forma net income (loss) per common and common equivalent share:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
----------- -----------------
1995 1996 1997
----- ----- -----------------
<S> <C> <C> <C>
As reported--primary........................ $ .19 (.86) (.40)
Pro forma--primary.......................... .16 (.91) (.44)
As reported--fully diluted.................. .19 (.86) (.40)
Pro forma--fully diluted.................... .16 (.91) (.44)
===== ===== ====
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosures for
1995 and 1996 and for the nine-months ended September 30, 1997 are not likely
to be representative of the effects on reported net income (loss) and net
income (loss) per common equivalent share for future years, because options
vest over several years and additional awards generally are made each year.
F-88
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following summary presents the options granted and outstanding as of
September 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF SHARES AVERAGE
------------------------------ EXERCISE
EMPLOYEE NONEMPLOYEE TOTAL PRICE
-------- ----------- -------- --------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1994........ 110,000 -- 110,000 $4.52
Granted............................. 136,000 72,750 208,750 5.91
Canceled............................ (31,000) (5,000) (36,000) 6.56
-------- ------- -------- -----
Outstanding, December 31, 1995........ 215,000 67,750 282,750 5.47
Granted............................. 192,112 38,705 230,817 3.43
Exercised........................... (2,000) -- (2,000) --
Canceled............................ (96,549) (5,833) (102,382) 8.19
-------- ------- -------- -----
Outstanding, December 31, 1996........ 308,563 100,622 409,185 3.66
Granted............................. 741,855 -- 741,855 3.03
Exercised........................... (343,918) -- (343,918) .58
Canceled............................ (110,101) (13,667) (123,768) 5.17
-------- ------- -------- -----
Outstanding, September 30, 1997....... 596,399 86,955 683,354 $4.26
======== ======= ======== =====
</TABLE>
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options at September 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS WEIGHTED
------------------------------------- AVERAGE
EXERCISE CONTRACTUAL LIFE
PRICE OUTSTANDING EXERCISABLE REMAINING
-------- ----------- ----------- ----------------
<S> <C> <C> <C>
$ .20 15,250 15,250 7.82 years
.21 110,604 46,734 9.15
4.13 45,500 -- 7.01
5.00 318,000 57,900 8.63
5.50 81,000 81,000 6.08
8.02 68,000 1,000 9.90
10.00 45,000 27,672 7.61
------ ------- ------- ----
4.72 683,354 229,556 9.02
====== ======= ======= ====
</TABLE>
(11) TRANSACTIONS WITH AFFILIATES
Management Agreements
The Company currently derives substantially all of its management fee
revenue from three dental groups with which it is related through common
ownership of certain shareholders.
F-89
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Company provides management support services to these three related dental
groups under management agreements with forty-year terms. The Company is
currently earning revenues based on specified percentages of net dental
practice patient revenues as defined in the agreements. Such percentages are
negotiated with the dental groups and have been developed and revised as
necessary based on the Company's services and operating needs. The management
agreements provide that management fee revenue is based upon the following
percentage of net dental group revenue:
<TABLE>
<CAPTION>
DANY TSE,
P.C. WASHINGTON OREGON
--------- ---------- ------
<S> <C> <C> <C>
1997.......................................... 53% 51% 53%
1998.......................................... 54% 52% 54%
1999.......................................... 55% 53% 55%
2000.......................................... 56% 54% 55%
2001, and thereafter.......................... 56% 55% 55%
</TABLE>
Office Lease
The Company leases office space for $4 per month from one of the related
dental groups (see note 1) on a month-to-month basis. Lease expense aggregated
approximately $50 for the years ended December 31, 1995 and 1996 and $37 for
the nine-months ended September 30, 1997.
Receivables from affiliates
Affiliate receivables consist primarily of amounts owed to the Company by
the unconsolidated dental groups to reimburse the Company for payment of the
unconsolidated dental groups' payroll and other direct costs, net of amounts
due to the unconsolidated dental groups related to the acquisitions and the
unconsolidated dental groups' share of revenues. The Company also transacts
various other business with the related dental groups, including short-term
operating advances.
(12) INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
1995
----------------------
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
U.S. Federal......................................... $ 147 65 212
State and local...................................... 16 6 22
----- ---- ----
$ 163 71 234
===== ==== ====
<CAPTION>
1996
----------------------
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
U.S. Federal......................................... $(175) (420) (595)
State and local...................................... (6) (54) (60)
----- ---- ----
$(181) (474) (655)
===== ==== ====
<CAPTION>
1997
----------------------
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
U.S. Federal......................................... $ 7 71 78
State and local...................................... 4 (2) 2
----- ---- ----
$ 11 69 80
===== ==== ====
</TABLE>
F-90
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Income tax benefit differed from the amount computed by applying the U.S.
Federal income tax rate to loss before income tax benefit as a result of the
following:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax (benefit)............................. $167 (804) (234)
Increase (reduction) in income taxes resulting from:
State income taxes, net of Federal income tax benefit....... 11 (90) (36)
Amortization of nondeductible goodwill and other
nondeductible items........................................ 31 163 39
Valuation allowance for deferred tax assets allocated to
income tax expense......................................... -- 75 265
Other....................................................... 25 1 46
---- ---- ----
$234 (655) 80
==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of the temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
1996 1997
------- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward.............................. $ 647 1,005
Accrued payroll/bonus related................................ -- 29
Allowance for doubtful accounts.............................. 618 857
Compensated absences, principally due to accrual for
financial reporting purposes................................ 114 143
Intangible assets, principally due to differences in
amortization and capitalized cost........................... -- 239
Other........................................................ 12 14
------- ------
Total gross deferred tax assets........................... 1,391 2,287
Less valuation allowance..................................... (75) (339)
------- ------
Deferred tax assets, net of valuation allowance........... 1,316 1,948
------- ------
Deferred tax liabilities:
Accounts receivable.......................................... (759) (1,535)
Plant and equipment, principally due to differences in
depreciation and capitalized cost........................... (444) (461)
Intangible assets, principally due to accrual for financial
reporting purposes.......................................... (11) (67)
Cash versus accrual reporting for tax purposes............... (68) (66)
Other........................................................ -- (2)
------- ------
Deferred tax liabilities.................................. (1,282) (2,131)
------- ------
Net deferred tax asset (liability)........................ $ 34 (183)
======= ======
</TABLE>
(13) MALPRACTICE INSURANCE
The dental groups' dentists are insured with respect to dentistry
malpractice risks on a claims-made basis. There are known claims and incidents
that may result in the assertion of additional claims, as well as claims from
unknown incidents that may be asserted arising from services provided to
patients. Management is not aware of any claims against the Company or its
affiliated groups which might have a material impact on the Company's
financial position or results of operations.
F-91
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(14) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has primarily entered into operating leases of commercial
property. Commercial properties under operating leases mostly include space
required to perform dental services and space for administrative facilities.
Lease expense for dental office space and administrative office space for the
years ended December 31, 1995 and 1996 and for the nine-months ended September
30, 1997 was $837, $1,432 and $2,402, respectively.
The future minimum lease payments under capital leases and noncancelable
operating leases with remaining terms of one or more years consist of the
following at September 30, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C>
1998................................................... $ 514 2,896
1999................................................... 320 2,736
2000................................................... 274 2,424
2001................................................... 92 2,073
2002................................................... 50 1,730
Thereafter............................................. -- 8,083
------ -------
Total minimum lease obligation....................... 1,250 $19,942
=======
Less portion attributable to interest.................. (211)
------
Obligations under capital leases..................... 1,039
Less current portion................................... (398)
------
$ 641
======
</TABLE>
Litigation
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
(15) SUBSEQUENT EVENTS
During October 1997, the Company acquired substantially all of the assets of
two dental practices, one located in Idaho Falls, ID, and the other with two
offices in Sacramento, CA and Daly City, CA for a combined purchase price of
approximately $3,600. The purchase price is payable in a combination of cash,
common stock and warrants to purchase common stock. Additional consideration
may be paid subject to earn-out agreements.
On October 31, 1997, the Company's $1,850 credit line expired. On January 7,
1998, the Company amended its $10 million credit facility (the "Credit
Facility") to provide for a maximum credit line of $25 million, which may be
increased at the option of the Company to $30 million following completion of
an equity offering by the Company in which the Company receives at least $20
million in net cash proceeds. The Company intends to use the Credit Facility
for working capital requirements, to purchase non-professional dental practice
assets of additional dental practices that the Company may seek to affiliate
with, and to purchase operating assets for existing Affiliated Dental
Practices. The Credit Facility provides that aggregate amount borrowed under
the Credit Facility for working capital purposes and letter of credit
obligations may not exceed $4 million, and that remaining amounts available
under the Credit Facility may be used by the Company for
F-92
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
permitted acquisitions and capital expenditures. The ability of the Company to
incur indebtedness under the Credit Facility is subject to delivery of
customary opinions, certificates and closing documents by the Company. The
revolving feature of the Credit Facility expires on September 30, 1999, at
which time it will convert into a three year term loan to be repaid in 12 equal
quarterly installments. Principal amounts owed under the Credit Facility bear
interest, at the Company's option and dependent upon the Company's leverage
ratio, of (i) up to 1.0% over prime or (ii) up to 3.25% above LIBOR. The Credit
Facility requires the Company to pay an unused commitment fee in the amount of
0.50% per annum or 0.375% per annum, depending on the Company's leverage ratio,
on the average daily amount by which the bank commitment under the Credit
Facility exceeds the aggregate amount of all loans then outstanding. The Credit
Facility contains several covenants including (i) restrictions on the ability
of the Company to incur indebtedness and repurchase, or make dividends with
respect to, its capital stock; and (ii) requirements relating to maintenance of
a specified net worth and specified ratios of current assets to current
liabilities, debt to cash flow and EBITDAR to fixed charges. In addition, the
Credit Facility requires the Company to notify the lenders prior to making any
acquisition and to obtain the consent of the lenders prior to making (i)
certain acquisitions with purchase prices exceeding $3 million, (ii) all
acquisitions with purchase prices exceeding $5 million and (iii) capital
expenditures exceeding $5 million in any fiscal year. The Credit Facility also
requires the Company to convert to a holding company that owns no assets other
than the stock of its operating subsidiaries on or before May 31, 1998. If the
Company does not attain holding company status on or before May 31, 1998, the
interest rate applicable to amounts borrowed under the Credit Facility would be
increased by 0.5% and if holding company status is not obtained on or before
July 31, 1998 an event of default would exist under the terms of the Credit
Facility. The Company's obligations under the Credit Facility are guaranteed by
each of the subsidiaries of the Company. The obligations of the Company under
the Credit Facility and the subsidiaries under the guarantees are secured by a
security interest in the equipment, fixtures, inventory, receivables,
subsidiary stock, certain debt instruments, accounts and general intangibles of
each of such entities.
During November 1997, the Company entered into an agreement to acquire a
dental practice management company with dental practices located in and around
Bakersfield, CA for a purchase price of approximately $22,750. The purchase
price is payable in a combination of $9.8 million cash and 1,519,103 shares of
common stock. Of the $22,750 purchase price, approximately $550 is estimated to
be paid subject to an earn-out agreement.
In December 1997, the Company and the Oregon and Washington professional
corporations signed letters of intent to amend the management agreements with
those professional corporations. In exchange for amended management agreements
which provide the Company with a controlling financial interest in the
operation of the practices, the Company will pay consideration of $1.8 million,
to be offset by its receivable from the professional corporations for $1.8
million, the right to receive an aggregate of either $575,000 cash in 18 equal
monthly installments or options to acquire 230,000 shares of common stock at an
exercise price of $8.38 per share, subject to five year vesting plus options to
acquire an aggregate of 10,000 shares of common stock at an exercise price of
$8.38 per share, subject to five year vesting and future cash or options
subject to five year vesting in amounts to be determined according to a formula
based upon the operating revenues of such Oregon and Washington professional
corporations for the fiscal years ending December 31, 1998 and 1999.
F-93
<PAGE>
[Inside back cover graphic setting forth the following information:]
[Description of content and format.]
<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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Recent and Pending Affiliations.......................................... 19
Use of Proceeds.......................................................... 21
Price Range of Common Stock.............................................. 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Selected Pro Forma Consolidated Financial Data........................... 23
Selected Historical Financial Data....................................... 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 31
Business................................................................. 39
Management............................................................... 50
Certain Transactions..................................................... 56
Principal and Selling Shareholders....................................... 58
Description of Capital Stock............................................. 60
Shares Eligible for Future Sale.......................................... 63
Underwriting............................................................. 64
Legal Matters............................................................ 65
Experts.................................................................. 65
Additional Information................................................... 66
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,600,000 SHARES
GENTLE DENTAL SERVICE CORPORATION
COMMON STOCK
-----------------
PROSPECTUS
-----------------
BEAR, STEARNS & CO. INC.
SALOMON SMITH BARNEY
WESSELS, ARNOLD & HENDERSON
BLACK & COMPANY, INC.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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.
(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.
II-1
<PAGE>
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 listing fees.
<TABLE>
<S> <C>
SEC Registration fee............................................... $ 10,952
NASD filing fee.................................................... 4,213
Blue Sky fees...................................................... *
Printing and engraving expenses.................................... *
Legal fees and expenses............................................ *
Auditors' fees and expenses........................................ *
Transfer Agent and Registrar fees.................................. *
NASDAQ listing fees................................................
Miscellaneous expenses............................................. *
--------
Total.......................................................... $ *
========
</TABLE>
- --------
* To be filed by amendment
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 was effected in October 1996.
1. Between January 1995 and January 1996 the Registrant issued an
aggregate total of 129,935 shares of its Common Stock to eight dentists in
connection with the affiliation 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
173,327 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.
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
Affiliated Dental Practices 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.
II-2
<PAGE>
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 ServiceMaster
Company Limited Partnership subsequently transferred the shares and warrant
to its subsidiary, ServiceMaster Venture Fund, L.L.C. 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.
8. On November 4, 1997, in connection with the GMS Merger, the Registrant
issued 4,548,163 shares of Common Stock in exchange for all outstanding
shares of the common stock of GMS. The issuance of the shares was 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.
ITEM 27. EXHIBITS
(a) Exhibits
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger of Gentle Dental Service Corporation and GMS
Dental Group, Inc. dated October 30, 1997, incorporated by reference to
the Registrant's Report on Form 8-K, Accession No. 97-000678.
3.1 Restated Articles of Incorporation, incorporated by reference to the
Registrant's Registration Statement on Form SB-2, Registration No. 33-
13529.
3.2 Bylaws, as amended, incorporated by reference to the Registrant's
Registration Statement on Form SB-2, Registration No. 33-13529.
4.1 Restated Articles of Incorporation (filed as Exhibit 3.1).
4.2 Bylaws, as amended (filed as Exhibit 3.2).
*5.1 Legal Opinion of McDermott, Will & Emery with respect to the validity of
the securities being registered.
10.1 Support Services Agreement dated as of January 1, 1996 between the
Registrant and Tse, Saiget, Watanabe & McClure, Inc., P.S., incorporated
by reference to the Registrant's Registration Statement on Form SB-2,
Registration No. 33-13529.
10.2 Support Services Agreement dated as of January 1, 1996 between the
Registrant and Gentle Dental of Oregon, P.C., incorporated by reference
to the Registrant's Registration Statement on Form SB-2, Registration
No. 33-13529.
10.3 Asset Purchase Agreement dated as of December 31, 1994 between the
Registrant and Tse, Saiget, Watanabe & McClure, Inc., P.S., incorporated
by reference to the Registrant's Registration Statement on Form SB-2,
Registration No. 33-13529.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.4 Asset Purchase Agreement dated as of December 31, 1994 between the
Registrant and Gentle Dental of Oregon, P.C., incorporated by reference
to the Registrant's Registration Statement on Form SB-2, Registration
No. 33-13529.
10.5 Asset Purchase Agreement dated as of January 2, 1995 between the
Registrant and Tse, Saiget, Watanabe & McClure, Inc., P.S.,
incorporated by reference to the Registrant's Registration Statement on
Form SB-2, Registration No. 33-13529.
10.6 Asset Purchase Agreement dated as of January 2, 1995 between the
Registrant and Gentle Dental of Oregon, P.C., incorporated by reference
to the Registrant's Registration Statement on Form SB-2, Registration
No. 33-13529.
10.7 1993 Stock Incentive Plan, incorporated by reference to the Registrant's
Registration Statement on Form SB-2, Registration No. 33-13529.
10.8 Stock Acquisition Agreement dated as of June 21, 1996 between the
Registrant and The ServiceMaster Company Limited Partnership,
incorporated by reference to the Registrant's Registration Statement on
Form SB-2, Registration No. 33-13529.
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, incorporated by reference to the
Registrant's Registration Statement on Form SB-2, Registration No. 33-
13529.
10.10 Employment Agreement dated November 3, 1997, by and between Dany Y. Tse,
DMD and the Registrant.
</TABLE>
<TABLE>
<C> <S>
10.11 Employment Agreement dated November 3, 1997, by and between Michael T.
Fiore and the Registrant.
10.12 Employment Agreement dated November 3, 1997, by and between L. Theodore
Van Eerden and the Registrant.
10.13 Employment Agreement dated August 31, 1996, by and between Grant M.
Sadler and GMS Dental Group, Inc.
10.14 Employment Agreement dated November 7, 1996, by and between Norman
Huffaker and GMS Dental Group, Inc.
10.15 Employment Agreement dated August 31, 1996, by and between Kenneth J.
Davis and GMS Dental Group, Inc..
10.16 1996 Stock Option Plan of GMS Dental Group, Inc.
10.17 1996 Performance Stock Option Plan of GMS Dental Group, Inc.
10.18 Incentive Stock Option Agreement dated April 1, 1997, by and between
Michael T. Fiore and GMS Dental Group, Inc.
10.19 Stock Option Agreement dated April 1, 1997, by and between Michael T.
Fiore and GMS Dental Group, Inc.
*10.20 Promissory Note dated April 1, 1997, executed by Michael T. Fiore in
favor of GMS Dental Group, Inc.
10.21 Security Agreement dated April 1, 1997, by and between Michael T. Fiore
and GMS Dental Group, Inc.
10.22 Acknowledgment and Clarification of Repurchase Rights Agreement dated
October 31, 1997, by and between Michael T. Fiore and GMS Dental
Group, Inc.
10.23 Founder Stock Purchase Agreement dated August 31, 1996, by and between
Grant M. Sadler and GMS Dental Group, Inc.
10.24 Promissory Note dated August 31, 1996, executed by Grant M. Sadler in
favor of GMS Dental Group, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.25 Security Agreement dated August 31, 1996, by and between Grant M.
Sadler and GMS Dental Group, Inc.
10.26 Common Stock Escrow Agreement dated October 11, 1996, by and among
Grant M. Sadler, Kenneth J. Davis and GMS Dental Group, Inc.
10.27 Acknowledgement and Clarification of Repurchase Rights Agreement, dated
October 31, 1997, by and among Grant M. Sadler, Kenneth J. Davis and
GMS Dental Group, Inc.
10.28 Founder Stock Purchase Agreement dated August 31, 1996, by and between
Kenneth J. Davis and GMS Dental Group, Inc.
10.29 Promissory Note dated August 31, 1996, executed by Kenneth J. Davis in
favor of GMS Dental Group, Inc.
10.30 Security Agreement dated August 31, 1996, by and between Kenneth J.
Davis and GMS Dental Group, Inc.
10.31 Incentive Stock Option Agreement dated December 4, 1996, by and between
Norman Huffaker and GMS Dental Group, Inc.
10.32 Stock Option Agreement dated December 4, 1996, by and between Norman
Huffaker and GMS Dental Group, Inc.
10.33 Acknowledgment and Clarification of Repurchase Rights Agreement dated
October 31, 1996, by and between Norman R. Huffaker and GMS Dental
Group, Inc.
+10.34 Dental Group Management Agreement dated October 11, 1996, by and
between Alan M. Slutsky, DMD, a Professional Corporation, and Slutsky
Dental Corporation.
+10.35 Dental Group Management Agreement dated October 11, 1996, by and
between GMS Dental Group Management of Hawaii, Inc. and Dental Care
Centers of Hawaii, Inc.
+10.36 Dental Group Management Agreement dated October 11, 1996, by and
between Henry J. Lerian, Trustee of the Henry J. Lerian and Jeanette
P. Lerian Irrevocable Marital Trust U/D/T 03/23/94, Henry J. Lerian,
Trustee of the Henry J. Lerian and Jeanette P. Lerian Revocable
Survivor's Trust U/D/T 03/23/04, Henry J. Lerian, DDS and Lerian
Dental Corporation.
+10.37 Dental Group Management Agreement dated June 30, 1997, by and between
Warren M. Francis, Jr. D.D.S., Inc. and Francis Dental Corporation.
+10.38 Dental Group Management Agreement dated June 30, 1997, by and between
Warren M. Francis, Jr. D.D.S., Inc. and Burrell Dental Corporation.
+10.39 Dental Group Management Agreement dated June 30, 1997, by and between
Warren M. Francis, Jr. D.D.S., Inc. and Ashrafi Dental Corporation.
+10.40 Dental Group Management Agreement dated October 11, 1996, by and
between GMS Dental Group Management of Hawaii, Inc. and Hualalai
Dental Services, Inc.
+10.41 Dental Group Management Agreement dated February 24, 1997, by and
between Naismith Dental Corporation and Yep Dental Corporation.
10.42 Dental Group Management Agreement dated October 11, 1996, by and
between GMS Dental Group Management, Inc. and Idaho Dental Group, P.A.
10.43 Dental Group Management Agreement dated July 24, 1997, by and between
GMS Dental Group Management, Inc. and Fremont Dental Group.
10.44 Dental Group Management Agreement dated July 24, 1997, by and between
GMS Dental Group Management, Inc. and Mark Armstrong, D.D.S. d/b/a
Concord Dental Care.
10.45 Dental Group Management Agreement dated October 31, 1997, by and
between GMS Dental Group Management, Inc. and Charles Murillo, D.D.S.
d/b/a Community Dental Group.
10.46 Dental Group Management Agreement dated July 24, 1997, by and between
GMS Dental Group Management, Inc. and Sam Samudio, D.D.S. d/b/a
Pleasanton Dental Care.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
10.47 Dental Group Management Agreement dated October 31, 1997, by and
between Premier Dental Care, Inc. and SJL, P.A.
+10.48 Dental Group Management Agreement dated February 24, 1997, by and
between Naismith Dental Corporation and Burns Dental Corporation.
10.49 Credit Agreement dated October 10, 1996, as amended, by and among GMS
Dental Group Management, Inc., GMS California Acquisition Company, GMS
Hawaii Acquisition Company and Imperial Bank.
+10.50 Support Services Agreement dated March 31, 1997, between the Registrant
and Arena Dental Corporation.
10.51 Promissory Note dated July 24, 1997, executed by GMS Dental Group
Management in favor of Fremont Dental Group.
10.52 Guaranty dated July 24, 1997, by GMS Dental Group, Inc. in favor of
Fremont Dental Group.
10.53 Merger Agreement, dated as of September 21, 1997, between the Company,
Gentle Dental Merger Corporation, a wholly-owned subsidiary of the
Company, Dedicated Dental Systems, Inc., a California corporation,
Arthur G. Kaiser, D.D.S. and Robert J. Newman, incorporated by
reference to the Registrant's Report on Form 10-QSB, Accession No. 97-
000656.
10.54 Asset Purchase Agreement, dated as of September 21, 1997, between the
Company, California Dental Practice Management Company, a California
general partnership, Arthur G. Kaiser, D.D.S., Robert J. Newman and
Mark Thomas, D.D.S., incorporated by reference to the Registrant's
Report on Form 10-QSB, Accession No. 97-000656.
10.55 Asset Purchase Agreement, dated as of September 21, 1997, between the
Company, California Dental Practice Management Company, a California
general partnership, Arthur G. Kaiser, D.D.S., Robert J. Newman and
Clarence Au, D.D.S., incorporated by reference to the Registrant's
Report on Form 10-QSB, Accession No. 97-000656.
10.56 Asset Purchase Agreement, dated as of September 21, 1997, between the
Company and Arthur G. Kaiser, D.D.S., incorporated by reference to the
Registrant's Report on Form 10-QSB, Accession No. 97-000656.
*10.57 Dental Group Management Agreement dated as of January 1, 1998 between
the Registrant and Tse, Saiget, Watanabe & McClure, Inc., P.S.
*10.58 Dental Group Management Agreement dated as of January 1, 1998, between
the Registrant and Gentle Dental of Oregon, P.C.
*10.59 Dental Group Management Agreement dated as of January 1, 1998 between
the Registrant and Dany Tse, P.C.
*23.1 Consent of McDermott, Will & Emery (included in Exhibit 5.1).
23.2 Independent Auditors' Consent of Price Waterhouse.
23.3 Independent Auditors' Consent of KPMG Peat Marwick LLP.
23.4 Independent Auditors' Consent of Ernst & Young LLP.
23.5 Independent Auditors' Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney (included on page II-8 of the Registrant's
Registration Statement on Form SB-2 filed January 9, 1998).
27.1 Financial Data Schedule.
99.1 Consent of Arthur G. Kaiser, DDS to being named as a director designee.
</TABLE>
- --------
*To be filed by Amendment.
+Confidential Treatment Requested.
II-6
<PAGE>
(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.
The Registrant will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of the securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
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-7
<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 AUTHORIZES THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE
CITY OF YORBA LINDA, STATE OF CALIFORNIA, ON JANUARY 8, 1998.
GENTLE DENTAL SERVICE CORPORATION
By: /s/ Michael T. Fiore
__________________________________
Michael T. Fiore
Co-Chairman, Chief Executive Officer
and President
POWER OF ATTORNEY
We, the undersigned officers and directors of Gentle Dental Service
Corporation, do hereby constitute and appoint Michael T. Fiore and Norman R.
Huffaker, and each of them, our true and unlawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments to this Registration Statement, and to file same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby, ratifying
and confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed be by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Michael T. Fiore Co-Chairman, Chief Executive January 8, 1998
____________________________________ Officer and President
Michael T. Fiore (Principal Executive
Officer)
/s/ Dany Y. Tse Co-Chairman and President of January 8, 1998
____________________________________ Clinical Services Council
Dany Y. Tse
/s/ Grant M. Sadler Vice Chairman of the Board January 8, 1998
____________________________________
Grant M. Sadler
/s/ L. Theodore Van Eerden Director, Executive Vice January 8, 1998
____________________________________ President and Chief
L. Theodore Van Eerden Development Officer
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Norman R. Huffaker Chief Financial Officer January 8, 1998
____________________________________ (Principal Financial and
Norman R. Huffaker Accounting Officer)
/s/ Steven R. Bull, DDS Director January 8, 1998
____________________________________
Steven R. Bull, DDS
/s/ Kenneth D. Hooten Director January 8, 1998
____________________________________
Kenneth D. Hooten
/s/ Robert Finzi Director January 8, 1998
____________________________________
Robert Finzi
/s/ Kathleen D. LaPorte Director January 8, 1998
____________________________________
Kathleen D. LaPorte
/s/ Craig W. Wong Director January 8, 1998
____________________________________
Craig W. Wong
/s/ Paul H. Keckley Director January 8, 1998
____________________________________
Paul H. Keckley
/s/ Gerald R. Aaron Director January 8, 1998
____________________________________
Gerald R. Aaron
/s/ H. Wayne Posey Director January 8, 1998
____________________________________
H. Wayne Posey
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
------- -------------------- ------------
<C> <S> <C>
*1.1 Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger of Gentle Dental Service
Corporation and GMS Dental Group, Inc. dated October
30, 1997, incorporated by reference to the
Registrant's Report on Form 8-K, Accession No. 97-
000678.
3.1 Restated Articles of Incorporation, incorporated by
reference to the Registrant's Registration Statement
on Form SB-2, Registration No. 33-13529.
3.2 Bylaws, as amended, incorporated by reference to the
Registrant's Registration Statement on Form SB-2,
Registration No. 33-13529.
4.1 Restated Articles of Incorporation (filed as Exhibit
3.1).
4.2 Bylaws, as amended (filed as Exhibit 3.2).
*5.1 Legal Opinion of McDermott, Will & Emery with respect
to the validity of the securities being registered.
10.1 Support Services Agreement dated as of January 1, 1996
between the Registrant and Tse, Saiget, Watanabe &
McClure, Inc., P.S., incorporated by reference to the
Registrant's Registration Statement on Form SB-2,
Registration No. 33-13529.
10.2 Support Services Agreement dated as of January 1, 1996
between the Registrant and Gentle Dental of Oregon,
P.C., incorporated by reference to the Registrant's
Registration Statement on Form SB-2, Registration No.
33-13529.
10.3 Asset Purchase Agreement dated as of December 31, 1994
between the Registrant and Tse, Saiget, Watanabe &
McClure, Inc., P.S., incorporated by reference to the
Registrant's Registration Statement on Form SB-2,
Registration No. 33-13529.
10.4 Asset Purchase Agreement dated as of December 31, 1994
between the Registrant and Gentle Dental of Oregon,
P.C., incorporated by reference to the Registrant's
Registration Statement on Form SB-2, Registration No.
33-13529.
10.5 Asset Purchase Agreement dated as of January 2, 1995
between the Registrant and Tse, Saiget, Watanabe &
McClure, Inc., P.S., incorporated by reference to the
Registrant's Registration Statement on Form SB-2,
Registration No. 33-13529.
10.6 Asset Purchase Agreement dated as of January 2, 1995
between the Registrant and Gentle Dental of Oregon,
P.C., incorporated by reference to the Registrant's
Registration Statement on Form SB-2, Registration No.
33-13529.
10.7 1993 Stock Incentive Plan, incorporated by reference to
the Registrant's Registration Statement on Form SB-2,
Registration No. 33-13529.
10.8 Stock Acquisition Agreement dated as of June 21, 1996
between the Registrant and The ServiceMaster Company
Limited Partnership, incorporated by reference to the
Registrant's Registration Statement on Form SB-2,
Registration No. 33-13529.
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, incorporated by reference to the
Registrant's Registration Statement on Form SB-2,
Registration No. 33-13529.
10.10 Employment Agreement dated November 3, 1997, by and
between Dany Y. Tse, DMD and the Registrant.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
------- -------------------- ------------
<C> <S> <C>
10.11 Employment Agreement dated November 3, 1997, by and
between Michael T. Fiore and the Registrant.
10.12 Employment Agreement dated November 3, 1997, by and
between L. Theodore Van Eerden and the Registrant.
10.13 Employment Agreement dated August 31, 1996, by and
between Grant M. Sadler and GMS Dental Group, Inc.
10.14 Employment Agreement dated November 7, 1996, by and
between Norman Huffaker and GMS Dental Group, Inc.
10.15 Employment Agreement dated August 31, 1996, by and
between Kenneth J. Davis and GMS Dental Group, Inc..
10.16 1996 Stock Option Plan of GMS Dental Group, Inc.
10.17 1996 Performance Stock Option Plan of GMS Dental Group,
Inc.
10.18 Incentive Stock Option Agreement dated April 1, 1997,
by and between Michael T. Fiore and GMS Dental Group,
Inc.
10.19 Stock Option Agreement dated April 1, 1997, by and
between Michael T. Fiore and GMS Dental Group, Inc.
*10.20 Promissory Note dated April 1, 1997, executed by
Michael T. Fiore in favor of GMS Dental Group, Inc.
10.21 Security Agreement dated April 1, 1997, by and between
Michael T. Fiore and GMS Dental Group, Inc.
10.22 Acknowledgment and Clarification of Repurchase Rights
Agreement dated October 31, 1997, by and between
Michael T. Fiore and GMS Dental Group, Inc.
10.23 Founder Stock Purchase Agreement dated August 31, 1996,
by and between Grant M. Sadler and GMS Dental Group,
Inc.
10.24 Promissory Note dated August 31, 1996, executed by
Grant M. Sadler in favor of GMS Dental Group, Inc.
10.25 Security Agreement dated August 31, 1996, by and
between Grant M. Sadler and GMS Dental Group, Inc.
10.26 Common Stock Escrow Agreement dated October 11, 1996,
by and among Grant M. Sadler, Kenneth J. Davis and GMS
Dental Group, Inc.
10.27 Acknowledgement and Clarification of Repurchase Rights
Agreement, dated October 31, 1997, by and among Grant
M. Sadler, Kenneth J. Davis and GMS Dental Group, Inc.
10.28 Founder Stock Purchase Agreement dated August 31, 1996,
by and between Kenneth J. Davis and GMS Dental Group,
Inc.
10.29 Promissory Note dated August 31, 1996, executed by
Kenneth J. Davis in favor of GMS Dental Group, Inc.
10.30 Security Agreement dated August 31, 1996, by and
between Kenneth J. Davis and GMS Dental Group, Inc.
10.31 Incentive Stock Option Agreement dated December 4,
1996, by and between Norman Huffaker and GMS Dental
Group, Inc.
10.32 Stock Option Agreement dated December 4, 1996, by and
between Norman Huffaker and GMS Dental Group, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
------- -------------------- ------------
<C> <S> <C>
10.33 Acknowledgment and Clarification of Repurchase Rights
Agreement dated October 31, 1996, by and between
Norman R. Huffaker and GMS Dental Group, Inc.
+10.34 Dental Group Management Agreement dated October 11,
1996, by and between Alan M. Slutsky, DMD, a
Professional Corporation, and Slutsky Dental
Corporation.
+10.35 Dental Group Management Agreement dated October 11,
1996, by and between GMS Dental Group Management of
Hawaii, Inc. and Dental Care Centers of Hawaii, Inc.
+10.36 Dental Group Management Agreement dated October 11,
1996, by and between Henry J. Lerian, Trustee of the
Henry J. Lerian and Jeanette P. Lerian Irrevocable
Marital Trust U/D/T 03/23/94, Henry J. Lerian, Trustee
of the Henry J. Lerian and Jeanette P. Lerian
Revocable Survivor's Trust U/D/T 03/23/04, Henry J.
Lerian, DDS and Lerian Dental Corporation.
+10.37 Dental Group Management Agreement dated June 30, 1997,
by and between Warren M. Francis, Jr. D.D.S., Inc. and
Francis Dental Corporation.
+10.38 Dental Group Management Agreement dated June 30, 1997,
by and between Warren M. Francis, Jr. D.D.S., Inc. and
Burrell Dental Corporation.
+10.39 Dental Group Management Agreement dated June 30, 1997,
by and between Warren M. Francis, Jr. D.D.S., Inc. and
Ashrafi Dental Corporation.
+10.40 Dental Group Management Agreement dated October 11,
1996, by and between GMS Dental Group Management of
Hawaii, Inc. and Hualalai Dental Services, Inc.
+10.41 Dental Group Management Agreement dated February 24,
1997, by and between Naismith Dental Corporation and
Yep Dental Corporation.
10.42 Dental Group Management Agreement dated October 11,
1996, by and between GMS Dental Group Management, Inc.
and Idaho Dental Group, P.A.
10.43 Dental Group Management Agreement dated July 24, 1997,
by and between GMS Dental Group Management, Inc. and
Fremont Dental Group.
10.44 Dental Group Management Agreement dated July 24, 1997,
by and between GMS Dental Group Management, Inc. and
Mark Armstrong, D.D.S. d/b/a Concord Dental Care.
10.45 Dental Group Management Agreement dated October 31,
1997, by and between GMS Dental Group Management, Inc.
and Charles Murillo, D.D.S. d/b/a Community Dental
Group.
10.46 Dental Group Management Agreement dated July 24, 1997,
by and between GMS Dental Group Management, Inc. and
Sam Samudio, D.D.S. d/b/a Pleasanton Dental Care.
10.47 Dental Group Management Agreement dated October 31,
1997, by and between Premier Dental Care, Inc. and
SJL, P.A.
+10.48 Dental Group Management Agreement dated February 24,
1997, by and between Naismith Dental Corporation and
Burns Dental Corporation.
10.49 Credit Agreement dated October 10, 1996, as amended, by
and among GMS Dental Group Management, Inc., GMS
California Acquisition Company, GMS Hawaii Acquisition
Company and Imperial Bank.
+10.50 Support Services Agreement dated March 31, 1997,
between the Registrant and Arena Dental Corporation.
10.51 Promissory Note dated July 24, 1997, executed by GMS
Dental Group Management in favor of Fremont Dental
Group.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
------- -------------------- ------------
<C> <S> <C>
10.52 Guaranty dated July 24, 1997, by GMS Dental Group, Inc.
in favor of Fremont Dental Group.
10.53 Merger Agreement, dated as of September 21, 1997,
between the Company, Gentle Dental Merger Corporation,
a wholly-owned subsidiary of the Company, Dedicated
Dental Systems, Inc., a California corporation, Arthur
G. Kaiser, D.D.S. and Robert J. Newman, incorporated
by reference to the Registrant's Report on Form 10-
QSB, Accession No. 97-000656.
10.54 Asset Purchase Agreement, dated as of September 21,
1997, between the Company, California Dental Practice
Management Company, a California general partnership,
Arthur G. Kaiser, D.D.S., Robert J. Newman and Mark
Thomas, D.D.S., incorporated by reference to the
Registrant's Report on Form 10-QSB, Accession No. 97-
000656.
10.55 Asset Purchase Agreement, dated as of September 21,
1997, between the Company, California Dental Practice
Management Company, a California general partnership,
Arthur G. Kaiser, D.D.S., Robert J. Newman and
Clarence Au, D.D.S., incorporated by reference to the
Registrant's Report on Form 10-QSB, Accession No. 97-
000656.
10.56 Asset Purchase Agreement, dated as of September 21,
1997, between the Company and Arthur G. Kaiser,
D.D.S., incorporated by reference to the Registrant's
Report on Form 10-QSB, Accession No. 97-000656.
*10.57 Dental Group Management Agreement dated as of January
1, 1998 between the Registrant and Tse, Saiget,
Watanabe & McClure, Inc., P.S.
*10.58 Dental Group Management Agreement dated as of January
1, 1998, between the Registrant and Gentle Dental of
Oregon, P.C.
*10.59 Dental Group Management Agreement dated as of January
1, 1998 between the Registrant and Dany Tse, P.C.
*23.1 Consent of McDermott, Will & Emery (included in Exhibit
5.1).
23.2 Independent Auditors' Consent of Price Waterhouse.
23.3 Independent Auditors' Consent of KPMG Peat Marwick LLP.
23.4 Independent Auditors' Consent of Ernst & Young LLP.
23.5 Independent Auditors' Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney (included on page II-8 of the
Registrant's Registration Statement on Form SB-2 filed
January 9, 1998).
27.1 Financial Data Schedule.
99.1 Consent of Arthur G. Kaiser, DDS to being named as a
director designee.
</TABLE>
- --------
*To be filed by Amendment.
+Confidential Treatment Requested.
<PAGE>
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made effective as of November 3,
1997 (the "Effective Date") by and between GENTLE DENTAL SERVICE CORPORATION, a
Washington corporation (the "Company"), and DANY Y. TSE, DMD ("Employee").
RECITALS
Pursuant to the Agreement and Plan of Merger dated October 30, 1997 (the
"Merger Agreement") between the Company and GMS Dental Group, Inc., a Delaware
corporation, the Company has agreed to employ Employee as its Co-Chairman,
Founder and President of Clinical Services Council. Employee wishes to accept
such position of employment with the Company.
AGREEMENT
In consideration of the promises, covenants, and representations below, the
parties agree as follows:
1. Compensation. From the Effective Date until December 31, 1997, the
------------
Company will pay Employee as compensation for Employee's services a base salary
("Base Salary") at an annual rate of $230,000. During 1998, the Company will
pay Employee a Base Salary no less than the greater of (i) 90% of the base
salary of the President and Chief Executive Officer of the Company or (ii)
$243,000, and with respect to bonus, stock options and all other items
considered as compensation for SEC disclosure purposes, the Company will provide
Employee 90% of the compensation paid to the President and Chief Executive
Officer. During the remaining term of employment, Base Salary and other
compensation shall be determined by the compensation committee of the Board of
Directors of the Company (the "Compensation Committee"). Employee's Base Salary
will be payable in accordance with the Company's standard payroll procedures.
2. Duties. Employee shall serve as Co-Chairman, Founder and President of
------
Clinical Services Council of the Company and shall perform such appropriate and
reasonable duties as may be delegated to Employee by the Board of Directors (the
"Board") or Chief Executive Officer of the Company. Employee shall be employed
on a full-time basis and shall devote all of Employee's working time, attention
and energies to the Company during the term of Employee's employment. Employee
shall be provided reasonable resources with which to perform his duties,
including but not limited to the support of a secretary and a national dental
officer. Notwithstanding the preceding, Employee will not be precluded from
engaging in appropriate professional, educational, civic, charitable or
religious activities or from devoting a reasonable amount of time to private
investments that do not interfere or conflict with
<PAGE>
Employee's responsibilities to the Company. Employee shall principally perform
Employee's duties hereunder at the executive offices of the Company located in
Vancouver, Washington.
3. Term of Employment. Employee's employment with the Company is for an
------------------
initial term (the "Initial Term") commencing on the date of this Agreement and
ending in approximately 4 1/2 years on April 30, 2002. During the Initial Term,
the Company may not terminate Employee's employment other than for "cause" (as
defined in Section 8(b) below). After the completion of the Initial Term,
Employee's employment with the Company will be "at-will" and, therefore, the
Company will thereafter be able to terminate Employee's employment at any time
for any reason, with or without cause.
4. Employee Benefits. During the term of Employee's employment, Employee
-----------------
will be eligible to participate in the employee benefit plans and executive
compensation programs (including any bonus plan(s) established by the
Compensation Committee) maintained from time to time for other senior executive
officers of the Company to the extent that other senior executive officers of
similar level and duties are eligible to participate in such programs and if
Employee qualifies for participation in any such programs. These benefits may
change from time to time.
5. Business Expenses. During the term of Employee's employment, the
-----------------
Company shall reimburse Employee for necessary and reasonable travel,
entertainment and other business expenses appropriately incurred by Employee in
connection with performing Employee's duties. The Company will reimburse
Employee for such expenses upon presentation of an itemized account and
appropriate supporting documentation, all in accordance with the Company's
generally applicable policies.
6. Proprietary Information Agreement. Employee will sign and abide by
---------------------------------
the terms of the Proprietary Information Agreement, the form of which is
attached as Exhibit A.
---------
7. Vacation and Holidays. Employee will be entitled to fully-paid
---------------------
vacation time and holidays consistent with the Company's policy as may be in
place from time to time.
8. Severance Compensation.
----------------------
(1) In the event that Employee's employment with the Company is terminated
by Employee for "good reason" (as defined below) during the initial three years
after the Effective Date hereof, and provided that Employee complies with the
provisions of Section 9 hereof, Employee will enter into a twelve-month
consulting agreement at Employee's Base Salary as of the date of the termination
of Employee's employment (the "Termination Date"). Following the termination of
such consulting agreement, Employee will receive severance payments from the
Company for 24 months at Employee's Base Salary as of the Termination Date,
payable in equal monthly installments. If Employee's employment is terminated
by Employee for "good reason" subsequent to the initial three years of
employment
2
<PAGE>
after the Effective Date hereof or if, after the expiration of the Initial Term,
Employee's employment is terminated by the Company for any reason other than
"cause" (as defined below), and provided in either case that Employee complies
with the provisions of Section 9 hereof, Employee will enter into a twelve-month
consulting agreement at Employee's Base Salary as of the Termination Date.
Following the termination of such consulting agreement, Employee will receive
severance payments from the Company for twelve months at Employee's Base Salary
as of the Termination Date, payable in equal monthly installments.
(2) For purposes of this Agreement, "cause" shall mean (i) Employee's
continuous and willful inattention to Employee's duties after at least one
written notice of same has been given to Employee and Employee has been given an
opportunity to cure the same within thirty days after such notice; (ii) any
breach by Employee of Section 9 of this Agreement; (iii) any act committed by
Employee with respect to the property or the business of the Company which
constitutes gross recklessness, willful or gross misconduct or fraud; or (iv)
criminal conduct which has caused material injury to the Company and which could
reasonably result in conviction of a felony which involves fraud, dishonesty or
moral turpitude, excluding from the definition of "cause," without limitation,
such events as are stated not to constitute "cause" in the following sentence.
Employee shall not be considered to have been terminated for "cause" if
terminated by the Company solely (a) as a result of Employee's bad judgment or
negligence, (b) because of any act or omission believed by Employee in good
faith to have been in or not opposed to the best interests of the Company
(without intent of gaining therefrom directly or indirectly a profit to which
Employee was not legally entitled) and reasonably believed by Employee not to
have been improper or unlawful, (c) because of an act or omission in respect of
which a determination could properly have been made by the Board that Employee
met the applicable standard of conduct prescribed for indemnification or
reimbursement under the bylaws or charter of the Company, or the laws of the
State of Washington, in each case in effect at the time of such acts or
omissions, or (d) because of any act or omission with respect to which notice of
termination is given more than twelve months after the earliest date on which a
non-employee director of the Company who is not a party to such act or omission
knew or should have known of such act or omission.
(3) For purposes of this Agreement, "good reason" shall mean termination of
Employee's employment by Employee within thirty days following (x) any
relocation of the Company's executive offices where Employee is employed on the
Effective Date to a new location which is in excess of 25 miles from its current
location, (y) a demotion in position from Co-Chairman and President of Clinical
Services Council of the Company, or (z) the assignment of duties and
responsibilities of materially lesser status, dignity and character, or a
substantial reduction in the nature or status of Employee's duties and
responsibilities.
(4) During any period in which Employee receives severance compensation
pursuant to subsection (a) of this Section 8 or, with respect to benefits other
than medical insurance, such shorter period following the Termination Date that
Employee is eligible to participate in Employer's employee benefit plans,
Employee shall further be entitled to
3
<PAGE>
medical, life insurance, disability insurance and any other similar benefits to
the same extent as theretofore provided by the Company to Employee prior to the
Termination Date.
9. Restrictive Covenants and Confidentiality.
-----------------------------------------
(1) Non-Solicitation. Employee agrees that during the term of Employee's
----------------
employment and for a period of one year following any termination thereof (for
any reason), Employee shall not (either directly or indirectly) solicit, entice,
encourage or induce any person who at any time within one year prior to
Employee's termination of employment shall have been an employee of the Company
or any of its subsidiaries, or who is a dentist who is employed by or performing
professional services for any dental practice managed by the Company or one of
its subsidiaries, to become employed by or associated with any person, firm or
corporation other than the Company, and Employee shall not approach any such
employee or dentist for such purpose or encourage the taking of such actions by
any other person, firm or corporation or assist any such person, firm or
corporation in taking such action.
(2) Non-Compete. Employee agrees that during the term of Employee's
-----------
employment and during any period in which Employee is receiving severance
compensation pursuant to Section 8 hereof, Employee shall not, directly or
indirectly, within a 50 mile radius of any location where the Company or any of
its subsidiaries owns, manages, develops, or operates any dental practice or
assets, engage or participate or make any financial investments in, or become
employed by, or act as an agent or principal of, or render advisory or other
services to or for, any person, firm or corporation that is engaged, directly or
indirectly, in any line of business then engaged in, or planned to be engaged
in, by the Company (a "Competing Enterprise"). A Competing Enterprise shall not
include any practice of dentistry with or consulting to a group of 10 or fewer
dentists located outside of a five mile radius of any location where the Company
or any of its subsidiaries owns, manages, develops or operates any dental
practice or assets. Similarly, nothing herein contained shall restrict Employee
from engaging in the solo practice of dentistry outside of a five mile radius of
any location where the Company or any of its subsidiaries owns, manages,
develops or operates any dental practice or assets. Nothing herein contained
shall restrict Employee from holding investments in not more than three percent
of the voting securities of any Competing Enterprise whose stock is listed on a
national securities exchange or is actively traded on the National Association
of Securities Dealers Automated Quotation System, so long as in connection with
such investments Employee does not render services to a Competing Enterprise.
10. Survival. The provisions of this Agreement shall survive the
--------
termination of Employee's employment with the Company, irrespective of the
reason therefor.
11. Remedies. Employee acknowledges that the services to be rendered by
--------
Employee are of a special, unique and extraordinary character and, in connection
with such
4
<PAGE>
services, Employee will have access to confidential information vital to the
Company's and its subsidiaries' businesses. By reason of this access, Employee
consents and agrees that if Employee violates any of the provisions of this
Agreement, the Company and its subsidiaries shall be entitled, without the need
to show actual damages, to an injunction and a temporary restraining order from
any court of competent jurisdiction restraining Employee from committing or
continuing any such violation of this Agreement. Employee acknowledges that
damages at law would not be an adequate remedy for violation of this Agreement,
and Employee therefore agrees that the provisions of this Agreement may be
specifically enforced against Employee in any court of competent jurisdiction.
The rights, powers and remedies of the Company under this Agreement are
cumulative and not exclusive of any other right, power or remedy which the
Company may have under any other agreement or by law.
12. Miscellaneous.
-------------
(1) Successors and Assigns. This Agreement shall be binding on and inure
----------------------
to the benefit of the parties hereto and their heirs, executors, legal
representatives, successors and assigns. Neither party shall have the right to
assign its obligations, or all or any portion of their rights or interests under
this Agreement without the prior written consent of the other party hereto, and
any attempt to do so will be null and void.
(2) Governing Law. This Agreement is made and entered into and is to be
-------------
governed by the internal laws of the State of California, applicable to
agreements made and to be performed entirely within such state without regard to
the conflicts of law principles of such State.
(3) Waiver. The failure of either party at any time to require performance
------
by the other party of any provision hereof shall not affect in any way the full
right to require such performance at any time thereafter, nor shall a waiver by
either party of a breach of any provision hereof be taken or held to be a
continuing waiver of such provision, or waiver of any other breach under any
other provision of this Agreement.
(4) Entire Agreement. This Agreement and the Proprietary Information
----------------
Agreement set forth the entire agreement and understanding between the parties
hereto with respect to the subject matter hereof and supersede all prior
contracts, agreements, arrangements, communications, discussions,
representations and warranties, whether oral or written, between the parties
with respect to such subject matter. This Agreement may be amended only by a
written instrument signed by both parties hereto making specific reference to
this Agreement and expressing the plan or intention to modify it.
(5) Severability. If any provision of this Agreement shall be adjudicated
------------
to be invalid, ineffective or unenforceable, the remaining provisions of this
Agreement shall not be affected thereby. The invalid, ineffective and
unenforceable provision shall, without further action by the parties, be
automatically amended to effect the original purpose and intent
5
<PAGE>
of the invalid, ineffective or unenforceable provision; provided, however, that
such amendment shall apply only with respect to the operation of such provision
in the particular jurisdiction with respect to which such adjudication is made.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
GENTLE DENTAL SERVICE CORPORATION
By: /s/ L.T. Van Eerden
------------------------------
Title: C.F.O.
---------------------------
/s/ Dany Y. Tse
---------------------------------
Dany Y. Tse, DMD
6
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made effective as of November 4,
1997 (the "Effective Date") by and between GENTLE DENTAL SERVICE CORPORATION, a
Washington corporation (the "Company"), and MICHAEL T. FIORE ("Employee").
RECITALS
Pursuant to the Agreement and Plan of Merger dated October 30, 1997 (the
"Merger Agreement") between the Company and GMS Dental Group, Inc., a Delaware
corporation, the Company has agreed to employ Employee as its Co-Chairman, Chief
Executive Officer and President. Employee wishes to accept such position of
employment with the Company.
AGREEMENT
In consideration of the promises, covenants, and representations below, the
parties agree as follows:
1. Base Compensation. The Company will pay Employee as compensation for
-----------------
Employee's services a base salary at the annual rate of $225,000 or at such
higher rate as the Company may determine from time to time ("Base Salary").
Employee's Base Salary will be payable in accordance with the Company's standard
payroll procedures.
2. Duties. Employee shall serve as Co-Chairman, Chief Executive Officer
------
and President of the Company and shall perform such customary, appropriate and
reasonable executive duties as are usually performed by persons in these
positions or as may be delegated to Employee by the Board of Directors (the
"Board") of the Company. Employee shall be employed on a full-time basis and
shall devote all of Employee's working time, attention and energies to the
Company during the term of Employee's employment. Notwithstanding the
preceding, Employee will not be precluded from engaging in appropriate
professional, educational, civic, charitable or religious activities or from
devoting a reasonable amount of time to private investments that do not
interfere or conflict with Employee's responsibilities to the Company. Employee
shall principally perform Employee's duties hereunder at the principal executive
offices of the Company in southern California.
3. Term of Employment. Employee's employment with the Company is for an
------------------
initial term commencing on the date of this Agreement and ending in
approximately 1 3/4 years on July 31, 1999. During the initial term, the
Company may not terminate Employee's employment other than for "cause" (as
defined in Section 8(b) below). After the completion of the initial term,
Employee's employment with the Company will be "at-will" and, therefore, the
Company will thereafter be able to terminate Employee's employment at any time
for any reason, with or without cause.
<PAGE>
4. Employee Benefits. During the term of Employee's employment, Employee
-----------------
will be eligible to participate in the employee benefit plans and executive
compensation programs (including any bonus plan(s) established by the
Compensation Committee) maintained from time to time for other senior executive
officers of the Company to the extent that other senior executive officers of
similar level and duties are eligible to participate in such programs and if
Employee qualifies for participation in any such programs. These benefits may
change from time to time.
5. Business Expenses; Automobile Allowance. During the term of
---------------------------------------
Employee's employment, the Company shall reimburse Employee for necessary and
reasonable travel, entertainment and other business expenses appropriately
incurred by Employee in connection with performing Employee's duties. The
Company will reimburse Employee for such expenses upon presentation of an
itemized account and appropriate supporting documentation, all in accordance
with the Company's generally applicable policies. During the term of Employee's
employment, Employee will be entitled to an automobile allowance of $1,000 per
month.
6. Proprietary Information Agreement. Employee will sign and abide by
---------------------------------
the terms of the Proprietary Information Agreement, the form of which is
attached as Exhibit A.
---------
7. Vacation and Holidays. Employee will be entitled to fully-paid
---------------------
vacation time and holidays consistent with the Company's policy as may be in
place from time to time.
8. Severance Compensation.
----------------------
(1) In the event Employee's employment is terminated by Employee for
"good reason" (as defined below) or in the event, on or after April 1, 2001,
Employee's employment is terminated by the Company for any reason other than
"cause" (as defined below), and provided in either case that Employee complies
with the provisions of Section 9 hereof, Employee will be entitled to continue
to receive from the Company Employee's Base Salary then in effect for a period
of 18 months following the effective date of such termination (the "Termination
Date"), payable in equal monthly installments. In the event, after the
expiration of the Initial Term and prior to April 1, 2001, Employee's employment
is terminated by the Company for any reason other than "cause" (as defined
below), and provided that Employee complies with the provisions of Section 9
hereof, Employee will enter into a consulting agreement at Employee's Base
Salary as of the Termination Date. The consulting agreement shall have a term
equal to one-half of the number of whole or partial one-month periods between
the Termination Date and April 1, 2001. Following the termination of such
consulting agreement, Employee will receive severance payments from the Company
at Employee's Base Salary as of the Termination Date for the balance of the 18
month period following the Termination Date, payable in equal monthly
installments.
2
<PAGE>
(2) For purposes of this Agreement, "cause" shall mean (i) Employee's
continuous and willful inattention to Employee's duties after at least one
written notice of same has been given to Employee and Employee has been given an
opportunity to cure the same within thirty days after such notice; (ii) any
breach by Employee of Section 9 of this Agreement; (iii) any act committed by
Employee with respect to the property or the business of the Company which
constitutes gross recklessness, willful or gross misconduct or fraud; or (iv)
criminal conduct which has caused material injury to the Company and which could
reasonably result in conviction of a felony which involves fraud, dishonesty or
moral turpitude, excluding from the definition of "cause," without limitation,
such events as are stated not to constitute "cause" in the following sentence.
Employee shall not be considered to have been terminated for "cause" if
terminated by the Company solely (a) as a result of Employee's bad judgment or
negligence, (b) because of any act or omission believed by Employee in good
faith to have been in or not opposed to the best interests of the Company
(without intent of gaining therefrom directly or indirectly a profit to which
Employee was not legally entitled) and reasonably believed by Employee not to
have been improper or unlawful, (c) because of an act or omission in respect of
which a determination could properly have been made by the Board that Employee
met the applicable standard of conduct prescribed for indemnification or
reimbursement under the bylaws or charter of the Company, or the laws of the
State of Washington, in each case in effect at the time of such acts or
omissions, or (d) because of any act or omission with respect to which notice of
termination is given more than twelve months after the earliest date on which a
non-employee director of the Company who is not a party to such act or omission
knew or should have known of such act or omission.
(3) For purposes of this Agreement, "good reason" shall mean
termination of Employee's employment by Employee within thirty days following
(x) any relocation of the Company's executive offices where Employee is employed
on the Effective Date to a new location which is in excess of 25 miles from its
current location, (y) a demotion in position from Co-Chairman, Chief Executive
Officer and President of the Company, or (z) the assignment of duties and
responsibilities of materially lesser status, dignity and character, or a
substantial reduction in the nature or status of Employee's duties and
responsibilities.
(4) During any period in which Employee receives severance
compensation pursuant to subsection (a) of this Section 8 or, with respect to
benefits other than medical insurance, such shorter period following the
Termination Date that Employee is eligible to participate in Employer's employee
benefit plans, Employee shall further be entitled to medical, life insurance,
disability insurance and any other similar benefits to the same extent as
theretofore provided by the Company to Employee prior to the Termination Date.
9. Restrictive Covenants and Confidentiality.
-----------------------------------------
(1) Non-Solicitation. Employee agrees that during the term of
----------------
Employee's employment and for a period of one year following any termination
thereof (for any reason), Employee shall not (either directly or indirectly)
solicit, entice, encourage or induce any
3
<PAGE>
person who at any time within one year prior to Employee's termination of
employment shall have been an employee of the Company or any of its
subsidiaries, or who is a dentist who is employed by or performing professional
services for any dental practice managed by the Company or one of its
subsidiaries, to become employed by or associated with any person, firm or
corporation other than the Company, and Employee shall not approach any such
employee or dentist for such purpose or encourage the taking of such actions by
any other person, firm or corporation or assist any such person, firm or
corporation in taking such action.
(2) Non-Compete. Employee agrees that during the term of Employee's
-----------
employment and during any period in which Employee is receiving severance
compensation pursuant to Section 8 hereof, Employee shall not, directly or
indirectly, within a 50 mile radius of any location where the Company or any of
its subsidiaries owns, manages, develops, or operates any dental practice or
assets, engage or participate or make any financial investments in, or become
employed by, or act as an agent or principal of, or render advisory or other
services to or for, any person, firm or corporation that is engaged, directly or
indirectly, in any line of business then engaged in, or planned to be engaged
in, by the Company (a "Competing Enterprise"). A Competing Enterprise shall not
include any practice of dentistry with or consulting to a group of 10 or fewer
dentists located outside of a five mile radius of any location where the Company
or any of its subsidiaries owns, manages, develops or operates any dental
practice or assets. Nothing herein contained shall restrict Employee from
holding investments in not more than three percent of the voting securities of
any Competing Enterprise whose stock is listed on a national securities exchange
or is actively traded on the National Association of Securities Dealers
Automated Quotation System, so long as in connection with such investments
Employee does not render services to a Competing Enterprise.
10. Survival. The provisions of this Agreement shall survive the
--------
termination of Employee's employment with the Company, irrespective of the
reason therefor.
11. Remedies. Employee acknowledges that the services to be rendered by
--------
Employee are of a special, unique and extraordinary character and, in connection
with such services, Employee will have access to confidential information vital
to the Company's and its subsidiaries' businesses. By reason of this access,
Employee consents and agrees that if Employee violates any of the provisions of
this Agreement, the Company and its subsidiaries shall be entitled, without the
need to show actual damages, to an injunction and a temporary restraining order
from any court of competent jurisdiction restraining Employee from committing or
continuing any such violation of this Agreement. Employee acknowledges that
damages at law would not be an adequate remedy for violation of this Agreement,
and Employee therefore agrees that the provisions of this Agreement may be
specifically enforced against Employee in any court of competent jurisdiction.
The rights, powers and remedies of the Company under this Agreement are
cumulative and not exclusive of any other right, power or remedy which the
Company may have under any other agreement or by law.
4
<PAGE>
12. Miscellaneous.
-------------
(1) Successors and Assigns. This Agreement shall be binding on and
----------------------
inure to the benefit of the parties hereto and their heirs, executors, legal
representatives, successors and assigns. Neither party shall have the right to
assign its obligations, or all or any portion of their rights or interests under
this Agreement without the prior written consent of the other party hereto, and
any attempt to do so will be null and void.
(2) Governing Law. This Agreement is made and entered into and is to
-------------
be governed by the internal laws of the State of California, applicable to
agreements made and to be performed entirely within such state without regard to
the conflicts of law principles of such State.
(3) Waiver. The failure of either party at any time to require
------
performance by the other party of any provision hereof shall not affect in any
way the full right to require such performance at any time thereafter, nor shall
a waiver by either party of a breach of any provision hereof be taken or held to
be a continuing waiver of such provision, or waiver of any other breach under
any other provision of this Agreement.
(4) Entire Agreement. This Agreement and the Proprietary Information
----------------
Agreement set forth the entire agreement and understanding between the parties
hereto with respect to the subject matter hereof and supersede all prior
contracts, agreements, arrangements, communications, discussions,
representations and warranties, whether oral or written, between the parties
with respect to such subject matter. This Agreement may be amended only by a
written instrument signed by both parties hereto making specific reference to
this Agreement and expressing the plan or intention to modify it.
(5) Severability. If any provision of this Agreement shall be
------------
adjudicated to be invalid, ineffective or unenforceable, the remaining
provisions of this Agreement shall not be affected thereby. The invalid,
ineffective and unenforceable provision shall, without further action by the
parties, be automatically amended to effect the original purpose and intent of
the invalid, ineffective or unenforceable provision; provided, however, that
such amendment shall apply only with respect to the operation of such provision
in the particular jurisdiction with respect to which such adjudication is made.
(6) Prior Agreement Superseded. This Agreement supersedes and
--------------------------
replaces in its entirety the Employment Agreement dated February 26, 1997
between Employee and GMS Dental Group, Inc.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
GENTLE DENTAL SERVICE CORPORATION
By: /s/ L. T. Van Eerden
---------------------------
Title: C.F.O.
------------------------
/s/ Michael T. Fiore
-------------------------------
Michael T. Fiore
6
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made effective as of November 3,
1997 (the "Effective Date") by and between GENTLE DENTAL SERVICE CORPORATION, a
Washington corporation (the "Company"), and L. THEODORE VAN EERDEN ("Employee").
RECITALS
Pursuant to the Agreement and Plan of Merger dated October 30, 1997 (the
"Merger Agreement") between the Company and GMS Dental Group, Inc., a Delaware
corporation, the Company has agreed to employ Employee as its Executive Vice
President and Chief Development Officer. Employee wishes to accept such
position of employment with the Company.
AGREEMENT
In consideration of the promises, covenants, and representations below, the
parties agree as follows:
29. Base Compensation. The Company will pay Employee as compensation for
-----------------
Employee's services a base salary at the annual rate of $140,000 or at such
higher rate as the Company may determine from time to time ("Base Salary").
Employee's Base Salary will be payable in accordance with the Company's standard
payroll procedures.
30. Duties. Employee shall serve as Executive Vice President and Chief
------
Development Officer of the Company and shall perform such customary, appropriate
and reasonable duties as are usually performed by persons in these positions or
as may be delegated to Employee by the Board of Directors (the "Board") or Chief
Executive Officer of the Company. Employee shall be employed on a full-time
basis and shall devote all of Employee's working time, attention and energies to
the Company during the term of Employee's employment. Notwithstanding the
preceding, Employee will not be precluded from engaging in appropriate
professional, educational, civic, charitable or religious activities or from
devoting a reasonable amount of time to private investments that do not
interfere or conflict with Employee's responsibilities to the Company. Employee
shall principally perform Employee's duties hereunder at the executive offices
of the Company in Vancouver, Washington.
31. Term of Employment. Employee's employment with the Company is for an
------------------
initial term (the "Initial Term") commencing on the date of this Agreement and
ending in approximately 4 1/2 years on April 30, 2002. During the Initial Term,
the Company may not terminate Employee's employment other than for "cause" (as
defined in Section 8(b) below).
<PAGE>
After the completion of the Initial Term, Employee's employment with the Company
will be "at-will" and, therefore, the Company will thereafter be able to
terminate Employee's employment at any time for any reason, with or without
cause.
32. Employee Benefits. During the term of Employee's employment, Employee
-----------------
will be eligible to participate in the employee benefit plans and executive
compensation programs (including any bonus plan(s) established by the
Compensation Committee) maintained from time to time for other senior executive
officers of the Company to the extent that other senior executive officers of
similar level and duties are eligible to participate in such programs and if
Employee qualifies for participation in any such programs. These benefits may
change from time to time.
33. Business Expenses. During the term of Employee's employment, the
-----------------
Company shall reimburse Employee for necessary and reasonable travel,
entertainment and other business expenses appropriately incurred by Employee in
connection with performing Employee's duties. The Company will reimburse
Employee for such expenses upon presentation of an itemized account and
appropriate supporting documentation, all in accordance with the Company's
generally applicable policies.
34. Proprietary Information Agreement. Employee will sign and abide by
---------------------------------
the terms of the Proprietary Information Agreement, the form of which is
attached as Exhibit A.
---------
35. Vacation and Holidays. Employee will be entitled to fully-paid
---------------------
vacation time and holidays consistent with the Company's policy as may be in
place from time to time.
36. Severance Compensation.
----------------------
(1) In the event Employee's employment is terminated by Employee for
"good reason" (as defined below) or in the event, after the expiration of the
Initial Term, Employee's employment is terminated by the Company for any reason
other than "cause" (as defined below), and provided in either case that Employee
complies with the provisions of Section 9 hereof, Employee will be entitled to
continue to receive from the Company Employee's Base Salary then in effect for a
period of 12 months following the effective date of such termination (the
"Termination Date"), payable in equal monthly installments.
(2) For purposes of this Agreement, "cause" shall mean (i) Employee's
continuous and willful inattention to Employee's duties after at least one
written notice of same has been given to Employee and Employee has been given an
opportunity to cure the same within thirty days after such notice; (ii) any
breach by Employee of Section 9 of this Agreement; (iii) any act committed by
Employee with respect to the property or the business of the Company which
constitutes gross recklessness, willful or gross misconduct or fraud; or (iv)
criminal conduct which has caused material injury to the Company and which could
reasonably result in conviction of a felony which involves fraud, dishonesty or
moral
2
<PAGE>
turpitude, excluding from the definition of "cause," without limitation, such
events as are stated not to constitute "cause" in the following sentence.
Employee shall not be considered to have been terminated for "cause" if
terminated by the Company solely (a) as a result of Employee's bad judgment or
negligence, (b) because of any act or omission believed by Employee in good
faith to have been in or not opposed to the best interests of the Company
(without intent of gaining therefrom directly or indirectly a profit to which
Employee was not legally entitled) and reasonably believed by Employee not to
have been improper or unlawful, (c) because of an act or omission in respect of
which a determination could properly have been made by the Board that Employee
met the applicable standard of conduct prescribed for indemnification or
reimbursement under the bylaws or charter of the Company, or the laws of the
State of Washington, in each case in effect at the time of such acts or
omissions, or (d) because of any act or omission with respect to which notice of
termination is given more than twelve months after the earliest date on which a
non-employee director of the Company who is not a party to such act or omission
knew or should have known of such act or omission.
(3) For purposes of this Agreement, "good reason" shall mean
termination of Employee's employment by Employee within thirty days following
(x) any relocation of the Company's executive offices where Employee is employed
on the Effective Date to a new location which is in excess of 25 miles from its
current location, (y) a demotion in position from Executive Vice President and
Chief Development Officer of the Company, or (z) the assignment of duties and
responsibilities of materially lesser status, dignity and character, or a
substantial reduction in the nature or status of Employee's duties and
responsibilities.
(4) During any period in which Employee receives severance
compensation pursuant to subsection (a) of this Section 8 or, with respect to
benefits other than medical insurance, such shorter period following the
Termination Date that Employee is eligible to participate in Employer's employee
benefit plans, Employee shall further be entitled to medical, life insurance,
disability insurance and any other similar benefits to the same extent as
theretofore provided by the Company to Employee prior to the Termination Date.
37. Restrictive Covenants and Confidentiality.
-----------------------------------------
(1) Non-Solicitation. Employee agrees that during the term of
----------------
Employee's employment and for a period of one year following any termination
thereof (for any reason), Employee shall not (either directly or indirectly)
solicit, entice, encourage or induce any person who at any time within one year
prior to Employee's termination of employment shall have been an employee of the
Company or any of its subsidiaries, or who is a dentist who is employed by or
performing professional services for any dental practice managed by the Company
or one of its subsidiaries, to become employed by or associated with any person,
firm or corporation other than the Company, and Employee shall not approach any
such employee or dentist for such purpose or encourage the taking of such
actions by any other person, firm or corporation or assist any such person, firm
or corporation in taking such action.
3
<PAGE>
(2) Non-Compete. Employee agrees that during the term of Employee's
-----------
employment and during any period in which Employee is receiving severance
compensation pursuant to Section 8 hereof, Employee shall not, directly or
indirectly, within a 50 mile radius of any location where the Company or any of
its subsidiaries owns, manages, develops, or operates any dental practice or
assets, engage or participate or make any financial investments in, or become
employed by, or act as an agent or principal of, or render advisory or other
services to or for, any person, firm or corporation that is engaged, directly or
indirectly, in any line of business then engaged in, or planned to be engaged
in, by the Company (a "Competing Enterprise"). A Competing Enterprise shall not
include any practice of dentistry with or consulting to a group of 10 or fewer
dentists located outside of a five mile radius of any location where the Company
or any of its subsidiaries owns, manages, develops or operates any dental
practice or assets. Nothing herein contained shall restrict Employee from
holding investments in not more than three percent of the voting securities of
any Competing Enterprise whose stock is listed on a national securities exchange
or is actively traded on the National Association of Securities Dealers
Automated Quotation System, so long as in connection with such investments
Employee does not render services to a Competing Enterprise.
38. Survival. The provisions of this Agreement shall survive the
--------
termination of Employee's employment with the Company, irrespective of the
reason therefor.
39. Remedies. Employee acknowledges that the services to be rendered by
--------
Employee are of a special, unique and extraordinary character and, in connection
with such services, Employee will have access to confidential information vital
to the Company's and its subsidiaries' businesses. By reason of this access,
Employee consents and agrees that if Employee violates any of the provisions of
this Agreement, the Company and its subsidiaries shall be entitled, without the
need to show actual damages, to an injunction and a temporary restraining order
from any court of competent jurisdiction restraining Employee from committing or
continuing any such violation of this Agreement. Employee acknowledges that
damages at law would not be an adequate remedy for violation of this Agreement,
and Employee therefore agrees that the provisions of this Agreement may be
specifically enforced against Employee in any court of competent jurisdiction.
The rights, powers and remedies of the Company under this Agreement are
cumulative and not exclusive of any other right, power or remedy which the
Company may have under any other agreement or by law.
40. Miscellaneous.
-------------
(1) Successors and Assigns. This Agreement shall be binding on and
----------------------
inure to the benefit of the parties hereto and their heirs, executors, legal
representatives, successors and assigns. Neither party shall have the right to
assign its obligations, or all or any portion of their rights or interests under
this Agreement without the prior written consent of the other party hereto, and
any attempt to do so will be null and void.
4
<PAGE>
(2) Governing Law. This Agreement is made and entered into and is to
-------------
be governed by the internal laws of the State of California, applicable to
agreements made and to be performed entirely within such state without regard to
the conflicts of law principles of such State.
(3) Waiver. The failure of either party at any time to require
------
performance by the other party of any provision hereof shall not affect in any
way the full right to require such performance at any time thereafter, nor shall
a waiver by either party of a breach of any provision hereof be taken or held to
be a continuing waiver of such provision, or waiver of any other breach under
any other provision of this Agreement.
(4) Entire Agreement. This Agreement and the Proprietary Information
----------------
Agreement set forth the entire agreement and understanding between the parties
hereto with respect to the subject matter hereof and supersede all prior
contracts, agreements, arrangements, communications, discussions,
representations and warranties, whether oral or written, between the parties
with respect to such subject matter. This Agreement may be amended only by a
written instrument signed by both parties hereto making specific reference to
this Agreement and expressing the plan or intention to modify it.
(5) Severability. If any provision of this Agreement shall be
adjudicated to be invalid, ineffective or unenforceable, the remaining
provisions of this Agreement shall not be affected thereby. The invalid,
ineffective and unenforceable provision shall, without further action by the
parties, be automatically amended to effect the original purpose and intent of
the invalid, ineffective or unenforceable provision; provided, however, that
such amendment shall apply only with respect to the operation of such provision
in the particular jurisdiction with respect to which such adjudication is made.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
GENTLE DENTAL SERVICE CORPORATION
By: /s/ Dany Y. Tse
------------------------------
Title: C.E.O.
---------------------------
/s/ L. Theodore Van Eerden
---------------------------------
L. Theodore Van Eerden
5
<PAGE>
EXHIBIT 10.13
GMS DENTAL GROUP, INC.
180 North Riverview Drive, Suite 255
Anaheim Hills, CA 92808
Dear Mr. Sadler:
This letter sets forth the basic terms and conditions of your offer of
employment with GMS Dental Group, Inc. ("Company") effective as of September
___, 1996.
1. Base Compensation. During the term of your employment, the Company
-----------------
will pay you as compensation for your services a base salary at the annual rate
of $175,000 or at such higher rate as the Company may determine from time to
time ("Base Salary"). Your Base Salary will be payable in accordance with the
Company's standard payroll procedures.
2. Duties. You shall perform such executive duties as may be delegated
------
to you by the Board of Directors (the "Board") of the Company. You shall be
employed on a full-time basis and shall devote all of your working time,
attention and energies to the Company during the term of your employment.
Notwithstanding the preceding, you will not be precluded from engaging in
appropriate professional, educational, civic, charitable or religious activities
(e.g., The Hearing Aid Centers, Sadler Brothers Development and the board of
directors of Northwestern University Oral Health Centers) or from devoting a
reasonable amount of time to private investments that do not interfere or
conflict with your responsibilities to the Company. You shall principally
perform your duties hereunder at the principal executive offices of the Company
in Anaheim Hills, California or such other location within the county of Orange,
California as may be designated in a notice by the Company to you.
3. Term of Employment. Your employment with the Company is "at-will." In
------------------
other words, either you or the Company can terminate your employment at any time
for any reason, with or without cause.
4. Employee Benefits. During the term of your employment you will be
-----------------
eligible for the employee benefit plans and executive compensation programs
maintained from time to time for other senior executive employees of the Company
to the extent that senior executive employees are eligible to participate in
such programs and if you qualify for participation in any such program. These
benefits may change from time to time.
5. Additional Benefits. You will be provided with the following
-------------------
additional benefits:
(a) Incentive Bonus. Prior to each fiscal year-end of the Company
---------------
during the term of your employment with the Company, the Board shall consult
with you to develop annual financial performance objectives for the Company for
the next subsequent fiscal year of the Company. Commencing with the Company's
1997 fiscal year and for each fiscal year of the Company thereafter during your
employment with the Company, the Company shall pay you, in addition to your Base
Salary, an annual bonus (the "Bonus") determined as provided below. The Bonus
shall be paid within sixty (60) days after the end of each fiscal year during
the term of your employment with the Company.
1.
<PAGE>
Bonus Performance Goal
----- ----------------
40% of Base Salary Company exceeds financial performance
objectives by 10%
30% of Base Salary; with a linear Company achieves 100% of financial
reduction to 0% as the percentage performance objectives
of financial performance objectives
achieved decreases from 100% to 75%
0% of Base Salary Company achieves less than 75% of
financial performance objectives
6. Business Expenses. During the term of your employment, the Company
-----------------
shall reimburse you for necessary and reasonable travel, entertainment and other
business expenses appropriately incurred by you in connection with performing
your duties. The Company will reimburse you for such expenses upon presentation
of an itemized account and appropriate supporting documentation, all in
accordance with the Company's generally applicable policies.
7. Proprietary Information Agreement. You will be required to sign and
---------------------------------
abide by the terms of the accompanying proprietary information agreement.
8. Vacation and Holidays. You shall be entitled to fully-paid vacation
---------------------
time and holidays consistent with Company policy as may be in place from time to
time.
9. Severance Compensation.
----------------------
(a) In the event that your employment with the Company is terminated
by the Company for any reasons other than "cause" (as defined below) and
provided that you comply with the provisions of Section 10 hereof, you shall be
entitled to continue to receive from the Company your Base Salary then in effect
for a period of nine (9) complete months following the effective date of such
termination. For purposes of this letter agreement, "cause" shall mean
termination of your employment due to (i) your continuous inattention to your
duties after at least one (1) written notice of same has been given to you and
you have been given an opportunity to cure the same within thirty (30) days
after such notice, (ii) any breach by you of Section 10 of this letter agreement
or (iii) any act committed by you which constitutes gross recklessness, willful
or gross misconduct, fraud or criminal conduct.
(b) During any period in which you receive severance compensation
pursuant to subsection (a) of this Section 9, you shall further be entitled to
medical, life insurance, disability insurance and any other similar benefits to
the same extent as theretofore provided by the Company to you prior to the
effective date of termination of your employment.
10. Restrictive Covenants and Confidentiality.
-----------------------------------------
(a) Non-Solicitation. You agree that during the term of your
----------------
employment and for a period of one (1) year following any termination thereof
(for any reason), you shall not (either directly or indirectly) solicit, entice,
encourage or induce any person who at any time within one (1) year prior to your
termination of employment shall have been an employee of the Company or any of
its subsidiaries, or who is a dentist who is employed by or performing
professional services for any dental practice managed by the Company or one of
its subsidiaries, to become employed by or associated with any person, firm or
corporation other than the Company, and you shall not approach any such employee
or
2.
<PAGE>
dentist for such purpose or encourage the taking of such actions by any other
person, firm or corporation or assist any such person, firm or corporation in
taking such action.
(b) Non-Compete. You agree that during the term of your employment
-----------
and during any period in which you are receiving severance compensation pursuant
to Section 9 hereof, you shall not, directly or indirectly, within a 50 mile
radius of any location where the Company or any of its subsidiaries owns,
manages, develops, or operates any dental practice or its assets during your
employment, engage or participate or make any financial investments in, or
become employed by, or act as an agent or principal of, or render advisory or
other services to or for, any person, firm or corporation that is engaged,
directly or indirectly, in any line of business then engaged in, or planned to
be engaged in, by the Company (a "Competing Enterprise"). Nothing herein
contained, however, shall restrict you from holding investments in not more than
three percent (3%) of the voting securities of any Competing Enterprise whose
stock is listed on national securities exchange or is actively traded on the
National Association of Securities Dealers Automated Quotation System, so long
as in connection with such investments you do not render services to a Competing
Enterprise.
11. Survival. The provisions of this letter agreement shall survive the
--------
termination of your employment with the Company, irrespective of the reason
therefor.
12. Remedies. You acknowledge that the services to be rendered by you are
` --------
of a special, unique and extraordinary character and, in connection with such
services, you will have access to confidential information vital to the
Company's and its subsidiaries' businesses. By reason of this access, you
consent and agree that if you violate any of the provisions of this letter
agreement, the Company and its subsidiaries shall be entitled, without the need
to show actual damages, to an injunction and a temporary restraining order from
any court of competent jurisdiction restraining you from committing or
continuing any such violation of this letter agreement. You acknowledge that
damages at law would not be an adequate remedy for violation of this letter
agreement, and you therefore agree that the provisions of this letter agreement
may be specifically enforced against you in any court of competent jurisdiction.
The rights, powers and remedies of the Company under this letter agreement are
cumulative and not exclusive of any other right, power or remedy which the
Company may have under any other agreement or by law.
13. Miscellaneous.
-------------
(a) Successors and Assigns. This letter agreement shall be binding
----------------------
on and inure to the benefit of the parties hereto and their heirs, executors,
legal representatives, successors and assigns. Neither party shall have the
right to assign its obligations, or all or any portion of their rights or
interests under this letter agreement without the prior written consent of the
other party hereto, and any attempt to do so will be null and void.
(b) Governing Law. This letter agreement is made and entered into
-------------
and is to be governed by the laws of the internal laws of the State of
California applicable to agreements made and to be performed entirely within
such State, without regard to the conflicts of law principles of such State.
(c) Waiver. The failure of either party at any time to require
------
performance by the other party of any provision hereof shall not affect in any
way the full right to require such performance at any time thereafter, nor shall
a waiver by either party of a breach of any provision hereof be taken or held to
be a continuing waiver of such provision, or waiver of any other breach under
any other provision of this letter agreement.
3.
<PAGE>
(d) Entire Agreement. This letter agreement, together with the
----------------
agreements attached hereto or thereto, and any documents executed in connection
herewith or therewith, set forth the entire agreement and understanding between
the parties hereto with respect to the subject matter hereof and supersede all
prior contracts, agreements, arrangements, communications, discussions,
representations and warranties, whether oral or written, between the parties
with respect to such subject matter. This letter agreement may be amended only
by a written instrument signed by both parties hereto making specific reference
to this letter agreement and expressing the plan or intention to modify it.
(e) Severability. If any provision of this letter agreement shall be
------------
adjudicated to be invalid, ineffective or unenforceable, the remaining
provisions of this letter agreement shall not be affected thereby. The invalid,
ineffective and unenforceable provision shall, without further action by the
parties, be automatically amended to effect the original purpose and intent of
the invalid, ineffective or unenforceable provision; provided, however, that
such amendment shall apply only with respect to the operation of such provision
in the particular jurisdiction with respect to which such adjudication is made.
In order to acknowledge your acceptance of these terms, please sign one
copy of this letter and return it to me.
Very truly yours,
GMS DENTAL GROUP
By /s/ Kenneth Davis
--------------------------------
Title CHIEF OPERATING OFFICER
----------------------------
- --------------------------------------------------------------------------------
I acknowledge the foregoing accurately sets forth the terms of my employment.
/s/ Grant Sadler
- ------------------------------ October ____, 1996
Grant Sadler
4.
<PAGE>
EMPLOYEE'S PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
-----------------------------------------------------------
GMS Dental Group, Inc.
180 N. Riverview Drive, Suite 255
Anaheim Hills, CA 92808
Gentlemen:
I recognize that GMS Dental Group, Inc., a Delaware corporation (the
"Company"), is engaged in a continuous program of research, development and
production with respect to its business, present and future.
I understand that:
A. As part of my employment by the Company I am expected to make new
contributions and inventions of value to the Company.
B. I understand that my employment creates a relationship of confidence
and trust between me and the Company with respect to any information:
(1) applicable to the business of the Company; or
(2) applicable to the business of any client or customer of the
Company,
which may be made known to me by the Company or by any client or customer of the
Company, or learned by me during the period of my employment.
C. The Company possesses and will continue to possess information that
has been created, discovered or developed, or has otherwise become known to the
Company (including without limitation information created, discovered, developed
or made known by or to me during the period of or arising out of my employment
by the Company), and/or in which property rights have been assigned or otherwise
conveyed to the Company, which information has commercial value in the business
in which the Company is engaged. All of the aforementioned information is
hereinafter called "Confidential Information." By way of illustration, but not
limitation, Confidential Information includes all data, compilations,
specifications, strategies, projections, processes, techniques, formulae, models
and patent disclosures; and all tangible and intangible embodiments thereof of
any kind whatsoever including, where appropriate and without limitation, all
compositions, machinery, apparatus, records, reports, drawings, patent
applications and documents.
In consideration of my employment or continued employment, as the case may
be, and the compensation received by me from the Company from time to time,
subject to Section 12 hereof, I hereby agree as follows:
<PAGE>
1. All Confidential Information shall be the sole property of the Company
and its assigns, and the Company and its assigns shall be the sole owner of all
patents and other rights in connection therewith. I hereby assign to the Company
any rights I may have or acquire in all Confidential Information. At all times
during my employment by the Company and at all times after termination of such
employment, I will keep in confidence and trust all Confidential Information,
and I will not disclose, sell, use, lecture upon or publish any Confidential
Information or anything relating to it without the written consent of the
Company, except as may be necessary in the ordinary course of performing my
duties as an employee of the Company.
2. I agree that during the period of my employment by the Company, I will
not, without the Company's express written consent, engage in any employment or
activity in any business competitive with the Company.
3. All documents, data, records, apparatus, equipment, chemicals,
molecules, organisms and other physical property, whether or not pertaining to
Confidential Information, furnished to me by the Company or produced by myself
or others in connection with my employment shall be and remain the sole property
of the Company and shall be returned promptly to the Company as and when
requested by the Company. Should the Company not so request, I shall return and
deliver all such property upon termination of my employment by me or by the
Company for any reason and I will not take with me any such property or any
reproduction of such property upon such termination.
4. [INTENTIONALLY OMITTED]
5. I will promptly disclose to the Company, or any persons designated by
it, all improvements, inventions, formulae, processes, techniques, know-how and
data, whether or not patentable, made or conceived or reduced to practice or
learned by me, either alone or jointly with others, during the period of my
employment which are related to or useful in the business of the Company, or
result from tasks assigned me by the Company, or result from use of premises
owned, leased or contracted for the Company (all said improvements, inventions,
formulae, processes, techniques, know-how and data shall be collectively
hereinafter called ("Inventions")); such disclosure shall continue for one year
after termination of the Agreement with respect to anything that would be an
Invention if made, conceived, reduced to practice or learned during the term
hereof.
6. I agree that all Inventions shall be the sole property of the Company
and its assigns, and the Company and its assigns shall be the sole owner of all
patents and other rights in connection therewith. I hereby assign to the Company
any rights I may have or acquire in all Inventions. I further agree as to all
Inven-
-2-
<PAGE>
tions to assist the Company in every proper way (but at the Company's expense)
to obtain and from time to time enforce patents on the Inventions in any and all
countries, and to that end I will execute all documents for use in applying for
and obtaining such patents thereon and enforcing same, as the Company may
desire, together with any assignments thereof to the Company or persons
designated by it. My obligation to assist the Company in obtaining and enforcing
patents for the Inventions in any and all countries shall continue beyond the
termination of my employment, but the Company shall compensate me at a
reasonable rate after such termination for time actually spent by me at the
Company's request on such assistance. In the event that the Company is unable
for any reason whatsoever to secure my signature to any lawful and necessary
document required to apply for or execute any patent application with respect to
Inventions (indicating renewals, extension, continuations, divisions or
continuations in part thereof), I hereby irrevocably designate and appoint the
Company and its duly authorized officers and agents, as my agents and
attorneys-in-fact to act for and in my behalf and instead of me, to execute and
file any such application and to do all other lawfully permitted acts to further
the prosecution and issuance of patents thereon with the same legal force and
effect as if executed by me.
7. As a matter of record I have attached hereto a complete list of all
inventions or improvements relevant to the subject matter of my employment by
the Company which have been made or conceived or first reduced to practice by me
alone or jointly with others prior to my employment by the Company which I
desire to remove from the operation of the Agreement; and I covenant that such
list is complete. If no such list is attached to the Agreement, I represent that
I have made no such inventions and improvements at the time of signing the
Agreement.
8. I represent that my performance of all the terms of the Agreement and
that my employment by the Company does not and will not breach any agreement to
keep in confidence proprietary information acquired by me in confidence or in
trust prior to, and continuing throughout, my employment by the Company. I have
not entered into, and I agree I will not enter into, any agreement either
written or oral in conflict herewith.
9. I understand, as part of the consideration for the offer of employment
extended to me by the Company and of my employment or continued employment by
the Company, that I have not brought and will not bring with me to the Company
or use in the performance of my responsibilities at the Company any equipment,
supplies, facility or trade secret information of any former employer which are
not generally available to the public, unless I have obtained written
authorization for their possession and use.
10. I also understand that, in my employment with the Company, I am not to
breach any obligation of confidentiality that
-3-
<PAGE>
I have to others, and I agree that I shall fulfill all such obligations during
my employment with the Company.
11. I agree that in addition to any other rights and remedies available to
the Company for any breach by me of my obligations hereunder, the Company shall
be entitled to enforcement of my obligations hereunder by court injunction.
12. If any provision of the Agreement shall be declared invalid, illegal
or unenforceable, such provision shall be severed and all remaining provisions
shall continue in full force and effect.
13. The Agreement does not apply to inventions which qualify fully for
protection under Section 2870 of the California Labor Code, which are ideas or
inventions for which no equipment, supplies, facility or trade secret
information of the Company was used and which were developed entirely on my own
time, and (1) which do not relate at the time of conception or reduction to
practice of the invention (a) to the business of the Company, or (b) to the
Company's actual or demonstrably anticipated research or development, or (2)
which do not result from any work performed by me for the Company.
Notwithstanding the foregoing, I shall disclose in confidence to the Company any
invention in order to permit the Company to make a determination as to
compliance by me with the terms and conditions of the Agreement.
14. The Agreement shall be effective as of the first day of my employment
by the Company.
15. The term Company, as used herein, shall include any subsidiary or
affiliate of GMS Dental Group, Inc.
16. The Agreement shall be binding upon me, my heirs, executors, assigns
and administrators and shall inure to the benefit of the Company, its successors
and assigns.
17. The Agreement shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
principles thereof.
Dated: August 31, 1996
/s/ Grant M. Sadler
-----------------------------------
Accepted and Agreed to
as of August 31, 1996
GMS DENTAL GROUP, INC.
By /s/ Grant M. Sadler
---------------------------
Title PRESIDENT
------------------------
-4-
<PAGE>
EXHIBIT 10.14
[LETTERHEAD OF GMS DENTAL GROUP, INC.]
November 7, 1996
Mr. Norm Huffaker
Dear Norm:
This letter sets forth the basic terms and conditions of your offer of
employment as the Vice President of Finance and Chief Financial Officer of GMS
Dental Group, Inc., (the "Company").
1. Base Compensation. During the term of your employment, the Company
-----------------
will pay you as compensation for your services as base salary at the annual rate
of $140,000 or at such higher rate as the Company may determine from time to
time ("Base Salary"). Your Base Salary will be payable in accordance with the
Company's standard payroll procedures.
2. Duties. You shall perform such executive duties as may be delegated
------
to you by the Board of Directors or Chief Executive Officer of the Company. You
shall be employed on a full-time basis and shall devote all of your working
time, attention and energies to the Company during the term of your employment.
Notwithstanding the preceding, you will not be precluded from engaging in
appropriate professional, educational, civic, charitable or religious activities
or from devoting a reasonable amount of time to private investments that do not
interfere or conflict with your responsibilities to the Company. You shall
principally perform your duties hereunder at the principal executive offices of
the Company in Yorba Linda, California or such other location within the county
of Orange, California as may be designated in a notice by the Company to you.
3. Terms of Employment. Your employment with the Company is "at-will".
-------------------
In other words, either you or the Company can terminate your employment at any
time for any reason, with or without cause.
<PAGE>
Mr. Norm Huffaker
November 7, 1996
Page 2 of 6
4. Employee Benefits. During the term of your employment you will be
-----------------
eligible for the employee benefit plans and executive compensation programs
maintained from time to time for other senior executive employees of the Company
to the extent that senior executive employees are eligible to participate in
such programs and if you qualify for participation in any such program. These
benefits may change from time to time.
5. Additional Benefits. You will be provided with the following
-------------------
additional benefits:
(a) Incentive Bonus. Prior to each fiscal year-end of the Company
---------------
during the term of your employment with the Company, the Chief Executive Officer
shall consult with you to develop annual financial performance objectives for
the Company for the next subsequent fiscal year of the Company. Commencing with
the Company's 1997 fiscal year and for each fiscal year of the Company
thereafter during your employment with the Company, the Company shall pay you,
in addition to your Base Salary, an annual bonus ("Bonus") determined as
provided below. The Bonus shall be paid within sixty (60) days after the end of
each fiscal year during the term of your employment with the Company.
Bonus Performance Goal
----- ----------------
40% of Base Salary Company exceeds financial
performance objectives by 10%
30% of Base Salary; with a linear Company achieves 100% of financial
reduction to 0% as the percentage performance objectives
of financial performance objectives
achieved decreases from 100% to
75%
0% of Base Salary Company achieves less than 75% of
financial performance objectives
<PAGE>
Mr. Norm Huffaker
November 7, 1996
Page 3 of 6
(b) Stock Options. You will receive a grant of options to purchase
-------------
100,000 shares of the Company's Common Stock which shall be exercisable during
your term of employment, at an exercise price equal to the fair market value of
the date of grant as determined in good faith by the Board of Directors of the
Company. The options will be granted in two separate grants:
(i) a grant of options to purchase 50,000 shares of
the Company's Common Stock under the Company's 1996 Stock
Option Plan which shall vest at the rate of 25% per year
over four years; and
(ii) a grant of options to purchase 50,000 shares of
the Company's Common Stock under the Company's 1996
Performance Stock Option Plan.
You should note the following legend that applies to both the offer contained in
this letter and to the Company's shares that will be issued pursuant to the
terms of the stock option plans described above:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
THEY MAY NOT BE SOLD, OFFER FOR SALE, PLEDGED, OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY
TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES
ACT OF 1933.
You and the Company will enter into a stock option agreement dated as of the
date of this letter agreement as required under the provisions of the applicable
stock option plan.
6. Business Expenses. During the term of your employment, the Company
------------------
shall reimburse you for necessary and reasonable travel, entertainment and other
business expenses appropriately incurred by you in connection with performing
your duties. The Company will reimburse you for such expenses upon presentation
of an itemized account and appropriate supporting documentation, all in
accordance with the Company's generally applicable policies.
<PAGE>
Mr. Norm Huffaker
November 7, 1996
Page 4 of 6
7. Proprietary Information Agreement. You will be required to sign and
----------------------------------
abide by the terms of the accompanying proprietary information agreement.
8. Vacation and Holidays. You shall be entitled to fully-paid vacation
----------------------
time and holidays consistent with Company policy as may be in place from time to
time.
9. Severance Compensation.
-----------------------
(a) In the event that your employment with the Company is terminated
by the Company for any reasons other than "cause" (as defined below) and
provided that you comply with the provisions of Section 10 hereof, you shall be
entitled to continue to receive from the Company your Base Salary then in effect
for a period of nine (9) complete months following the effective date of such
termination. For purposes of this letter agreement, "cause" shall mean
termination of your employment due to (i) your continuance inattention to your
duties after at least one (1) written notice of same has been given to you and
you have been given an opportunity to cure the same within thirty (30) days
after such notice, (ii) any breach by you of Section 10 of this letter agreement
or (iii) any act committed by you which constitutes gross recklessness, willful
or gross misconduct, fraud or criminal conduct.
(b) During any period in which you receive severance compensation
pursuant to subsection (a) of this Section 9, you shall further be entitled to
medical, life insurance, disability insurance and any other similar benefits to
the same extent as theretofore provided by the Company to you prior to the
effective date of termination of your employment.
10. Restrictive Covenants and Confidentiality.
------------------------------------------
(a) Non-Solicitation. You agree that during the term of your
----------------
employment and for a period of one (1) year following any termination thereof
(for any reason), you shall not (either directly or indirectly) solicit, entice,
encourage or induce any person who at any time within one (1) year prior to your
termination of employment shall have been an employee of the Company or any of
its subsidiaries, or who is a dentist who is employed by or performing
professional services for any dental practice managed by the Company or one of
its subsidiaries, to become employed by or associated with any person, firm or
corporation other than the Company, and you shall not approach any such employee
or dentist for such purpose or encourage the taking of such actions by any other
person, firm or corporation or assist any such person, firm or corporation in
taking such action.
<PAGE>
Mr. Norm Huffaker
November 7, 1996
Page 5 of 6
(b) Non-Compete. You agree that during the term of your employment and
-----------
during any period in which you are receiving severance compensation pursuant to
Section 9 hereof, you shall not, directly or indirectly, within a 50 mile radius
of any location where the Company or any of its subsidiaries owns, manages,
develops, or operates any dental practice or its assets during your employment,
engage or participate or make any financial investments in, or become employed
by, or act as an agent or principal of, or render advisory or other services to
or for, any person, firm or corporation that is engaged, directly or indirectly,
in any line of business then engaged in, or planned to be engaged in, by the
Company (a "Competing Enterprise"). Nothing herein contained, however, shall
restrict you from holding investments in not more than three percent (3%) of the
voting securities or any Competing Enterprise whose stock is listed on a
national securities exchange or is actively traded on the National Association
of Securities Dealers Automated Quotation System, so long as in connection with
such investments you do not render services to a Competing Enterprise.
11. Survival. The provisions of this letter agreement shall survive the
--------
termination of your employment with the Company, irrespective of the reason
therefor.
12. Remedies. You acknowledge that the services to be rendered by you are
--------
of a special, unique and extraordinary character and, in connection with such
services, you will have access to confidential information vital to the
Company's and its subsidiaries' businesses. By reason of this access, you
consent and agree that if you violate any of the provisions of this letter
agreement, the Company and its subsidiaries shall be entitled, without the need
to show actual damages, to an injunction and a temporary restraining order from
any court of competent jurisdiction restraining you from committing or
continuing any such violation of this agreement. You acknowledge that damages at
law would not be an adequate remedy for violation of this letter agreement, and
you therefore agree that the provisions of this letter agreement may be
specifically enforced against you in any court of competent jurisdiction. The
rights, powers and remedies of the Company under this letter agreement are
cumulative and not exclusive of any other right, power or remedy which the
Company may have under any other agreement or by law.
13. Miscellaneous.
-------------
(a) Successors and Assigns. This letter agreement shall be binding
----------------------
or and inure to the benefit of the parties hereto and their heirs, executors,
legal representatives, successors and assigns. Neither party shall have the
right to assign its obligations, or all or any portion of their rights or
interests under this letter agreement without the prior written consent of the
other party hereto, and any attempt to do so will be null and void.
<PAGE>
Mr. Norm Huffaker
November 7, 1996
Page 6 of 6
(b) Governing Law. This letter agreement is made and entered into
--------------
and is to be governed by the internal laws of the State of California applicable
to agreements made and to be performed entirely within such State, without
regard to the conflicts of laws principles of such State.
(c) Severability. If any provision of this letter agreement shall be
------------
adjudicated to be invalid, ineffective or unenforceable, the remaining provision
of this letter agreement shall not be affected thereby. The invalid, ineffective
and unenforceable provision shall without further action by the parties, be
automatically amended to effect the original purpose and intent of the invalid,
ineffective or unenforceable provision; provided, however, that such amendment
shall apply only with respect to the operation of such provision in the
particular jurisdiction with respect to which such adjudication is made.
In order to acknowledge your acceptance of these terms, please sign one copy of
this letter and return it to me.
Very truly yours,
GMS Dental Group, Inc.
By /s/ Grant M. Sadler
---------------------------------
Title PRESIDENT
------------------------------
- --------------------------------------------------------------------------------
I accept your offer of employment and I acknowledge the foregoing accurately
sets forth the terms of my employment.
November ____________, 1996 /s/ Norm Huffaker
--------------------------------------
Norm Huffaker
<PAGE>
EXHIBIT 10.15
GMS DENTAL GROUP, INC.
180 North Riverview Drive, Suite 255
Anaheim Hills, CA 92808
Dear Mr. Davis:
This letter sets forth the basic terms and conditions of your offer of
employment with GMS Dental Group, Inc. ("Company") effective as of September
___, 1996.
1. Base Compensation. During the term of your employment, the Company
-----------------
will pay you as compensation for your services a base salary at the annual rate
of $160,000 or at such higher rate as the Company may determine from time to
time ("Base Salary"). Your Base Salary will be payable in accordance with the
Company's standard payroll procedures.
2. Duties. You shall perform such executive duties as may be delegated
------
to you by the Board of Directors (the "Board") or the Chief Executive Officer of
the Company. You shall be employed on a full-time basis and shall devote all of
your working time, attention and energies to the Company during the term of your
employment. Notwithstanding the preceding, you will not be precluded from
engaging in appropriate professional, educational, civic, charitable or
religious activities or from devoting a reasonable amount of time to private
investments that do not interfere or conflict with your responsibilities to the
Company. You shall principally perform your duties hereunder at the principal
executive offices of the Company in Anaheim Hills, California or such other
location within the county of Orange, California as may be designated in a
notice by the Company to you.
3. Term of Employment. Your employment with the Company is "at-will." In
------------------
other words, either you or the Company can terminate your employment at any time
for any reason, with or without cause.
4. Employee Benefits. During the term of your employment you will be
-----------------
eligible for the employee benefit plans and executive compensation programs
maintained from time to time for other senior executive employees of the Company
to the extent that senior executive employees are eligible to participate in
such programs and if you qualify for participation in any such program. These
benefits may change from time to time.
5. Incentive Bonus. Prior to each fiscal year-end of the Company during
---------------
the term of your employment with the Company, the Board shall consult with you
to develop annual financial performance objectives for the Company for the next
subsequent fiscal year of the Company. Commencing with the Company's 1997
fiscal year and for each fiscal year of the Company thereafter during your
employment with the Company, the Company shall pay you, in addition to your Base
Salary, an annual bonus (the "Bonus") determined as provided below. The Bonus
shall be paid within sixty (60) days after the end of each fiscal year during
the term of your employment with the Company.
1.
<PAGE>
Bonus Performance Goal
----- ----------------
40% of Base Salary Company exceeds financial performance
objectives by 10%
30% of Base Salary; with a linear Company achieves 100% of financial
reduction to 0% as the percentage performance objectives
of financial performance objectives
achieved decreases from 100% to 75%
0% of Base Salary Company achieves less than 75% of
financial performances objectives
6. Business Expenses. During the term of your employment, the Company
-----------------
shall reimburse you for necessary and reasonable travel, entertainment and other
business expenses appropriately incurred by you in connection with performing
your duties. The Company will reimburse you for such expenses upon presentation
of an itemized account and appropriate supporting documentation, all in
accordance with the Company's generally applicable policies.
7. Proprietary Information Agreement. You will be required to sign and
---------------------------------
abide by the terms of the accompanying proprietary information agreement.
8. Vacation and Holidays. You shall be entitled to fully-paid vacation
---------------------
time and holidays consistent with Company policy as may be in place from time to
time.
9. Severance Compensation.
----------------------
(a) In the event that your employment with the Company is terminated
by the Company for any reasons other than "cause" (as defined below) and
provided that you comply with the provisions of Section 10 hereof, you shall be
entitled to continue to receive from the Company your Base Salary then in effect
for a period of nine (9) complete months following the effective date of such
termination. For purposes of this letter agreement, "cause" shall mean
termination of your employment due to (i) your continuous inattention to your
duties after at least one (1) written notice of same has been given to you and
you have been given an opportunity to cure the same within thirty (30) days
after such notice, (ii) any breach by you of Section 10 of this letter agreement
or (iii) any act committed by you which constitutes gross recklessness, willful
or gross misconduct, fraud or criminal conduct.
(b) During any period in which you receive severance compensation
pursuant to subsection (a) of this Section 9, you shall further be entitled to
medical, life insurance, disability insurance and any other similar benefits to
the same extent as theretofore provided by the Company to you prior to the
effective date of termination of your employment.
10. Restrictive Covenants and Confidentiality.
-----------------------------------------
(a) Non-Solicitation. You agree that during the term of your
----------------
employment and for a period of one (1) year following any termination thereof
(for any reason), you shall not (either directly or indirectly) solicit, entice,
encourage or induce any person who at any time within one (1) year prior to your
termination of employment shall have been an employee of the Company or any of
its subsidiaries, or who is a dentist who is employed by or performing
professional services for any dental practice managed by the Company or one of
its subsidiaries, to become employed by or associated with any person, firm or
corporation other than the Company, and you shall not approach any such employee
or
2.
<PAGE>
dentist for such purpose or encourage the taking of such actions by any other
person, firm or corporation or assist any such person, firm or corporation in
taking such action.
(b) Non-Compete. You agree that during the term of your employment
-----------
and during any period in which you are receiving severance compensation pursuant
to Section 9 hereof, you shall not, directly or indirectly, within a 50 mile
radius of any location where the Company or any of its subsidiaries owns,
manages, develops, or operates any dental practice or its assets during your
employment, engage or participate or make any financial investments in, or
become employed by, or act as an agent or principal of, or render advisory or
other services to or for, any person, firm or corporation that is engaged,
directly or indirectly, in any line of business then engaged in, or planned to
be engaged in, by the Company (a "Competing Enterprise"). Nothing herein
contained, however, shall restrict you from holding investments is not more
than three percent (3%) of the voting securities of any Competing Enterprise
whose stock is listed on a national securities exchange or is actively traded on
the National Association of Securities Dealers Automated Quotation System, so
long as in connection with such investments you do not render services to a
Competing Enterprise.
11. Survival. The provisions of this letter agreement shall survive the
--------
termination of your employment with the Company, irrespective of the reason
therefor.
12. Remedies. You acknowledge that the services to be rendered by you are
--------
of a special, unique and extraordinary character and, in connection with such
services, you will have access to confidential information vital to the
Company's and its subsidiaries' businesses. By reason of this access, you
consent and agree that if you violate any of the provisions of this letter
agreement, the Company and its subsidiaries shall be entitled, without the need
to show actual damages, to an injunction and a temporary restraining order from
any court of competent jurisdiction restraining you from committing or
continuing any such violation of this letter agreement. You acknowledge that
damages at law would not be an adequate remedy for violation of this letter
agreement, and you therefore agree that the provisions of this letter agreement
may be specifically enforced against you in any court of competent jurisdiction.
The rights, powers and remedies of the Company under this letter agreement are
cumulative and not exclusive of any other right, power or remedy which the
Company may have under any other agreement or by law.
13. Miscellaneous.
-------------
(a) Successors and Assigns. This letter agreement shall be binding on
----------------------
and inure to the benefit of the parties hereto and their heirs, executors, legal
representatives, successors and assigns. Neither party shall have the right to
assign its obligations, or all or any portion of their rights or interests under
this letter agreement without the prior written consent of the other party
hereto, and any attempt to do so will be null and void.
(b) Governing Law. This letter agreement is made and entered into and
-------------
is to be governed by the laws of the internal laws of the State of California
applicable to agreements made and to be performed entirely within such State,
without regard to the conflicts of law principles of such State.
(c) Waiver. The failure of either party at any time to require
------
performance by the other party of any provision hereof shall not affect in any
way the full right to require such performance at any time thereafter, nor shall
a waiver by either party of a breach of any provision hereof be taken or held to
be a continuing waiver of such provision, or waiver of any other breach under
any other provision of this letter agreement.
3.
<PAGE>
(d) Entire Agreement. This letter agreement, together with the
----------------
agreements attached hereto and thereto, and any documents executed in connection
herewith or therewith, set forth the entire agreement and understanding between
the parties hereto with respect to the subject matter hereof and supersede all
prior contracts, agreements, arrangements, communications, discussions,
representations and warranties, whether oral or written, between the parties
with respect to such subject matter. This letter agreement may be amended only
by a written instrument signed by both parties hereto making specific reference
to this letter agreement and expressing the plan or intention to modify it.
(e) Severability. If any provision of this letter agreement shall be
------------
adjudicted to be invalid, ineffective or unenforceable, the remaining provisions
of this letter agreement shall not be affected thereby. The invalid, ineffective
and unenforceable provision shall, without further action by the parties, be
automatically amended to effect the original purpose and intent of the invalid,
ineffective or unenforceable provision; provided, however, that such amendment
shall apply only with respect to the operation of such provision in the
particular jurisdiction with respect to which such adjudication is made.
In order to acknowledge your acceptance of these terms, please sign one
copy of this letter and return it to me.
Very truly yours,
GMS DENTAL GROUP
By: /s/ Grant M. Sadler
---------------------------
Title: PRESIDENT
-------------------------
................................................................................
I acknowledge the foregoing accurately sets forth the terms of my employment.
/s/ Kenneth Davis
- ----------------------- October__________, 1996
Ken Davis
4.
<PAGE>
EXHIBIT 10.16
GMS DENTAL GROUP, INC.
1996 STOCK OPTION PLAN
(Effective as of September 19, 1996)
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. PURPOSE..................................................... 1
SECTION 2. DEFINITIONS................................................. 1
(a) "Board of Directors"........................................ 1
(b) "Code"...................................................... 1
(c) "Committee"................................................. 1
(d) "Company"................................................... 1
(e) "Disability"................................................ 1
(f) "Employee".................................................. 2
(g) "Exercise Price"............................................ 2
(h) "Fair Market Value"......................................... 2
(i) "ISO"....................................................... 2
(j) "Nonstatutory Option"....................................... 2
(k) "Option".................................................... 2
(l) "Optionee".................................................. 2
(m) "Plan"...................................................... 2
(n) "Service"................................................... 2
(o) "Share"..................................................... 2
(p) "Stock"..................................................... 2
(q) "Stock Option Agreement".................................... 2
(r) "Subsidiary"................................................ 3
SECTION 3. ADMINISTRATION.............................................. 3
(a) Committee Membership........................................ 3
(b) Committee Procedures........................................ 3
(c) Committee Responsibilies.................................... 3
(d) Financial Reports........................................... 4
SECTION 4. ELIGIBILITY................................................. 5
(a) General Rule................................................ 5
(b) Ten-Percent Shareholders.................................... 5
(c) Attribution Rules........................................... 5
(d) Outstanding Stock........................................... 5
SECTION 5. STOCK SUBJECT TO PLAN....................................... 5
(a) Basic Limitation............................................ 5
(b) Additional Shares........................................... 6
SECTION 6. TERMS AND CONDITIONS OF OPTIONS............................. 6
(a) Stock Option Agreement...................................... 6
(b) Number of Shares............................................ 6
(c) Exercise Price.............................................. 6
(d) Withholding Taxes........................................... 7
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
(e) Vesting and Exercisability.................................... 7
(f) Term.......................................................... 7
(g) Nontransferability............................................ 7
(h) Exercise of Options on Termination of Service................. 8
(i) No Rights as a Shareholder.................................... 8
(j) Modification, Extension and Assumption of Options............. 8
(k) Restrictions on Transfer of Shares............................ 8
SECTION 7. PAYMENT FOR SHARES............................................ 9
(a) General Rule.................................................. 9
(b) Surrender of Stock............................................ 9
(c) Promissory Notes.............................................. 9
(d) Cashless Exercise............................................. 9
SECTION 8. ADJUSTMENT OF SHARES.......................................... 10
(a) General....................................................... 10
(b) Reorganizations............................................... 10
(c) Reservation of Rights......................................... 10
SECTION 9. LEGAL REQUIREMENTS............................................ 11
SECTION 10. NO EMPLOYMENT RIGHTS.......................................... 11
SECTION 11. DURATION AND AMENDMENTS....................................... 11
(a) Term of the Plan.............................................. 11
(b) Right to Amend or Terminate the Plan.......................... 12
(c) Effect of Amendment of Termination............................ 12
SECTION 12. EXECUTION..................................................... 12
</TABLE>
-ii-
<PAGE>
GMS DENTAL GROUP, INC.
1996 STOCK OPTION PLAN
(EFFECTIVE AS OF SEPTEMBER 19, 1996)
SECTION 1. PURPOSE.
- ------------------
The purpose of the Plan is to offer selected employees, directors and
consultants an opportunity to acquire a proprietary interest in the success of
the Company, or to increase such interest, to encourage such selected persons to
remain in the employ of the Company and to attract new employees with
outstanding qualifications. The Plan provides for the grant of Options to
purchase Shares. Options granted under the Plan may include Nonstatutory
Options as well as incentive stock options intended to qualify under section 422
of the Internal Revenue Code.
SECTION 2. DEFINITIONS.
- ----------------------
(a) "Board of Directors" shall mean the Board of Directors of the Company,
------------------
as constituted from time to time.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Committee" shall mean a committee consisting of members of the Board
---------
of Directors that is appointed by the Board of Directors. If no Committee has
been appointed, the entire Board of Directors shall constitute the Committee.
The Committee shall have membership composition which enables the Plan to
qualify under Rule 16b-3 with regard to the grant of Options to persons who are
subject to Section 16 of the Securities Exchange Act of 1934.
(d) "Company" shall mean GMS Dental Group, Inc., a Delaware corporation.
-------
(e) "Disability" shall means that an Optionee is unable to engage in any
----------
substantial gainful activity by reason of any medically determinable physical or
mental impairment.
-1-
<PAGE>
GMS DENTAL GROUP, INC.
1996 STOCK OPTION PLAN
(EFFECTIVE AS OF SEPTEMBER 19, 1996)
SECTION 1. PURPOSE.
- --------------------
The purpose of the Plan is to offer selected employees, directors and
consultants an opportunity to acquire a proprietary interest in the success of
the Company, or to increase such interest, to encourage such selected persons to
remain in the employ of the Company and to attract new employees with
outstanding qualifications. The Plan provides for the grant of Options to
purchase Shares. Options granted under the Plan may include Nonstatutory Options
as well as incentive stock options intended to qualify under section 422 of the
Internal Revenue Code.
SECTION 2. DEFINITIONS.
- ------------------------
(a) "Board of Directors" shall mean the Board of Directors of the
------------------
Company, as constituted from time to time.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Committee" shall mean a committee consisting of members of the
---------
Board of Directors that is appointed by the Board of Directors. If no Committee
has been appointed, the entire Board of Directors shall constitute the
Committee. The Committee shall have membership composition which enables the
Plan to qualify under Rule 16b-3 with regard to the grant of Options to persons
who are subject to Section 16 of the Securities Exchange Act of 1934.
(d) "Company" shall mean GMS Dental Group, Inc., a Delaware
-------
corporation.
(e) "Disability" shall means that an Optionee is unable to engage in
----------
any substantial gainful activity by reason of any medically determinable
physical or mental impairment.
-1-
<PAGE>
(f) "Employee" shall mean (i) any individual who is a common-law
--------
employee of the Company or of a Subsidiary, (ii) a member of the Board of
Directors, or (iii) a consultant who performs services for the Company or a
Subsidiary. Service as a member of the Board of Directors or as a consultant
shall be considered employment for all purposes under the Plan except the second
sentence of Section 4(a).
(g) "Exercise Price" shall mean the amount for which one Share may be
--------------
purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.
(h) "Fair Market Value" shall mean the fair market value of a Share, as
-----------------
determined by the Committee in good faith. Such determination shall be
conclusive and binding on all persons.
(i) "ISO" shall mean an employee incentive stock option described in
---
Code section 422(b).
(j) "Nonstatutory Option" shall mean an employee stock option that is
-------------------
not an ISO.
(k) "Option" shall mean an ISO or Nonstatutory Option granted under the
------
Plan and entitling the holder to purchase Shares.
(l) "Optionee" shall mean an individual who holds an Option.
--------
(m) "Plan" shall mean this GMS Dental Group, Inc. 1996 Stock Option
----
Plan.
(n) "Service" shall mean service as an Employee.
-------
(o) "Share" shall mean one share of Stock, as adjusted in accordance
-----
with Section 8 (if applicable).
(p) "Stock" shall mean the common stock of the Company.
-----
(q) "Stock Option Agreement" shall mean the agreement between the
----------------------
Company and an Optionee which contains the terms, conditions and restrictions
pertaining to his or her Option.
-2-
<PAGE>
(r) "Subsidiary" shall mean any corporation, of which the Company and/or
----------
one or more other Subsidiaries own not less than 50 percent of the total
combined voting power of all classes of outstanding stock of such corporation.
A corporation that attains the status of a Subsidiary on a date after the
adoption of the Plan shall be considered a Subsidiary commencing as of such
date.
SECTION 3. ADMINISTRATION.
- -------------------------
(a) Committee Membership. The Plan shall be administered by the Committee,
--------------------
which shall consist of members of the Board of Directors. The members of the
Committee shall be appointed by the Board of Directors. If no Committee has
been appointed, the entire Board of Directors shall constitute the Committee.
(b) Committee Procedures. The Board of Directors shall designate one of
--------------------
the members of the Committee as chairperson. The Committee may hold meetings at
such times and places as it shall determine. The acts of a majority of the
Committee members present at meetings at which a quorum exists, or acts reduced
to or approved in writing by all Committee members, shall be valid acts of the
Committee.
(c) Committee Responsibilities. Subject to the provisions of the Plan, the
--------------------------
Committee shall have full authority and discretion to take the following
actions:
(i) To interpret the Plan and to apply its provisions;
(ii) To adopt, amend or rescind rules, procedures and forms
relating to the Plan;
(iii) To authorize any person to execute, on behalf of the Company,
any instrument required to carry out the purposes of the Plan;
(iv) To determine when Options are to be granted under the Plan;
(v) To select Optionees;
-3-
<PAGE>
(vi) To determine the number of Shares to be made subject to each
Option;
(vii) To prescribe the terms and conditions of each Option including
(without limitation) the Exercise Price and vesting of the Option, to
determine whether such Option is to be classified as an ISO or as a
Nonstatutory Option, and to specify the provisions of the Stock Option
Agreement relating to such Option;
(viii) To amend any outstanding Stock Option Agreement; provided,
however, that the rights and obligations under any Stock Option Agreement
shall not be materially altered or impaired adversely by any such
amendment, except with the consent of the Optionee;
(ix) To determine the disposition of an Option in the event of an
Optionee's divorce or dissolution of marriage;
(x) To correct any defect, supply any omission, or reconcile any
inconsistency in the Plan and any Stock Option Agreement; and
(xi) To take any other actions deemed necessary or advisable for the
administration of the Plan.
All decisions, interpretations and other actions of the Committee shall be
final and binding on all Optionees, and all persons deriving their rights from
an Optionee. No member of the Committee shall be liable for any action that he
or she has taken or has failed to take in good faith with respect to the Plan or
any Option.
(d) Financial Reports. To the extent required by applicable law, and not
-----------------
less often than annually, the Company shall furnish to Optionees Company summary
financial information including a balance sheet regarding the Company's
financial condition and results of operations, unless such Optionees have duties
with the Company that assure them access to equivalent information. Such
financial information need not be audited.
-4-
<PAGE>
SECTION 4. ELIGIBILITY.
- ----------------------
(a) General Rules. Only Employees shall be eligible for designation as
-------------
Optionees by the Committee. In addition, only individuals who are employed as
common-law employees by the Company or a Subsidiary shall be eligible for the
grant of ISOs.
(b) Ten-Percent Shareholders. An Employee who owns more than 10 percent of
------------------------
the total combined voting power of all classes of outstanding stock of the
Company or any of its Subsidiaries shall not be eligible for designation as an
Optionee unless (i) the Exercise Price for an ISO (and, to the extent required
by applicable law, the Exercise Price for a Nonstatutory Option) is at least 110
percent of the Fair Market Value of a Share on the date of grant, and (ii) in
the case of an ISO, such ISO by its terms is not exercisable after the
expiration of five years from the date of grant.
(c) Attribution Rules. For purposes of Subsection (b) above, in
-----------------
determining stock ownership, an Employee shall be deemed to own the stock owned,
directly or indirectly, by or for his brothers, sisters, spouse, ancestors and
lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its shareholders, partners or beneficiaries.
(d) Outstanding Stock. For purposes of Subsection (b) above, "outstanding
-----------------
stock" shall include all stock actually issued and outstanding immediately after
the grant. "Outstanding stock" shall not include shares authorized for issuance
under outstanding options held by the Employee or by any other person.
SECTION 5. STOCK SUBJECT TO PLAN.
- --------------------------------
(a) Basic Limitation. Shares offered under the Plan shall be authorized
----------------
but unissued Shares. The aggregate number of Shares which may be issued under
the Plan (upon exercise of
-5-
<PAGE>
Options) shall not exceed five hundred and ten thousand (510,000) Shares,
subject to adjustment pursuant to Section 8. The number of Shares which are
subject to Options outstanding at any time under the Plan shall not exceed the
number of Shares which are reserved for issuance under the Plan. During the term
of the Plan, the Company shall at all times reserve and keep available
sufficient Shares to satisfy the requirements of the Plan.
(b) Additional Shares. In the event that any outstanding Option for any
-----------------
reason expires or is canceled or otherwise terminated, the Shares allocable to
the unexercised portion of such Option shall again be available for the purposes
of the Plan.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
- ------------------------------------------
(a) Stock Option Agreement. Each grant of an Option under the Plan shall
----------------------
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms and conditions of the Plan
and may be subject to any other terms and conditions which are not inconsistent
with the Plan and which the Committee deems appropriate for inclusion in a Stock
Option Agreement. The provisions of the various Stock Option Agreements entered
into under the Plan need not be identical.
(b) Number of Shares. Each Stock Option Agreement shall specify the number
----------------
of Shares that are subject to the Option and shall provide for the adjustment of
such number in accordance with Section 8. The Stock Option Agreement shall also
specify whether the Option is an ISO or a Nonstatutory Option.
(c) Exercise Price. Each Stock Option Agreement shall specify the Exercise
--------------
Price. The Exercise Price of an ISO shall not be less than one hundred percent
(100%) of the Fair Market Value of a Share on the date of grant, except as
otherwise provided in Section 4(b). The Exercise Price of a Nonstatutory Option
shall not be less than eighty-five percent (85%) of the
-6-
<PAGE>
Fair Market Value of a Share on the date of grant, except as otherwise provided
in Section 4(b). Subject to the preceding two sentences, the Exercise Price
under any Option shall be determined by the Committee in its sole discretion.
The Exercise Price shall be payable in a form described in Section 7.
(d) Withholding Taxes. As a condition to the exercise of an Option, the
-----------------
Optionee shall make such arrangements as the Committee may require for the
satisfaction of any federal, state, local or foreign withholding tax obligations
that may arise in connection with such exercise. The Optionee shall also make
such arrangements as the Committee may require for the satisfaction of any
federal, state, local or foreign withholding tax obligations that may arise in
connection with the disposition of Shares acquired by exercising an Option.
(e) Vesting and Exercisability. Each Stock Option Agreement shall specify
--------------------------
the date when all or any installment of the Option is to become vested and shall
be exercisable. To the extent required by applicable law, an Option shall become
exercisable no less rapidly than the rate of 20% per year for each of the first
five years of Service from the date of grant. Subject to the preceding sentence,
the vesting and exercisability of any Option shall be determined by the
Committee in its sole discretion.
(f) Term. The Stock Option Agreement shall specify the term of the Option.
----
The term shall not exceed ten (10) years from the date of grant, except as
otherwise provided in Section 4(b). Subject to the preceding sentence, the
Committee at its sole discretion shall determine when an Option is to expire.
(g) Nontransferability. No Option shall be transferable by the Optionee
------------------
other than by will or the laws of descent and distribution. An Option may be
exercised during the lifetime of the Optionee only by him or by his guardian or
legal representative. No Option or interest therein may be transferred,
assigned, pledged or hypothecated by the Optionee during his
-7-
<PAGE>
lifetime, whether by operation of law or otherwise, or be made subject to
execution, attachment or similar process.
(b) Exercise of Options on Termination of Service. Each Stock Option
---------------------------------------------
Agreement shall set forth the extent to which the Optionee shall have the right
to exercise the Option following termination of the Optionee's Service with the
Company and its Subsidiaries. Such provisions shall be determined in the sole
discretion of the Committee, need not be uniform among all Options issued
pursuant to the Plan, and may reflect distinctions based on the reasons for
termination of employment. Notwithstanding the foregoing, to the extent
required by applicable law, each Option shall provide that the Optionee shall
have the right to exercise the vested portion of any Option held at termination
for at least 30 days following termination of Service with the Company for any
reason, and that the Optionee shall have the right to exercise the Option for at
least six months if the Optionee's Service terminates due to death or
Disability.
(i) No Rights as a Shareholder. An Optionee, or a transferee of an
--------------------------
Optionee, shall have no rights as a shareholder with respect to any Shares
covered by an Option until the date of the issuance of a stock certificate for
such Shares.
(j) Modification, Extension and Assumption of Options. Within the
-------------------------------------------------
limitations of the Plan, the Committee may modify, extend or assume outstanding
Options or may accept the cancellation of outstanding Options (whether granted
by the Company or another issuer) in return for the grant of new Options for the
same or a different number of Shares and at the same or a different Exercise
Price.
(k) Restrictions on Transfer of Shares. Shares issued upon exercise of an
----------------------------------
Option may not be sold or otherwise transferred or disposed of by the Optionee
during such period as may be specified by the Company or its underwriter on or
following the effective date of a registration statement covering securities of
the Company filed under the Securities Act of 1933.
-8-
<PAGE>
Subject to the preceding sentence, any Shares issued upon exercise of an
Option shall be subject to such rights of repurchase, rights of first refusal
and other transfer restrictions as the Committee may determine. Such
restrictions shall be set forth in the applicable Stock Option Agreement and
shall apply in addition to any restrictions that may apply to holders of Shares
generally.
SECTION 7. PAYMENT FOR SHARES.
- -----------------------------
(a) General Rule. The entire Exercise Price of Shares issued under the
------------
Plan shall be payable in lawful money of the United States of America at the
time when such Shares are purchased, except as provided in Subsections (b), (c)
and (d) below.
(b) Surrender of Stock. To the in extent that a Stock Option Agreement so
------------------
provides, payment may be made all or in part with Shares which have already been
owned by the Optionee or the Optionee's representative for any time period
specified by the Committee and which are surrendered to the Company in good form
for transfer. Such Shares shall be valued at their Fair Market Value on the date
when the new Shares are purchased under the Plan.
(c) Promissory Notes. To the extent that a Stock Option Agreement so
----------------
provides, payment may be made all or in part with a full recourse promissory
note executed by the Optionee. The interest rate and other terms and conditions
of such note shall be determined by the Committee. The Committee may require
that the Optionee pledge his or her Shares to the Company for the purpose of
securing the payment of such note. In no event shall the stock certificate(s)
representing such Shares be released to the Optionee until such note is paid in
full.
(d) Cashless Exercise. To the extent that a Stock Option Agreement so
-----------------
provides and a public market for the Shares exists, payment may be made all or
in part by delivery (on a form prescribed by the Committee) of an irrevocable
direction to a securities broker to sell Shares and
-9-
<PAGE>
to deliver all or part of the sale proceeds to the Company in payment of the
aggregate Exercise Price.
SECTION 8. ADJUSTMENT OF SHARES.
- -------------------------------
(a) General. In the event of a subdivision of the outstanding Stock, a
-------
declaration of a dividend payable in Shares, a declaration of a dividend payable
in a form other than Shares in an amount that has a material effect on the value
of Shares, a combination or consolidation of the outstanding Stock into a lesser
number of Shares, a recapitalization, a reclassification or a similar
occurrence, the Committee shall make appropriate adjustments in one or more of
(i) the number of Shares available for future grants of Options under Section 5,
(ii) the number of Shares covered by each outstanding Option or (iii) the
Exercise Price of each outstanding Option.
(b) Reorganizations. In the event that the Company is a party to a merger
---------------
or reorganization, outstanding Options shall be subject to the agreement of
merger or reorganization.
(c) Reservation of Rights. Except as provided in this Section 8, an
---------------------
Optionee shall have no rights by reason of (i) any subdivision or consolidation
of shares of stock of any class, (ii) the payment of any dividend, or (iii) any
other increase or decrease in the number of shares of stock of any class. Any
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or Exercise Price of Shares
subject to an Option. The grant of an Option pursuant to the Plan shall not
affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its
-10-
<PAGE>
capital or business structure, to merge or consolidate or to dissovle,
liquidate, sell or transfer all or any part of its business or assets.
SECTION 9. LEGAL REQUIREMENTS.
- ------------------------------
Shares shall not be issued under the Plan unless the issuance and delivery
of such Shares complies with (or is exempt from) all applicable requirements of
law, including (without limitation) the Securities Act of 1933, as amended, the
rules and regulations promulgated thereunder, state securities laws and
regulations, and the regulations of any stock exchange on which the Company's
securities may then be listed, and the Company has obtained the approval or
favorable ruling from any governmental agency which the Company determines is
necessary or advisable.
SECTION 10. NO EMPLOYMENT RIGHTS.
- --------------------------------
No provision of the Plan, nor any Option granted under the Plan, shall be
construed to give any person any right to become, to be treated as, or to remain
an Employee. The Company and its Subsidiaries reserve the right to terminate any
person's Service at any time and for any reason.
SECTION 11. DURATION AND AMENDMENTS.
- -----------------------------------
(a) Term of the Plan. The Plan, as set forth herein, shall become
----------------
effective on the date of its adoption by the Board of Directors, subject to the
approval of the Company's shareholders. In the event that the shareholders fail
to approve the Plan within twelve (12) months after its adoption by the Board of
Directors, any Option grants already made shall be null and void, and no
additional Option grants shall be made after such date. The Plan shall
-11-
<PAGE>
terminate automatically ten (10) years after its adoption by the Board of
Directors and may be terminated on any earlier date pursuant to Subsection (b)
below.
(b) Right to Amend or Terminate the Plan. The Board of Directors may amend
------------------------------------
the Plan at any time and from time to time. Rights and obligations under any
Option granted before amendment of the Plan shall not be materially altered, or
impaired adversely, by such amendment, except with consent of the Optionee. An
amendment of the Plan shall be subject to the approval of the Company's
shareholders only to the extent required by applicable laws, regulations or
rules.
(c) Effect of Amendment or Termination. No Shares shall be issued or sold
----------------------------------
under the Plan after the termination thereof, except upon exercise of an Option
granted prior to such termination. The termination of the Plan, or any amendment
thereof, shall not affect any Share previously issued or Option previously
granted under the Plan.
SECTION 12. EXECUTION.
- ---------------------
To record the adoption of the Plan by the Board of Directors as September
16, 1996, the Company has caused its authorized officer to execute the same.
GMS DENTAL GROUP, INC.
By___________________________________
Its__________________________________
-12-
<PAGE>
AMENDMENT
TO
GMS DENTAL GROUP, INC.
1996 STOCK OPTION PLAN
Subsection (a) of Section 5 of the GMS Dental Group, Inc. 1996 Stock
Option Plan is hereby amended by deleting such subsection in its entirety and
inserting in its place the following:
" (a) Basic Limitation. Shares offered under the Plan shall be
----------------
authorized but unissued Shares. The aggregate number of Shares which may be
issued under the Plan (upon exercise of Options) shall not exceed one
million two hundred fifty thousand (1,250,000) Shares, subject to
adjustment pursuant to Section 8. The number of Shares which are subject to
Options outstanding at any time under the Plan shall not exceed the number
of Shares which are reserved for issuance under the Plan. During the term
of the Plan, the Company shall at all times reserve and keep available
sufficient Shares to satisfy the requirements of the Plan."
(This Amendment is effective April 1, 1997, and was approved by the
Board of Directors at a meeting held on February 12, 1997 and by Written Consent
of the Stockholders effective April 1, 1997).
1
<PAGE>
EXHIBIT 10.17
GMS DENTAL GROUP, INC.
1996 PERFORMANCE STOCK OPTION PLAN
(EFFECTIVE AS OF SEPTEMBER 19, 1996)
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. PURPOSE....................................... 1
SECTION 2. DEFINITIONS................................... 1
(a) Board of Directors............................ 1
(b) Code.......................................... 1
(c) Committee..................................... 1
(d) Company....................................... 1
(e) Disability.................................... 1
(f) Employee...................................... 1
(g) Exercise Price................................ 2
(h) Fair Market Value............................. 2
(i) ISO........................................... 2
(j) Nonstatutory Option........................... 2
(k) Option........................................ 2
(l) Optionee...................................... 2
(m) Plan.......................................... 2
(n) Service....................................... 2
(o) Share......................................... 2
(p) Stock......................................... 2
(q) Stock Option Agreement........................ 2
(r) Subsidiary.................................... 2
SECTION 3. ADMINISTRATION................................ 3
(a) Committee Membership.......................... 3
(b) Committee Procedures.......................... 3
(c) Committee Responsibilities.................... 3
(d) Financial Reports............................. 4
SECTION 4. ELIGIBILITY................................... 4
(a) General Rule.................................. 4
(b) Ten-Percent Shareholders...................... 5
(c) Attribution Rules............................. 5
(d) Outstanding Stock............................. 5
SECTION 5. STOCK SUBJECT TO PLAN......................... 5
(a) Basic Limitation.............................. 5
(b) Additional Shares............................. 6
SECTION 6. TERMS AND CONDITIONS OF OPTIONS............... 6
(a) Stock Option Agreement........................ 6
(b) Number of Shares.............................. 6
(c) Exercise Price................................ 6
(d) Withholding Taxes............................. 7
(e) Vesting and Exercisability.................... 7
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
(f) Term........................................................ .... 7
(g) Nontransferability............................................... 7
(h) Exercise of Options on Termination of Service.................... 8
(i) No Rights as a Shareholder....................................... 8
(j) Modification, Extension and Assumption of Options................ 8
(k) Restrictions on Transfer of Shares............................... 8
SECTION 7. PAYMENT FOR SHARES............................................... 9
(a) General Rule..................................................... 9
(b) Surrender of Stock............................................... 9
(c) Promissory Notes................................................. 9
(d) Cashless Exercise................................................ 9
SECTION 8. ADJUSTMENT OF SHARES............................................. 10
(a) General.......................................................... 10
(b) Reorganizations.................................................. 10
(c) Reservation of Rights............................................ 10
SECTION 9. LEGAL REQUIREMENTS............................................... 11
SECTION 10. NO EMPLOYMENT RIGHTS............................................. 11
SECTION 11. DURATION AND AMENDMENTS.......................................... 11
(a) Terms of the Plan................................................ 11
(b) Right to Amend or Terminate the Plan............................. 12
(c) Effect of Amendment to Termination............................... 12
SECTION 12. EXECUTION........................................................ 12
</TABLE>
-ii-
<PAGE>
GMS DENTAL GROUP, INC.
1996 PERFORMANCE STOCK OPTION PLAN
(EFFECTIVE AS OF SEPTEMBER 19, 1996)
SECTION 1. PURPOSE.
- ------------------
The purpose of the Plan is to offer selected employees an opportunity to
acquire a proprietary interest in the success of the Company, or to increase
such interest, to encourage such selected employees to remain in the employ of
the Company and to attract new employees with outstanding qualifications. The
Plan provides for the grant of Options to purchase Shares. Options granted under
the Plan may include Nonstatutory Options as well as incentive stock options
intended to qualify under section 422 of the Internal Revenue Code.
SECTION 2. DEFINITIONS.
- ----------------------
(a) "Board of Directors" shall mean the Board of Directors of the Company,
------------------
as constituted from time to time.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Committee" shall mean a committee consisting of members of the Board
---------
of Directors that is appointed by the Board of Directors. If no Committee has
been appointed, the entire Board of Directors shall constitute the Committee.
The Committee shall have membership composition which enables the Plan to
qualify under Rule 16b-3 with regard to the grant of Options to persons who are
subject to Section 16 of the Securities Exchange Act of 1934.
(d) "Company" shall mean GMS Dental Group, Inc., a Delaware corporation.
-------
(e) "Disability" shall means that an Optionee is unable to engage in any
----------
substantial gainful activity by reason of any medically determinable physical or
mental impairment.
(f) "Employee" shall mean any individual who is a common-law employee of
--------
the Company or of a Subsidiary.
-1-
<PAGE>
(g) "Exercise Price shall mean the amount for which one Share may be
---------------
purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.
(h) "Fair Market Value" shall mean the fair market value of a Share, as
-----------------
determined by the Committee in good faith. Such determination shall be
conclusive and binding on all persons.
(i) "ISO" shall mean an employee incentive stock option described in Code
----
section 422(b).
(j) "Nonstatutorv Option" shall mean an employee stock option that is not
-------------------
an ISO.
(k) "Option" shall mean an ISO or Nonstatutory Option granted under the
------
Plan and entitling the holder to purchase Shares.
(1) "Optionee" shall mean an individual who holds an Option.
--------
(m) "Plan" shall mean this GMS Dental Group, Inc. 1996 Stock Option Plan.
----
(n) "Service" shall mean service as an Employee.
-------
(o) "Share" shall mean one share of Stock, as adjusted in accordance with
-----
Section 8 (if applicable).
(p) "Stock" shall mean the common stock of the Company.
-----
(q) "Stock Option Agreement" shall mean the agreement between the Company
----------------------
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her Option.
(r) "Subsidiary" shall mean any corporation, of which the Company and/or
----------
one or more other Subsidiaries own not less than 50 percent of the total
combined voting power of all classes of outstanding stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the adoption
of the Plan shall be considered a Subsidiary commencing as of such date.
-2-
<PAGE>
SECTION 3. ADMINISTRATION.
- -------------------------
(a) Committee Membership. The Plan shall be administered by the Committee,
--------------------
which shall consist of members of the Board of Directors. The members of the
Committee shall be appointed by the Board of Directors. If no Committee has been
appointed, the entire Board of Directors shall constitute the Committee.
(b) Committee Procedures. The Board of Directors shall designate one of
--------------------
the members of the Committee as chairperson. The Committee may hold meetings at
such times and places as it shall determine. The acts of a majority of the
Committee members present at meetings at which a quorum exists, or acts reduced
to or approved in writing by all Committee members, shall be valid acts of the
Committee.
(c) Committee Responsibilities. Subject to the provisions of the Plan,
--------------------------
the Committee shall have full authority and discretion to take the following
actions:
(i) To interpret the Plan and to apply its provisions;
(ii) To adopt, amend or rescind rules, procedures and forms
relating to the Plan;
(iii) To authorize any person to execute, on behalf of the
Company, any instrument required to carry out the purposes of the Plan;
(iv) To determine when Options are to be granted under the Plan;
(v) To select Optionees;
(vi) To determine the number of Shares to be made subject to each
Option;
(vii) To prescribe the terms and conditions of each Option,
including (without limitation) the Exercise Price and vesting of the
Option, to determine whether such Option is to be classified as an ISO or
as a Nonstatutory Option, and to specify the provisions of the Stock Option
Agreement relating to such Option;
-3-
<PAGE>
(viii) To amend any outstanding Stock Option Agreement; provided,
however, that the rights and obligations under any Stock Option Agreement
shall not be materially altered or impaired adversely by any such
amendment, except with the consent of the Optionee;
(ix) To determine the disposition of an Option in the event of an
Optionee's divorce or dissolution of marriage;
(x) To correct any defect, supply any omission, or reconcile any
inconsistency in the Plan and any Stock Option Agreement; and
(xi) To take any other actions deemed necessary or advisable for
the administration of the Plan.
All decisions, interpretations and other actions of the Committee shall be
final and binding on all Optionees, and all persons deriving their rights from
an Optionee. No member of the Committee shall be liable for any action that he
or she has taken or has failed to take in good faith with respect to the Plan or
any Option.
(d) Financial Reports. To the extent required by applicable law, and not
-----------------
less often than annually, the Company shall furnish to Optionees Company summary
financial information including a balance sheet regarding the Company's
financial condition and results of operations, unless such Optionees have duties
with the Company that assure them access to equivalent information. Such
financial information need not be audited.
SECTION 4. ELIGIBILITY.
- ----------------------
(a) General Rule. Only Employees shall be eligible for designation as
------------
Optionees by the Committee.
-4-
<PAGE>
(b) Ten-Percent Shareholders. An Employee who owns more than 10 percent
------------------------
of the total combined voting power of all classes of outstanding stock of the
Company or any of its Subsidiaries shall not be eligible for designation as an
Optionee unless (i) the Exercise Price for an ISO (and, to the extent required
by applicable law, the Exercise Price for a Nonstatutory Option) is at least 110
percent of the Fair Market Value of a Share on the date of grant, and (ii) in
the case of an ISO, such ISO by its terms is not exercisable after the
expiration of five years from the date of grant.
(c) Attribution Rules. For purposes of Subsection (b) above, in
-----------------
determining stock ownership, an Employee shall be deemed to own the stock owned,
directly or indirectly, by or for his brothers, sisters, spouse, ancestors and
lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its shareholders, partners or beneficiaries.
(d) Outstanding Stock. For purposes of Subsection (b) above,
-----------------
"outstanding stock" shall include all stock actually issued and outstanding
immediately after the grant. "Outstanding stock" shall not include shares
authorized for issuance under outstanding options held by the Employee or by any
other person.
SECTION 5. STOCK SUBJECT TO PLAN.
- ---------------------------------
(a) Basic Limitation. Shares offered under the Plan shall be authorized
----------------
but unissued Shares. The aggregate number of shares which may be issued under
the Plan (upon exercise of Options) shall not exceed six hundred forty two
thousand six hundred (642,600) Shares, subject to adjustment pursuant to Section
8. The number of Shares which are subject to Options outstanding at any time
under the Plan shall not exceed the number of Shares which are reserved
-5-
<PAGE>
for issuance under the Plan. During the term of the Plan, the Company shall at
all times reserve and keep available sufficient Shares to satisfy the
requirements of the Plan.
(b) Additional Shares. In the event that any outstanding Option for any
-----------------
reason expires or is canceled or otherwise terminated, the Shares allocable to
the unexercised portion of such Option shall again be available for the purposes
of the Plan.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
- ------------------------------------------
(a) Stock Option Agreement. Each grant of an Option under the Plan shall
----------------------
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms and conditions of the Plan
and may be subject to any other terms and conditions which are not inconsistent
with the Plan and which the Committee deems appropriate for inclusion in a Stock
Option Agreement. The provisions of the various Stock Option Agreements entered
into under the Plan need not be identical.
(b) Number of Shares. Each Stock Option Agreement shall specify the
----------------
number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section 8. The Stock Option
Agreement shall also specify whether the Option is an ISO or a Nonstatutory
Option.
(c) Exercise Price. Each Stock Option Agreement shall specify the Exercise
--------------
Price. The Exercise Price of an ISO shall not be less than one hundred percent
(100%) of the Fair Market Value of a Share on the date of grant, except as
otherwise provided in Section 4(b). The Exercise Price of a Nonstatutory Option
shall not be less than eighty-five percent (85%) of the Fair Market Value of a
Share on the date of grant, except as otherwise provided in Section 4(b).
Subject to the preceding two sentences, the Exercise Price under any Option
shall be determined
-6-
<PAGE>
by the Committee in its sole discretion. The Exercise Price shall be payable in
a form described in Section 7.
(d) Withholding Taxes. As a condition to the exercise of an Option, the
-----------------
Optionee shall make such arrangements as the Committee may require for the
satisfaction of any federal, state, local or foreign withholding tax obligations
that may arise in connection with such exercise. The Optionee shall also make
such arrangements as the Committee may require for the satisfaction of any
federal, state, local or foreign withholding tax obligations that may arise in
connection with the disposition of Shares acquired by exercising an Option.
(e) Vesting and Exercisability. Each Stock Option Agreement shall specify
--------------------------
the date when all or any installment of the Option is to become vested and shall
be exercisable. To the extent required by applicable law, an Option shall become
exercisable no less rapidly than the rate of 20% per year for each of the first
five years of Service from the date of grant. Subject to the preceding sentence,
the vesting and exercisability of any Option shall be determined by the
Committee in its sole discretion, and the vesting of Options may be subject to
the achievement of performance goals.
(f) Term. The Stock Option Agreement shall specify the term of the Option.
----
The term shall not exceed ten (10) years from the date of grant, except as
otherwise provided in Section 4(b). Subject to the preceding sentence, the
Committee at its sole discretion shall determine when an Option is to expire.
(g) Nontransferability. No Option shall be transferable by the Optionee
------------------
other than by will or by the laws of descent and distribution. An Option may be
exercised during the lifetime of the Optionee only by him or by his guardian or
legal representative. No Option or interest therein may be transferred,
assigned, pledged or hypothecated by the Optionee during his
-7-
<PAGE>
lifetime, whether by operation of law or otherwise, or be made subject to
execution, attachment or similar process.
(h) Exercise of Options on Termination of Service. Each Stock Option
----------------------------------------------
Agreement shall set forth the extent to which the Optionee shall have the right
to exercise the Option following termination of the Optionee's Service with the
Company and its Subsidiaries. Such provisions shall be determined in the sole
discretion of the Committee, need not be uniform among all Options issued
pursuant to the Plan, and may reflect distinctions based on the reasons for
termination of employment. Notwithstanding the foregoing, to the extent required
by applicable law, each Option shall provide that the Optionee shall have the
right to exercise the vested portion of any Option held at termination for at
least 30 days following termination of Service with the Company for any reason,
and that the Optionee shall have the right to exercise the Option for at least
six months if the Optionee's Service terminates due to death or Disability.
(i) No Rights as a Shareholder. An Optionee, or a transferee of an
--------------------------
Optionee, shall have no rights as a shareholder with respect to any Shares
covered by an Option until the date of the issuance of a stock certificate for
such Shares.
(j) Modification, Extension and Assumption of Options. Within the
-------------------------------------------------
limitations of the Plan, the Committee may modify, extend or assume outstanding
Options or may accept the cancellation of outstanding Options (whether granted
by the Company or another issuer) in return for the grant of new Options for the
same or a different number of Shares and at the same or a different Exercise
Price.
(k) Restrictions on Transfer of Shares. Shares issued upon exercise of an
----------------------------------
Option may not be sold or otherwise transferred or disposed of by the Optionee
during such period as may be specified by the Company or its underwriter on or
following the effective date of a registration statement covering securities of
the Company filed under the Securities Act of 1933.
-8-
<PAGE>
Subject to the preceding sentence, any Shares issued upon exercise of an Option
shall be subject to such rights of repurchase, right of first refusal and other
transfer restrictions as the Committee may determine. Such restrictions shall be
set forth in the applicable Stock Option Agreement and shall apply in addition
to any restrictions that may apply to holders of Shares generally.
SECTION 7. PAYMENT FOR SHARES.
- -----------------------------
(a) General Rule. The entire Exercise Price of Shares issued under the
------------
Plan shall be payable in lawful money of the Untied States of America at the
time when such Shares are purchased, except as provided in Subsections (b), (c)
and (d) below.
(b) Surrender of Stock. To the extent that a Stock Option Agreement so
------------------
provides, payment may be made all or in part with Shares which have already been
owned by the Optionee or the Optionee's representative for any time period
specified by the Committee and which are surrendered to the Company in good form
for transfer. Such Shares shall be valued at their Fair Market Value on the date
when the new Shares are purchased under the Plan.
(c) Promissory Notes. To the extent that a Stock Option Agreement so
----------------
provides, payment may be made all or in part with a full recourse promissory
note executed by the Optionee. The interest rate and other terms and conditions
of such note shall be determined by the Committee. The Committee may require
that the Optionee pledge his or her Shares to the Company for the purpose of
securing the payment of such note. In no event shall the stock certificate(s)
representing such Shares be released to the Optionee until such note is paid in
full.
(d) Cashless Exercise. To the extent that a Stock Option Agreement so
-----------------
provides and a public market for the Shares exists, payment may be made all or
in part by delivery (on a form prescribed by the Committee) of an irrevocable
direction to a securities broker to sell Shares and
-9-
<PAGE>
to deliver all or part of the sale proceeds to the Company in payment of the
aggregate Exercise Price.
SECTION 8. ADJUSTMENT OF SHARES.
- -------------------------------
(a) General. In the event of a subdivision of the outstanding Stock, a
-------
declaration of a dividend payable in Shares, a declaration of a dividend payable
in a form other than Shares in an amount that has a material effect on the value
of Shares, a combination or consolidation of the outstanding Stock into a lesser
number of Shares, a recapitalization, a reclassification or a similar
occurrence, the Committee shall make appropriate adjustments in one or more of
(i) the number of Shares available for future grants of Options under Section 5,
(ii) the number of Shares covered by each outstanding Option or (iii) the
Exercise Price of each outstanding Option.
(b) Reorganizations. In the event that the Company is a party to a merger
---------------
or reorganization, outstanding Options shall be subject to the agreement of
merger or reorganization.
(c) Reservation of Rights. Except as provided in this Section 8, an
---------------------
Optionee shall have no rights by reason of (i) any subdivision or consolidation
of shares of stock of any class, (ii) the payment of any dividend, or (iii) any
other increase or decrease in the number of shares of stock of any class. Any
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or Exercise Price of Shares
subject to an Option. The grant of an Option pursuant to the Plan shall not
affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its
-10-
<PAGE>
capital or business structure, to merge or consolidate or to dissolve,
liquidate, sell or transfer all or any part of its business or assets.
SECTION 9. LEGAL REQUIREMENTS,
- -----------------------------
Shares shall not be issued under the Plan unless the issuance and delivery
of such Shares complies with (or is exempt from) all applicable requirements of
law, including (without limitation) the Securities Act of 1933, as amended, the
rules and regulations promulgated thereunder, state securities laws and
regulations, and the regulations of any stock exchange on which the Company's
securities may then be listed, and the Company has obtained the approval or
favorable ruling from any governmental agency which the Company determines is
necessary or advisable.
SECTION 10. NO EMPLOYMENT RIGHTS.
- ---------------------------------
No provision of the Plan, nor any Option granted under the Plan, shall be
construed to give any person any right to become, to be treated as, or to remain
an Employee. The Company and its Subsidiaries reserve the right to terminate any
person's Service at any time and for any reason.
SECTION 11. DURATION AND AMENDMENTS.
- ------------------------------------
(a) Term of the Plan. The Plan, as set forth herein, shall become effective
----------------
on the date of its adoption by the Board of Directors, subject to the approval
of the Company's shareholders. In the event that the shareholders fail to
approve the Plan within twelve (12) months after its adoption by the Board of
Directors, any Option grants already made shall be null and void, and no
additional Option grants shall be made after such date. The Plan shall
-11-
<PAGE>
terminate automatically ten (10) years after its adoption by the Board of
Directors and may be terminated on any earlier date pursuant to Subsection (b)
below.
(b) Right to Amend or Terminate the Plan. The Board of Directors may amend
------------------------------------
the Plan at any time and from time to time. Rights and obligations under any
Option granted before amendment of the Plan shall not be materially altered, or
impaired adversely, by such amendment, except with consent of the Optionee. An
amendment of the Plan shall be subject to the approval of the Company's
shareholders only to the extent required by applicable laws, regulations or
rules.
(c) Effect of Amendment or Termination. No shares shall be issued or sold
----------------------------------
under the Plan after the termination thereof, except upon exercise of an Option
granted prior to such termination. The termination of the Plan, or any amendment
thereof, shall not affect any Share previously issued or Option previously
granted under the Plan.
SECTION 12. EXECUTION.
- ----------------------
To record the adoption of the Plan by the Board of Directors as September
19, 1996, the Company has caused its authorized officer to execute the same.
GMS DENTAL GROUP, INC.
By _________________________________________
Its _________________________________________
-12-
<PAGE>
EXHIBIT 10.18
GMS DENTAL GROUP, INC.
1996 STOCK OPTION PLAN
INCENTIVE STOCK OPTION AGREEMENT
INCENTIVE STOCK This Option is intended to be an incentive stock option
OPTION under Section 422 of the Internal Revenue Code and will
be interpreted accordingly.
VESTING The Option Shares shall be unvested and subject to
repurchase by the Company at the Exercise Price paid per
share ($.20 per share). Optionee shall acquire a vested
interest in, and the Company's repurchase right shall
accordingly lapse with respect to, (i) twenty-five percent
(25%) of the Option Shares upon Optionee's completion of
one (1) year of Service measured from the Vesting
Commencement Date and (ii) the balance of the Option
Shares in a series of thirty-six (36) successive equal
monthly installments upon Optionee's completion of each
additional month of Service over the thirty-six (36)-month
period measured from the first anniversary of the Vesting
Commencement Date. In no event shall any additional Option
Shares vest after Optionee's cessation of Service.
TERM Your Option will expire in any event at the close of
business at Company headquarters on the day before the
10th anniversary of the Date of Grant, as shown on the
cover sheet. (It will expire earlier if your Company
service terminates, as described below.)
REGULAR If your Service terminates for any reason except death or
TERMINATION Disability, then your Option will expire at the close of
business at Company headquarters no less than 30 days
after your termination date.
DEATH If you die as an Employee, then your Option will expire at
the close of business at Company headquarters on a day not
less than 6 months after the date of death. During the 6-
month period, your estate or heirs may exercise the vested
portion of your Option.
DISABILITY If your Service terminates because of your Disability,
then your Option will expire at the close of business at
the Company headquarters on the day not less than 6 months
after your termination date.
A-1
<PAGE>
LEAVES OF ABSENCE For purposes of this Option, your status as an Employee
does not terminate when you go on a military leave, a sick
leave or another bona fide leave of absence that was
approved by the Company in writing if the terms of the
leave provide for continued service crediting, or when
continued service crediting is required by applicable law.
Your status as an Employee terminates in any event when
the approved leave ends, unless you immediately return to
active work.
The Company determines which leaves count for this
purpose, whether your Option continues to vest during a
leave and when your service terminates for all purposes
under the Plan.
NOTICE OF EXERCISE When you wish to exercise this Option, you must notify the
Company by filing the proper "Notice of Exercise" form at
the address given on the form. The Company may prescribe a
minimum number of shares of Common Stock which may be
purchased. Your notice must specify how many shares of
Common Stock you with to purchase. Your notice must also
specify how your Common Stock should be registered (in
your name only or in your and your spouse's names as
community property or as joint tenants with right of
survivorship). The notice will be effective when it is
received by the Company.
If someone else wants to exercise this Option after your
death, that person must prove to the Company's
satisfaction that he or she is entitled to do so.
RESTRICTIONS ON The Company will not permit you to exercise this Option if
EXERCISE the issuance of shares of the Company's Common Stock at
that time would violate any law or regulation.
A-2
<PAGE>
PERIODS OF Any other provision of this Agreement notwithstanding, the
NONEXERCISABILITY Company shall have the right to designate one or more
periods of time, each of which shall not exceed 180 days
in length, during which this Option shall not be
exercisable if the Company determines (in its sole
discretion) that such limitation on exercise could in any
way facilitate a lessening of any restriction on transfer
pursuant to the Securities Act of 1933 (the "Securities
Act") or any state securities laws with respect to any
issuance of securities by the Company, facilitate the
registration or qualification of any securities by the
Company under the Securities Act or any state securities
laws, or facilitate the perfection of any exemption from
the registration or qualification requirements of the
Securities Act or any applicable state securities laws for
the issuance or transfer of any securities. Such
limitation on exercise shall not alter the vesting
schedule set forth in this Agreement other than to limit
the periods during which this Option shall be exercisable.
*Form of Payment When you submit your notice of exercise, you must include
payment of the Option exercise price for the Option Shares
you are purchasing. Payment may be made in one (or a
combination) of the following forms:
. Promissory Note in favor of the Company, your
personal check, a cashier's check or a money order.
. Shares of the Company's Common Stock which have
already been owned by you for any time period
specified by the Committee and which are surrendered to
the Company. The value of such shares, determined as of
the effective date of the Option exercise, will be
applied to the Exercise Price.
. To the extent that a public market for the Option
Shares exists as determined by the Company, by delivery
(on a form prescribed by the Committee) of an
irrevocable direction to a securities broker to sell
Option Shares and to deliver all or part of the sale
proceeds to the Company in payment of the aggregate
Exercise Price.
WITHHOLDING TAXES You will not be allowed to exercise this Option unless you
make acceptable arrangements to pay any withholding or
other taxes that may be due as a result of the Option
exercise or the sale of Option Shares acquired upon
exercise of this Option.
A-3
<PAGE>
RESTRICTIONS ON You agree that the Option Shares may not be sold,
RESALE transferred, pledged or otherwise disposed of until the
repurchase rights with respect to those Option Shares
expire. By signing this Agreement, you agree not to sell
any Option Shares at a time when applicable laws,
regulations or Company or underwriter trading policies
prohibit a sale.
You represent and agree that the Option Shares to be
acquired upon exercising this Option will be acquired for
investment, and not with a view to the sale or
distribution thereof.
In the event that the sale of Option Shares under the Plan
is not registered under the Securities Act of 1933, as
amended, but an exemption is available which requires an
investment representation or other representation, you
shall represent and agree at the time of exercise that the
Option Shares being acquired upon exercising this Option
are being acquired for investment, and not with a view to
the sale or distribution thereof, and shall make such
other representations as are deemed necessary or
appropriate by the Company and its counsel.
THE COMPANY'S In the event that you propose to sell, pledge or otherwise
RIGHT OF FIRST transfer to a third party any Option Shares acquired
REFUSAL under this Agreement, or any interest in such Option
Shares, the Company shall have the "Right of First
Refusal" with respect to all (and not less than all) of
such Option Shares. If you desire to transfer Option
Shares acquired under this Agreement, you must give a
written "Transfer Notice" to the Company describing fully
the proposed transfer, including the number of Option
Shares proposed to be transferred, the proposed transfer
price and the name and address of the proposed transferee.
The Transfer Notice shall be signed both by you and by the
proposed new transferee and must constitute a binding
commitment of both parties to the transfer of the Option
Shares. The Company shall have the right to purchase all,
and not less than all, of the Option Shares on the terms
of the proposal described in the Transfer Notice (subject,
however, to any change in such terms permitted in the next
paragraph) by delivery of a notice of exercise of the
Right of First Refusal within 30 days after the date when
the Transfer Notice was received by the Company. The
Company's rights under this Subsection shall be freely
assignable, in whole or in part.
A-4
<PAGE>
If the Company fails to exercise is Right of First Refusal
within 30 days after the date when it received the
Transfer Notice, you may, not later than 90 days following
receipt of the Transfer Notice by the Company, conclude a
transfer of the Option Shares subject to the Transfer
Notice on the terms and conditions described in the
Transfer Notice. Any proposed transfer on terms and
conditions different form those described in the Transfer
Notice, as well as any subsequent proposed transfer by
you, shall again be subject to the Right of First Refusal
and shall require compliance with the procedure described
in the paragraph above. If the Company exercises its Right
of First Refusal, the parties shall consummate the sale of
the Option Shares on the terms set forth in the Transfer
Notice within 60 days after the date when the Company
received the Transfer Notice (or within such longer period
as may have been specified in the Transfer Notice);
provided, however, that in the event the Transfer Notice
provided that payment for the Option Shares was to be made
in a form other than lawful money paid at the time of
transfer, the Company shall have the Option of paying for
the Option Shares with lawful money equal to the present
value of the consideration described in the Transfer
Notice.*
The Company's Right of First Refusal shall inure to the
benefit of its successors and assigns and shall be binding
upon any transferee of the Option Shares.
The Company's Right of First Refusal shall terminate in
the event that the Company's Common Stock is listed on an
established stock exchange or is quoted regularly on the
Nasdaq National Market.
A-5
<PAGE>
RIGHT OF Following termination of your Service for any reason, the
REPURCHASE Company shall have the right to repurchase all of those
unvested Option Shares that you have or will acquire under
this Option. If the Company fails to provide you with
written notice of its intention to purchase such Option
Shares before or within 30 days of the date the Company
receives written notice from you of your termination of
Service, the Company's right to purchase such Option
Shares shall terminate. If the Company exercises its right
to purchase such Option Shares, the Company will
consummate the purchase of such Option Shares within 60
days of the date of its written notice to you. The
purchase price for any Option Shares repurchased shall be
equal to the Exercise Price for those Option Shares ($.20
per share) and shall be paid in cash, or by cancellation
of all or a portion of any indebtedness owed by you to the
Company. To secure its repurchase right, the Company shall
retain the certificates representing Option Shares until
such time as the repurchase rights expire as provided
herein. Upon any exercise of repurchase rights, the
Company shall be authorized to transfer or cancel the
Option Shares so repurchased without any further actions
of you.
TRANSFER OF OPTION Prior to your death, only you may exercise this Option.
You cannot transfer or assign this Option. For instance,
you may not sell this Option or use it as security for a
loan. If you attempt to do any of these things, this
Option will immediately become invalid. You may, however,
dispose of this Option in your will or designate a
beneficiary.
Regardless of any marital property settlement agreement,
the Company is not obligated to honor a notice of exercise
from your spouse or former spouse, nor is the Company
obligated to recognize such individual's interest in your
Option in any other way.
RETENTION RIGHTS Neither your Option nor this Agreement give you the right
to be retained by the Company (or any subsidiaries) in any
capacity. The Company (and any subsidiaries) reserve the
right to terminate your Service at any time for any
reason.
SHAREHOLDER RIGHTS You, or your estate or heirs, have no rights as a
shareholder of the Company until a certificate for the
shares of the Company's Common Stock acquired upon
exercise of this Option has been issued. No adjustments
are made for dividends or other rights if the applicable
record date occurs before your stock certificate is
issued, except as described in the Plan.
A-6
<PAGE>
ADJUSTMENTS On the event of a stock split, a stock dividend or a
similar change in the outstanding Common Stock of the
Company, the number of shares of the Company's Common
Stock covered by this Option and the exercise price per
share may be adjusted pursuant to the Plan. Your Option
shall be subject to the terms of the agreement of merger,
liquidation or reorganization in the event the Company is
subject to such corporate activity.
AMENDMENTS AND This Agreement may be amended in writing signed by both
ADMINISTRATION parties. The Committee shall have the sole discretion to
interpret and administer this Agreement and to adopt rules
and policies to administer and enforce this Agreement.
LEGENDS All certificates representing the Option Shares issued
upon exercise of this Option shall, where applicable, have
endorsed thereon the following legends:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AND OPTIONS TO PURCHASE
SUCH SHARES SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY
AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN
INTEREST. A COPY OF SUCH AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON
WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY BY THE
HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS
CERTIFICATE."
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND
ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED."
APPLICABLE LAW This Agreement will be interpreted and enforced under the
laws of the State of California.
THE PLAN AND The text of the Plan is incorporated in this Agreement by
OTHER AGREEMENTS reference. Certain capitalized terms used in this
Agreement or in the Notice of Grant which are not defined
herein or in the Notice of Grant shall have the meanings
defined in the Plan.
A-7
<PAGE>
ENTIRE AGREEMENT This Agreement, that certain employment letter, dated
February 26, 1997, by and between you and the Company,
as amended or superseded from time to time, and the Plan
constitute the entire understanding between you and the
Company regarding this Option and Option Shares. Any
prior agreements, commitments or negotiations concerning
this Option or Option Shares are superseded.
By signing the cover sheet of this Agreement, you agree to all of the terms
and conditions described above and in the Plan.
A-8
<PAGE>
EXHIBIT 10.19
GMS DENTAL GROUP, INC.
1996 PERFORMANCE STOCK OPTION PLAN
NOTICE OF GRANT OF STOCK OPTION
-------------------------------
Notice is hereby given of the following option grant (the "Option") to
purchase Shares of Stock of GMS Dental Group, Inc., a Delaware corporation (the
"Company"):
Optionee: Michael T. Fiore
--------
Grant Date: April 1, 1997
----------
Vesting Commencement Date: April 1, 1997
-------------------------
Exercise Price: $.20 per share
--------------
Number of Option Shares: 75,000 shares
-----------------------
Expiration Date: March 31, 2001
---------------
Type of Option: X Incentive Stock Option
-------------- ---
Non-Statutory Stock Option
---
Date Exercisable: Immediately Exercisable
----------------
Vesting Schedule: The Option Shares shall be unvested and subject to
----------------
repurchase by the Company at the Exercise Price paid per share.
Optionee shall acquire a vested interest in, and the Company's
repurchase right shall accordingly lapse with respect to the Option
Shares in accordance with the financial performance objectives and
vesting schedule set forth in Schedule 1 to Exhibit A hereto. In no
---------- ---------
event shall any additional Option Shares vest after Optionee's
cessation of Service.
Optionee understands and agrees that the Option is granted subject to
and in accordance with the terms of the GMS Dental Group, Inc. 1996 Performance
Stock Option Plan (the "Plan"). Optionee further agrees to be bound by the
terms of the Plan and the terms of the Option as set forth in the Incentive
Stock Option Agreement attached hereto as Exhibit A. Optionee hereby
---------
acknowledges receipt of a copy of the Plan in the form attached hereto as
Exhibit B.
- ---------
1
<PAGE>
REPURCHASE RIGHTS. OPTIONEE HEREBY AGREES THAT ALL OPTION SHARES
-----------------
ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO CERTAIN REPURCHASE
RIGHTS EXERCISABLE BY THE COMPANY AND ITS ASSIGNS. THE TERMS OF SUCH RIGHTS ARE
SPECIFIED IN THE INCENTIVE STOCK OPTION AGREEMENT ATTACHED HERETO AS EXHIBIT A.
---------
No Employment or Service Contract. Nothing in this Notice or in the
---------------------------------
attached Stock Option Agreement or Plan shall confer upon Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Company (or any Subsidiary
employing or retaining Optionee) or of Optionee, which rights are hereby
expressly reserved by each, to terminate Optionee's Service at any time for any
reason, with or without cause. All rights to terminate Optionee 's Service
shall be as set forth in that certain offer of employment letter between the
Company and Optionee, dated February 26, 1997, as may be amended or superseded.
Definitions. All capitalized terms in this Notice shall have the
-----------
meaning assigned to them in this Notice or in the attached Performance Stock
Option Agreement.
Dated: April 1, 1997
GMS DENTAL GROUP, INC.
By: /s/ Grant M. Sadler
-------------------------------
Grant M. Sadler
Its: Chairman of the Board of Directors
MICHAEL T. FIORE, OPTIONEE
By: /s/ Michael T. Fiore
------------------------
Michael T. Fiore
Address:
--------------------------
--------------------------
--------------------------
ATTACHMENTS
- -----------
Exhibit A - Stock Option Agreement
Exhibit B - 1996 Performance Stock Option Plan
2
<PAGE>
EXHIBIT A
---------
INCENTIVE STOCK OPTION AGREEMENT
--------------------------------
<PAGE>
GMS DENTAL GROUP, INC.
1996 PERFORMANCE STOCK OPTION PLAN
INCENTIVE STOCK OPTION AGREEMENT
INCENTIVE STOCK This option is intended to be an incentive stock option
OPTION under Section 422 of the Internal Revenue Code and will
be interpreted accordingly.
VESTING The Option Shares shall be unvested and subject to
repurchase by the Company at the Exercise Price paid per
share. Optionee shall acquire a vested interest in, and
the Company's repurchase right shall accordingly lapse
with respect to the Option Shares in accordance with the
financial performance objectives and vesting schedule
set forth in Schedule 1 hereto. In no event shall any
additional Option Shares vest after Optionee's cessation
of Service.
TERM Your option will expire in any event at the close of
business at Company headquarters on the day before the
5th anniversary of the Date of Grant, as shown on the
cover sheet. (It will expire earlier if your Company
service terminates, as described below.)
REGULAR If your service as an employee of the Company (or any
TERMINATION subsidiary) terminates for any reason except death or
Disability, then your Option will expire at the close of
business at Company headquarters no less than 30 days
after your termination date.
DEATH If you die as an employee of the Company (or any
subsidiary), then your Option will expire at the close
of business at Company headquarters on a day not less
than 6 months after the date of death. During the 6-
month period, your estate or heirs may exercise the
vested portion of your option.
DISABILITY If your service as an employee of the Company (or any
subsidiary) terminates because of your Disability, then
your Option will expire at the close of business at the
Company headquarters on the day not less than 6 months
after your termination date.
A-1
<PAGE>
LEAVES OF ABSENCE For purposes of this Option, your status as an Employee
does not terminate when you go on a military leave, a
sick leave or another bona fide leave of absence that
was approved by the Company in writing if the terms of
the leave provide for continued service crediting, or
when continued service crediting is required by
applicable law. Your status as an Employee terminates in
any event when the approved leave ends, unless you
immediately return to active work.
The Company determines which leaves count for this
purpose, whether your option continues to vest during a
leave and when your service terminates for all purposes
under the Plan.
NOTICE OF EXERCISE When you wish to exercise this Option, you must notify
the Company by filing the proper "Notice of Exercise"
form at the address given on the form. The Company may
prescribe a minimum number of shares of Common Stock
which may be purchased. Your notice must specify how
many shares of Common Stock you with to purchase. Your
notice must also specify how your Common Stock should be
registered (in your name only or in your and your
spouse's names as community property or as joint tenants
with right of survivorship). The notice will be
effective when it is received by the Company.
If someone else wants to exercise this option after your
death, that person must prove tot he Company's
satisfaction that he or she is entitled to do so.
RESTRICTIONS ON The Company will not permit you to exercise this Option
EXERCISE if the issuance of Common stock at that time would
violate any law or regulation.
A-2
<PAGE>
PERIODS OF Any other provision of this Agreement notwithstanding,
NONEXERCISABILITY the Company shall have the right to designate one or
more periods of time, each of which shall not exceed 180
days in length, during which this Option shall not be
exercisable if the Company determines (in its sole
discretion) that such limitation on exercise could in
any way facilitate a lessening of any restriction on
transfer pursuant to the Securities Act of 1933 (the
"Securities Act") or any state securities laws with
respect to any issuance of securities by the Company,
facilitate the registration or qualification of any
securities by the Company under the Securities Act or
any state securities laws, or facilitate the perfection
of any exemption from the registration or qualification
requirements of the Securities Act or any applicable
state securities laws for the issuance or transfer of
any securities. Such limitation on exercise shall not
alter the vesting schedule set forth in this Agreement
other than to limit the periods during which this option
shall be exercisable.
*FORM OF PAYMENT When you submit your notice of exercise, you must
include payment of the option exercise price for the
Shares you are purchasing. Payment may be made in one
(or a combination) of the following forms:
. Your personal check, a cashier's check or a money
order.
. Common Shares which have already been owned by you
for any time period specified by the Committee and
which are surrendered to the Company. The value of
the Shares, determined as of the effective date of
the option exercise, will be applied to the option
price.
. To the extent that a public market for the Shares
exists as determined by the Company, by delivery (on
a form prescribed by the Committee) of an irrevocable
direction to a securities broker to sell Shares and
to deliver all or part of the sale proceeds to the
Company in payment of the aggregate Exercise Price.
WITHHOLDING TAXES You will not be allowed to exercise this option unless
you make acceptable arrangements to pay any withholding
or other taxes that may be due as a result of the option
exercise or the sale of shares acquired upon exercise of
this option and the sale of the shares.
A-3
<PAGE>
RESTRICTIONS ON By signing this Agreement, you agree not to sell any
RESALE option Shares at a tine when applicable laws,
regulations or Company or underwriter trading policies
prohibit a sale.
You represent and agree that the Shares to be acquired
upon exercising this option will be acquired for
investment, and not with a view to the sale or
distribution thereof.
In the event that the sale of Share under the Plan is
not registered under the Securities Act of 1933, as
amended, but an exemption is available which requires an
investment representation or other representation, you
shall represent and agree at the time of exercise that
the Shares being acquired upon exercising this option
are being acquired for investment, and not with a view
to the sale or distribution thereof, and shall make such
other representations as are deemed necessary or
appropriate by the Company and its counsel.
THE COMPANY'S In the event that you propose to sell, pledge or
RIGHT OF FIRST otherwise transfer to a third party any Shares acquired
REFUSAL under this Agreement, or any interest in such Shares,
the Company shall have the "Right of First Refusal" with
respect to all (and not less than all) of such Shares.
If you desire to transfer Shares acquired under this
Agreement, you must give a written "Transfer Notice" to
the Company describing fully the proposed transfer,
including the number of Shares proposed to be
transferred, the proposed transfer price and the name
and address of the proposed transferee. The Transfer
Notice shall be signed both by you and by the proposed
new transferee and must constitute a binding commitment
of both parties to the transfer of the Shares. The
Company shall have the right to purchase all, and not
less than all, of the Shares on the terms of the
proposal described in the Transfer Notice (subject,
however, to any change in such terms permitted in the
next paragraph) by delivery of a notice of exercise of
the Right of First Refusal within 30 days after the date
when the Transfer Notice was received by the Company.
The Company's rights under this Subsection shall be
freely assignable, in whole or in part.
A-4
<PAGE>
If the Company fails to exercise is Right of First
Refusal within 30 days after the date when it received
the Transfer Notice, you may, not later than 90 days
following receipt of the Transfer Notice by the Company,
conclude a transfer of the Shares subject to the
Transfer Notice on the terms and conditions described in
the Transfer Notice. Any proposed transfer on terms and
conditions different form those described in the
Transfer Notice, as well as any subsequent proposed
transfer by you, shall again be subject to the Right of
First Refusal and shall require compliance with the
procedure described in the paragraph above. If the
Company exercises its Right of First Refusal, the
parties shall consummate the sale of the Shares on the
terms set forth in the Transfer Notice within 60 days
after the date when the Company received the Transfer
Notice (or within such longer period as may have been
specified in the Transfer Notice); provided, however,
that in the event the Transfer Notice provided that
payment for the Shares was to be made in a form other
than lawful money paid at the time of transfer, the
Company shall have the option of paying for the Share
with lawful money equal to the present value of the
consideration described in the Transfer Notice.*
The Company's Right of First Refusal shall inure to the
benefit of its successors and assigns and shall be
binding upon any transferee of the shares.
The Company's Right of First Refusal shall terminate in
the event that Stock is listed on an established stock
exchange or is quoted regularly on the Nasdaq National
Market.
RIGHT OF At any time following the Company's failure to achieve
REPURCHASE the performance objectives set forth on Schedule 1 or
following termination of your employment for any reason,
the Company shall have the right to repurchase all of
those Option Shares that you have or will acquire under
this Option. If the Company fails to provide you with
written notice of its intention to purchase such shares
before or within 30 days of the date the Company
receives written notice from you of your termination of
employment, the Company's right to purchase such shares
shall terminate. If the Company exercises its right to
purchase such shares, the Company will consummate the
purchase of such shares within 60 days of the date of
its written notice to you. The purchase price for any
shares repurchased shall be equal to the Exercise Price
for those shares ($.20 per share) and shall be paid in
cash.
A-5
<PAGE>
TRANSFER OF OPTION Prior to your death, only you may exercise this Option.
You cannot transfer or assign this Option. For instance,
you may not sell this option or use it as security for a
loan. If you attempt to do any of these things, this
Option will immediately become invalid. You may,
however, dispose of this Option in your will or
designate a beneficiary.
Regardless of any marital property settlement agreement,
the Company is not obligated to honor a notice of
exercise from your spouse or former spouse, nor is the
Company obligated to recognize such individual's
interest in your Option in any other way.
RETENTION RIGHTS Neither your Option or this Agreement do not give you
the right to be retained by the Company (or any
subsidiaries) in any capacity. The Company (and any
subsidiaries) reserve the right to terminate your
service at any time for any reason.
SHAREHOLDER RIGHTS you, or your estate or heirs, have no rights as a
shareholder of the Company until a certificate for the
shares of Common stock acquired upon exercise of this
Option has been issued. No adjustments are made for
dividends or other rights if the applicable record date
occurs before your stock certificate is issued, except
as described in the Plan.
ADJUSTMENTS On the event of a stock split, a stock dividend or a
similar change in the outstanding Common Stock of the
Company, the number of shares of Common Stock covered by
this Option and the exercise price per share may be
adjusted pursuant to the Plan. Your Option shall be
subject to the terms of the agreement of merger,
liquidation or reorganization in the event the Company
is subject to such corporate activity.
AMENDMENTS AND This Agreement may be amended in writing signed by both
ADMINISTRATION parties. The Committee shall have the sole discretion to
interpret and administer this Agreement and to adopt
rules and policies to administer and enforce this
Agreement.
A-6
<PAGE>
LEGENDS All certificates representing the shares issued upon
exercise of this Option shall, where applicable, have
endorsed thereon the following legends:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO CERTAIN RESTRICTIONS ON TRANSFER AND OPTIONS TO
PURCHASE SUCH SHARES SET FORTH IN AN AGREEMENT BETWEEN
THE COMPANY AND THE REGISTERED HOLDER, OR HIS OR HER
PREDECESSOR IN INTEREST. A COPY OF SUCH AGREEMENT IS ON
FILE AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE
FURNISHED UPON WRITTEN REQUEST TO THE SECRETARY OF THE
COMPANY BY THE HOLDER OF RECORD OF THE SHARES
REPRESENTED BY THIS CERTIFICATE."
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY
AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED."
APPLICABLE LAW This Agreement will be interpreted and enforced under
the laws of the State of California.
THE PLAN AND The text of the Plan is incorporated in this Agreement
OTHER AGREEMENTS by reference. Certain capitalized terms used in this
Agreement are defined in the Plan.
ENTIRE AGREEMENT This Agreement, that certain employment letter, dated
February 26, 1997, by and between you and the Company,
as amended or superseded from time to time, and the Plan
constitute the entire understanding between you and the
Company regarding this Option and the Option Shares. Any
prior agreements, commitments or negotiations concerning
this Option or the Option Shares are superseded.
By signing the cover sheet of this Agreement, you agree to all of the terms
and conditions described above and in the Plan.
A-7
<PAGE>
SCHEDULE 1
----------
Financial Performance Objectives
The Repurchase Right as to the Option Shares subject to vesting based
on financial performance objectives (the "Performance Objectives") will expire
in 1997 with respect to up to one-half ( 1/2) of the Option Shares (the "Initial
Amount") and in 1998 with respect to the remaining half of the Option Shares
(the "Second Amount"), but only if the following conditions are met:
(i) the aggregate consideration paid by the Company for acquired
dental practices from (x) inception through December 31, 1997 (with respect to
the Initial Amount) and (y) from inception through December 31, 1998 (with
respect to the Second Amount) does not exceed an amount equal to six (6)
multiplied by the aggregate of the earnings before interest, taxes, depreciation
and amortization ("EBITDA") for such practices for the immediately preceding
twelve (12) month period; and
(ii) Adjusted EBITDA (as defined below) exceeds seventy-five percent
(75%) of Target EBITDA (as defined below) for (x) the Company's fiscal year
ended December 31, 1997 (with respect to the Initial Amount) or (y) the
Company's fiscal year ended December 31, 1998 (with respect to the Second
Amount).
For purposes of this Schedule 1, the term "Target EBITDA" shall mean
----------
$6,298,000 for the fiscal year ended December 31, 1997 and $16,911,000 for the
fiscal year ended December 31, 1998. For purposes of this Schedule 1, the term
----------
"Adjusted EBITDA" shall mean the Company's EBITDA less corporate general and
administrative expenses (but excluding direct expenses incurred in connection
with the employment of a CEO, such as salary, bonus, travel and entertainment,
car allowance and costs of administrative assistant). All computation of
EBITDA, Target EBITDA and Adjusted EBITDA shall be based on audited financial
statements of the Company.
Vesting Formula
If the conditions set forth above are met, that number of shares of
the Initial Amount and Second Amount shall vest as of the dates indicated above
as follows:
Percentage of Target Percentage of Initial Amount or
EBITDA Achieved by Company Second Amount Shares Which Will Vest
-------------------------- ------------------------------------
75% or less of Target EBITDA 0%
100% of Target EBITDA or greater 100%
Greater than 75%, but less than 100% The percentage which will vest shall
decrease linearly to 0% as the
percentage of Target EBITDA achieved
decreases from 100% to 75%
<PAGE>
EXHIBIT 10.21
SECURITY AGREEMENT
THIS AGREEMENT, entered into as of April 1, 1997, between GMS DENTAL GROUP,
INC., a Delaware corporation (the "Company"), and MICHAEL T. FIORE
("Purchaser").
W I T N E S S E T H:
WHEREAS, Purchaser has purchased from the Company 750,000 shares of the
Company's Common Stock (the "Shares"); and
WHEREAS, the Company has loaned to Purchaser the amount of $150,000.00
which Purchaser has used to pay the purchase price of the Shares; and
WHEREAS, Purchaser has executed and delivered to the Company a
full-recourse Promissory Note evidencing such loan (the "Note") and has agreed
to pledge all of the Shares to the Company as security for the payment of the
Note:
NOW, THEREFORE, it is agreed as follows:
1. Purchaser hereby delivers to the Company one or more certificates
representing the Shares, together with two Assignments Separate From Certificate
endorsed in blank by the Purchaser. Purchaser hereby pledges and grants a
security interest in the Shares, including any shares into which the Shares may
be converted and all proceeds of the Shares, as security for the timely payment
of all of Purchaser's obligations under the Note and for Purchaser's performance
of all of its obligations under this Agreement. In the event of a default in
payment of the Note, Purchaser hereby appoints the Company as his true and
lawful attorney to take such action as may be necessary or appropriate to cause
the Shares to be transferred into the name of the Company or any assignee of the
Company and to take any other action on behalf of Purchaser permitted hereunder
or under applicable law.
2. The Company agrees to hold the Shares as security for the timely
payment of all of Purchaser's obligations under the Note and for Purchaser's
performance of all of its obligations under this Agreement, as provided herein.
At no time shall the Company dispose of or encumber the Shares, except as
otherwise provided in this Agreement.
3. At all times while the Company is holding the Shares as security under
this Agreement, the Company shall:
(a) Collect any dividends that may be declared on the Shares and
credit such dividends against any accrued interest or unpaid principal under the
Note, as part payment;
(b) Collect and hold any shares that may be issued upon conversion of
the Shares; and
<PAGE>
(c) Collect and hold any other securities or other property that
may be distributed with respect to the Shares.
Such shares and other securities or property shall be subject to the security
interest granted in Section 1 of this Agreement and shall be held by the Company
under this Agreement.
4. While the Shares are pledged to the Company, as security under
this Agreement, Purchaser shall have the right to vote the Shares at all
meetings of the Company's stockholders; provided that Purchaser is not in
default in the performance of any material term of this Agreement or in any
payment due under the Note. In the event of such a default, the Company shall
have the right to the extent permitted by law to vote and to give consents,
recertifications and waivers and take any other action with respect to the
Shares with the same force and effect as if the Company were the absolute and
sole owner of the Shares.
5. Upon payment of all or part of the outstanding principal balance
of the Note and any interest and other charges due under the Note, the Company
shall release from pledge and redeliver to Purchaser the certificate(s)
representing the Shares for which payment has been received and the Assignment
Separate From Certificate forms.
6. Following ten (10) days prior written notice of Purchaser's
failure to perform any material term of this Agreement or failure to make any
payment when due under the Note, and Purchaser has not cured such failure within
the 10-day period, the Company shall have all of the rights and remedies of a
creditor and secured party at law and in equity, including (without limitation)
through a public or private sale or at any broker's board or on any securities
exchange, for cash, upon credit or for future deliver. The Company is authorized
at any such sale, if it deems it advisable to do so, to restrict the prospective
bidders or purchasers of any of the Shares to persons who will represent and
agree that they are purchasing for their own account for investment, and not
with a view to the distribution or sale of any of the Shares, to restrict the
prospective bidders or purchasers and the use any purchaser may make of the
Shares and impose any other restriction or condition that the Company deems
necessary or advisable under the federal and state securities laws. Upon any
such sale the Company shall have the right to deliver, assign and transfer to
Purchaser thereof the Shares so sold. Each purchaser at any such sale shall hold
the Shares so sold absolute, free from any claim or right of any kind. In case
of any sale of any or all of the Shares on credit or for future delivery, the
Shares so sold may be retained by the Company until the selling price is paid by
Purchaser thereof, but the Company shall not incur any liability in case of the
failure of such purchaser to take up and pay for the Shares to sold and, in case
of any such failure, such Shares may again be sold under the terms of this
section. Purchaser hereby agrees that any disposition of any or all of the
Shares by way of a private placement or other method which is in the opinion of
the Company is required or advisable under Federal and state securities laws is
commercially reasonable. At any public sale, the Company may (if it is the
highest bidder) purchase all or any part of the Shares at such price as the
Company deems proper. Out of the proceeds of any sale, the Company may retain an
amount sufficient to pay all amounts then due under the Note, together with the
expenses of the sale an reasonable attorneys' fees. The Company shall pay
<PAGE>
the balance of such proceeds, if any, to Purchaser. Purchaser shall be liable
for any deficiency that remains after the Company has exercised its rights under
this Agreement.
7. This Agreement shall be governed by and construed in accordance
with the laws of the State of California. This Agreement shall inure to the
benefit of, and be binding upon, the Company and its successors and assigns and
be binding upon Purchaser and Purchaser's legal representative, heirs, legatees,
distributees, assigns and transferees by operation of law. This Agreement
contains the entire security agreement between the Company and Purchaser.
Purchaser will execute any additional agreements, assignments or documents or
take any other actions reasonably required by the Company to preserve and
perfect the security interest in the Shares granted to the Company herein and
otherwise to effectuate this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer, and Purchaser has
personally executed this Agreement.
GMS DENTAL GROUP, INC.
By _____________________________
Grant M. Sadler
Chairman of the Board
PURCHASER
________________________________
Michael T. Fiore
<PAGE>
EXHIBIT 10.22
ACKNOWLEDGEMENT AND CLARIFICATION
OF REPURCHASE RIGHTS AGREEMENT
------------------------------
THIS ACKNOWLEDGEMENT AND CLARIFICATION OF REPURCHASE RIGHTS AGREEMENT dated
as of October 31, 1997, is executed by and between GMS Dental Group, Inc., a
Delaware corporation (the "Company") and Michael T. Fiore ("Shareholder"), with
reference to the following facts:
RECITALS
--------
A. On April 1, 1997, the Company granted to Shareholder performance stock
options for 75,000 shares of the Company's Common Stock (the "GMS Common Stock")
pursuant to that certain Incentive Stock Option Agreement, dated April 1, 1997,
by and between the Company and Shareholder (the "Incentive Stock Option
Agreement") and Shareholder exercised such options on the same date and acquired
75,000 shares of GMS Common Stock (the "Shares").
B. Pursuant to the Incentive Stock Option Agreement, the Shares are
subject to certain repurchase rights of the Company (the "Repurchase Rights").
C. On October 17, 1997 the Board of Directors of the Company approved a
merger (the "Merger") of the Company with and into Gentle Dental Service
Corporation, a Washington corporation ("GDSC") pursuant to which all shares of
GMS Common Stock outstanding immediately prior to the Merger will be exchanged
for shares of the common stock of GDSC (the "GDSC Common Stock").
D. The parties to this Agreement wish to hereby supplement the Incentive
Stock Option Agreement in order to clarify that following the Merger, the shares
of GDSC Common Stock the Shareholder will receive in the Merger in exchange for
the Shares will be subject to the Repurchase Rights.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agrees as
follows:
1. Repurchase Rights Clarification. Following the Merger, the shares
-------------------------------
of GDSC Common Stock the Shareholder will receive in the Merger in exchange for
the Shares will be subject to the Repurchase Rights; provided, however, the
parties hereby acknowledge and agree that the Repurchase Rights shall not become
exercisable by the Company unless and until there is a failure of the Company to
achieve the milestones in the time periods indicated in the Incentive Stock
Option Agreement and attached hereto as Exhibit A.
---------
2. Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
3. Successors and Assigns. This Agreement shall be binding upon and
-----------------------
inure to the benefit of the parties' successors and assigns.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Acknowledgement and
Clarification of Repurchase Rights Agreement as of the date first above written.
COMPANY:
GMS DENTAL GROUP, INC.
By: /s/ Michael T. Fiore
-------------------------------------
Michael T. Fiore, President and
Chief Executive Officer
SHAREHOLDER:
/s/ Michael T. Fiore
----------------------------------------
Michael T. Fiore
<PAGE>
EXHIBIT A
---------
FINANCIAL PERFORMANCE OBJECTIVES
The repurchase right as to the Performance Option Shares subject to
vesting based on financial performance objectives (the "Performance Objectives")
will expire in 1997 with respect to up to one-half (1/2) of the Performance
Option Shares (the "Initial Amount") and in 1998 with respect to the remaining
half of the Performance Option Shares (the "Second Amount"), but only if the
following conditions are met:
(i) the aggregate consideration paid by the Company for acquired
dental practices from (x) inception through December 31, 1997 (with respect to
the Initial Amount) and (y) from inception through December 31, 1998 (with
respect to the Second Amount) does not exceed an amount equal to six (6)
multiplied by the aggregate of the earnings before interest, taxes, depreciation
and amortization ("EBITDA") for such practices for the immediately preceding
twelve (12) month period; and
(ii) Adjusted EBITDA (as defined below) exceeds seventy-five percent
(75%) of Target EBITDA (as defined below) for (x) the Company's fiscal year
ended December 31, 1997 (with respect to the Initial Amount) or (y) the
Company's fiscal year ended December 31, 1998 (with respect to the Second
Amount).
For purposes of this Exhibit A, the term "Target EBITDA" shall mean
---------
$6,298,000 for the fiscal year ended December 31, 1997 and $16,911,000 for the
fiscal year ended December 31, 1998. For purposes of this Exhibit A, the term
---------
"Adjusted EBITDA" shall mean the Company's EBITDA less corporate general and
administrative expenses (but excluding direct expenses incurred in connection
with the employment of a CEO, such as salary, bonus, travel and entertainment,
car allowance and costs of administrative assistant). All computation of
EBITDA. Target EBITDA and Adjusted EBITDA shall be based on audited financial
statements of the Company.
Vesting Formula
If the conditions set forth above are met, that number of shares of
the Initial Amount and Second Amount shall vest as of the dates indicated above
as follows:
<TABLE>
<CAPTION>
Percentage of Target Percentage of Initial Amount or
EBITDA Achieved by Company Second Amount Shares Which Will Vest
-------------------------- ------------------------------------
<S> <C>
75% or less of Target EBITDA 0%
100% of Target EBITDA or greater 100%
Greater than 75%, but less than 100% The percentage which will vest shall decrease
linearly to 0% as the percentage of Target EBITDA
achieved decreases from 100% to 75%
</TABLE>
A-1
<PAGE>
EXHIBIT 10.23
GMS DENTAL GROUP, INC.
FOUNDER STOCK PURCHASE AGREEMENT
--------------------------------
THIS FOUNDER STOCK PURCHASE AGREEMENT is made as of this 31 day of August,
1996, by and between GMS DENTAL GROUP, INC., a Delaware corporation (the
----------------------
"Company"), and GRANT M.SADLER (the "Purchaser").
--------------
1. Purchase of Shares.
------------------
1.1 Purchase. Purchaser hereby purchases, and the Company hereby sells
--------
to Purchaser, 957,041 shares of the Company's Common Stock (the "Shares") at a
purchase price of $95,704.10 or $0.10 per share (the "Purchase Price")
1.2 Payment. Concurrently with the execution of this Agreement,
-------
Purchaser shall pay the Purchase Price for the Shares by full recourse
promissory note, in which case cash shall be paid to the extent of the par value
of the shares purchased with such promissory note. Purchaser shall also deliver
to the Secretary of the Company a duly executed blank Assignment Separate from
Certificate (in the form attached hereto as Exhibit A) and any additional
---------
documents required by the Company as a condition for the purchase. When and as
shares vest pursuant to Section 5.3, Purchaser shall receive a bonus from the
Company in the amount sufficient so that after payment of all federal and state
income and employment taxes, Purchaser retains an amount sufficient to make a
payment on the promissory note in an amount sufficient to release the vested
shares from the Security Agreement.
1.3 Delivery of Certificates. The certificates representing the Shares
------------------------
purchased hereunder and subject to the Company's Repurchase Right under Article
5 hereof shall be held in escrow by the Secretary of the Company as provided in
Article 5 hereof.
2. Securities Law Compliance.
-------------------------
2.1 Exemption From Registration. The Shares have not been registered
---------------------------
under the Securities Act of 1933, as amended (the "1933 Act") and are being
issued to Purchaser in reliance upon the exemption from such registration
provided by Rule 701 of the Securities and Exchange Commission (the
"Commission") for stock issuances under compensatory benefit arrangements such
as this Agreement. Purchaser hereby acknowledges receipt of a copy of this
Agreement.
2.2 Restricted Securities.
---------------------
(a) Purchaser hereby confirms that Purchaser has been informed that the
Shares are "restricted securities" under the
-1-
<PAGE>
1933 Act and may not be resold or transferred unless the Shares are first
registered under the federal securities laws or unless an exemption from such
registration is available. Accordingly, Purchaser hereby acknowledges that
Purchaser is prepared to hold the Shares for an indefinite period and that
Purchaser is aware that Rule 144 of the commission issued under the 1933 Act is
not presently available to exempt the sale of the Shares from the registration
requirements of the 1933 Act.
(b) Purchaser is aware of the adoption of Rule 144 by the Commission,
promulgated under the 1933 Act, which permits limited public resales of
securities acquired in a nonpublic offering, subject to the satisfaction of
certain conditions. Purchaser understands that under Rule 144, the conditions
include, among other things: the availability of certain current public
information about the issuer, the resale occurring not fewer than two (2) years
from the date the party purchased and paid for the securities to be sold, the
sale being through a broker in an unsolicited "broker's transaction" and the
amount of securities being sold during any three (3) month period not exceeding
specified limitations. Purchaser acknowledges and understands that the Company
may not be satisfying the current public information requirements of Rule 144
or other conditions under Rule 144 which are required of the Company at the time
Purchaser wishes to sell the Shares. If so, Purchaser understands that he will
be precluded from selling the securities under Rule 144, even if the two (2)
year holding period requirement of said Rule has been satisfied. Prior to
acquisition of the Shares, Purchaser acquired sufficient information about the
Company to reach an informed knowledgeable decision to acquire the Shares.
Purchaser has such knowledge and experience in financial and business matters as
to make him capable of evaluating the risks of the prospective investment and to
make an informed investment decision. Purchaser is able to bear the economic
risk of his investment in the Shares.
2.3 Disposition of Shares. Purchaser hereby agrees that Purchaser shall
---------------------
make no disposition of the Shares (other than a permitted transfer under Section
4.1) unless and until:
(a) Purchaser shall have notified the Company of the proposed
disposition and provided a written summary of the terms and conditions of
the proposed disposition;
(b) Purchaser shall have complied with all requirements of this
Agreement applicable to the disposition of the Shares; and
(c) Purchaser shall have provided the Company an opinion of counsel
in form and substance satisfactory to the Company, that (i) the proposed
disposition does not require registration of the Shares under the 1933 Act
or (ii) all appropriate action necessary for
-2-
<PAGE>
compliance with the registration requirements of the 1933 Act or
of any exemption from registration available under the 1933 Act
(including Rule 144) has been taken.
The Company shall not be required (i) to transfer on its books any Shares
that have been sold or transferred in violation of the provisions of this
Article 2 nor (ii) to treat as the owner of the Shares, or otherwise to accord
voting or dividend rights to, any transferee to whom the Shares have been
transferred in contravention of this Agreement.
2.4 Restrictive Legends. In order to reflect the restrictions on the
-------------------
disposition of the Shares, the stock certificates for the Shares will be
endorsed with restrictive legends, including one or both of the following
legends:
(a) "The securities represented by this certificate have
not been registered or qualified under the Securities Act of 1933
or the securities laws of any state, and may be offered and sold
only if registered and qualified pursuant to federal and state
securities laws or if the Company is provided an opinion of
counsel satisfactory to the Company that registration and
qualification under federal and state securities laws is not
required."
(b) If required by the authorities of any state in
connection with the issuance of the Shares, the legend or legends
required by such state authorities shall also be endorsed on all
such certificates.
3. Special Provisions.
------------------
3.1 Stockholder Rights. Until such time as the Company actually exercises
------------------
its repurchase rights under this Agreement, Purchaser (or any successor in
interest) shall have all the rights of a stockholder (including voting and
dividend rights) with respect to the Shares, including the Shares held in escrow
under Article 7, which are not subject to the vesting provisions set forth in
clause (iv) of Section 5.3. All shares are subject, however, to the transfer
restrictions of Article 4. Purchaser shall have no dividend rights with respect
to the shares which are subject to the vesting provisions of clause (iv) of
Section 5.3
3.2 Section 83(b) Election. Purchaser understands that under section 83 of
----------------------
the Internal Revenue Code of 1986, as amended (the "Code"), the difference
between the Purchase Price paid for the Shares and their fair market value on
the date any forfeiture restrictions applicable to such Shares lapse will be
reportable as ordinary income at that time. For this purpose, the term
"forfeiture restriction" includes the right of the Company to repurchase the
Unvested Shares under Article 5 of
-3-
<PAGE>
this Agreement. Purchaser understands that he may elect to be taxed at the time
the Shares are acquired hereunder to the extent the fair market value of the
Shares differs from the Purchase Price rather than when such Shares cease to be
subject to such forfeiture restrictions, by filing an election under section 83
(b) of the Code with the I.R.S. within thirty (30) days after the date of
purchase hereunder. The form for making this election is attached as Exhibit B
---------
hereto. Purchaser understands that failure to make this filing within the thirty
(30) day period will result in the recognition of ordinary income by Purchaser
(in the event the fair market value of the Shares increases after the date of
purchase) as the forfeiture restrictions lapse. PURCHASER ACKNOWLEDGES THAT IT
IS PURCHASER'S SOLE RESPONSIBILITY, AND NOT THE COMPANY'S, TO FILE A TIMELY
ELECTION UNDER SECTION 83(b), EVEN IF PURCHASER REQUESTS THE COMPANY OR ITS
REPRESENTATIVES TO MAKE THIS FILING ON HIS/HER BEHALF. PURCHASER IS RELYING
SOLELY ON HIS OR HER ADVISORS WITH RESPECT TO THE DECISION AS TO WHETHER OR NOT
- ------
TO FILE AN 83(b) ELECTION.
3.3 Market Stand-Off.
----------------
(a) If requested by the Company and an underwriter of Common Stock (or
other securities) of the Company, the Purchaser shall not pledge, sell, offer to
sell, contract to sell, grant any option to purchase, make any short sale of any
Common Stock of the Company, or any options or warrants to purchase any shares
of the Common Stock of the Company or any securities convertible into or
exchangeable for shares of Common Stock of the Company, whether now owned or
hereinafter acquired, owned directly by the Purchaser or with respect to which
the Purchaser has beneficial ownership within the rules and regulations of the
Commission (collectively, the "Purchaser Shares"); otherwise than (a) as a bona
fide gift or gifts, provided that the donee or donees thereof agree to be bound
by the restrictions set forth herein, (b) a transfer to any trust for the direct
or indirect benefit of the Purchaser or his or her immediate family provided
that the trustee of the trust agrees to be bound by the restrictions set forth
herein, held by the Purchaser during the one hundred eighty (180) day period
following the effective date of a registration statement of the Company filed
under the 1933 Act.
(b) In the event of any stock dividend, stock split, recapitalization or
other change affecting the Company's outstanding common Stock effected without
receipt of consideration, then any new, substituted or additional securities
distributed with respect to the Shares shall be immediately subject to the
provisions of this Section 3.3, to the same extent the Shares are at such time
covered by such provisions.
For purposes of this Section 3.3, "immediate family" shall mean any
relationship by blood, marriage or adoption, not more
-4-
<PAGE>
remote than first cousin. The Purchaser also agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent and registrar
against the transfer of the Purchaser Shares except in compliance with the
foregoing restrictions.
The obligations described in this Section 3.3 shall not apply to a
registration statement relating solely to employee benefit plans on Form S-1 or
Form S-8 or similar forms that may be promulgated in the future, or a
registration relating solely to a Commission Rule 145 transaction on Form S-4 or
similar forms that may be promulgated in the future.
3.4 Stop Transfer. In order to enforce the provisions of Section 3.3, the
-------------
Company may impose stop-transfer instructions with respect to the Shares until
the end of the applicable stand-off period.
4. Transfer Restrictions.
---------------------
4.1 Restriction on Transfer. Purchaser shall not transfer, assign,
-----------------------
encumber, or otherwise dispose of any of the Shares that are subject to the
Company's Repurchase Right under Article 5. In addition, Shares that are
released from the Repurchase Right shall not be transferred, assigned,
encumbered, or otherwise made the subject of disposition in contravention of the
Company's First Refusal Right under Article 6. Such restrictions on transfer,
however, shall not be applicable if Purchaser receives prior written consent
from the Company to (i) a gratuitous transfer of the Shares made to Purchaser's
spouse or issue, including adopted children, or to a trust for the exclusive
benefit of Purchaser or Purchaser's spouse or issue, (ii) a transfer of title to
the Shares effected pursuant to Purchaser's will or the laws of intestate
succession, or (iii) a transfer to the Company in pledge as security for any
purchase-money indebtedness incurred by Purchaser in connection with the
acquisition of the Shares.
4.2 Transferee Obligations. Each person (other than the Company) to whom
----------------------
the Shares are transferred by means of one of the permitted transfers
specified in Section 4.1 must, as a condition precedent to such transfer,
acknowledge in writing to the Company that such person is bound by the
provisions of this Agreement and that the transferred shares are subject to (i)
both the Company's Repurchase Right and the Company's First Refusal Right
granted hereunder and (ii) the market stand-off provisions of Section 3.3, to
the same extent such shares would be so subject if retained by Purchaser.
4.3 Definition of Owner. For purposes of Articles 5, 6 and 7 of this
-------------------
Agreement, the term "Owner" shall include Purchaser and all subsequent holders
of the Shares who derive their chain of ownership through a permitted transfer
from Purchaser in accordance with Section 4.1.
-5-
<PAGE>
5. Repurchase Right.
----------------
5.1 Grant. The Company is hereby granted the right (the "Repurchase
-----
Right"), exercisable below) at any time during the sixty (60) day period
following the date Purchaser ceases to be a "Service Provider", to repurchase at
the Purchase Price all or (at the discretion of the Company and with the consent
of Purchaser) any portion of the Shares in which Purchaser has not acquired a
vested interest in accordance with Section 5.3 (the "Unvested Shares"). For
purposes of this Agreement, Purchaser shall be deemed to be a "Service Provider"
of the Company for so long as Purchaser renders services to the Company or one
or more of its parent or subsidiary corporations as an employee.
5.2 Exercise of the Repurchase Right and Termination of the Repurchase
------------------------------------------------------------------
Right. The Repurchase Right shall be exercisable by written notice delivered to
- -----
the Owner of the Shares prior to the expiration of the sixty (60) day period
specified in Section 5.1 (or, in certain cases, Section 5.4(b)). The notice
shall indicate the number of Shares to be repurchased and the date on which the
repurchase is to be effected, such date to be not more than thirty (30) days
after the date of notice. To the extent one or more certificates representing
Shares may have been previously delivered out of escrow to the Owner, then the
Owner shall, prior to the close of business on the date specified for the
repurchase, deliver to the Secretary of the Company the certificates
representing the Shares to be repurchased, properly endorsed for transfer. The
Company shall, concurrently with the receipt of such stock certificates, pay to
the Owner in cash or cash equivalents (including the cancellation of any
purchase-money indebtedness), an amount equal to the Purchase Price previously
paid for the Unvested Shares that are to be repurchased. The Repurchase Right
shall terminate with respect to any Shares for which it is not timely exercised
under Section 5.2. All Shares as to which the Repurchase Right lapses shall,
however, continue to be subject to (i) the First Refusal Right under Article 6,
(ii) the market stand-off provisions of Section 3.3 and (i) the transfer
restrictions set forth in Articles 2 and 4.
5.3 Vesting of Shares.
-----------------
Provided Purchaser continues to be a Service Provider of the Company,
Purchaser shall acquire a vested interest (i) with respect to 105,882 Shares on
the date hereof, (ii) with respect to 79,406 Shares on the first anniversary of
the date hereof, (iii) with respect to 6,617 Shares at the end of each month
beginning on the first anniversary of the date hereof, and (iv) with respect to
the remaining 533,541 Shares upon the earlier of the satisfaction of the
conditions set forth in Exhibit C or nine years and nine months from the date
hereof.
5.4 Fractional Shares. No fractional shares shall be repurchased by the
-----------------
Company. Accordingly, should the Repurchase
-6-
<PAGE>
Right extend to a fractional share at the time Purchaser ceases to be a Service
Provider of the Company, then such fractional share shall be added to any
fractional share in which Purchaser is at such time vested in order to make one
whole vested share no longer subject to the Repurchase Right.
5.5 Additional Shares or Substituted Securities. In the event of any stock
-------------------------------------------
dividend, stock split, recapitalization or other change affecting the Company's
outstanding Common Stock as a class effected without receipt of consideration,
then any new, substituted or additional securities or other property (including
money paid other than as a regular cash dividend) which is by reason of any such
transaction distributed with respect to the Shares shall be immediately subject
to the Repurchase Right, but only to the extent the Shares are at the time
covered by such right. Appropriate adjustments to reflect the distribution of
such securities or property shall be made to the number of Shares hereunder and
to the price per share to be paid upon the exercise of the Repurchase Right in
order to reflect the effect of any such transaction upon the Company's capital
structure.
6. Right of First Refusal.
----------------------
6.1 Grant. The Company is hereby granted the right of first refusal (the
-----
"First Refusal Right"), exercisable in connection with any proposed sale or
other transfer of the Shares in which Purchaser has vested in accordance with
Article 5. For purposes of this Article 6, the term "transfer" shall include any
assignment, pledge, encumbrance or other disposition for value of the Shares
intended to be made by the Owner, but shall not include any of the permitted
transfers under Section 4.1.
6.2 Notice of Intended Disposition. In the event the Owner desires to
------------------------------
accept a bona fide third-party offer for any or all of the Shares (the shares
subject to such offer to be hereinafter called, for purposes of this Article 6,
the "Target Shares"), the Owner shall promptly (i) deliver to the Secretary of
the Company written notice (the "Disposition Notice") of the offer and the basic
terms and conditions thereof, including the proposed purchase price, and (ii)
provide satisfactory proof that the disposition of the Target Shares to the
third-party offeror would not contravene the provisions of Articles 2 and 3 of
this Agreement.
6.3 Exercise of Right. The Company (or its assignees) shall, for a period
-----------------
of sixty (60) days following receipt of the Disposition Notice, have the right
to repurchase all or a portion of the Target Shares specified in the Disposition
Notice upon substantially the same terms and conditions specified therein. Such
right shall be exercisable by written notice (the "Exercise Notice") delivered
to the Owner prior to the expiration of the thirty (30) day exercise period. If
such
-7-
<PAGE>
right is exercised with respect to all the Target Shares specified in the
Disposition Notice, then the Company (or its assignees) shall effect the
repurchase of the Target Shares, including payment of the purchase price, not
more than five (5) business days after delivery of the Exercise Notice; and at
such time the Owner shall deliver to the Company the certificates representing
the Target Shares to be repurchased, properly endorsed for transfer. If any of
the Target Shares are at the time held in escrow under Article 7, the
certificates for such shares shall automatically be released from escrow and
surrendered to the Company for cancellation. The Target Shares so purchased
shall thereupon be canceled and cease to be issued and outstanding shares of the
Company's Common Stock.
Should the purchase price specified in the Disposition Notice be payable in
property other than cash or evidences of indebtedness, the Company (or its
assignees) shall have the right to pay the purchase price in the form of cash
equal in amount to the value of such property. If the Owner and the Company (or
its assignees) cannot agree on such cash value within ten (10) days after the
Company's receipt of the Disposition Notice, the valuation shall be made by an
appraiser of recognized standing selected by the Owner and the Company ( or its
assignees), or, if they cannot agree on an appraiser within twenty (20) days
after the Company's receipt of the Disposition Notice, each shall select an
appraiser of recognized standing and the two appraisers shall designate a third
appraiser of recognized standing, whose appraisal shall be determinative of such
value. The cost of such appraisal shall be shared equally by the Owner and the
Company. The closing shall then be held on the latter of (i) the fifth business
day following delivery of the Exercise Notice or (ii) the 15th day after such
cash valuation shall have been made.
6.4 Non-Exercise of Right. In the event the Exercise Notice is not given to
---------------------
the Owner within thirty (30) days following the date of the Company's receipt of
the Disposition Notice, the Owner shall have a period of thirty (30) days
thereafter, in which to sell or otherwise dispose of any or all of the Target
Shares upon terms and conditions (including the purchase price) no more
favorable to the third-party purchaser than those specified in the Disposition
Notice; provided that any such sale or disposition must not contravene the
provisions of Article 2 of this Agreement. If any of the Target Shares are at
the time held in escrow under Article 7, the certificates for such shares shall
automatically be released from escrow and surrendered to the Owner. The third-
party purchaser shall acquire the Target Shares free and clear of all the terms
and provisions of this Agreement (including the Company's Repurchase Right under
Article 5 and the First Refusal Right hereunder). If the Owner does not sell or
otherwise dispose of the Target Shares within the specified thirty (30) day
period, the Company's First Refusal Right shall continue to apply to any
subsequent dispo-
-8-
<PAGE>
sition of the Target Shares by the Owner until such right lapses in accordance
with Section 6.7.
6.5 Partial Exercise of Right. In the event the Company (or its assignees)
-------------------------
makes a timely exercise of the First Refusal Right with respect to a portion,
but not all, of the Target Shares specified in the Disposition Notice, the Owner
shall sell to the Company (or its assignees) the portion of the Target Shares
which the Company (or its assignees) has elected to purchase, such sale to be
effected in substantial conformity with the provisions of Section 6.3 and sell
the remaining Target Shares to a third party purchaser, if so desired by Owner.
6.6 Recapitalization. In the event of any stock dividend, stock split,
----------------
recapitalization or other transaction affecting the Company's outstanding Common
Stock as a class effected without receipt of consideration, then any new,
substituted or additional securities or other property which is by reason of
such transaction distributed with respect to the Shares shall be immediately
subject to the Company's First Refusal Right hereunder, but only to the extent
the Shares are at the time covered by such right.
6.7 Lapse. The First Refusal Right under this Article 6 shall lapse and
-----
cease to have effect upon the earliest to occur of (i) the determination by the
Company's Board of Directors that a public market exists for the outstanding
shares of the Company's Common Stock, or (ii) the closing of a Qualified IPO.
6.8 Legend. In addition to the legends required by Section 2.4, all
------
certificates representing Shares subject to the Company's Right of Repurchase
and the Right of First Refusal shall be endorsed with the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN
COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY
AND THE INITIAL HOLDER HEREOF. SUCH AGREEMENT PROVIDES FOR
CERTAIN RESTRICTIONS ON TRANSFER OF THE SECURITIES, INCLUDING RIGHTS OF
FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SECURITIES AND CERTAIN
REPURCHASE RIGHTS IN FAVOR OF THE COMPANY UPON TERMINATION OF SERVICE
WITH THE COMPANY. THE SECRETARY OF THE COMPANY WILL UPON WRITTEN
REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT
CHARGE."
7. Escrow.
------
7.1 Deposit. Upon issuance, the certificates for the Shares shall be
-------
deposited in escrow with the Secretary of the Company to be held in accordance
with the provisions of this Article 7. Each deposited certificate shall be
accompanied by a duly executed Assignment Separate from Certificate in the form
-9-
<PAGE>
of Exhibit A. The deposited certificates, together with any other assets or
---------
securities from time to time deposited with the Company pursuant to the
requirements of this Agreement, shall remain in escrow until such time or times
as the certificates (or other assets and securities) are to be released or
otherwise surrendered for cancellation in accordance with Section 7.3. Upon
delivery of the certificates (or other assets and securities) to the Company,
the Owner shall be issued an instrument of deposit acknowledging the number of
Shares (or other assets and securities) delivered in escrow to the Secretary of
the Company.
7.2 Recapitalization. All regular cash dividends on the Shares (or other
----------------
securities at the time held in escrow) shall be paid directly to the Owner and
shall not be held in escrow. However, in the event of any stock dividend, stock
split, recapitalization or other change affecting the Company's outstanding
Common Stock as a class effected without receipt of consideration, any new,
substituted or additional securities or other property which is by reason of
such transaction distributed with respect to the Shares shall be immediately
delivered to the Secretary of the Company to be held in escrow under this
Article 7, but only to the extent the Shares are at the time subject to the
escrow requirements of Section 7.1.
7.3 Release/Surrender. The Shares, together with any other assets or
-----------------
securities held in escrow hereunder, shall be subject to the following terms and
conditions relating to their release from escrow or their surrender to the
Company for repurchase and cancellation:
(a) Should the Company exercise the Repurchase Right under Article 5 with
respect to any Shares, then the escrowed certificates for such Shares (together
with any other assets or securities issued with respect thereto) shall be
delivered to the Company for cancellation, concurrently with the payment to the
Owner, in cash or cash equivalent (including the cancellation of any purchase-
money indebtedness), of an amount equal to the aggregate Purchase Price for
Unvested Shares, and the Owner shall have no further rights with respect to such
Shares (or other assets or securities).
(b) Should the Company exercise its First Refusal Right under Article 6
with respect to any Target Shares held at the time in escrow hereunder, then the
escrowed certificates for such Target Shares (together with any other assets or
securities issued with respect thereto) shall, concurrently with the payment of
the Section 6.3 purchase price for such Target Shares to the Owner, be
surrendered to the Company for cancellation, and the Owner shall have no further
rights with respect to such Target Shares (or other assets or securities).
(c) Should the Company elect not to exercise its First Refusal Right under
Article 6 with respect to any Target Shares held at the time in escrow
hereunder, then the escrowed certifi-
-10-
<PAGE>
cates for such Target Shares (together with any other assets or securities
issued with respect thereto) shall be surrendered to the Owner for disposition
according to the provisions of Section 6.4.
(d) As the interest of Purchaser in the Shares (or any other assets or
securities issued with respect thereto) vests in accordance with the provisions
of Article 5, the certificates for such vested Shares (as well as all other
vested assets and securities) shall be released from escrow and delivered to the
Owner.
(e) All Shares (or other assets or securities) released from escrow in
accordance with the provisions of subparagraph (d) above shall nevertheless
remain subject to the First Refusal Right under Article 6 and the market
stand-off provisions of Section 3.3 until such provisions terminate in
accordance herewith.
8. General Provisions.
------------------
8.1 Assignment. The Company may assign its Repurchase Rights under
----------
Article 5 and/or its First Refusal Right under Article 6 to any person or entity
selected by the Company's Boards of Directors, including one or more
stockholders of the Company.
If the assignee of the Repurchase Right is other than a parent or
subsidiary corporation of the Company, then such assignee must take a cash
payment to the Company, upon the assignment of the Repurchase Right, in an
amount equal to the excess (if any) of the fair market value of the Unvested
Shares at the time subject to the Repurchase Right (as determined by the
Company's Board of Directors) and the aggregate Repurchase Price payable for
such Unvested Shares.
8.2 Definitions. For purposes of this Agreement, the following provisions
-----------
shall be applicable in determining the parent and subsidiary corporations of the
Company:
(a) Any corporation (other than the Company) in an unbroken chain of
corporations ending with the Company shall be considered to be a parent
corporation of the Company, provided each such corporation in the unbroken chain
(other than the Company) owns, at the time of the determination, stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
(b) Each corporation (other than the Company) in an unbroken chain of
corporations beginning with the Company shall be considered to be a subsidiary
of the Company, provided each such corporation (other than the last corporation)
in the unbroken chain owns, at the time of determination, stock
-11-
<PAGE>
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
8.3 No Employment or Service Contract. Nothing in this Agreement shall
---------------------------------
confer upon Purchaser any right to continue in the service of the Company (or
any parent or subsidiary corporation of the Company) for any period of time or
restrict in any way the rights of the Company (or any parent or subsidiary
corporation of the Company) or Purchaser, to terminate the Service Provider
status of Purchaser at any time for any reason whatsoever, with or without
cause.
8.4 Notices. Any notice required in connection with (i) the Repurchase
-------
Right or the First Refusal Right or (ii) the disposition of any Shares covered
thereby shall be given in writing and shall be deemed effective upon personal
delivery, upon deposit with a nationally recognized courier service, or upon
deposit in the United States mail, registered or certified, postage prepaid and
addressed to the party entitled to such notice at the address indicated below
such party's signature line on this Agreement or at such other address as such
party may designate by ten (10) days advance written notice under this Section
8.4 to all other parties to this Agreement.
8.5 No Waiver. The failure of the Company (or its assignees) in any
---------
instance to exercise the Repurchase Rights granted under Article 5, or the
failure of the Company (or its assignees) in any instance to exercise the First
Refusal Right granted under Article 6, shall not constitute a waiver of any
other repurchase rights and/or rights of first refusal that may subsequently
arise under the provisions of this Agreement or any other agreement between the
Company and Purchaser. No waiver of any breach or condition of this Agreement
shall be deemed to be a waiver of any other or subsequent breach or condition,
whether of like of different nature.
8.6 Cancellation of Shares. If the Company (or its assignees) shall make
----------------------
available, at the time and place and in the amount and form provided in this
Agreement, the consideration for the Shares to be repurchased in accordance with
the provisions of this Agreement, then from and after such time, the person from
whom such shares are to be repurchased shall no longer have any rights as a
holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement), and such shares shall be
deemed purchased in accordance with the applicable provisions hereof and the
Company (or its assignees) shall be deemed the owner and holder of such shares,
whether or not the certificates therefor have been delivered as required by this
Agreement.
-12-
<PAGE>
9. Miscellaneous Provisions.
------------------------
9.1 Purchaser Undertaking. Purchaser hereby agrees to take whatever
---------------------
additional action and execute whatever additional documents the Company may in
its judgment deem necessary or advisable in order to carry out the obligations
or restrictions imposed on Purchaser under this Agreement.
9.2 Agreement Is Entire Contract. This Agreement constitutes the entire
----------------------------
contract between the parties hereto with regard to the subject matter hereof.
9.3 Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of California, as such laws are applied
to contracts entered into and performed in such State.
9.4 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
9.5 Successors and Assigns. The provisions of this Agreement shall inure
----------------------
to the benefit of, and be binding upon, the Company and its successors and
assigns and Purchaser and Purchaser's legal representatives, heirs, legatees,
distributees, assigns and transferees by operation of law, whether or not any
such person shall have become a party to this Agreement
-13-
<PAGE>
and have agreed in writing to join herein and be bound by the terms and
conditions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first indicated above.
GMS DENTAL GROUP, INC
By /s/ Kenneth J. Davis
-------------------------------------
Address 105 North Riverview Drive
Suite 255
Anaheim Hills, CA 92808
PURCHASER
/s/ Grant M. Sadler
-----------------------------------
Signature
Address 455 Bridgeview Dr.
--------------------------
Anaheim Hills, CA 92807
--------------------------
__________________________
_____________________________
* I have received, completed, executed and retained the I.R.C. section 83(b)
election that was attached hereto as Exhibit B. As set forth in Section 3.2, I
understand that I, and not the Corporation, will be responsible for completing
---
the form and filing the election with the appropriate office of the federal and
state tax authorities and that if such filing is not completed within thirty
(30) days after the date of this Agreement, I will forfeit the significant tax
benefits of section 83(b). I understand further that such filing should be made
by registered or certified mail, return receipt requested, and that I must
retain two (2) copies of the completed form for filing with my state and federal
tax returns for the current tax year and an additional copy for my records.
-14-
<PAGE>
Spousal Consent
---------------
Jean Sadler (Purchaser's spouse) indicates by the execution of this
-----------
Agreement his or her consent to be bound by the terms herein as to his or her
interests, whether as community property or otherwise, if any, in the Shares.
/s/ Jean Sadler
----------------------------
Signature
-15-
<PAGE>
EXHIBIT 10.24
PROMISSORY NOTE
$94,747.06 Anaheim Hills, California
Dated as of August 31, 1996
FOR VALUE RECEIVED, the undersigned, GRANT M. SADLER, promises to pay to
the order of GMS DENTAL GROUP, INC., a Delaware corporation (the "Company"), the
principal sum of Ninety-Four Thousand Seven Hundred Forty-Seven and 06/100
Dollars ($94,747.06), with interest from the date hereof on the unpaid principal
at the applicable federal rate of 6.84%, compounded annually. The entire unpaid
balance of principal and interest shall be payable on August 31, 2000.
If payment is not made when due, and if action is instituted on this note,
the undersigned agrees to pay the Company reasonable attorneys' fees and costs
of suit, as fixed by court.
The undersigned shall have the right to prepay all or any part of the
unpaid principal amount of this note, without premium, at any time prior to the
maturity hereof on ten (10) days' prior written notice.
This note is a full-recourse note originally secured by a pledge of 957,041
shares of Common Stock of the Company pursuant to a Security Agreement of even
date herewith, which is on file with the Secretary of the Company.
This note shall be governed by and construed in accordance with the laws of
the State of California.
IN WITNESS WHEREOF, the undersigned has signed, dated and delivered this
note as of the date and year first above written.
/s/ Grant M. Sadler
-------------------------------------
Grant M. Sadler
<PAGE>
EXHIBIT 10.25
SECURITY AGREEMENT
THIS AGREEMENT, entered into as of August 31, 1996, between GMS DENTAL
----------
GROUP, INC., a Delaware corporation (the "Company"), and GRANT M. SADLER (the
- ----------- ---------------
"Purchaser").
W I T N E S S E T H:
WHEREAS, the Purchaser has purchased from the Company 957,041 shares of the
Company's Common Stock (the "Shares"); and
WHEREAS, the Company has loaned to the Purchaser the amount of $94,747.06
which the Purchaser has used to pay a portion of the purchase price of the
Shares; and
WHEREAS, the Purchaser has executed and delivered to the Company a full-
recourse promissory note evidencing such loan (the "Note") and has agreed to
pledge all of the Shares to the Company as security for the payment of the Note:
NOW, THEREFORE, it is agreed as follows:
1. The Purchaser hereby delivers to the Company one or more certificates
representing the Shares, together with two Assignments Separate From Certificate
signed by the Purchaser. The Purchaser hereby pledges and grants a security
interest in the Shares, including any shares into which the Shares may be
converted and all proceeds of the Shares, as security for the timely payment of
all of the Purchaser's obligations under the Note and for the Purchaser's
performance of all of its obligations under this Agreement. In the event of a
default in payment of the Note, the Purchaser hereby appoints the Company as his
true and lawful attorney to take such action as may be necessary or appropriate
to cause the Shares to be transferred into the name of the Company or any
assignee of the Company and to take any other action on behalf of the Purchaser
permitted hereunder or under applicable law.
2. The Company agrees to hold the Shares as security for the timely
payment of all of the Purchaser's obligations under the Note and for the
Purchaser's performance of all of its obligations under this Agreement, as
provided herein. At no time shall the Company dispose of or encumber the Shares,
except as otherwise provided in this Agreement.
3. At all times while the Company is holding the Shares as security under
this Agreement, the Company shall:
(a) Collect any dividends that may be declared on the Shares and
credit such dividends against any accrued interest or unpaid principal
under the Note, as part payment;
-1-
<PAGE>
(b) Collect and hold any shares that may be issued upon conversion of
the Shares; and
(c) Collect and hold any other securities or other property that may
be distributed with respect to the Shares.
Such shares and other securities or property shall be subject to the security
interest granted in Section 1 of this Agreement and shall be held by the company
under this Agreement.
4. While the Company holds the Shares as security under this Agreement,
the Purchaser shall have the right to vote the Shares at all meetings of the
Company's stockholders; provided that the Purchaser is not in default in the
performance of any term of this Agreement or in any payment due under the Note.
In the event of such a default, the Company shall have the right to the extent
permitted by law to vote and to give consents, ratifications and waivers and
take any other action with respect to the Shares with the same force and effect
as if the Company were the absolute and sole owner of the Shares.
5. Upon payment in full of the outstanding principal balance of the Note
and all interest and other charges due under the Note, the Company shall release
from pledge and redeliver to the Purchaser the certificate(s) representing the
Shares and the Assignment Separate From Certificate forms.
6. In the event that the Purchaser fails to perform any term of this
Agreement or fails to make any payment when due under the Note, the Company
shall have all of the rights and remedies of a creditor and secured party at law
and in equity, including (without limitation) the rights and remedies provided
under the California Uniform Commercial Code. Without limiting the foregoing,
the Company may, after giving ten (10) days' prior written notice to the
Purchaser by certified mail at his residence or business address, sell any or
all of the Shares in such manner and for such price as the Company may
determine, including (without limitation) through a public or private sale or at
any broker's board or on any securities exchange, for cash, upon credit or for
future delivery. The Company is authorized at any such sale, if it deems it
advisable to do so, to restrict the prospective bidders or purchasers of any of
the Shares to persons who will represent and agree that they are purchasing for
their own account for investment, and not with a view to the distribution or
sale of any of the Shares, to restrict the prospective bidders or purchasers and
the use any purchaser may make of the Shares and impose any other restriction or
condition that the Company deems necessary or advisable under the federal and
state securities laws. Upon any such sale the Company shall have the right to
deliver, assign and transfer to the purchaser thereof the Shares so sold. Each
purchaser at any such sale shall hold the Shares so sold absolute, free from any
claim or right of any kind. In case of any sale of any or all of the Shares on
-2-
<PAGE>
credit or for future delivery, the Shares so sold may be retained by the Company
until the selling price is paid by the purchaser thereof, but the Company shall
not incur any liability in case of the failure of such purchaser to take up and
pay for the Shares so sold and, in case of any such failure, such Shares may
again be sold under the terms of this section. The Purchaser hereby agrees that
any disposition of any or all of the Shares by way of a private placement or
other method which in the opinion of the Company is required or advisable under
Federal and state securities laws is commercially reasonable. At any public
sale, the Company may (if it is the highest bidder) purchase all or any part of
the Shares at such price as the Company deems proper. Out of the proceeds of any
sale, the Company may retain an amount sufficient to pay all amounts then due
under the Note, together with the expenses of the sale and reasonable attorneys'
fees. The Company shall pay the balance of such proceeds, if any, to the
Purchaser. The Purchaser shall be liable for any deficiency that remains after
the Company has exercised its rights under this Agreement.
7. This Agreement shall be governed by and construed in accordance with
the laws of the State of California. This Agreement shall inure to the benefit
of, and be binding upon, the Company and its successors and assigns and be
binding upon the purchaser and the Purchaser's legal representative, heirs,
legatees, distributees, assigns and transferees by operation of law. This
Agreement contains the entire security agreement between the Company and the
Purchaser. The Purchaser will execute any additional agreements, assignments or
documents or take any other actions reasonably required by the Company to
preserve and perfect the security interest in the Shares granted to the Company
herein and otherwise to effectuate this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by its duly authorized officer, and the Purchaser has personally
executed this Agreement.
GMS DENTAL GROUP, INC.
By /s/ Kenneth J. Davis
-----------------------------------
Kenneth J. Davis, Vice
President of Operations
PURCHASER
/s/ Grant M. Sadler
-------------------------------------
Grant M. Sadler
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<PAGE>
EXHIBIT 10.26
GMS DENTAL GROUP, INC.
---------------------
COMMON STOCK ESCROW AGREEMENT
-----------------------------
THIS COMMON STOCK AGREEMENT, dated as of October 11, 1996 between GMS
---
DENTAL GROUP, INC., a Delaware corporation (the "Corporation"), and GRANT M.
- ------------------ --------
SADLER and KENNETH J. DAVIS. (each a "Purchaser," collectively, the
- ----------------------------
"Purchasers"),
W I T N E S S E T H:
WHEREAS, the Corporation has issued to Purchasers certain shares of the
Corporation as herein described; and
WHEREAS, the Corporation has issued the shares to Purchasers on the terms
and conditions hereinafter set forth:
NOW, THEREFORE, it is agreed between the parties as follows:
1. The Corporation issued 1,367,201 shares of the Corporation's common
stock to Purchasers (the "Stock"), at a purchase price of $.10 per share of
which 393,250 shares of common stock issued to Mr. Sadler and 211,750 shares of
common stock issued to Mr. Davis (the "vesting Stock") are subject to a four (4)
year vesting schedule as follows:
(i) One-quarter (1/4) (which vested on the date of issuance);
(ii) One-quarter (1/4) of the balance which vests on the first
anniversary of the date hereof; and
(iii) The remainder of the Vesting Stock vests in equal amounts
monthly for the remaining term of the vesting schedule.
2. In addition to the Vesting Stock, 495,431 shares of the Corporation's
common stock issued to Mr. Sadler and 266,770 shares of the Corporation's common
stock issued to Mr. Davis (the "Repurchase Right Stock"), are not subject to
the four (4) year vesting described above in Section 1 but are subject to the
right of the corporation to repurchase the Repurchase Stock at a price of $.10
per share (the "Repurchase Right") which Repurchase Right expires on the earlier
of: (a) the achievement by the Company of certain performance milestones over a
two (2) year period described in Exhibit A attached hereto and made a part
hereof or (b) nine (9) years and nine (9) months from the date of issuance.
3. The Repurchase Right shall be exercised by written notice signed by an
officer of the Corporation and delivered or mailed as provided in Section 11 of
this Agreement to the Escrow Agent and the Purchasers.
4. (a) To ensure the availability for delivery of Purchasers' shares upon
exercise of the Repurchase Right herein provided for, Purchaser agrees at the
Closing hereunder, to
-1-
<PAGE>
deliver to and deposit with the Secretary of the Corporation acting as escrow
agent (the "Escrow Agent"), the certificate or certificates evidencing the
Vesting Stock and the Repurchase Right Stock and Assignments Separate from
Certificate duly executed (with date and number of shares in blank) by the
Purchasers. Such documents are to be held by the Escrow Agent and delivered by
the Escrow Agent in accordance with the terms and conditions of this Agreement.
(b) Within ten (10) days after the last day of each full calendar year
after the Closing Date, if Purchaser so requests, the Escrow Agent will deliver
to Purchaser certificates representing the shares of vested Vesting Stock and
those shares of Repurchase Right Stock as are no longer subject to the
Repurchase Right (less such shares as have been previously delivered).
5. Escrow Agent shall be obligated only for the performance of such
duties as are specifically set forth herein and he or she may rely and shall be
protected in relying or refraining from acting on any instrument reasonably
believed by him or her to be genuine and to have been signed or presented by the
proper party or parties. Escrow Agent shall not be personally liable for any act
he or she may do or omit to do hereunder as Escrow Agent or as attorney-in-fact
of Purchaser while acting in good faith and in the exercise of his or her own
good judgment, and any act done or omitted by him or her pursuant to the advice
of his or her own attorneys shall be conclusive evidence of such good faith. The
Escrow Agent's duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
6. The corporation shall not be required (a) to transfer on its books any
shares of Stock of the Corporation which shall have been sold or transferred in
violation of any of the provisions set forth in this Agreement or (b) to treat
as owner of such shares or to accord the right to vote as such owner or to pay
dividends to any transferee to whom such shares shall have been so transferred.
7. Except as otherwise provided herein, Purchaser shall, during the term
of this Agreement, exercise all rights and privileges of a stockholder of the
Corporation, including the right to vote as a stockholder of the Corporation
with respect to the Stock held in Escrow.
8. At all times while the Escrow Agent is holding said shares hereunder,
the Escrow Agent shall collect and hold any other securities and/or other
property distributed, other than cash dividends on such shares, on account of
such stock, all of which shall be subject to the Escrow hereunder.
9. The parties agree to execute such further instruments and to take
such further action as may reasonably be necessary to carry out the intent of
this Agreement.
-2-
<PAGE>
10. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon the earliest of personal delivery,
receipt or the third full day following deposit in the United States Post
Office with postage and fees prepaid, addressed to the other party hereto at the
address hereinafter shown below such party's signature or at such other address
as such party may designate by ten (10) days advance written notice to the other
party hereto.
11. This Agreement shall inure to the benefit of the successors and
assigns of the Corporation and, subject to the restrictions on transfer herein
set forth, be binding upon Purchasers and Purchasers heirs, executors,
administrators, successors and assigns. The failure of the Corporation in any
instance to exercise the Repurchase Right described herein shall not constitute
a waiver of any other Repurchase Option or right of first offer that may
subsequently arise under the provisions of this Agreement. No waiver of any
breach or condition of this Agreement shall be deemed to be a waiver of any
other or subsequent breach or condition, whether of a like or different nature.
12. This Agreement shall be governed by and construed in accordance with
the substantive laws of the State of California, except with respect to choice
of law.
13. No modification of this Agreement shall be valid unless made in
writing and signed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
GMS DENTAL GROUP, INC.
By /s/ Grant Sadler
------------------------------
Name Grant Sadler
----------------------------
Title PRESIDENT
---------------------------
Address 180 N. Riverview Dr.
-------------------------
Suite 255
-------------------------
Anaheim Hills, CA 92808
-------------------------
-3-
<PAGE>
PURCHASERS:
----------
/s/ Grant M. Sadler
------------------------------------------
Grant M. Sadler
Address 455 Bridgeview Dr.
--------------------------------
Anaheim Hills, CA 92808
--------------------------------
--------------------------------
/s/ Kenneth J. Davis
------------------------------------------
Kenneth J. Davis
Address 26236 Devonshire
--------------------------------
Mission Viejo, CA
--------------------------------
92692-3279
--------------------------------
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<PAGE>
EXHIBIT 10.27
ACKNOWLEDGEMENT AND CLARIFICATION
OF REPURCHASE RIGHTS AGREEMENT
------------------------------
THIS ACKNOWLEDGEMENT AND CLARIFICATION OF REPURCHASE RIGHTS AGREEMENT dated
as of October 31, 1997, is executed by and among GMS Dental Group, Inc., a
Delaware corporation (the "Company") and Grant M. Sadler and Kenneth J. Davis
("Shareholders"), with reference to the following facts:
RECITALS
--------
A. On August 31, 1996, the Company and Shareholders entered into Founder
Stock Purchase Agreements (the "Founder Stock Purchase Agreements") pursuant to
which Mr. Sadler acquired 957,041 shares and Mr. Davis acquired 410,160 shares
of the Company's Common Stock (the "GMS Common Stock").
B. Pursuant to Section 5 of the Founder Stock Purchase Agreements and
pursuant to that certain Common Stock Escrow Agreement by and among the Company
and the Shareholders dated October 11, 1996 (the "Escrow Agreement"), 495,431
shares of GMS Common Stock purchased by Mr. Sadler and 266,770 shares of GMS
Common Stock purchased by Mr. Davis (collectively, the "Shares") are subject to
certain repurchase rights of the Company (the "Repurchase Rights").
C. In September, 1996, the Company entered into certain employment offer
letters by and between the Company and each Shareholder, respectively (the
"Employment Letters").
D. On or about January 17, 1997, the Board of Directors of the Company
approved a modification to Exhibit A to the Escrow Agreement, a copy of which is
---------
attached hereto as Exhibit A, revising the Repurchase Right milestones (the
---------
"Revised Milestones").
E. On October 17, 1997 the Board of Directors of the Company approved a
merger (the "Merger") of the Company with and into Gentle Dental Service
Corporation, a Washington corporation ("GDSC") pursuant to which all shares of
GMS Common Stock outstanding immediately prior to the Merger will be exchanged
for shares of the common stock of GDSC (the "GDSC Common Stock").
F. The parties to this Agreement wish to hereby supplement the Founder
Stock Purchase Agreements and the Escrow Agreement in order to clarify that
notwithstanding anything to the contrary provided in the Founder Stock Purchase
Agreements, the Shares are subject to the Repurchase Rights as described in the
Escrow Agreement and to clarify that following the Merger, the shares of GDSC
Common Stock the Shareholders will receive in the Merger in exchange for the
Shares will be subject to the Repurchase Rights as clarified hereby.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agrees as
follows:
1. Repurchase Rights Clarification. The parties hereby agree that
-------------------------------
notwithstanding anything to the contrary provided in the Founder Stock Purchase
Agreements, the Escrow Agreement or the Employment Letters, the Shares are
subject to the Repurchase Rights as described in the Escrow Agreement, in
particular that the Repurchase Rights with respect to the
<PAGE>
Vesting Stock (as defined in the Escrow Agreement and which include 393,250
shares of GMS Common Stock and 211,750 shares of GMS Common Stock, respectively,
for Mr. Sadler and Mr. Davis) shall continue to be governed by the Founder Stock
Purchase Agreements and that the Repurchase Rights with respect to the
Repurchase Rights Stock (as defined in the Escrow Agreement and which include
495,431 and 266,770 Shares, respectively, for Mr. Sadler and Mr. Davis) shall be
governed by the Escrow Agreement, as modified by the Revised Milestones, and
shall be exercisable regardless of whether Shareholder ceases to be a Service
Provider (as defined in the Founder Stock Purchase Agreements); provided,
however, the parties hereby acknowledge and agree that the Repurchase Rights
with respect to the Repurchase Rights Stock shall not become exercisable by the
Company unless and until there is a failure of the Company to achieve the
Revised Milestones in the time periods indicated in the Escrow Agreement. The
parties further agree that following the Merger the shares of GDSC Common Stock
the Shareholders will receive in the Merger in exchange for the Shares will be
subject to the Repurchase Rights as clarified hereby.
2. Counterparts. This Agreement may be executed in multiple counterparts,
------------
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument.
3. Successors and Assigns. This Agreement shall be binding upon and inure
----------------------
to the benefit of the parties' successors and assigns.
IN WITNESS WHEREOF, the parties have executed this Acknowledgement and
Clarification of Repurchase Rights Agreement as of the date first above written.
COMPANY:
GMS DENTAL GROUP, INC.
By: /s/ Michael T. Fiore
----------------------------------------
Michael T. Fiore, President and
Chief Executive Officer
SHAREHOLDERS:
/s/ Grant M. Sadler
----------------------------------------
Grant M. Sadler
/s/ Kenneth J. Davis
----------------------------------------
Kenneth J. Davis
<PAGE>
EXHIBIT A
---------
Financial Performance Objectives
The repurchase right as to the Performance Option Shares subject to
vesting based on financial performance objectives (the "Performance Objectives")
will expire in 1997 with respect to up to one-half (1/2) of the Performance
Option shares (the "Initial Amount") and in 1998 with respect to the remaining
half of the Performance Option Shares (the "Second Amount"), but only if the
following conditions are met:
(i) the aggregate consideration paid by the Company for acquired
dental practices from (x) inception through December 31, 1997 (with respect to
the Initial Amount) and (y) from inception through December 31, 1998 (with
respect to the Second Amount) does not exceed an amount equal to six (6)
multiplied by the aggregate of the earnings before interest, taxes, depreciation
and amortization ("EBITDA") for such practices for the immediately preceding
twelve (12) month period; and
(ii) Adjusted EBITDA (as defined below) exceeds seventy-five percent
(75%) of Target EBITDA (as defined below) for (x) the Company's fiscal year
ended December 31, 1997 (with respect to the Initial Amount) and (y) the
Company's fiscal year ended December 31, 1998 (with respect to the Second
Amount).
For purposes of this Exhibit A, the term "Target EBITDA" shall mean
---------
$6,298,000 for the fiscal year ended December 31, 1997 and $16,911,000 for the
fiscal year ended December 31, 1998. For purposes of this Exhibit A, the term
---------
"Adjusted EBITDA" shall mean the Company's EBITDA less corporate general and
administrative expenses (but excluding direct expenses incurred in connection
with the employment of a CEO, such as salary, bonus, travel and entertainment,
car allowance and costs of administrative assistant). All computation of EBITDA,
Target EBITDA and Adjusted EBITDA shall be based on audited financial statements
of the Company.
Vesting Formula
If the conditions set forth above are met, that number of shares of
the Initial Amount and Second Amount shall vest as of the dates indicated above
as follows:
<TABLE>
<CAPTION>
Percentage of Target Percentage of Initial Amount or
EBITDA Achieved by Company Second Amount Shares Which Will Vest
-------------------------- ------------------------------------
<S> <C>
75% or less of Target EBITDA 0%
100% of Target EBITDA or greater 100%
Greater than 75%, but less than 100% The percentage which will vest shall decrease
linearly to 0% as the percentage of Target EBITDA
achieved decreases from 100% to 75%
</TABLE>
A-1
<PAGE>
EXHIBIT 10.28
GMS DENTAL GROUP, INC.
FOUNDER STOCK PURCHASE AGREEMENT
--------------------------------
THIS FOUNDER STOCK PURCHASE AGREEMENT is made as of this 31 day of August,
1996, by and between GMS DENTAL GROUP, INC., a Delaware corporation (the
----------------------
"Company"), and KENNETH J. DAVIS (the "Purchaser").
----------------
1. Purchase of Shares.
------------------
1.1 Purchase. Purchaser hereby purchases, and the Company hereby sells to
--------
Purchaser, 410,160 shares of the Company's Common Stock (the "Shares") at a
purchase price of $41,016.00 or $0.10 per share (the "Purchase Price").
1.2 Payment. Concurrently with the execution of this Agreement, Purchaser
-------
shall pay the Purchase Price for the Shares by full recourse promissory note,
in which case cash shall be paid to the extent of the par value of the shares
purchased with such promissory note. Purchaser shall also deliver to the
Secretary of the Company a duly executed blank Assignment Separate from
Certificate (in the form attached hereto as Exhibit A) and any additional
---------
documents required by the Company as a condition for the purchase. When and as
shares vest pursuant to Section 5.3, Purchaser shall receive a bonus from the
Company in the amount sufficient so that after payment of all federal and state
income and employment taxes, Purchaser retains an amount sufficient to make a
payment on the promissory note in an amount sufficient to release the vested
shares from Security Agreement.
1.3 Delivery of Certificates. The certificates representing the Shares
------------------------
purchased hereunder and subject to the Company's Repurchase Right under Article
5 hereof shall be held in escrow by the Secretary of the Company as provided in
Article 5 hereof.
2. Securities Law Compliance.
-------------------------
2.1 Exemption From Registration. The Shares have not been registered under
---------------------------
the Securities Act of 1933, as amended (the "1933 Act") and are being issued to
Purchaser in reliance upon the exemption from such registration provided by
Rule 701 of the Securities and Exchange Commission (the "Commission") for stock
issuances under compensatory benefit arrangements such as this Agreement.
Purchaser hereby acknowledges receipt of a copy of this Agreement.
2.2 Restricted Securities.
---------------------
(a) Purchaser hereby confirms that Purchaser has been informed that the
Shares are "restricted securities" under the
-1-
<PAGE>
1933 Act and may not be resold or transferred unless the Shares are first
registered under the federal securities laws or unless an exemption from such
registration is available. Accordingly, Purchaser hereby acknowledges that
Purchaser is prepared to hold the Shares for an indefinite period and that
Purchaser is aware that Rule 144 of the commission issued under the 1933 Act is
not presently available to exempt the sale of the Shares from the registration
requirements of the 1933 Act.
(b) Purchaser is aware of the adoption of Rule 144 by the Commission,
promulgated under the 1933 Act, which permits limited public resales of
securities acquired in a nonpublic offering, subject to the satisfaction of
certain conditions. Purchaser understands that under Rule 144, the conditions
include, among other things: the availability of certain current public
information about the issuer, the resale occurring not fewer than two (2) years
from the date the party purchased and paid for the securities to be sold, the
sale being through a broker in an unsolicited "broker's transaction" and the
amount of securities being sold during any three (3) month period not exceeding
specified limitations. Purchaser acknowledges and understands that the Company
may not be satisfying the current public information requirements of Rule 144 or
other conditions under Rule 144 which are required of the Company at the time
Purchaser wishes to sell the Shares. If so, Purchaser understands that he will
be precluded from selling the securities under Rule 144, even if the two (2)
year holding period requirement of said Rule has been satisfied. Prior to
acquisition of the Shares, Purchaser acquired sufficient information about the
Company to reach an informed knowledgeable decision to acquire the Shares.
Purchaser has such knowledge and experience in financial and business matters as
to make him capable of evaluating the risks of the prospective investment and to
make an informed investment decision. Purchaser is able to bear the economic
risk of his investment in the Shares.
2.3 Disposition of Shares. Purchaser hereby agrees that Purchaser shall
---------------------
make no disposition of the Shares (other than a permitted transfer under Section
4.1) unless and until:
(a) Purchaser shall have notified the Company of the
proposed disposition and provided a written summary of the terms
and conditions of the proposed disposition;
(b) Purchaser shall have complied with all requirements of
this Agreement applicable to the disposition of the Shares;
and
(c) Purchaser shall have provided the Company an opinion of
counsel in form and substance satisfactory to the Company, that
(i) the proposed disposition does not require registration of the
Shares under the 1933 Act or (ii) all appropriate action
necessary for
-2-
<PAGE>
compliance with the registration requirements of the 1933 Act or
of any exemption from registration available under the 1933 Act
(including Rule 144) has been taken.
The Company shall not be required (i) to transfer on its books any Shares
that have been sold or transferred in violation of the provisions of this
Article 2 nor (ii) to treat as the owner of the Shares, or otherwise to accord
voting or dividend rights to, any transferee to whom the Shares have been
transferred in contravention of this Agreement.
2.4 Restrictive Legends. In order to reflect the restrictions on the
-------------------
disposition of the Shares, the stock certificates for the Shares will be
endorsed with restrictive legends, including one or both of the following
legends:
(a) "The securities represented by this certificate have
not been registered or qualified under the Securities Act of 1933
or the securities laws of any state, and may be offered and sold
only if registered and qualified pursuant to federal and state
securities laws or if the Company is provided an opinion of
counsel satisfactory to the Company that registration and
qualification under federal and state securities laws is not
required."
(b) If required by the authorities of any state in
connection with the issuance of the Shares, the legend or legends
required by such state authorities shall also be endorsed on all
such certificates.
3. Special Provisions.
------------------
3.1 Stockholder Rights. Until such time as the Company actually exercises
------------------
its repurchase rights under this Agreement, Purchaser (or any successor in
interest) shall have all the rights of a stockholder (including voting and
dividend rights) with respect to the Shares, including the Shares held in escrow
under Article 7, which are not subject to the vesting provisions set forth in
clause (iv) of Section 5.3. All shares are subject, however, to the transfer
restrictions of Article 4. Purchaser shall have no dividend rights with respect
to the shares which are subject to the vesting provisions of clause (iv) of
Section 5.3.
3.2 Section 83(b) Election. Purchaser understands that under section 83
----------------------
of the Internal Revenue Code of 1986, as amended (the "Code"), the difference
between the Purchase Price paid for Shares and their fair market value on the
date any forfeiture restrictions applicable to such Shares lapse will be
reportable as ordinary income at that time. For this purpose, the term
"forfeiture restrictions" includes the right of the Company to repurchase the
Unvested Shares under Article 5 of
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<PAGE>
this Agreement. Purchaser understands that he may elect to be taxed at the time
the Shares are acquired hereunder to the extent the fair market value of the
Shares differs from the Purchase Price rather than when such Shares cease to be
subject to such forfeiture restrictions, by filing an election under section 83
(b) of the Code with the I.R.S. within thirty (30) days after the date of
purchase hereunder. The form for making this election is attached as Exhibit B
---------
hereto. Purchaser understands that failure to make this filing within the thirty
(30) day period will result in the recognition of ordinary income by Purchaser
(in the event the fair market value of the Shares increases after the date of
purchase) as the forfeiture restrictions lapse. PURCHASER ACKNOWLEDGES THAT IT
IS PURCHASER'S SOLE RESPONSIBILITY, AND NOT THE COMPANY'S, TO FILE A TIMELY
ELECTION UNDER SECTION 83(b), EVEN IF PURCHASER REQUESTS THE COMPANY OR ITS
REPRESENTATIVES TO MAKE THIS FILING ON HIS/HER BEHALF. PURCHASER IS RELYING
SOLELY ON HIS OR HER ADVISORS WITH RESPECT TO THE DECISION AS TO WHETHER OR NOT
- ------
TO FILE AN 83(b) ELECTION.
3.3 Market Stand-Off.
----------------
(a) If requested by the Company and an underwriter of Common Stock (or
other securities) of the Company, the Purchaser shall not pledge, sell, offer to
sell, contract to sell, grant any option to purchase, make any short sale of any
Common Stock of the Company, or any options or warrants to purchase any shares
of the Common Stock of the Company or any securities convertible into or
exchangeable for shares of Common Stock of the Company, whether now owned or
hereinafter acquired, owned directly by the Purchaser or with respect to which
the Purchaser has beneficial ownership within the rules and regulations of the
Commission (collectively, the "Purchaser Shares"); otherwise than (a) as a bona
fide gift or gifts, provided that the donee or donees thereof agree to be bound
by the restrictions set forth herein, (b) a transfer to any trust for the direct
or indirect benefit of the Purchaser or his or her immediate family provided
that the trustee of the trust agrees to be bound by the restrictions set forth
herein, held by the Purchaser during the one hundred eighty (180) day period
following the effective date of a registration statement of the Company filed
under the 1933 Act.
(b) In the event of any stock dividend, stock split, recapitalization or
other change affecting the Company's outstanding common Stock effected without
receipt of consideration, then any new, substituted or additional securities
distributed with respect to the Shares shall be immediately subject to the
provisions of this Section 3.3, to the same extent the Shares are at such time
covered by such provisions.
For purposes of this Section 3.3, "immediate family" shall mean any
relationship by blood, marriage or adoption, not more
-4-
<PAGE>
remote than first cousin. The Purchaser also agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent and registrar
against the transfer of the Purchaser Shares except in compliance with the
foregoing restrictions.
The obligations described in this Section 3.3 shall not apply to a
registration statement relating solely to employee benefit plans on Form S-1 or
Form S-8 or similar forms that may be promulgated in the future, or a
registration relating solely to a Commission Rule 145 transaction on Form S-4 or
similar forms that may be promulgated in the future.
3.4 Stop Transfer. In order to enforce the provisions of Section 3.3, the
-------------
Company may impose stop-transfer instructions with respect to the Shares until
the end of the applicable stand-off period.
4. Transfer Restrictions.
---------------------
4.1 Restriction on Transfer. Purchaser shall not transfer, assign,
-----------------------
encumber, or otherwise dispose of any of the Shares that are subject to the
Company's Repurchase Right under Article 5. In addition, Shares that are
released from the Repurchase Right shall not be transferred, assigned,
encumbered, or otherwise made the subject of disposition in contravention of the
Company's First Refusal Right under Ariticle 6. Such restrictions on transfer,
however, shall not be applicable if Purchaser receives prior written consent
from the Company to (i) a gratuitous transfer of the Shares made to Purchaser's
spouse or issue, including adopted children, or to a trust for the exclusive
benefit of Purchaser or Purchaser's spouse or issue, (ii) a transfer of title
to the Shares effected pursuant to Purchaser's will or the laws of intestate
succession, or (iii) a transfer to the Company in pledge as security for any
purchase-money indebtedness incurred by Purchaser in connection with the
acquisition of the Shares.
4.2 Transferee Obligations. Each person (other than the Company) to whom
----------------------
the Shares are transferred by means of one of the permitted transfers specified
in Section 4.1 must, as a condition precedent to such transfer, acknowledge in
writing to the Company that such person is bound by the provisions of this
Agreement and that the transferred shares are subject to (i) both the Company's
Repurchase Right and the Company's First Refusal Right granted hereunder and
(ii) the market stand-off provisions of Section 3.3, to the same extent such
shares would be so subject if retained by Purchaser.
4.3 Definition of Owner. For purposes of Articles 5, 6 and 7 of this
-------------------
Agreement, the term "Owner" shall include Purchaser and all subsequent holders
of the Shares who derive their chain of ownership through a permitted transfer
from Purchaser in accordance with Section 4.1.
-5-
<PAGE>
5. Repurchase Right.
-----------------
5.1 Grant. The Company is hereby granted the right (the "Repurchase
-----
Right"), exercisable below) at any time during the sixty (60) day period
following the date Purchaser ceases to be a "Service Provider", to repurchase at
the Purchase Price all or (at the discretion of the Company and with the consent
of Purchaser) any portion of the Shares in which Purchaser has not acquired a
vested interest in accordance with Section 5.3 (the "Unvested Shares"). For
purposes of this Agreement, Purchaser shall be deemed to be a "Service Provider"
of the Company for so long as Purchaser renders services to the Company or one
or more of its parent or subsidiary corporations as an employee.
5.2 Exercise of the Repurchase Right and Termination of the Repurchase
------------------------------------------------------------------
Right. The Repurchase Right shall be exercisable by written notice delivered to
- -----
the Owner of the Shares prior to the expiration of the sixty (60) day period
specified in Section 5.1 (or, in certain cases, Section 5.4(b)). The notice
shall indicate the number of Shares to be repurchased and the date on which the
repurchase is to be effected, such date to be not more than thirty (30) days
after the date of notice. To the extent one or more certificates representing
Shares may have been previously delivered out of escrow to the Owner, then the
Owner shall, prior to the close of business on the date specified for the
repurchase, deliver to the Secretary of the Company the certificates
representing the Shares to be repurchased, properly endorsed for transfer. The
Company shall, concurrently with the receipt of such stock certificates, pay to
the Owner in cash or cash equivalents (including the cancellation of any
purchase-money indebtedness), an amount equal to the Purchase Price previously
paid for the Unvested Shares that are to be repurchased. The Repurchase Right
shall terminate with respect to any Shares for which it is not timely exercised
under Section 5.2. All Shares as to which the Repurchase Right lapses shall,
however, continue to be subject to (i) the First Refusal Right under Article 6,
(ii) the market stand-off provisions of Section 3.3 and (i) the transfer
restrictions set forth in Articles 2 and 4.
5.3 Vesting of Shares.
-----------------
Provided Purchaser continues to be a Service Provider of the Company,
Purchaser shall acquire a vested interest (i) with respect to 45,374 Shares on
the date hereof, (ii) with respect to 34,030 Shares on the first anniversary of
the date hereof, (iii) with respect to 2,836 Shares at the end of each month
beginning on the first anniversary of the date hereof, and (iv) with respect to
the remaining 228,600 Shares upon the earlier of the satisfaction of the
conditions set forth in Exhibit C or nine years and nine months from the date
hereof.
5.4 Fractional Shares. No fractional shares shall be repurchased by the
-----------------
Company. Accordingly, should the Repurchase
-6-
<PAGE>
Right extend to a fractional share at the time Purchaser ceases to be a Service
Provider of the Company, then such fractional share shall be added to any
fractional share in which Purchaser is at such time vested in order to make one
whole vested share no longer subject to the Repurchase Right.
5.5 Additional Shares or Substituted Securities. In the event of any stock
-------------------------------------------
dividend, stock split, recapitalization or other change affecting the Company's
outstanding Common Stock as a class effected without receipt of consideration,
then any new, substituted or additional securities or other property (including
money paid other than as a regular cash dividend) which is by reason of any such
transaction distributed with respect to the Shares shall be immediately subject
to the Repurchase Right, but only to the extent the Shares are at the time
covered by such right. Appropriate adjustments to reflect the distribution of
such securities or property shall be made to be the number of Shares hereunder
and to the price per share to be paid upon the exercise of the Repurchase Right
in order to reflect the effect of any such transaction upon the Company's
capital structure.
6. Right of First Refusal.
----------------------
6.1 Grant. The Company is hereby granted the right of first refusal (the
-----
"First Refusal Right"), exercisable in connection with any proposed sale or
other transfer of the Shares in which Purchaser has vested in accordance with
Article 5. For purposes of this Article 6, the term "transfer" shall include any
assignment, pledge, encumbrance or other disposition for value of the Shares
intended to be made by the Owner, but shall not include any of the permitted
transfers under Section 4.1.
6.2 Notice of Intended Disposition. In the event the Owner desires to
------------------------------
accept a bona fide third-party offer for any or all of the Shares (the shares
subject to such offer to be hereinafter called, for purposes of this Article 6,
the "Target Shares"), the Owner shall promptly (i) deliver to the Secretary of
the Company written notice (the "Disposition Notice") of the offer and the
basic terms and conditions thereof, including the proposed purchase price, and
(ii) provide satisfactory proof that the disposition of the Target Shares to the
third-party offeror would not contravene the provisions of Articles 2 and 3 of
this Agreement.
6.3 Exercise of Right. The Company (or its assignees) shall, for a period
-----------------
of sixty (60) days following receipt of the Disposition Notice, have the right
to repurchase all or a portion of the Target Shares specified in the Disposition
Notice upon substantially the same terms and conditions specified therein. Such
right shall be exercisable by written notice (the "Exercise Notice") delivered
to the Owner prior to the expiration of the thirty (30) day exercise period. If
such
-7-
<PAGE>
right is exercised with respect to all the Target Shares specified in the
Disposition Notice, then the Company (or its assignees) shall effect the
repurchase of the Target Shares, including payment of the purchase price, not
more than five (5) business days after delivery of the Exercise Notice; and at
such time the Owner shall deliver to the Company the certificates representing
the Target Shares to be repurchased, properly endorsed for transfer. If any of
the Target Shares are at the time held in escrow under Article 7, the
certificates for such shares shall automatically be released from escrow and
surrendered to the Company for cancellation. The Target Shares so purchased
shall thereupon be canceled and cease to be issued and outstanding shares of the
Company's Common Stock.
Should the purchase price specified in the Disposition Notice be payable in
property other than cash or evidences of indebtedness, the Company (or its
assignees) shall have the right to pay the purchase price in the form of cash
equal in amount to the value of such property. If the Owner and the Company (or
its assignees) cannot agree on such cash value within ten (10) days after the
Company's receipt of the Disposition Notice, the valuation shall be made by an
appraiser of recognized standing selected by the Owner and the Company (or its
assignees), or, if they cannot agree on an appraiser within twenty (20) days
after the Company's receipt of the Disposition Notice, each shall select an
appraiser of recognized standing and the two appraisers shall designate a third
appraiser of recognized standing, whose appraisal shall be determinative of such
value. The cost of such appraisal shall be shared equally by the Owner and the
Company. The closing shall then be held on the latter of (i) the fifth business
day following delivery of the Exercise Notice of (ii) the 15th day after such
cash valuation shall have been made.
6.4. Non-Exercise of Right. In the event the Exercise Notice is not given
---------------------
to the Owner within thirty (30) days following the date of the Company's receipt
of the Disposition Notice, the Owner shall have a period of thirty (30) days
thereafter, in which to sell or otherwise dispose of any or all of the Target
Shares upon terms and conditions (including the purchase price) no more
favorable to the third-party purchaser than those specified in the Disposition
Notice; provided that any such sale or disposition must not contravene the
provisions of Article 2 of this Agreement. If any of the Target Shares are at
the time held in escrow under Article 7, the certificates for such shares shall
automatically be released from escrow and surrendered to the Owner. The third-
party purchaser shall acquire the Target Shares free and clear of all the terms
and provisions of this Agreement (including the Company's Repurchase Right under
Article 5 and the First Refusal Right hereunder). If the Owner does not sell or
otherwise dispose of the Target Shares within the specified thirty (30) day
period, the Company's First Refusal Right shall continue to apply to any
subsequent dispo-
-8-
<PAGE>
sition of the Target Shares by the Owner until such right lapses in accordance
with Section 6.7.
6.5 Partial Exercise of Right. In the event the Company (or its
-------------------------
assignees) makes a timely exercise of the First Refusal Right with respect to a
portion, but not all, of the Target Shares specified in the Disposition Notice,
the Owner shall sell to the Company (or its assignees) the portion of the Target
Shares which the Company (or its assignees) has elected to purchase, such sale
to be effected in substantial conformity with the provisions of Section 6.3 and
sell the remaining Target Shares to a third party purchaser, if so desired by
Owner.
6.6 Recapitalization. In the event of any stock dividend, stock split,
----------------
recapitalization or other transaction affecting the Company's outstanding Common
Stock as a class effected without receipt of consideration, then any new,
substituted or additional securities or other property which is by reason of
such transaction distributed with respect to the Shares shall be immediately
subject to the Company's First Refusal Right hereunder, but only to the extent
the Shares are at the time covered by such right.
6.7 Lapse. The First Refusal Right under this Article 6 shall lapse and
-----
cease to have effect upon the earliest to occur of (i) the determination by the
Company's Board of Directors that a public market exists for the outstanding
shares of the Company's Common Stock, or (ii) the closing of a Qualified IPO.
6.8 Legend. In addition to the legends required by Section 2.4, all
------
certificates representing Shares subject to the Company's Right of Repurchase
and the Right of First Refusal shall be endorsed with the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN
COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE
COMPANY AND THE INITIAL HOLDER HEREOF. SUCH AGREEMENT PROVIDES
FOR CERTAIN RESTRICTIONS ON TRANSFER OF THE SECURITIES, INCLUDING
RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE
SECURITIES AND CERTAIN REPURCHASE RIGHTS IN FAVOR OF THE COMPANY
UPON TERMINATION OF SERVICE WITH THE COMPANY. THE SECRETARY OF
THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH
AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE."
7. Escrow.
------
7.1 Deposit. Upon issuance, the certificates for the Shares shall be
-------
deposited in escrow with the Secretary of the Company to be held in accordance
with the provisions of this Article 7. Each deposited certificate shall be
accompanied by a duly executed Assignment Separate from Certificate in the form
-9-
<PAGE>
of Exhibit A. The deposited certificates, together with any other assets or
---------
securities from time to time deposited with the Company pursuant to the
requirements of this Agreement, shall remain in escrow until such time or times
as the certificates (or other assets and securities) are to be released or
otherwise surrendered for cancellation in accordance with Section 7.3. Upon
delivery of the certificates (or other assets and securities) to the Company,
the Owner shall be issued an instrument of deposit acknowledging the number of
Shares (or other assets and securities) delivered in escrow to the Secretary of
the Company.
7.2 Recapitalization. All regular cash dividends on the Shares (or other
----------------
securities at the time held in escrow) shall be paid directly to the Owner and
shall not be held in escrow. However, in the event of any stock dividend, stock
split, recapitalization or other change affecting the Company's outstanding
Common Stock as a class effected without receipt of consideration, any new,
substituted or additional securities or other property which is by reason of
such transaction distributed with respect to the Shares shall be immediately
delivered to the Secretary of the Company to be held in escrow under this
Article 7, but only to the extent the Shares are at the time subject to the
escrow requirements of Section 7.1.
7.3 Release/Surrender. The Shares, together with any other assets or
-----------------
securities held in escrow hereunder, shall be subject to the following terms and
conditions relating to their release from escrow or their surrender to the
Company for repurchase and cancellation:
(a) Should the Company exercise the Repurchase Right under Article 5 with
respect to any Shares, then the escrowed certificates for such Shares (together
with any other assets or securities issued with respect thereto) shall be
delivered to the Company for cancellation, concurrently with the payment to the
Owner, in cash or cash equivalent (including the cancellation of any purchase-
money indebtedness), of an amount equal to the aggregate Purchase Price for
Unvested Shares, and the Owner shall have no further rights with respect to such
Shares (or other assets or securities).
(b) Should the Company exercise its First Refusal Right under Article 6
with respect to any Target Shares held at the time in escrow hereunder, then the
escrowed certificates for such Target Shares (together with any other assets or
securities issued with respect thereto) shall, concurrently with the payment of
the Section 6.3 purchase price for such Target Shares to the Owner, be
surrendered to the Company for cancellation, and the Owner shall have no further
rights with respect to such Target Shares (or other assets or securities).
(c) Should the Company elect not to exercise its First Refusal Right under
Article 6 with respect to any Target Shares held at the time in escrow
hereunder, then the escrowed certifi-
-10-
<PAGE>
cates for such Target Shares (together with any other assets or securities
issued with respect thereto) shall be surrendered to the Owner for disposition
according to the provisions of Section 6.4.
(d) As the interest of Purchaser in the Shares (or any other assets or
securities issued with respect thereto) vests in accordance with the provisions
of Article 5, the certificates for such vested Shares (as well as all other
vested assets and securities) shall be released from escrow and delivered to the
Owner.
(e) All Shares (or other assets or securities) released from escrow in
accordance with the provisions of subparagraph (d) above shall nevertheless
remain subject to the First Refusal Right under Article 6 and the market
stand-off provisions of Section 3.3 until such provisions terminate in
accordance herewith.
8. General Provisions.
------------------
8.1 Assignment. The Company may assign its Repurchase Rights under Article
----------
5 and/or its First Refusal Right under Article 6 to any person or entity
selected by the Company's Board of Directors, including one or more stockholders
of the Company.
If the assignee of the Repurchase Right is other than a parent or
subsidiary corporation of the Company, then such assignee must make a cash
payment to the Company, upon the assignment of the Repurchase Right, in an
amount equal to the excess (if any) of the fair market value of the Unvested
Shares at the time subject to the Repurchase Right (as determined by the
Company's Board of Directors) and the aggregate Repurchase Price payable for
such Unvested Shares.
8.2 Definitions. For purposes of this Agreement, the following provisions
-----------
shall be applicable in determining the parent and subsidiary corporations of the
Company:
(a) Any corporation (other than the Company) in an unbroken chain of
corporations ending with the Company shall be considered to be a parent
corporation of the Company, provided each such corporation in the unbroken chain
(other than the Company) owns, at the time of the determination, stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
(b) Each corporation (other than the Company) in an unbroken chain of
corporations beginning with the Company shall be considered to be a subsidiary
of the Company, provided each such corporation (other than the last corporation)
in the unbroken chain owns, at the time of the determination, stock
-11-
<PAGE>
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
8.3 No Employment or Service Contract. Nothing in this Agreement shall
---------------------------------
confer upon Purchaser any right to continue in the Service of the Company (or
any parent or subsidiary corporation of the Company) for any period of time or
restrict in any way the rights of the Company (or any parent or subsidiary
corporation of the Company) or Purchaser, to terminate the Service Provider
status of Purchaser at any time for any reason whatsoever, with or without
cause.
8.4 Notices. Any notice required in connection with (i) the Repurchase
-------
Right or the First Refusal Right or (ii) the disposition of any Shares covered
thereby shall be given in writing and shall be deemed effective upon personal
delivery, upon deposit with a nationally recognized courier service, or upon
deposit in the United States mail, registered or certified, postage prepaid and
addressed to the party entitled to such notice at the address indicated below
such party's signature line on this Agreement or at such other address as such
party may designate by ten (10) days advance written notice under this Section
8.4 to all other parties to this Agreement.
8.5 No Waiver. The failure of the Company (or its assignees) in any
---------
instance to exercise the Repurchase Rights granted under Article 5, or the
failure of the Company (or its assignees) in any instance to exercise the First
Refusal Right granted under Article 6, shall not constitute a waiver of any
other repurchase rights and/or rights of first refusal that may subsequently
arise under the provisions of this Agreement or any other agreement between the
Company and Purchaser. No waiver of any breach or condition of this Agreement
shall be deemed to be a waiver of any other or subsequent breach or condition,
whether of like or different nature.
8.6 Cancellation of Shares. If the Company (or its assignees) shall make
----------------------
available, at the time and place and in the amount and form provided in this
Agreement, the consideration for the Shares to be repurchased in accordance with
the provisions of this Agreement, then from and after such time, the person from
whom such shares are to be repurchased shall no longer have any rights as a
holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement), and such shares shall be
deemed purchased in accordance with the applicable provisions hereof and the
Company (or its assignees) shall be deemed the owner and holder of such shares,
whether or not certificates therefor have been delivered as required by this
Agreement.
-12-
<PAGE>
9. Miscellaneous Provisions.
------------------------
9.1 Purchaser Undertaking. Purchaser hereby agrees to take whatever
---------------------
additional action and execute whatever additional documents the Company may in
its judgment deem necessary or advisable in order to carry out the obligations
or restrictions imposed on Purchaser under this Agreement.
9.2 Agreement Is Entire Contract. This Agreement constitutes the entire
----------------------------
contract between the parties hereto with regard to the subject matter hereof.
9.3 Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of California, as such laws are applied
to contracts entered into and performed in such State.
9.4 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
9.5 Successors and Assigns. The provisions of this Agreement shall inure
----------------------
to the benefit of, and be binding upon, the Company and its successors and
assigns and Purchaser and Purchaser's legal representatives, heirs, legatees,
distributees, assigns and transferees by operation of law, whether or not any
such person shall have become a party to this Agreement
-13-
<PAGE>
and have agreed in writing to join herein and be bound by the terms and
conditions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first indicated above.
GMS DENTAL GROUP, INC.
By /s/ Grant M. Sadler
------------------------------
Address 105 North Riverview Drive
Suite 255
Anaheim Hills, CA 92808
PURCHASER*
/s/ Kenneth J. Davis
---------------------------------
Signature
Address 26236 Devonshire
-------------------------
Mission Viejo
-------------------------
CA 92692
-------------------------
________________________
* I have received, completed, executed and retained the I.R.C. section 83(b)
election that was attached hereto as Exhibit B. As set forth in Section 3.2, I
understand that I, and not the Corporation, will be responsible for completing
---
the form and filing the election with the appropriate office of the federal and
state tax authorities and that if such filing is not completed within thirty
(30) days after the date of this Agreement, I will forfeit the significant tax
benefits of section 83(b). I understand further that such filing should be made
by registered or certified mail, return receipt requested, and that I must
retain two (2) copies of the completed form for filing with my state and federal
tax returns for the current tax year and an additional copy for my records.
-14-
<PAGE>
Spousal Consent
---------------
_________________________ (Purchaser's spouse) indicates by the execution
of this Agreement his or her consent to be bound by the terms herein as to his
or her interests, whether as community property or otherwise, if any, in the
Shares.
/s/ Kenneth J. Davis
--------------------------------
Signature
-15-
<PAGE>
EXHIBIT A
---------
Assignment Separate From Certificate
------------------------------------
FOR VALUE RECEIVED KENNETH J. DAVIS ("Stockholder") hereby sells, assigns
----------------
and transfers unto GMS DENTAL GROUP, INC., a Delaware corporation (the
"Company"), _______________ (___) shares of Common Stock of the Company
represented by Certificate No._____ herewith and does hereby irrevocably
constitute and appoint _____________ Attorney to transfer the said stock on the
books of the Company with full power of substitution in the premises.
Dated: ___________, 19__.
/s/ Kenneth J. Davis
------------------------------
Signature
Spousal Consent
---------------
______________ (Purchaser's spouse) indicates by the execution of this
Assignment his or her consent to be bound by the terms herein as to his or her
interests, whether as community property or otherwise, if any, in the Shares.
/s/ Andrea M. Davis
------------------------------
Signature
INSTRUCTIONS: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE SIGNATURE LINE.
THE PROPOSE OF THIS ASSIGNMENT IS TO ENABLE THE COMPANY TO EXERCISE ITS
"REPURCHASE OPTION" SET FORTH IN THE AGREEMENT WITHOUT REQUIRING ADDITIONAL
SIGNATURES ON THE PART OF PURCHASER.
<PAGE>
EXHIBIT B
---------
Election Under Section 83(b) Of
The Internal Revenue Code
The undersigned hereby makes an election pursuant to Section 83(b) of the
Internal Revenue Code with respect to the property described below and supplies
the following information in accordance with the regulations promulgated
thereunder:
(i) The name, address and social security number of the undersigned:
Kenneth J. Davis
------------------------------------------------------------
____________________________________________________________
____________________________________________________________
Social Security No.: ###-##-####
----------------------------------------
(ii) Description of property with respect to which the election is being
made:
______________ shares of Common Stock of GMS Dental, Inc. (the
"Company").
(iii) The date on which the property was transferred is August ____, 1996.
(iv) The taxable year to which this election relates is calendar year
1996.
(v) Nature of restrictions to which the property is subject:
The shares of stock transferred to the undersigned taxpayer are
subject to the provisions of a Founder Stock Purchase Agreement
between the undersigned and the Company. Under the provisions of the
Agreement, the Company will have the right to repurchase the stock
at a price which may be less than the fair market value of the
shares in the event of the undersigned's termination of employment
with the Company.
(vi) The fair market value of the property at the time of transfer
(determined without regard to any lapse restriction) was $0.10 per share, for a
total of $__________.
(vii) The amount paid by taxpayer for the property was $__________.
-17-
<PAGE>
(viii) A copy of this statement has been furnished to the Company.
Dated: _________________, 1996
/s/ Kenneth J. Davis
-------------------------------
Kenneth J. Davis
-18-
<PAGE>
EXHIBIT C
---------
Performance Vesting
114,300 Shares shall vest for 1997 and 114,300 Shares for 1998 when and if
the Company's audited financial statements for such respective years show that
(i) the aggregate consideration paid for acquired dental practices from
inception to December 31, 1997 or December 31, 1998, as applicable, does not
exceed 6x aggregate 12-month historical earnings before interest, taxes,
depreciation, and amortization ("EBITDA") for such practices and (ii) the
Company meets or exceeds the Target EBITDA" (as defined below) for the year
ending on such date (the "Vesting Date"). In the event the Company's EBITDA less
general and administrative expenses for 1997 or 1998, as applicable, is less
than the Target EBITDA for such year, up to one-half of the shares of Common
Stock subject to the right of repurchase will no longer be subject to the
Company's right of repurchase as of the applicable Vesting Date at a linearly
declining rate to zero is the rate of release if the Company's EBITDA less
general and administrative expenses is 75% of the Target EBITDA. For purposes of
the expiration of the Company's right of repurchase only, Target EBITDA is
$7,693,000 and $19,565,000 for 1997 and 1998, respectively.
-19-
<PAGE>
EXHIBIT 10.29
PROMISSORY NOTE
$40,605.84 Anaheim Hills, California
Dated as of August 31, 1996
FOR VALUE RECEIVED, the undersigned, KENNETH J. DAVIS, promises to pay to
the order of GMS DENTAL GROUP, INC., a Delaware corporation (the "Company"), the
principal sum of Forty Thousand Six Hundred Five and 84/100 Dollars
($40,605.84), with interest from the date hereof on the unpaid principal at the
applicable federal rate of 6.84%, compounded annually. The entire unpaid balance
of principal and interest shall be payable on August 31, 2000.
If payment is not made when due, and if action is instituted on this note,
the undersigned agrees to pay the Company reasonable attorneys' fees and costs
of suit, as fixed by court.
The undersigned shall have the right to prepay all or any part of the
unpaid principal amount of this note, without premium, at any time prior to the
maturity hereof on ten (10) days' prior written notice.
This note is a full-recourse note originally secured by a pledge of 410,160
shares of Common Stock of the Company pursuant to a Security Agreement of even
date herewith, which is on file with the Secretary of the Company.
This note shall be goverened by and construed in accordance with the laws
of the State of California.
IN WITNESS WHEREOF, the undersigned has signed, dated and delivered this
note as of the date and year first above written
/s/ Kenneth J. Davis
------------------------------------
Kenneth J. Davis
<PAGE>
EXHIBIT 10.30
SECURITY AGREEMENT
THIS AGREEMENT, entered into as of August 31, 1996, between GMS DENTAL
----------
GROUP, INC., a Delaware corporation (the "Company"), and KENNETH J. DAVIS (the
- ---------- ----------------
"Purchaser").
W I T N E S S E T H:
WHEREAS, the Purchaser has purchased from the Company 410,160 shares of
the Company's Common Stock (the "Shares"); and
WHEREAS, the Company has loaned to the Purchaser the amount of $40,605.84
which the Purchaser has used to pay a portion of the purchase price of the
Shares; and
WHEREAS, the Purchaser has executed and delivered to the Company a
full-recourse promissory note evidencing such loan (the "Note") and has agreed
to pledge all of the Shares to the Company as security for the payment of the
Note:
NOW, THEREFORE, it is agreed as follows:
1. The Purchaser hereby delivers to the Company one or more certificates
representing the Shares, together with two Assignments Separate From Certificate
signed by the Purchaser. The Purchaser hereby pledges and grants a security
interest in the Shares, including any shares into which the Shares may be
converted and all proceeds of the Shares, as security for the timely payment of
all of the Purchaser's obligations under the Note and for the Purchaser's
performance of all of its obligations under this Agreement. In the event of a
default in payment of the Note, the Purchaser hereby appoints the Company as his
true and lawful attorney to take such action as may be necessary or appropriate
to cause the Shares to be transferred into the name of the Company or any
assignee of the Company and to take any other action on behalf of the Purchaser
permitted hereunder or under applicable law.
2. The Company agrees to hold the Shares as security for the timely
payment of all of the Purchaser's obligations under the Note and for the
Purchaser's performance of all of its obligations under this Agreement, as
provided herein. At no time shall the Company dispose of or encumber the Shares,
except as otherwise provided in this Agreement.
3. At all times while the Company is holding the Shares as security under
this Agreement, the Company shall:
(a) Collect any dividends that may be declared on the shares and
credit such dividends against any accrued interest or unpaid principal
under the Note, as part payment;
-1-
<PAGE>
(b) Collect and hold any shares that may be issued upon conversion of
the Shares: and
(c) Collect and hold any other securities or other property that may
be distributed with respect to the Shares.
Such shares and other securities or property shall be subject to the security
interest granted in Section 1 of this Agreement and shall be held by the Company
under this Agreement.
4. While the Company holds the Shares as security under this Agreement,
the Purchaser shall have the right to vote the shares at all meetings of the
Company's stockholders; provided that the Purchaser is not in default in the
performance of any term of this Agreement or in any payment due under the Note.
In the event of such a default, the Company shall have the right to the extent
permitted by law to vote and to give consents, ratifications and waivers and
take any other action with respect to the Shares with the same force and effect
as if the Company were the absolute and sole owner of the Shares.
5. Upon payment in full of the outstanding principal balance of the Note
and all interest and other charges due under the Note, the Company shall release
from pledge and redeliver to the Purchaser the certificate(s) representing
the Shares and the Assignment Separate From Certificate forms.
6. In the event that the Purchaser fails to perform any term of this
Agreement or fails to make any payment when due under the Note, the Company
shall have all of the rights and remedies of a creditor and secured party at
law and in equity, including (without limitation) the rights and remedies
provided under the California Uniform Commercial Code. Without limiting the
foregoing, the Company may, after giving ten (10) days' prior written notice to
the Purchaser by certified mail at his residence or business address, sell any
or all of the Shares in such manner and for such price as the Company may
determine, including (without limitation) through a public or private sale or at
any broker's board or on any securities exchange, for cash, upon credit or for
future delivery. The Company is authorized at any such sale, if it deems it
advisable to do so, to restrict the prospective bidders or purchasers of any of
the Shares to persons who will represent and agree that they are purchasing for
their own account for investment, and not with a view to the distribution or
sale of any of the Shares, to restrict the prospective bidders or purchasers and
the use any purchaser may make of the Shares and impose any other restriction or
condition that the Company deems necessary or advisable under the federal and
state securities laws. Upon any such sale the Company shall have the right to
deliver, assign and transfer to the purchaser thereof the Shares so sold. Each
purchaser at any such sale shall hold the Shares so sold absolute, free from any
claim or right of any kind. In case of any sale of any or all of the Shares on
-2-
<PAGE>
credit or for future delivery, the Shares so sold may be retained by the Company
until the selling price is paid by the purchaser thereof, but the Company shall
not incur any liability in case of the failure of such purchaser to take up and
pay for the Shares so sold and, in case of any such failure, such Shares may
again be sold under the terms of this section. The Purchaser hereby agrees that
any disposition of any or all of the Shares by way of a private placement or
other method which in the opinion of the Company is required or advisable under
Federal and state securities laws is commercially reasonable. At any public
sale, the Company may (if it is the highest bidder) purchase all or any part of
the Shares at such price as the Company deems proper. Out of the proceeds of any
sale, the Company may retain an amount sufficient to pay all amounts then due
under the Note, together with the expenses of the sale and reasonable attorneys'
fees. The Company shall pay the balance of such proceeds, if any, to the
Purchaser. The Purchaser shall be liable for any deficiency that remains after
the Company has exercised its rights under this Agreement.
7. This Agreement shall be governed by and construed in accordance with
the laws of the State of California. This Agreement shall inure to the benefit
of, and be binding upon, the Company and its successors and assigns and be
binding upon the purchaser and the Purchaser's legal representative, heirs,
legatees, distributees, assigns and transferees by operation of law. This
Agreement contains the entire security agreement between the Company and the
Purchaser. The Purchaser will execute any additional agreements, assignments or
documents or take any other actions reasonably required by the Company to
preserve and perfect the security interest in the Shares granted to the Company
herein and otherwise to effectuate this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by its duly authorized officer, and the Purchaser has personally
executed this Agreement.
GMS DENTAL GROUP, INC.
BY /s/ Grant M.Sadler
--------------------------
Grant M. Sadler, President
PURCHASER
/s/ Kenneth J. Davis
---------------------------
Kenneth J. Davis
-3-
<PAGE>
EXHIBIT 10.31
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
GMS DENTAL GROUP, INC.
1996 PERFORMANCE STOCK OPTION PLAN
INCENTIVE STOCK OPTION AGREEMENT
GMS Dental Group, Inc., a Delaware corporation (the "Company"), hereby
grants an option to purchase Shares of its common stock to the optionee named
below. The terms and conditions of the option are set forth in this cover sheet,
in the attachment and in the Company's 1996 Performance Stock Option Plan (the
"Plan").
Date of Option Grant: 12-4-96
-------
Name of Optionee: Norman Huffaker
---------------
Optionee's Social Security Number: ###-##-####
-----------
Number of Shares of Common Stock Covered by Option: 50,000
------
Exercise Price per Share: $.20
----
Vesting Start Date: 12-4-96
-------
By signing this cover sheet, you agree to all of the terms and conditions
described in the attached Agreement and in the Plan, a copy of which is
also enclosed.
Optionee: Norman R. Huffaker /s/ NORMAN R. HUFFAKER
---------------------------------------------
(Signature)
Company: Grant M. Sadler /s/ GRANT M. SADLER
---------------------------------------------
(Signature)
Title: President
--------------------------------------
Attachment
- ----------
<PAGE>
EXHIBIT 10.18
GMS DENTAL GROUP, INC.
1996 STOCK OPTION PLAN
INCENTIVE STOCK OPTION AGREEMENT
INCENTIVE STOCK This Option is intended to be an incentive stock option
OPTION under Section 422 of the Internal Revenue Code and will
be interpreted accordingly.
VESTING The Option Shares shall be unvested and subject to
repurchase by the Company at the Exercise Price paid per
share ($.20 per share). Optionee shall acquire a vested
interest in, and the Company's repurchase right shall
accordingly lapse with respect to, (i) twenty-five percent
(25%) of the Option Shares upon Optionee's completion of
one (1) year of Service measured from the Vesting
Commencement Date and (ii) the balance of the Option
Shares in a series of thirty-six (36) successive equal
monthly installments upon Optionee's completion of each
additional month of Service over the thirty-six (36)-month
period measured from the first anniversary of the Vesting
Commencement Date. In no event shall any additional Option
Shares vest after Optionee's cessation of Service.
TERM Your Option will expire in any event at the close of
business at Company headquarters on the day before the
10th anniversary of the Date of Grant, as shown on the
cover sheet. (It will expire earlier if your Company
service terminates, as described below.)
REGULAR If your Service terminates for any reason except death or
TERMINATION Disability, then your Option will expire at the close of
business at Company headquarters no less than 30 days
after your termination date.
DEATH If you die as an Employee, then your Option will expire at
the close of business at Company headquarters on a day not
less than 6 months after the date of death. During the 6-
month period, your estate or heirs may exercise the vested
portion of your Option.
DISABILITY If your Service terminates because of your Disability,
then your Option will expire at the close of business at
the Company headquarters on the day not less than 6 months
after your termination date.
A-1
<PAGE>
LEAVES OF ABSENCE For purposes of this Option, your status as an Employee
does not terminate when you go on a military leave, a sick
leave or another bona fide leave of absence that was
approved by the Company in writing if the terms of the
leave provide for continued service crediting, or when
continued service crediting is required by applicable law.
Your status as an Employee terminates in any event when
the approved leave ends, unless you immediately return to
active work.
The Company determines which leaves count for this
purpose, whether your Option continues to vest during a
leave and when your service terminates for all purposes
under the Plan.
NOTICE OF EXERCISE When you wish to exercise this Option, you must notify the
Company by filing the proper "Notice of Exercise" form at
the address given on the form. The Company may prescribe a
minimum number of shares of Common Stock which may be
purchased. Your notice must specify how many shares of
Common Stock you with to purchase. Your notice must also
specify how your Common Stock should be registered (in
your name only or in your and your spouse's names as
community property or as joint tenants with right of
survivorship). The notice will be effective when it is
received by the Company.
If someone else wants to exercise this Option after your
death, that person must prove to the Company's
satisfaction that he or she is entitled to do so.
RESTRICTIONS ON The Company will not permit you to exercise this Option if
EXERCISE the issuance of shares of the Company's Common Stock at
that time would violate any law or regulation.
A-2
<PAGE>
PERIODS OF Any other provision of this Agreement notwithstanding, the
NONEXERCISABILITY Company shall have the right to designate one or more
periods of time, each of which shall not exceed 180 days
in length, during which this Option shall not be
exercisable if the Company determines (in its sole
discretion) that such limitation on exercise could in any
way facilitate a lessening of any restriction on transfer
pursuant to the Securities Act of 1933 (the "Securities
Act") or any state securities laws with respect to any
issuance of securities by the Company, facilitate the
registration or qualification of any securities by the
Company under the Securities Act or any state securities
laws, or facilitate the perfection of any exemption from
the registration or qualification requirements of the
Securities Act or any applicable state securities laws for
the issuance or transfer of any securities. Such
limitation on exercise shall not alter the vesting
schedule set forth in this Agreement other than to limit
the periods during which this Option shall be exercisable.
*Form of Payment When you submit your notice of exercise, you must include
payment of the Option exercise price for the Option Shares
you are purchasing. Payment may be made in one (or a
combination) of the following forms:
. Promissory Note in favor of the Company, your
personal check, a cashier's check or a money order.
. Shares of the Company's Common Stock which have
already been owned by you for any time period
specified by the Committee and which are surrendered to
the Company. The value of such shares, determined as of
the effective date of the Option exercise, will be
applied to the Exercise Price.
. To the extent that a public market for the Option
Shares exists as determined by the Company, by delivery
(on a form prescribed by the Committee) of an
irrevocable direction to a securities broker to sell
Option Shares and to deliver all or part of the sale
proceeds to the Company in payment of the aggregate
Exercise Price.
WITHHOLDING TAXES You will not be allowed to exercise this Option unless you
make acceptable arrangements to pay any withholding or
other taxes that may be due as a result of the Option
exercise or the sale of Option Shares acquired upon
exercise of this Option.
A-3
<PAGE>
RESTRICTIONS ON You agree that the Option Shares may not be sold,
RESALE transferred, pledged or otherwise disposed of until the
repurchase rights with respect to those Option Shares
expire. By signing this Agreement, you agree not to sell
any Option Shares at a time when applicable laws,
regulations or Company or underwriter trading policies
prohibit a sale.
You represent and agree that the Option Shares to be
acquired upon exercising this Option will be acquired for
investment, and not with a view to the sale or
distribution thereof.
In the event that the sale of Option Shares under the Plan
is not registered under the Securities Act of 1933, as
amended, but an exemption is available which requires an
investment representation or other representation, you
shall represent and agree at the time of exercise that the
Option Shares being acquired upon exercising this Option
are being acquired for investment, and not with a view to
the sale or distribution thereof, and shall make such
other representations as are deemed necessary or
appropriate by the Company and its counsel.
THE COMPANY'S In the event that you propose to sell, pledge or otherwise
RIGHT OF FIRST transfer to a third party any Option Shares acquired
REFUSAL under this Agreement, or any interest in such Option
Shares, the Company shall have the "Right of First
Refusal" with respect to all (and not less than all) of
such Option Shares. If you desire to transfer Option
Shares acquired under this Agreement, you must give a
written "Transfer Notice" to the Company describing fully
the proposed transfer, including the number of Option
Shares proposed to be transferred, the proposed transfer
price and the name and address of the proposed transferee.
The Transfer Notice shall be signed both by you and by the
proposed new transferee and must constitute a binding
commitment of both parties to the transfer of the Option
Shares. The Company shall have the right to purchase all,
and not less than all, of the Option Shares on the terms
of the proposal described in the Transfer Notice (subject,
however, to any change in such terms permitted in the next
paragraph) by delivery of a notice of exercise of the
Right of First Refusal within 30 days after the date when
the Transfer Notice was received by the Company. The
Company's rights under this Subsection shall be freely
assignable, in whole or in part.
A-4
<PAGE>
If the Company fails to exercise is Right of First Refusal
within 30 days after the date when it received the
Transfer Notice, you may, not later than 90 days following
receipt of the Transfer Notice by the Company, conclude a
transfer of the Option Shares subject to the Transfer
Notice on the terms and conditions described in the
Transfer Notice. Any proposed transfer on terms and
conditions different form those described in the Transfer
Notice, as well as any subsequent proposed transfer by
you, shall again be subject to the Right of First Refusal
and shall require compliance with the procedure described
in the paragraph above. If the Company exercises its Right
of First Refusal, the parties shall consummate the sale of
the Option Shares on the terms set forth in the Transfer
Notice within 60 days after the date when the Company
received the Transfer Notice (or within such longer period
as may have been specified in the Transfer Notice);
provided, however, that in the event the Transfer Notice
provided that payment for the Option Shares was to be made
in a form other than lawful money paid at the time of
transfer, the Company shall have the Option of paying for
the Option Shares with lawful money equal to the present
value of the consideration described in the Transfer
Notice.*
The Company's Right of First Refusal shall inure to the
benefit of its successors and assigns and shall be binding
upon any transferee of the Option Shares.
The Company's Right of First Refusal shall terminate in
the event that the Company's Common Stock is listed on an
established stock exchange or is quoted regularly on the
Nasdaq National Market.
A-5
<PAGE>
RIGHT OF Following termination of your Service for any reason, the
REPURCHASE Company shall have the right to repurchase all of those
unvested Option Shares that you have or will acquire under
this Option. If the Company fails to provide you with
written notice of its intention to purchase such Option
Shares before or within 30 days of the date the Company
receives written notice from you of your termination of
Service, the Company's right to purchase such Option
Shares shall terminate. If the Company exercises its right
to purchase such Option Shares, the Company will
consummate the purchase of such Option Shares within 60
days of the date of its written notice to you. The
purchase price for any Option Shares repurchased shall be
equal to the Exercise Price for those Option Shares ($.20
per share) and shall be paid in cash, or by cancellation
of all or a portion of any indebtedness owed by you to the
Company. To secure its repurchase right, the Company shall
retain the certificates representing Option Shares until
such time as the repurchase rights expire as provided
herein. Upon any exercise of repurchase rights, the
Company shall be authorized to transfer or cancel the
Option Shares so repurchased without any further actions
of you.
TRANSFER OF OPTION Prior to your death, only you may exercise this Option.
You cannot transfer or assign this Option. For instance,
you may not sell this Option or use it as security for a
loan. If you attempt to do any of these things, this
Option will immediately become invalid. You may, however,
dispose of this Option in your will or designate a
beneficiary.
Regardless of any marital property settlement agreement,
the Company is not obligated to honor a notice of exercise
from your spouse or former spouse, nor is the Company
obligated to recognize such individual's interest in your
Option in any other way.
RETENTION RIGHTS Neither your Option nor this Agreement give you the right
to be retained by the Company (or any subsidiaries) in any
capacity. The Company (and any subsidiaries) reserve the
right to terminate your Service at any time for any
reason.
SHAREHOLDER RIGHTS You, or your estate or heirs, have no rights as a
shareholder of the Company until a certificate for the
shares of the Company's Common Stock acquired upon
exercise of this Option has been issued. No adjustments
are made for dividends or other rights if the applicable
record date occurs before your stock certificate is
issued, except as described in the Plan.
A-6
<PAGE>
ADJUSTMENTS On the event of a stock split, a stock dividend or a
similar change in the outstanding Common Stock of the
Company, the number of shares of the Company's Common
Stock covered by this Option and the exercise price per
share may be adjusted pursuant to the Plan. Your Option
shall be subject to the terms of the agreement of merger,
liquidation or reorganization in the event the Company is
subject to such corporate activity.
AMENDMENTS AND This Agreement may be amended in writing signed by both
ADMINISTRATION parties. The Committee shall have the sole discretion to
interpret and administer this Agreement and to adopt rules
and policies to administer and enforce this Agreement.
LEGENDS All certificates representing the Option Shares issued
upon exercise of this Option shall, where applicable, have
endorsed thereon the following legends:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AND OPTIONS TO PURCHASE
SUCH SHARES SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY
AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN
INTEREST. A COPY OF SUCH AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON
WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY BY THE
HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS
CERTIFICATE."
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND
ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED."
APPLICABLE LAW This Agreement will be interpreted and enforced under the
laws of the State of California.
THE PLAN AND The text of the Plan is incorporated in this Agreement by
OTHER AGREEMENTS reference. Certain capitalized terms used in this
Agreement or in the Notice of Grant which are not defined
herein or in the Notice of Grant shall have the meanings
defined in the Plan.
A-7
<PAGE>
ENTIRE AGREEMENT This Agreement, that certain employment letter, dated
February 26, 1997, by and between you and the Company,
as amended or superseded from time to time, and the Plan
constitute the entire understanding between you and the
Company regarding this Option and Option Shares. Any
prior agreements, commitments or negotiations concerning
this Option or Option Shares are superseded.
By signing the cover sheet of this Agreement, you agree to all of the terms
and conditions described above and in the Plan.
A-8
<PAGE>
EXHIBIT 10.32
GMS DENTAL GROUP, INC.
1996 PERFORMANCE STOCK OPTION PLAN
NOTICE OF GRANT OF STOCK OPTION
-------------------------------
Notice is hereby given of the following option grant (the "Option") to
purchase Shares of Stock of GMS Dental Group, Inc., a Delaware corporation (the
"Company"):
Optionee: Norman Huffaker
--------
Grant Date: December 4, 1996
----------
Vesting Commencement Date: See Vesting Schedule
-------------------------
Exercise Price: $.20 per share
--------------
Number of Option Shares: 50,000 shares
-----------------------
Expiration Date: December 3, 2006
---------------
Type of Option: X Incentive Stock Option
-------------- -----
Non-Statutory Stock Option
-----
Date Exercisable: See Vesting Schedule
----------------
Vesting Schedule: The Option Shares shall be unvested and subject to the
----------------
vesting upon the achievement by the Company of the financial performance
objectives over a two year period as set forth in Schedule 1 to Exhibit A
---------- ---------
hereto. This Option may not be exercised to purchase any Option Shares until
such Option Shares vest. This Option shall immediately lapse with respect to
any Option Shares that do not vest because the applicable performance objectives
set forth in Schedule 1 to Exhibit A are not met. In no event shall any
---------- ---------
additional Option Shares vest after Optionee's cessation of Service.
Optionee understands and agrees that the Option is granted subject to
and in accordance with the terms of the GMS Dental Group, Inc. 1996 Performance
Stock Option Plan (the "Plan"). Optionee further agrees to be bound by the
terms of the Plan and the terms of the Option as set forth in the Stock Option
Agreement attached hereto as Exhibit A. Optionee hereby acknowledges receipt of
---------
a copy of the Plan in the form attached hereto as Exhibit B.
---------
No Employment or Service Contract. Nothing in this Notice or in the
---------------------------------
attached Stock Option Agreement or Plan shall confer upon Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Company (or any Subsidiary
employing or retaining Optionee) or of Optionee, which rights are hereby
expressly reserved by each, to terminate Optionee's Service at any time for any
reason, with or without cause. All rights to terminate Optionee's Service shall
be as set forth in that certain offer of employment letter between the Company
and Optionee, dated November 7, 1996, as may be amended or superseded.
1
<PAGE>
Definitions. All capitalized terms in this Notice shall have the
-----------
meaning assigned to them in this Notice or in the attached Stock Option
Agreement.
Dated: December 4, 1996
GMS DENTAL GROUP, INC.
By: /s/ Michael T. Fiore
-------------------------------
Michael T. Fiore
Its: President and Chief Executive Officer
NORMAN HUFFAKER, OPTIONEE
By: /s/ Norman Huffaker
------------------------------
Norman Huffaker
Address:
-------------------------
-------------------------
-------------------------
ATTACHMENTS
- -----------
Exhibit A - Stock Option Agreement
Exhibit B - 1996 Performance Stock Option Plan
2
<PAGE>
EXHIBIT 10.33
ACKNOWLEDGEMENT AND CLARIFICATION
OF REPURCHASE RIGHTS AGREEMENT
------------------------------
THIS ACKNOWLEDGEMENT AND CLARIFICATION OF REPURCHASE RIGHTS AGREEMENT dated
as of October 31, 1997, is executed by and between GMS Dental Group, Inc., a
Delaware corporation (the "Company") and Norman R. Huffaker ("Optionholder"),
with reference to the following facts:
RECITALS
--------
A. On December 4, 1996, the Company granted Optionholder options (the
"Options") to acquire shares (the "Shares") of the Company's Common Stock (the
"GMS Common Stock").
B. Pursuant to the Option grant documents (the "Option Documents"), the
shares underlying the Options (the "Option Shares") are subject to certain
repurchase rights of the Company (the "Repurchase Rights").
C. On October 17, 1997 the Board of Directors of the Company approved a
merger (the "Merger") of the Company with and into Gentle Dental Service
Corporation, a Washington corporation ("GDSC") pursuant to which all shares of
GMS Common Stock outstanding immediately prior to the Merger will be exchanged
for shares of the common stock of GDSC (the "GDSC Common Stock").
D. The parties to this Agreement wish to hereby supplement the Option
Documents in order to clarify that notwithstanding anything to the contrary
provided in the Option Documents, that following the Merger, the shares of GDSC
Common Stock the Optionholder will be entitled to purchase upon exercise of the
Options as a result of in the Merger will be subject to the Repurchase Rights.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agrees as
follows:
1. Repurchase Rights Clarification. The parties hereby agree that
-------------------------------
notwithstanding anything to the contrary provided in the Option Documents,
following the Merger, the shares of GDSC Common Stock the Optionholder will be
entitled to purchase upon exercise of the Options as a result of the Merger will
be subject to the Repurchase Rights.
2. Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
3. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties' successors and assigns.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Acknowledgement and
Clarification of Repurchase Rights Agreement as of the date first above written.
COMPANY:
GMS DENTAL GROUP, INC.
By: /s/ Michael T. Fiore
-----------------------------------------
Michael T. Fiore, President and
Chief Executive Officer
OPTIONHOLDER:
/s/ Norman R. Huffaker
-----------------------------------------
Norman R. Huffaker
<PAGE>
EXHIBIT 10.34[*]
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
THIS DENTAL GROUP MANAGEMENT AGREEMENT (this "Agreement") is dated as of
October 11, 1996 and is effective as of the date set forth in Section 6.1
("Effective Date") by and between ALAN M. SLUTSKY, DMD, A PROFESSIONAL
------------------------------------
CORPORATION, a California professional dental corporation ("Manager") and
- -----------
SLUTSKY DENTAL CORPORATION, a California professional dental corporation
- --------------------------
("Dental Group").
RECITALS:
A. Prior to the execution of this Agreement, pursuant to the terms of
that certain Assignment Agreement dated as of October 11, 1996, all of Manager's
right, title and interest in all contracts with dentist employees and
independent contractors and other licensed health professional employees and
independent contractors, all independent physician association and managed care
plan contracts, all patient records, and any and all other assets required by
statute, rule or regulation to be owned or held by an entity licensed to
practice dentistry, together with all goodwill associated with the foregoing
(collectively, the "Dental Practice Assets") were assigned to Dental Group.
B. Dental Group engages in the practice of dentistry by providing dental
services to patients of Dental Group ("Group Patients") and to enrollees
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
between Dental Group and Plans or between Beneficiaries and Plans.
C. Dental Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
arrangements may include contracts ("Employment Agreements") with dentist
employees and allied health professional employees (collectively "Employee
Providers") and agreements ("Provider Subcontracts") with independent contractor
dentists and non-dentist providers of various dental care services (collectively
"Subcontract Providers").
D. All activities of Dental Group subject to this Agreement are
referenced as the "Practice." All references to "dental" care and services
include general and specialist dental services. All references to "dentists"
include generalists and specialists.
E. Manager desires to provide certain support services for the Practice.
F. Dental Group desires to retain Manager on an independent contractor
basis to provide management services that are more particularly described below,
and Manager desires to provide such
__________
[*] Confidential Treatment Requested.
<PAGE>
management services under the terms and conditions set forth in this Agreement.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the covenants and conditions contained
herein, Manager and Dental Group agree as follows:
ARTICLE 1
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
ARTICLE 2
SCOPE OF AGREEMENT
------------------
2.1 General Scope of Agreement. This Agreement shall apply to the
--------------------------
Practice, including, without limitation, all professional, administrative and
technical services, marketing, contracting, case management, ancillary dental
services, outpatient services and dental care facilities, equipment, supplies
and items, except as otherwise specifically provided in this Agreement. Dental
Group's Employment Agreements shall encompass substantially all such activities
of Employee Providers and shall provide that all revenues derived from such
activities (and not excluded below) are Revenues. Nothing in this Agreement
shall be construed to alter or in any way affect the legal, ethical and
professional relationship between and among Providers and Providers' patients,
nor shall anything contained in this Agreement abrogate any right or obligation
arising out of or applicable to the dentist-patient relationship.
2.2 License. Dental Group grants Manager an exclusive license to use any
-------
and all of Dental Group's assets, whether tangible or intangible, in carrying
out Manager's duties and responsibilities under the provisions of this
Agreement.
2.3 Intellectual Property. Dental Group hereby grants to Manager a non-
---------------------
exclusive, perpetual, royalty-free, worldwide license to use and sublicense the
use of any intellectual property owned by Dental Group. This license shall
cover, but not be limited to, use of the following:
(a) Service Mark. Dental Group hereby grants Manager the right to use all
------------
service marks and trademarks of Dental Group (the "Marks") for marketing and
promotional materials in connection with Dental Group's offering of dental
services. Manager agrees to use the Marks solely in the design format used by
Dental Group
-2-
<PAGE>
as of the date of this Agreement or another design format approved in advance in
writing by Dental Group. Dental Group shall have the opportunity to review any
marketing or other materials using the Marks in advance of any public
distribution. Manager agrees that it will include these restrictions on use in
any sublicense of the Marks.
(b) Copyrighted Materials. Dental Group hereby grants Manager the right to
---------------------
use any and all copyrighted materials authored or owned by Dental Group
including, specifically, the Dental Group dental management system software
programs (the "Programs"). This license includes the right to sublicense the
Programs and the right to prepare and own derivative works based on the
Programs, all without a duty of accounting to Dental Group. Dental Group shall
execute all documents required to enable Manager to own, use and exploit all
such rights.
2.4 Revenues. "Revenues" shall mean all of Dental Group's accounts
--------
receivable (net of contractual adjustments and bad debt), and cash collections.
Revenues shall include all funds collected by, or legally due to, Dental Group
or any Affiliate of Dental Group, including, without limitation, the following:
(a) all fee-for-service payments for services to Group Patients or
Beneficiaries; (b) all payments established under Payor Contracts; (c) all
coordination of benefits or deductibles and third-party liability recoveries
related to the Group's services; (d) all payments, dues, fees or other
compensation to Dental Group, (e) any income, profits, dividends, distributions
or other payments from Dental Group's investments; and (f) any interest or other
non-operating income of Dental Group.
2.5 Deposit Accounts. All cash received by Dental Group from whatever
----------------
source shall be deposited into an account or accounts ("Accounts") in the name
of Dental Group at a banking institution selected by Dental Group and approved
by Manager. Dental Group authorizes Manager to bill and collect, in Dental
Group's name, all charges and reimbursements for Dental Group's dental related
activities and to deposit such collections in the Accounts. Dental Group agrees
to assist and cooperate with Manager in the billing and collection process and
to immediately deliver to Manager for deposit any monies Dental Group may
receive.
2.6 Assignment.
----------
(a) Assets. Except as prohibited by contract or by law, Dental Group
------
hereby assigns, sells, conveys, transfers, and delivers to Manager, and Manager
hereby accepts from Dental Group, all of the assets and properties of Dental
Group of every kind, character and description, whether tangible, intangible,
real, personal, or mixed, and wherever located, including, but not limited to,
all Revenues, cash, accounts receivable, advances, prepaid expenses, deposits,
equipment and improvements. The assets shall be valued at their fair market
value which has been determined to be their respective book values. Manager
shall have
-3-
<PAGE>
the authority, and Dental Group shall execute any and all documents as may be
necessary or appropriate to transfer the assets to Manager, authorize Manager to
transfer the funds in the Accounts to a separate account in the name of Manager,
and effectuate the intention of this provision.
(b) Liabilities. Manager shall be responsible for paying all claims and
-----------
obligations associated with the operation of Dental Group pursuant to this
Agreement; provided, Manager shall be deemed to fully discharge its
responsibility to Dental Group for the liabilities described in this
subparagraph by its timely payment on Dental Group's behalf of, or delivery to
Dental Group of an amount sufficient to discharge, all of Dental Group's
obligations and liabilities now existing or arising in the future, including
those under Provider Subcontracts, Employment Agreements, Dental Group's
professional liability insurance and any other operational expenses for which
Dental Group retains responsibility or that are delegated to Dental Group,
whether pursuant to this Agreement or any other agreement of the parties or
action of the Joint Operations Committee ("Dental Expenses"). Notwithstanding
the foregoing, Manager does not assume any liabilities of Dental Group which are
unrelated to the dental business or any liabilities for income taxes.
ARTICLE 3
GOVERNANCE AND CONTROL
----------------------
3.1 Appointment. Dental Group hereby appoints Manager as its sole and
-----------
exclusive manager for the operation of the Practice and covenants not to enter
into an agreement with any Person other than Manager to perform or assume any of
Manager's rights, duties or responsibilities as provided herein. Manager hereby
accepts full responsibility for such management as more fully set forth herein.
3.2 Professional Matters. Pursuant to applicable laws and requirements
--------------------
governing the practice of dentistry, Dental Group shall retain ultimate
responsibility for all activities of Dental Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's non-
licensed status. The parties understand and agree that during the term of this
Agreement, Dental Group shall be the provider of dental services for all
purposes, including, but not limited to, licensure and reimbursement.
3.3 Relationship of Parties. In the performance of its duties and
-----------------------
obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Dental Group. Except as provided in this Agreement or as
required by law, Dental Group shall neither have nor exercise any control or
direction over the methods by which Manager shall perform its obligation
thereunder; nor shall Manager have or exercise any
-4-
<PAGE>
control or direction over the methods by which Dental Group shall practice
dentistry. It is expressly agreed by the parties that no work, act, commission
or omission of Manager pursuant to the terms and conditions of this Agreement
shall be construed to make or render Manager or Manager's employees or agents,
the employees of Dental Group. Manager and Dental Group are not partners or
joint venturers with each other and nothing herein shall be construed so as to
make them partners or joint venturers or impose upon either of them any
liability as partners or joint venturers. Dental Group's responsibility is to
assure that the services covered by this Agreement shall be performed and
rendered in a competent, efficient and satisfactory manner.
3.4 Authority and Control. Strategic planning, overall direction and
---------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group shall be accomplished as follows:
(a) Exclusive Authority.
-------------------
(1) Dental Group. Dental Group shall have the sole responsibility and
------------
authority for all aspects of the practice of dentistry and delivery of dental
services by Providers. Dental Group shall consult with Manager or the Joint
Operations Committee to the extent reasonable and not inconsistent with the
licensure of dentists.
(2) Manager. After reasonable consultation with Dental Group or the
-------
Joint Operations Committee, Manager shall have the sole responsibility and
authority for decisions related to the administration of the Practice.
(b) Joint Authority. All other decision-making authority related to the
---------------
business and affairs of Dental Group shall be vested in a joint operations
committee (the "Joint Operations Committee"). Nothing herein shall be construed
as preventing the Joint Operations Committee from appointing representatives and
delegating authority to such representatives so long as the Joint Operations
Committee may revoke such appointment and delegation at any time and so long as
the Joint Operations Committee retains ultimate responsibility for the decisions
of such representatives.
3.5 Joint Operations Committee. Strategic planning, overall direction and
--------------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group shall be overseen by the Joint Operations
Committee as follows:
(a) Joint Operations Committee Membership. The Joint Operations Committee
-------------------------------------
shall consist initially of three (3) individuals (the "Committee Members").
Dental Group shall designate one (1) Committee Member (the "Dental Group
Member") and the remaining two (2) Committee Members (the "Manager Members")
shall be appointed by Manager. The number of Committee Members may be increased
by agreement of the parties. Each party shall continue to direct the
appointment of the same percentage of
-5-
<PAGE>
Committee Members as described above. Each Committee Member shall serve at the
pleasure of the party designating such Committee Member and may be replaced,
with or without cause, at any time by such party upon the delivery of written
notice thereof to the other Committee Members. Manager, Dental Group and their
respective Committee Members shall diligently pursue any preliminary activities
that are necessary to allow the Joint Operations Committee to take an action.
Where Committee Members are required to consult with the organization appointing
such Committee Members, the Committee shall establish and agree on a deadline
for accomplishing such consultation.
(b) Joint Operations Committee Action.
---------------------------------
(1) Joint Action. Except as otherwise expressly set forth above, the
------------
Joint Operations Committee shall take all other actions that have been approved
by a majority of the Committee Members.
(2) Consultation Forum. Consultation between Dental Group and
------------------
Manager, if any, shall take place at a meeting of the Joint Operations
Committee, and Dental Group and Manager hereby agree to be bound by the decision
of their Dental Group Members or Manager Members, as the case may be.
(c) Joint Operations Committee Meetings. Meetings of the Joint Operations
-----------------------------------
Committee may be held by telephone or similar communications equipment so long
as all Committee Members participating in a meeting can hear and speak to each
other. The Joint Operations Committee shall prepare and maintain written
minutes of all meetings and shall provide a copy of the minutes to the parties
within fifteen (15) business days following each meeting.
(1) Regular Meetings. The Joint Operations Committee shall hold not
----------------
less than four (4) regular meetings each year, at such specific times and places
as the Committee Members may determine.
(2) Special Meetings. A special meeting of the Joint Operations
----------------
Committee may be called by a majority of the Committee Members.
(3) Notice Requirement. A Committee Member calling a special meeting
------------------
must provide all other Committee Members with ten (10) days' advance written or
telephonic notice. Notice must be given or sent to the Committee Member's
address or telephone number as shown on the records of the Joint Operations
Committee. Notice may be delivered directly to each Committee Member or to a
person at the Committee Member's principal place of business who would
reasonably be expected to communicate that notice promptly to the Committee
Member.
-6-
<PAGE>
(4) Waiver of Notice Requirement.
----------------------------
(A) Written Waiver, Consent or Approval. Notice of a special
-----------------------------------
meeting need not be given to any Committee Member who, either before or after
the meeting, signs a waiver of notice or a written consent to the holding of the
special meeting, or an approval of the minutes of the special meeting. Such
waiver, consent or approval need not specify the purpose of the special meeting.
All such waivers, consents, and approvals shall be filed with the Joint
Operations Committee records or made a part of the minutes of the special
meetings.
(B) Failure to Object. Notice of a special meeting need not be
-----------------
given to any Committee Member who attends the special meeting and does not
protest before or at the commencement of the special meeting such lack of
notice.
(5) Quorum. The smallest number of Committee Members that exceed
------
fifty percent (50%) of all Committee Members shall constitute a quorum of the
Joint Operations Committee.
(6) Proxies. The Joint Operations Committee shall provide for the use
-------
of proxies, telephonic conference calls, written consents or other appropriate
methods by which the full participation of the Dental Group Members and Manager
Members can be assured.
(d) Limitation of Responsibility. Notwithstanding any other provisions
----------------------------
hereof, Committee Members shall be liable to the parties only for actions
constituting bad faith, gross negligence or breach of an express provision of
this Agreement (so long as such breach remains uncured after ten (10) days of
receiving notice of the nature of such breach). In all other respects,
Committee Members shall not be liable for negligence or mistakes of judgment.
3.6 Budgets. A capital and operating budget ("Annual Budget") shall be
-------
established regarding all financial aspects of the Practice. The Annual Budget
shall include the following elements and other items, as appropriate:
(a) A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
(b) An operating budget setting forth an estimate of Revenues and expenses
for the next succeeding fiscal year, together with an explanation of anticipated
changes or modifications, if any, in the Practice's utilization, rates, charges
to patients or third party payors, salaries, costs of Providers, non-wage cost
increases, and all other similar factors expected to differ significantly from
those prevailing during the current fiscal year;
(c) Other expenses of operation;
-7-
<PAGE>
(d) The amount of a reasonable reserve to satisfy possible shortfalls from
operations. The allocation of such reserve shall be made by the Joint
Operations Committee as and when necessary; and
(e) The Management Fee, as defined below, for the next succeeding fiscal
year.
3.7 Budget Process.
--------------
(a) Initial Annual Budget. Not later than 45 days after the Effective
---------------------
Date, the Joint Operations Committee will have prepared the initial Annual
Budget for the first fiscal year (which shall initially be the calendar year)
during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains, or, at the option of
the parties, such portion of the then current fiscal year plus the immediately
subsequent fiscal year.
(b) Preliminary Budget. Not later than forty-five (45) days prior to the
------------------
end of each fiscal year during the term of this Agreement, the Manager shall
prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
(c) Joint Operations Committee Approval. The Joint Operations Committee
-----------------------------------
shall review and suggest modifications to the Preliminary Budget within ten (10)
days of receipt. Manager shall prepare a revised budget based upon the Joint
Operations Committee's recommendations and the Preliminary Budget as revised
shall become the Annual Budget.
(d) Adjustments. In the event of a material deviation between financial
-----------
forecasts and financial performance during a fiscal year, Manager or Dental
Group may propose adjustments to the Annual Budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
3.8 Personnel.
---------
(a) Providers. Except in unusual circumstances approved by the Joint
---------
Operations Committee, Manager shall not employ or contract with any Providers
for the provision of dental services. All Providers who provide dental services
to Group Patients or to Beneficiaries shall be either (1) Employee Providers,
(2) Subcontract Providers or (3) employees of Subcontract Providers.
(b) Non-Providers. With the exception of employees of Subcontract
-------------
Providers, Manager shall employ all non-Provider personnel necessary for the
operation of the Practice.
(c) Salary and Benefits. Each party to this Agreement shall remain liable
-------------------
for the salary and benefits paid to such party's own
-8-
<PAGE>
employees and shall be ultimately responsible for compliance with state and
federal laws pertaining to employment taxes, workers' compensation, unemployment
compensation and other employment-related statutes pertaining to the party's own
employees.
(d) Payments to Subcontract Providers. Dental Group shall be liable for
---------------------------------
any payments due Subcontract Providers under Provider Subcontracts after receipt
of funds from Manager.
ARTICLE 4
MANAGEMENT SERVICES
-------------------
4.1 General Description of Services. Within the limitations set out
-------------------------------
elsewhere in this Agreement, Manager shall provide or arrange for the provision
to Dental Group of all support services reasonably necessary and appropriate for
the efficient operation of the Practice. Such services include all
administrative services necessary to Dental Group's performance of its
obligations under Payor Contracts, contracting, marketing, capital formation and
assistance with long term strategic planning.
4.2 Facilities. When appropriate, Manager shall secure and maintain
----------
facilities, including, without limitation, office space, improvements,
furnishings, equipment, supplies and personal property, of a nature and in a
condition necessary and appropriate for the efficient and effective operations
of the Practice subject to the general approval of the Joint Operations
Committee. Manager shall secure and maintain said facilities in the name of
Dental Group.
4.3 Purchased Items and Services. Manager shall serve as the purchasing
----------------------------
agent for Dental Group and shall arrange for personnel benefits, insurance, and
any other items and services required for the proper operation of the Practice.
4.4 Manager Personnel.
-----------------
(a) Management Team. Subject to any approval or consulting rights of the
---------------
Joint Operations Committee, Manager shall engage or designate one or more
individuals experienced in dental group management and direction, including, but
not limited to, an administrator, who will be responsible for the overall
administration of the Practice including day-to-day operations and strategic
development activities.
(b) Other Manager Personnel. Manager shall select, hire, train, supervise,
-----------------------
monitor and terminate all non-Provider personnel necessary for the operation and
management of the Practice. During the two year period following the date of
this Agreement, Manager shall maintain in effect for the benefit of all non-
Provider personnel of Manager assigned to the operation and management of the
Practice, the following programs and benefits
-9-
<PAGE>
currently being provided by Manager: holiday bonus program; health club
membership; and annual incentive trip for employees and family.
4.5 Day-to-Day Management and Supervision. Subject to any approval or
-------------------------------------
consulting rights of the Joint Operations Committee, Manager shall provide
general management including, but not limited to, day-to-day supervision of:
(a) Manager personnel;
(b) Equipment and supply acquisition;
(c) Office space and facility maintenance;
(d) Patient records organization and retention;
(e) Third party payor contracting;
(f) Case management tracking;
(g) Billing, collections and accounting activities as set forth below;
(h) All operating aspects and policies of the Practice including, but not
limited to, hours of operation, work schedules, standard duties and job
descriptions, for all nondentist personnel; and
(i) Other related and incidental matters.
4.6 Billing and Collection Payment of Expenses. Manager shall be
------------------------------------------
responsible for all billing and collecting activities required by Dental Group.
Manager shall also be responsible for reviewing and paying accounts payable of
Dental Group. Dental Group hereby appoints the Manager its true and lawful
attorney-in-fact to take the following actions for and on behalf of and in the
name of Dental Group:
(a) Bill and collect in Dental Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Dental Group. Dental
Group shall give Manager all necessary access to Patient records to accomplish
all billing and collection. In so doing, Manager will use its best efforts but
does not guarantee any specific level of collections, and Manager will comply
with Dental Group's reasonable and lawful policies regarding courtesy discounts;
(b) Take possession of and endorse in the name of Dental Group any and all
instruments received as payment of accounts receivable;
(c) Deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
-10-
<PAGE>
(d) Place accounts for collection, settle and compromise claims, and
institute legal action for the recovery of accounts.
4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
(a) Financial Reporting. Manager shall prepare, analyze, and deliver to
-------------------
the Joint Operations Committee financial reports to the extent necessary or
appropriate for the operation of the Practice, including the following:
(1) Financial statements, including balance sheets and statements of
cash flow and income;
(2) Accounts payable and accounts receivable analysis;
(3) Billing status including any Medicaid remittances; and
(4) Reconciliation of assets, liabilities and major expenses.
(b) Audits. Dental Group shall have the right to review and, at its sole
------
cost and expense, obtain an audit (separate from any annual audit or review of
Dental Group's financial statements performed at the direction of the Manager)
of Dental Group's financial books and records maintained by the Manager. Upon
five (5) days' prior written notice, Manager shall allow Dental Group access
during reasonable business hours to all information and documents reasonably
required for such review or audit. Upon Dental Group's request and at Dental
Group's expense, Manager shall also provide copies of such documents.
4.8 Marketing and Public Relations Services. Manager shall provide such
---------------------------------------
marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Dental Group.
Manager shall provide Dental Group with marketing materials and activities.
4.9 Dental Group Agreements. On behalf of Dental Group, Manager shall
-----------------------
review, evaluate and negotiate Payor Contracts and Provider Subcontracts and any
other contracts or agreements regarding the provision of dental related items or
services by Dental Group or Providers.
4.10 Utilization Review Quality Improvement and Outcomes Monitoring.
--------------------------------------------------------------
Manager shall be responsible for providing administrative support for Dental
Group's utilization review, quality improvement and outcomes monitoring
activities, including, without limitation, data collection, analysis and
reporting for Group Patients and Beneficiaries. Manager shall also support the
development and implementation of relevant policies, procedures,
-11-
<PAGE>
protocols, practice guidelines and other interventions based on such activities.
4.11 Applicable Law. Manager and Dental Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE 5
DENTAL GROUP SERVICES
---------------------
5.1 Provision of Dental Services by Dental Group. Dental Group shall
--------------------------------------------
operate the Practice during the Term as a dental practice in accordance with
terms of this Agreement and the Annual Budget.
5.2 Providers.
---------
(a) Professional Dental Services. Dental Group shall employ or contract
----------------------------
with the number of Providers Dental Group deems necessary for the efficient and
effective operation of the Practice and in accordance with quality assurance,
credentialing and utilization management protocols approved by Manager. Dental
Group shall provide full and prompt dental coverage for the Practice, including
emergency service twenty-four hours per day, seven days per week, including
holidays according to policies and schedules approved by the Joint Operations
Committee.
(b) Provider Subcontracts and Employment Agreements. Dental Group shall not
-----------------------------------------------
negotiate or execute any Provider Subcontract, Employment Agreement, or any
amendment thereto, without the approval of the Joint Operations Committee. The
Joint Operations Committee shall have the right of review and reasonable
approval of any Provider Subcontract and Employment Agreement. Dental Group
shall be responsible for the payment, in accordance with the Annual Budget, of
all Employee and Subcontract Providers.
5.3 Peer Review. Dental Group, after consultation with the Joint
-----------
Operations Committee, shall implement, regularly review, modify as necessary or
appropriate and obtain the commitment of Providers to actively participate in
peer review procedures for Providers. Dental Group shall assist Manager in the
production of periodic reports describing the results of such procedures.
Dental Group shall provide Manager with prompt notice of any information that
raises a reasonable risk to the health and safety of Group Patients or
Beneficiaries. In any event, after consultation with the Joint Operations
Committee, Dental Group shall take such action as may be reasonably warranted
under the facts and circumstances.
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<PAGE>
5.4 Billing Information and Assignments. Dental Group shall promptly
-----------------------------------
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Dental Group's
services. Dental Group shall use reasonable efforts to procure consents to
assignments and other approvals and documents necessary to enable Manager to
obtain payment or reimbursement from third party payors and patients. With the
assistance of Manager, Dental Group shall obtain all provider numbers necessary
to obtain payment or reimbursement for its services.
5.5 Third Party Contracts. Dental Group shall be in compliance with all
---------------------
contracts, agreements and arrangements, including any contracts that exist on
the Effective Date, between Dental Group and third parties.
5.6 Use of Manager's Goods and Services. Dental Group shall not use any
-----------------------------------
goods or services provided by Manager pursuant to this Agreement for any purpose
other than the provision of and management of dental services as contemplated by
this Agreement and purposes incidental thereto.
5.7 Negative Covenants. During the Term, Dental Group shall not, without
------------------
the prior approval of the Joint Operations Committee, (a) assign, pledge,
mortgage or otherwise encumber any of its property, (b) transfer substantially
all of its assets, including its goodwill, (c) merge or consolidate with any
other entity, (d) allow the transfer or issuance of any of its stock (other than
in accordance with the terms and provisions of that certain Share Acquisition
Agreement dated October 11, 1996, between GMS Dental Group Management, Inc., a
Delaware corporation and Alan M. Slutsky), or (e) take or allow any act that
would materially impair the ability of Dental Group to carry on the business of
the Practice or to fulfill its obligations under this Agreement.
ARTICLE 6
TERM
----
6.1 Term. This Agreement shall be effective as of October 11, 1996 (the
----
"Effective Date"), and shall remain in effect for an initial term of forty (40)
years from the Effective Date, expiring on the fortieth (40th) anniversary of
the Effective Date, unless earlier terminated pursuant to the terms of this
Agreement. The word "Term" shall include such initial term and, where
applicable, any extension of such initial term (whether extended pursuant to
Section 6.2(a) or otherwise), subject to earlier termination pursuant to the
provisions of this Agreement.
6.2 Termination and Extension.
-------------------------
(a) Automatic Extension. At the end of the initial term and any subsequent
-------------------
term, this Agreement shall automatically renewed for a five (5) year term unless
one of the parties provides the
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<PAGE>
other party with written notice of intent not to renew, not less than one
hundred eighty (180) day prior to the expiration of the then current term.
(b) Early Termination. This Agreement may be terminated according to the
-----------------
provisions of this Section.
(1) Material Breach. In the event either party materially breaches
---------------
this Agreement and such breach is not cured to the reasonable satisfaction of
the non-breaching party within thirty (30) days after the non-breaching party
serves written notice of the default upon the defaulting party (the "Default
Notice"), the Agreement shall automatically terminate at the election of the
non-breaching party upon the giving of a written notice of termination to the
defaulting party not later than forty-five (45) days after service of the
Default Notice; provided that if such uncured breach is only capable of being
cured within a reasonable period of time in excess of thirty (30) days, the non-
breaching party shall not be entitled to terminate this Agreement so long as the
defaulting party has commenced such cure and thereafter diligently pursue such
cure to completion.
(2) Refusal To Comply. In the event that Dental Group or Manager
-----------------
refuses or fails to comply with a decision of the Joint Operations Committee,
the aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if such dispute between Dental Group and Manager continues for
sixty (60) days after the date the aggrieved party exercises its option
regarding mediation, the non-complying party shall have thirty (30) days in
which to comply with the decision of the Joint Operations Committee. If the
non-complying party has not complied by the end of such thirty (30) day period,
the aggrieved party shall have the option to terminate this Agreement upon
fifteen (15) days prior written notice. During such mediation, Manager and
Dental Group shall continue to operate and manage the Practice in good faith.
(3) Bankruptcy. A party may, upon three (3) days' prior written
----------
notice, terminate this Agreement if the other party:
(A) Applies for or consents to the appointment of a receiver,
trustee or liquidator of all or a substantial part of its assets, files a
voluntary petition in bankruptcy or consents to an involuntary petition, makes a
general assignment for the benefit of its creditors, files a petition or answer
seeking reorganization or arrangement with its creditors, or admits in writing
its inability to pay its debts when due, or
(B) Suffers any order, judgment or decree to be entered by any
court of competent jurisdiction, adjudicating such party bankrupt or approving a
petition seeking its reorganization or the appointment of a receiver, trustee or
liquidator of such party or of all or a substantial part of its assets, and
such
-14-
<PAGE>
order, judgment or decree continues unstayed and in effect for ninety (90) days
after its entry.
(4) Nonperformance. Manager may terminate this Agreement in the event
--------------
that in any two consecutive fiscal quarters the Manager has not been paid the
Management Fee and, in the sole discretion of the Manager, it is not reasonably
likely that the Management Fee will be paid in the next fiscal quarter. Any
such termination shall be effective as of the last day of such third fiscal
quarter provided at least sixty (60) days notice shall have been given;
otherwise, such termination shall be effective on the sixtieth day after notice
is given.
(5) Change in Law. In the event of any material change in federal or
-------------
state law that has a significant adverse impact on either party hereto in
connection with their performance under this Agreement, or if performance by a
party of court or any duties under this Agreement be deemed illegal by any
administrative agency or in a formal opinion rendered to Manager by legal
counsel knowledgeable in health law matter retained by the Manager, the affected
party shall have the right to require that the other party renegotiate the terms
of this Agreement. Unless the parties otherwise mutually agree in writing, such
renegotiated terms shall be effective not later than twenty (20) days after
receipt of written notice of such request for renegotiation. Solely in the event
of illegality, if the parties fail to reach an agreement within thirty (30) days
of the request for renegotiation, either party may (subject to the severability
provision of this Agreement) terminate this Agreement upon thirty (30) days'
prior written notice to the other party.
(c) Effect of Termination. Upon termination of this Agreement:
---------------------
(1) Dental Group shall surrender to Manager all of Manager's property
used primarily in the operation of the Practice in the same condition as
received, reasonable wear and tear excepted.
(2) Manager shall deliver to Dental Group all records related to the
business of and provision of dental care through the Practice including, without
limitation, patient records and any corporate, personnel and financial records
maintained for the Practice and Providers, provided, that except as limited by
law, including, but not limited to laws governing the confidentiality of patient
records, Manager shall have the option to copy (or otherwise duplicate) at its
sole cost and expense such records of Dental Group and to retain and utilize
such records for its own use;
(3) Manager shall deliver to Dental Group any other property of Dental
Group in Manager's possession;
-15-
<PAGE>
(4) Both parties shall cooperate to ensure the provision of
appropriate dental care to Group Patients and Beneficiaries;
(5) Dental Group shall promptly deliver to Manager any Revenues that
it may receive in payment for dental services rendered by Dental Group prior to
termination; and
(6) Both parties shall cooperate to ensure the appropriate billing and
collections for dental services rendered by Dental Group prior to the effective
date of termination, and any such cash collected shall be retained by Dental
Group and/or paid to Manager pursuant to Article 7.
ARTICLE 7
MANAGEMENT FEE
--------------
For its services hereunder, which shall include the providing of all
facilities and furniture, fixtures and equipment at the Practice, all non-
dentist employees of Manager who perform services at or for the Practice and all
management services provided hereunder, Manager shall retain as a management fee
(collectively, the "Management Fee") the following:
7.1 Base Management Fee. As a base management fee (the "Base Management
-------------------
Fee") Manager shall retain that portion of Revenues equal to the sum of the
amount of Manager's Costs plus [*]% of Revenues.
7.2 Performance Management Fee. As a bonus for meeting performance
--------------------------
standards goals as set by the Joint Operations Committee, Manager shall be
eligible for a Performance Management Bonus that is calculated in accordance
with the applicable exhibit to the Annual Budget.
7.3 Adjustments. If there are not sufficient funds to pay the Base
-----------
Management Fee, all unpaid amounts shall accumulate and carry over until paid or
until the termination of this Agreement, in which case such unpaid amounts shall
be immediately due and payable as of the date of termination.
7.4 Reasonable Value. Payment of the Base Management Fee and the
----------------
Performance Management Fee is acknowledged as the parties' negotiated agreement
as to the reasonable fair market value of the services furnished by Manager
pursuant to this Agreement, considering the nature and volume of the services
required and risks assumed by Manager.
7.5 Priority. Notwithstanding anything to the contrary contained in this
--------
Article 7, any expenses incurred in connection with the Practice shall be paid
prior to the payment of any Base Management Fee or performance Management Fee.
In addition, any
__________
[*] Confidential Treatment Requested.
-16-
<PAGE>
accruals pursuant to Section 7.3 will be eliminated prior to the payment of any
future Performance Management Fee.
ARTICLE 8
INDEMNITY AND INSURANCE
-----------------------
8.1 Indemnity.
---------
(a) Indemnification. Each party shall indemnify, defend and hold harmless
---------------
the other party from any and all liability, loss, claim, lawsuit, injury, cost,
damage or expense whatsoever (including reasonable attorneys' fees and court
costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Dental Group
agrees to indemnify, defend and hold harmless Manager for all liability, loss,
claim, lawsuit, injury, cost, damage or expense whatsoever (including reasonable
attorneys' fees and court costs) arising out of the professional negligence of
Dental Group, its employees, agents, contractors or subcontractors, including
any amounts in excess of the professional liability insurance coverage of Dental
Group or its employees, agents, contractors or subcontractors.
(b) Mutual Indemnity. Each party to this Agreement shall be indemnified by
----------------
the other party for any claim under this Agreement or otherwise against the
indemnified party for vacation pay, sick leave, retirement benefits, Social
Security benefits, workers' compensation benefits, disability or unemployment,
insurance benefits, or other employee benefits of any kind accrued during the
term of this Agreement by an employee of the indemnifying party.
8.2 Manager's Insurance. Manager shall, on its own behalf and at its sole
-------------------
cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
(a) Comprehensive general liability insurance covering the risks of
Manager, in an amount determined by the Joint Operations Committee;
(b) Workers' compensation insurance covering the employees of Manager, in
such amounts as is usual and customary under the circumstances;
(c) Property insurance covering the facilities, equipment and supplies
owned or leased by Manager or Dental Group for use in the operation of the
Practice.
-17-
<PAGE>
8.3 Dental Group's Insurance. At Dental Group's sole cost and expense,
------------------------
Manager shall obtain, and maintain on behalf of Dental Group in full force and
effect during the Term, policies in the following categories in the amount
indicated:
(a) Comprehensive professional liability insurance coverage for Dental
Group and Dental Group's Employee Providers, in such amounts as Manager shall
reasonably deem necessary;
(b) Workers' compensation insurance covering the employees of Dental Group,
in such amounts as is usual and customary under the circumstances;
(c) Comprehensive general liability insurance covering the risks of Dental
Group, in an amount determined by the Joint Operations Committee.
ARTICLE 9
BOOKS AND RECORDS
-----------------
9.1 Ownership of Records. All business records and information relating
--------------------
exclusively to the business and activities of either party shall be the property
of that party, irrespective of identity of the party responsible for producing
or maintaining such records and information. Without limiting the foregoing,
all patient charts and records maintained by Manager relating to the dental
services of Dental Group shall be the property of Dental Group. Dental Group
also shall be entitled to a copy at Dental Group's sole cost of all business
records pertaining to Dental Group. Except as limited by law, including, but
not limited to laws governing the confidentiality of patient records, Manager
shall be entitled to a copy at Manager's sole cost of all records of Dental
Group.
ARTICLE 10
MISCELLANEOUS PROVISIONS
------------------------
10.1 Assignment. Except for an assignment by Manager to GMS Dental Group
----------
Management, Inc., or an affiliate of GMS Dental Group Management, Inc., neither
party shall assign this Agreement to any other party or parties without the
prior written consent of the other party, which consent may be withheld
arbitrarily or capriciously, for any reason or for no reason whatsoever and any
attempted assignment in violation of this Agreement shall be null and void.
10.2 Headings. The article and section headings used in this Agreement
--------
are for purposes of convenience only. They shall not be construed to limit or
to extend the meaning of any part of this Agreement.
-18-
<PAGE>
10.3 Waiver. Waiver by either Dental Group or Manager of any breach of
------
any provision of this Agreement shall not be deemed to be a waiver of such
provision or of any subsequent breach of the same or of any other provision of
this Agreement.
10.4 Notices. Any notice, demand, approval, consent, or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be deemed to have been given when five (5) business days have
elapsed from the date of deposit in the United States mails, certified and
postage prepaid, addressed to the party to be served at the following address or
such other address as may be given in writing to the parties.
Dental Group: Slutsky Dental Corporation
6565 Grossmont Center Drive
Suite 459
La Mesa, CA 91942
Attn: President
Manager: Alan M. Slutsky DMD, A Professional Corporation
6565 Grossmont Center Drive
Suite 459
La Mesa, CA 91942
Attn: President
10.5 Attorneys' Fees. If any legal action, arbitration, mediation or
---------------
other proceeding is commenced, whether by Manager or Dental Group concerning
this Agreement, the prevailing party shall recover from the losing party
reasonable attorneys' fees and costs and expenses, including those of appeal and
not limited to taxable costs, incurred by the prevailing party, in addition to
all other remedies to which the prevailing party may be entitled. If a claim or
claims asserted by a third party against Manager or Dental Group or any of them
arise from an action or omission by the other, the party responsible for the
action or omission shall be the losing party, and the other party shall be the
prevailing party, for purposes of the foregoing sentence.
10.6 Successors. Without limiting or otherwise affecting any restrictions
----------
on assignments of this Agreement or rights or duties under this Agreement, this
Agreement shall be binding upon and inure to the benefit of the successors and
assigns of Dental Group and Manager.
10.7 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between Dental Group and Manager and supersedes all prior negotiations and
agreements, written or oral, concerning or relating to the subject matter of
this Agreement, and this
-19-
<PAGE>
Agreement may not be modified except by a writing executed by all parties and
subject to the provisions thereof.
10.8 Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereto shall be governed by, and construed according to, the laws of the
State of California.
10.9 Severability. If any provision of this Agreement is held to be
------------
invalid or unenforceable by any court or administrative agency of competent
jurisdiction, or in a written opinion to the Manager by legal counsel
knowledgeable in health law matters retained by the Manager, such holding or
opinion shall not affect the validity and enforceability of the other provisions
of this Agreement and the remainder of this Agreement shall be considered valid
and operative to the fullest extent permitted by law, but only if and to the
extent such enforcement would not materially and adversely frustrate the parties
essential objectives as expressed herein.
10.10 Time is of the Essence. Time is of the essence in this Agreement.
----------------------
10.11 Authority. Any Person signing this Agreement on behalf of any
---------
entity hereby represents and warrants in its individual capacity that it has
full authority to do so on behalf of such entity.
10.12 Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute on and the same instrument.
IN WITNESS WHEREOF, Dental Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
"DENTAL GROUP"
SLUTSKY DENTAL CORPORATION, a California
professional dental corporation
By /s/ Alan M. Slutsky
-------------------------------------
President
-20-
<PAGE>
MANAGER:
-------
ALAN M. SLUTSKY, DMD, A PROFESSIONAL CORPORATION,
a California professional corporation
By /s/ Alan M. Slutsky
----------------------------------
Alan M. Slutsky, President
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<PAGE>
ADDENDUM 1
----------
For purposes of this Agreement, the following terms shall have the meaning
indicated below or defined at the indicated section:
1. Accounts. See Section 2.5(a).
--------
2. Affiliate. "Affiliate" shall mean, with respect to any Person, any
---------
individual or entity directly or indirectly owned or controlled by such Person,
any individual or entity directly or indirectly owning or controlling such
Person or any individual or entity directly or indirectly owned or controlled
by the same family member, individual or entity as owns or controls such Person.
For purposes of this Agreement, neither Dental Group nor Manager shall be deemed
an Affiliate of the other.
3. Agreement. "Agreement" means this Dental Group Management Agreement.
---------
4. Annual Budget. See Section 3.6, first sentence.
-------------
5. Beneficiaries. See Recital A.
-------------
6. Books and Records. "Books and Records" means Dental Group's books of
-----------------
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
7. Capital Costs. "Capital Costs" shall mean any and all investments
-------------
that are or would be capitalized pursuant to GAAP.
8. Committee Members. See Section 3.5(a).
-----------------
9. Default Notice. See Section 6.2(b)(1).
--------------
10. Dental Group. See first paragraph of this Agreement.
------------
11. Dental Group Members. See Section 3.5(a).
--------------------
12. Dental Expenses. See Section 2.6(b).
---------------
13. Effective Date. See Section 6.1.
--------------
14. Employee Providers. See Recital B.
------------------
15. Employment Agreements. See Recital B.
---------------------
A-1
<PAGE>
16. GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with 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 Manager's financial
statements.
17. Group Patients. See Recital A.
--------------
18. Joint Operations Committee. See Section 3.4(b).
--------------------------
19. Management Fee. See Article 7.
--------------
20. Manager. See first paragraph of this Agreement.
-------
21. Manager Members. See Section 3.5(a).
---------------
22. Manager's Costs. "Manager's Costs" means all costs incurred by
---------------
Manager including amortization associated with costs acquiring assets of the
Dental Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which are
attributable to Manager's business operations in accordance with Manager's
corporate allocation policies.
23. Marks. See Section 2.3(a).
-----
24. Net Revenues. "Net Revenues" means all Revenues net of allowances for
------------
uncollectible accounts.
25. Payor Contracts. See Recital A.
---------------
26. Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
27. Plans. See Recital A.
-----
28. Practice. See Recital A.
--------
29. Preliminary Budget. See Section 3.7(b).
------------------
30. Programs. See Section 2.3(b).
--------
31. Providers. "Providers" shall mean individuals or organizations
---------
licensed to practice dentistry (including specialists) as well as other dental
professionals who provide ancillary reimbursable dental services.
A-2
<PAGE>
32. Provider Subcontracts. See Recital A.
---------------------
33. Revenues. "Revenues" means all amounts assigned hereunder by Dental
--------
Group to Manager pursuant to Section 2.6(a).
34. Subcontract Providers. See Recital B.
---------------------
35. Term. See Section 6.1.
----
A-3
<PAGE>
EXHIBIT 10.35[*]
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
THIS DENTAL GROUP MANAGEMENT AGREEMENT (this "Agreement") is dated as of
October 11, 1996 and is effective as of the date set forth in Section 6.1
("Effective Date") by and between GMS DENTAL GROUP MANAGEMENT OF HAWAII, INC., a
-------------------------------------------
Hawaii corporation (formerly known as Dental Care Management, Inc.) ("Manager")
which is wholly-owned by GMS Dental Group, Inc., a Delaware corporation (the
"Company") and DENTAL CARE CENTERS OF HAWAII, INC., a Hawaii professional dental
-----------------------------------
corporation ("Dental Group").
RECITALS
--------
A. Dental Group engages in the practice of dentistry by providing dental
services to patients of Dental Group ("Group Patients") and to enrollees
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
between Dental Group and Plans or between Beneficiaries and Plans.
B. Dental Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
arrangements may include contracts ("Employment Agreements") with dentist
employees and allied health professional employees (collectively "Employee
Providers") and agreements ("Provider Subcontracts") with independent contractor
dentists and non-dentist providers of various dental care services (collectively
"Subcontract Providers").
C. All activities of Dental Group subject to this Agreement are
referenced as the "Practice." All references to "dental" care and services
include general and specialist dental services. All references to "dentists"
include generalists and specialists.
D. Manager is a management services company that has been organized to
provide certain support services for the Practice and for other dental groups.
Manager is in the business of providing or arranging for management services,
facilities, equipment and certain personnel necessary for the operation of the
Practice.
E. Dental Group desires to retain Manager on an independent contractor
basis to provide management services that are more particularly described below,
and Manager desires to provide such management services under the terms and
conditions set forth in this Agreement.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the covenants and conditions contained
herein, Manager and Dental Group agree as follows:
__________
[*] Confidential Treatment Requested.
<PAGE>
ARTICLE 1
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
ARTICLE 2
SCOPE OF AGREEMENT
------------------
2.1 General Scope of Agreement. This Agreement shall apply to the
--------------------------
Practice, including, without limitation, all professional, administrative and
technical services, marketing, contracting, case management, ancillary dental
services, outpatient services and dental care facilities, equipment, supplies
and items, except as otherwise specifically provided in this Agreement. Dental
Group's Employment Agreements shall encompass substantially all such activities
of Employee Providers and shall provide that all revenues derived from such
activities (and not excluded below) are Revenues. Nothing in this Agreement
shall be construed to alter or in any way affect the legal, ethical and
professional relationship between and among Providers and Provider's patients,
nor shall anything contained in this Agreement abrogate any right or obligation
arising out of or applicable to the dentist-patient relationship.
2.2 License. Dental Group grants Manager an exclusive license to use any
-------
and all of Dental Group's assets, whether tangible or intangible, in carrying
out Manager's duties and responsibilities under the provisions of this
Agreement.
2.3 Intellectual Property. Dental Group hereby grants to Manager a non-
---------------------
exclusive, perpetual, royalty-free, worldwide license to use and sublicense the
use of any intellectual property owned by Dental Group to the extent necessary
in carrying out Manager's duties and responsibilities under the provisions of
this Agreement. This license shall cover, but not be limited to, use of the
following:
(a) Service Mark. Dental Group hereby grants Manager the right to use all
------------
service marks and trademarks of Dental Group (the "Marks") for marketing and
promotional materials in connection with Dental Group's offering of dental
services. Manager agrees to use the Marks solely in the design format used by
Dental Group as of the date of this Agreement or another design format approved
in advance in writing by Dental Group. Dental Group shall have the opportunity
to review any marketing or other materials using the Marks in advance of any
public distribution. Manager agrees that it will include these restrictions on
use in any sublicense of the Marks.
-2-
<PAGE>
(b) Copyrighted Materials. Dental Group hereby grants Manager the right to
---------------------
use any and all copyrighted materials authored or owned by Dental Group
including, specifically, the Dental Group dental management system software
programs (the "Programs"). This license includes the right to sublicense the
Programs and the right to prepare and own derivative works based on the
Programs, all without a duty of accounting to Dental Group. Dental Group shall
execute all documents required to enable Manager to own, use and exploit all
such rights.
2.4 Revenues. "Revenues" shall mean all of Dental Group's accounts
--------
receivable (net of contractual adjustments and bad debt), and cash collections.
Revenues shall include all funds collected by, or legally due to, Dental Group
or any Affiliate of Dental Group, including, without limitation, the following:
(a) all fee-for-service payments for services to Group Patients or
Beneficiaries; (b) all payments established under Payor Contracts; (c) all
coordination of benefits or deductibles and third-party liability recoveries
related to the Group's services; (d) all payments, dues, fees or other
compensation to Dental Group, (e) any income, profits, dividends, distributions
or other payments from Dental Group's investments; and (f) any interest or other
non-operating income of Dental Group.
2.5 Deposit Accounts. All cash received by Dental Group from whatever
----------------
source shall be deposited into an account or accounts ("Accounts") in the name
of Dental Group at a banking institution selected by Dental Group and approved
by Manager. Dental Group authorizes Manager to bill and collect, in Dental
Group's name, all charges and reimbursements for Dental Group's dental related
activities and to deposit such collections in the Accounts. Dental Group agrees
to assist and cooperate, at no cost or expense to Dental Group, with Manager in
the billing and collection process and to immediately deliver to Manager for
deposit any monies Dental Group may receive.
2.6 Assignment.
----------
(a) Assets. Except as prohibited by contract or by law, Dental Group
------
hereby assigns, sells, conveys, transfers, and delivers to Manager, and Manager
hereby accepts from Dental Group, all of the assets and properties of Dental
Group of every kind, character and description, whether tangible, intangible,
real, personal, or mixed, and wherever located, including, but not limited to,
all Revenues, cash, accounts receivable, advances, prepaid expenses, deposits,
equipment and improvements. The assets shall be valued at their fair market
value which has been determined to be their respective book values. Manager
shall have the authority, and Dental Group shall execute any and all documents
as may be necessary or appropriate to transfer the assets to Manager, authorize
Manager to transfer the funds in the Accounts to a separate account in the name
of Manager, and effectuate the intention of this provision.
-3-
<PAGE>
(b) Liabilities. Manager shall be responsible for paying all claims and
-----------
obligations associated with the operation of Dental Group pursuant to this
Agreement; provided, Manager shall be deemed to fully discharge its
responsibility to Dental Group for the liabilities described in this
subparagraph by its timely payment on Dental Group's behalf of, or timely
delivery to Dental Group of an amount sufficient to discharge, all of Dental
Group's obligations and liabilities now existing or arising in the future,
including, but not limited to, those under Provider Subcontracts, Employment
Agreements, Dental Group's professional liability insurance and any other
operational expenses for which Dental Group retains responsibility or that are
delegated to Dental Group, whether pursuant to this Agreement or any other
agreement of the parties or action of the Joint Operations Committee ("Dental
Expenses"). Notwithstanding the foregoing, Manager does not assume any
liabilities of Dental Group which are unrelated to the dental business or any
liabilities for income taxes which are unrelated to the dental business.
ARTICLE 3
GOVERNANCE AND CONTROL
----------------------
3.1 Appointment. Dental Group hereby appoints Manager as its sole and
-----------
exclusive manager for the operation of the Practice and covenants not to enter
into an agreement with any Person other than Manager to perform or assume any of
Manager's rights, duties or responsibilities as provided herein. Manager hereby
accepts full responsibility for such management as more fully set forth herein.
3.2 Professional Matters. Pursuant to applicable laws and requirements
--------------------
governing the practice of dentistry, Dental Group shall retain ultimate
responsibility for all activities of Dental Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's non-
licensed status. The parties understand and agree that during the term of this
Agreement, Dental Group shall be the provider of dental services for all
purposes, including, but not limited to, licensure and reimbursement.
3.3 Relationship of Parties. In the performance of its duties and
-----------------------
obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Dental Group. Except as provided in this Agreement or as
required by law, Dental Group shall neither have nor exercise any control or
direction over the methods by which Manager shall perform its obligation
thereunder; nor shall Manager have or exercise any control or direction over the
methods by which Dental Group shall practice dentistry. It is expressly agreed
by the parties that no work, act, commission or omission of Manager pursuant to
the terms and conditions of this Agreement shall be construed to make or
-4-
<PAGE>
render Manager or Manager's employees or agents, the employees of Dental Group.
Manager and Dental Group are not partners or joint venturers with each other and
nothing herein shall be construed so as to make them partners or joint venturers
or impose upon either of them any liability as partners or joint venturers.
Dental Group's responsibility is to assure that the services covered by this
Agreement shall be performed and rendered in a competent, efficient and
satisfactory manner.
3.4 Authority and Control. Strategic planning, overall direction and
---------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group shall be accomplished as follows:
(a) Exclusive Authority.
-------------------
(1) Dental Group. Dental Group shall be solely and exclusively in control
------------
of all aspects of the practice of dentistry and delivery of dental services by
Providers. The rendition of all dental professional services, including, but
not limited to, diagnosis, treatment, surgery, therapy and prescription medicine
and drugs, and the supervision and preparation of dental reports shall be the
responsibility of Dental Group. Notwithstanding, the foregoing, Dental Group
shall consult with Manager or the Joint Operations Committee to the extent
reasonable and not inconsistent with the licensure of dentists.
(2) Manager. After reasonable consultation with Dental Group or the Joint
-------
Operations Committee, Manager shall have the sole responsibility and authority
for decisions related to the administration of the Practice.
(b) Joint Authority. All other decision-making authority related to the
---------------
business and affairs of Dental Group shall be vested in a joint operations
committee (the "Joint Operations Committee"). Nothing herein shall be construed
as preventing the Joint Operations Committee from appointing representatives and
delegating authority to such representatives so long as the Joint Operations
Committee may revoke such appointment and delegation at any time and so long as
the Joint Operations Committee retains ultimate responsibility for the decisions
of such representatives.
3.5 Joint Operations Committee. Strategic planning, overall direction and
--------------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group shall be overseen by the Joint Operations
Committee as follows:
(a) Joint Operations Committee Membership. The Joint Operations Committee
-------------------------------------
shall consist initially of three (3) individuals (the "Committee Members").
Dental Group shall designate one (1) Committee Member (the "Dental Group
Member") and the remaining two (2) Committee Members (the "Manager Members")
shall be appointed by Manager. The number of Committee Members may be increased
by agreement of the parties. Each party shall
-5-
<PAGE>
continue to direct the appointment of the same percentage of Committee Members
as described above. Each Committee Member shall serve at the pleasure of the
party designating such Committee Member and may be replaced, with or without
cause, at any time by such party upon the delivery of written notice thereof to
the other Committee Members. Manager, Dental Group and their respective
Committee Members shall diligently pursue any preliminary activities that are
necessary to allow the Joint Operations Committee to take an action. Where
Committee Members are required to consult with the organization appointing such
Committee Members, the Committee shall establish and agree on a deadline for
accomplishing such consultation.
(b) Joint Operations Committee Action.
---------------------------------
(1) Joint Action. Except as otherwise expressly set forth above, the Joint
------------
Operations Committee shall take all other actions that have been approved by a
majority of the Committee Members.
(2) Consultation Forum. Consultation between Dental Group and Manager, if
------------------
any, shall take place at a meeting of the Joint Operations Committee, and Dental
Group and Manager hereby agree to be bound by the decision of the Joint
Operations Committee.
(c) Joint Operations Committee Meetings. Meetings of the Joint Operations
-----------------------------------
Committee may be held by telephone or similar communications equipment so long
as all Committee Members participating in a meeting can hear and speak to each
other. The Joint Operations Committee shall prepare and maintain written
minutes of all meetings and shall provide a copy of the minutes to the parties
within fifteen (15) business days following each meeting.
(1) Regular Meetings. The Joint Operations Committee shall hold not less
----------------
than four (4) regular meetings each year, at such specific times and places as
the Committee Members may determine.
(2) Special Meetings. A special meeting of the Joint Operations Committee
----------------
may be called by a majority of the Committee Members.
(3) Notice Requirement. A Committee Member calling a special meeting must
------------------
provide all other Committee Members with ten (10) days' advance written or
telephonic notice. Notice must be given or sent to the Committee Member's
address or telephone number as shown on the records of the Joint Operations
Committee. Notice may delivered directly to each Committee Member or to a
person at the Committee Member's principal place of business who would
reasonably be expected to communicate that notice promptly to the Committee
Member.
-6-
<PAGE>
(4) Waiver of Notice Requirement.
----------------------------
(A) Written Waiver, Consent or Approval. Notice of a special meeting need
-----------------------------------
not be given to any Committee Member who, either before or after the meeting,
signs a waiver of notice or a written consent to the holding of the special
meeting, or an approval of the minutes of the special meeting. Such waiver,
consent or approval need not specify the purpose of the special meeting. All
such waivers, consents, and approvals shall be filed with the Joint Operations
Committee records or made a part of the minutes of the special meetings.
(B) Failure to Object. Notice of a special meeting need not be given to
-----------------
any Committee Member who attends the special meeting and does not protest before
or at the commencement of the special meeting such lack of notice.
(5) Quorum. The smallest number of Committee Members that exceed fifty
------
percent (50%) of all Committee Members shall constitute a quorum of the Joint
Operations Committee.
(6) Proxies. The Joint Operations Committee shall provide for the use of
-------
proxies, telephonic conference calls, written consents or other appropriate
methods by which the full participation of the Dental Group Members and Manager
Members can be assured.
(d) Limitation of Responsibility. Notwithstanding any other provisions
----------------------------
hereof, Committee Members shall be liable to the parties only for actions
constituting bad faith, gross negligence or breach of an express provision of
this Agreement (so long as such breach remains uncured after ten (10) days of
receiving notice of the nature of such breach). In all other respects,
Committee Members shall not be liable for negligence or mistakes of judgment.
3.6 Budgets. A capital and operating budget ("Annual Budget") shall be
-------
established regarding all financial aspects of the Practice. The Annual Budget
shall include the following elements and other items, as appropriate:
(a) A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
(b) An operating budget setting forth an estimate of Revenues and expenses
for the next succeeding fiscal year, together with an explanation of anticipated
changes or modifications, if any, in the Practice's utilization, rates, charges
to patients or third party payors, salaries, costs of Providers, non-wage cost
increases, and all other similar factors expected to differ significantly from
those prevailing during the current fiscal year;
-7-
<PAGE>
(c) Other expenses of operation;
(d) The amount of a reasonable reserve to satisfy possible shortfalls from
operations. The allocation of such reserve shall be made by the Joint
Operations Committee as and when necessary; and
(e) The Management Fee, as defined below, for the next succeeding fiscal
year.
3.7 Budget Process.
--------------
(a) Initial Annual Budget. Not later than 45 days after the Effective
---------------------
Date, the Joint Operations Committee will have prepared the initial Annual
Budget for the first fiscal year (which shall initially be the calendar year)
during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains, or, at the option of
the parties, such portion of the then current fiscal year plus the immediately
subsequent fiscal year.
(b) Preliminary Budget. Not later than forty-five (45) days prior to the
------------------
end of each fiscal year during the term of this Agreement, the Manager shall
prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
(c) Joint Operations Committee Approval. The Joint Operations Committee
-----------------------------------
shall review and suggest modifications to the Preliminary Budget within ten (10)
days of receipt. Manager shall prepare a revised budget based upon the Joint
Operations Committee's recommendations and the Preliminary Budget as revised
shall become the Annual Budget.
(d) Adjustments. In the event of a material deviation between financial
-----------
forecasts and financial performance during a fiscal year, Manager or Dental
Group may propose adjustments to the Annual Budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
3.8 Personnel.
---------
(a) Providers. Manager shall not employ or contract with any Providers for
---------
the provision of dental services. All Providers who provide dental services to
Group Patients or to Beneficiaries shall be either (1) Employee Providers, (2)
Subcontract Providers or (3) employees of Subcontract Providers.
(b) Non-Providers. With the exception of employees of Subcontract
-------------
Providers, Manager shall employ all non-Provider personnel necessary for the
operation of the Practice.
-8-
<PAGE>
(c) Salary and Benefits. Each party to this Agreement shall remain liable
-------------------
for the salary and benefits paid to such party's own employees and shall be
ultimately responsible for compliance with state and federal laws pertaining to
employment taxes, workers' compensation, unemployment compensation and other
employment-related statutes pertaining to the party's own employees.
(d) Payments to Subcontract Providers. Dental Group shall be liable for
---------------------------------
any payments due Subcontract Providers under Provider Subcontracts after timely
receipt of funds from Manager.
ARTICLE 4
MANAGEMENT SERVICES
-------------------
4.1 General Description of Services. Within the limitations set out
-------------------------------
elsewhere in this Agreement, Manager shall provide or arrange for the provision
to Dental Group of all support services reasonably necessary and appropriate for
the efficient operation of the Practice. Such services include all
administrative services necessary to Dental Group's performance of its
obligations under Payor Contracts, contracting, marketing, capital formation and
assistance with long term strategic planning.
4.2 Facilities. When appropriate, Manager shall secure and maintain
----------
facilities, including, without limitation, office space, improvements,
furnishings, equipment, supplies and personal property, of a nature and in a
condition necessary and appropriate for the efficient and effective operations
of the Practice subject to the general approval of the Joint Operations
Committee. Manager shall secure and maintain said facilities in the name of
Dental Group. Manager shall ensure that said facilities are reasonably safe and
free of hazards.
4.3 Purchased Items and Services. Manager shall serve as the purchasing
----------------------------
agent for Dental Group and shall arrange for personnel benefits, insurance, and
any other items and services required for the proper operation of the Practice.
4.4 Manager Personnel.
-----------------
(a) Management Team. Subject to any approval or consulting rights of the
---------------
Joint Operations Committee, Manager shall engage or designate one or more
individuals experienced in dental group management and direction, including, but
not limited to, an administrator, who will be responsible for the overall
administration of the Practice including day-to-day operations and strategic
development activities.
(b) Other Manager Personnel. Manager shall select, hire, train, supervise,
-----------------------
monitor and terminate all non-Provider personnel necessary for the operation and
management of the Practice.
-9-
<PAGE>
4.5 Day-to-Day Management and Supervision. Subject to any approval or
-------------------------------------
consulting rights of the Joint Operations Committee, Manager shall provide
general management including, but not limited to, day-to-day supervision of:
(a) Manager personnel;
(b) Equipment and supply acquisition;
(c) Office space and facility maintenance;
(d) Patient records organization and retention;
(e) Third party payor contracting;
(f) Case management;
(g) Billing, collections and accounting activities as set forth below;
(h) All operating aspects and policies of the Practice including, but
not limited to, hours of operation, work schedules, standard duties and job
descriptions, for all nondentist personnel; and
(i) Other related and incidental matters.
4.6 Billing and Collection Payment of Expenses. Manager shall be
------------------------------------------
responsible for all billing and collecting activities required by Dental Group.
Manager shall also be responsible for reviewing and paying accounts payable of
Dental Group. Dental Group hereby appoints the Manager its true and lawful
attorney-in-fact to take the following actions for and on behalf of and in the
name of Dental Group:
(a) Bill and collect in Dental Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Dental Group. Dental
Group shall give Manager all necessary access to Patient records to accomplish
all billing and collection. In so doing, Manager will use its best efforts but
does not guarantee any specific level of collections, and Manager will comply
with Dental Group's reasonable and lawful policies regarding courtesy discounts;
(b) Take possession of and endorse in the name of Dental Group any and all
instruments received as payment of accounts receivable;
(c) Deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
(d) Place accounts for collection, settle and compromise claims, and
institute legal action for the recovery of accounts.
-10-
<PAGE>
4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
(a) Financial Reporting. Manager shall prepare, analyze, and deliver to
-------------------
the Joint Operations Committee financial reports to the extent necessary or
appropriate for the operation of the Practice, including the following:
(1) Financial statements, including balance sheets and statements of
cash flow and income;
(2) Accounts payable and accounts receivable analysis;
(3) Billing status including any Medicaid remittances; and
(4) Reconciliation of assets, liabilities and major expenses.
(b) Audits. Dental Group shall have the right to review and, at its sole
------
cost and expense, obtain an audit (separate from any annual audit or review of
Dental Group's financial statements performed at the direction of the Manager)
of Dental Group's financial books and records maintained by the Manager;
provided, however, that in the event there is a material discrepancy between the
information set forth in an audit performed at the direction of the Manager and
the information set forth in an audit performed at the direction of Dental
Group, and such discrepancy is materially adverse to Dental Group, then the cost
of the audit performed at the direction of Dental Group shall be borne by
Manager. Upon five (5) days' prior written notice, Manager shall allow Dental
Group access during reasonable business hours to all information and documents
reasonably required for such review or audit. Upon Dental Group's request and
at Dental Group's expense, Manager shall also provide copies of such documents.
4.8 Marketing and Public Relations Services. Manager shall provide such
---------------------------------------
marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Dental Group.
Manager shall provide Dental Group with marketing materials and activities.
4.9 Dental Group Agreements. On behalf of Dental Group, Manager shall
-----------------------
review, evaluate and negotiate Payor Contracts and Provider Subcontracts and any
other contracts or agreements regarding the provision of dental related items or
services by Dental Group or Providers.
4.10 Utilization Review Quality Improvement and Outcomes Monitoring.
--------------------------------------------------------------
Manager shall be responsible for providing administrative support for Dental
Group's utilization review,
-11-
<PAGE>
quality improvement and outcomes monitoring activities, including, without
limitation, data collection, analysis and reporting for Group Patients and
Beneficiaries. Manager shall also support the development and implementation of
relevant policies, procedures, protocols, practice guidelines and other
interventions based on such activities.
4.11 Applicable Law. Manager and Dental Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
4.12 Third Party Contracts. Manager shall be in substantial compliance
---------------------
with all contracts, agreements and arrangements, including any contracts that
exist on the Effective Date, between Manager and third parties.
ARTICLE 5
DENTAL GROUP SERVICES
---------------------
5.1 Provision of Dental Services by Dental Group. Dental Group shall
--------------------------------------------
operate the Practice during the Term as a dental practice in accordance with
terms of this Agreement and the Annual Budget.
5.2 Providers.
---------
(a) Professional Dental Services. Dental Group shall employ or contract
----------------------------
with the number of Providers Dental Group deems necessary for the efficient and
effective operation of the Practice and in accordance with quality assurance,
credentialing and utilization management protocols approved by the Joint
Operations Committee. Dental Group shall provide full and prompt dental
coverage for the Practice, including emergency service twenty-four hours per
day, seven days per week, including holidays according to policies and schedules
approved by the Joint Operations Committee.
(b) Provider Subcontracts and Employment Agreements. Dental Group shall not
-----------------------------------------------
negotiate or execute any Provider Subcontract, Employment Agreement, or any
amendment thereto, without the approval of the Joint Operations Committee. The
Joint Operations Committee shall have the right of review and reasonable
approval of any Provider Subcontract and Employment Agreement. Dental Group
shall be responsible for the payment, in accordance with the Annual Budget, of
all Employee and Subcontract Providers.
5.3 Peer Review. Dental Group, after consultation with the Joint
-----------
Operations Committee, shall implement, regularly review, modify as necessary or
appropriate and obtain the commitment of
-12-
<PAGE>
Providers to actively participate in peer review procedures for Providers.
Dental Group shall assist Manager in the production of periodic reports
describing the results of such procedures. Dental Group shall provide Manager
with prompt notice of any information that raises a reasonable risk to the
health and safety of Group Patients or Beneficiaries. In any event, after
consultation with the Joint Operations Committee, Dental Group shall take such
action as may be reasonably warranted under the facts and circumstances.
5.4 Billing Information and Assignments. Dental Group shall promptly
-----------------------------------
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Dental Group's
services. Dental Group shall use reasonable efforts to procure consents to
assignments and other approvals and documents necessary to enable Manager to
obtain payment or reimbursement from third party payors and patients. With the
assistance of Manager, Dental Group shall obtain all provider numbers necessary
to obtain payment or reimbursement for its services.
5.5 Third Party Contracts. Dental Group shall be in substantial
---------------------
compliance with all contracts, agreements and arrangements, including any
contracts that exist on the Effective Date, between Dental Group and third
parties.
5.6 Use of Manager's Goods and Services. Dental Group shall not use any
-----------------------------------
goods or services provided by Manager pursuant to this Agreement for any purpose
other than the provision of and management of dental services as contemplated by
this Agreement and purposes incidental thereto.
5.7 Negative Covenants. During the Term, Dental Group shall not, without
------------------
the prior approval of the Joint Operations Committee, (a) assign, pledge,
mortgage or otherwise encumber any of its property, (b) transfer substantially
all of its assets, including its goodwill, (c) merge or consolidate with any
other entity, (d) allow the transfer or issuance of any of its stock (other than
in accordance with the terms and provisions of that certain Share Ownership
Agreement dated October __, 1996, between an affiliate of Manager, GMS Dental
Group Management, Inc. and Victor G. Romley), or (e) take or allow any act that
would materially impair the ability of Dental Group to carry on the business of
the Practice or to fulfill its obligations under this Agreement.
ARTICLE 6
TERM
----
6.1 Term. This Agreement shall be effective as of October __, 1996 (the
----
"Effective Date"), and shall remain in effect for an initial term of forty (40)
years from the Effective Date, expiring on the fortieth (40th) anniversary of
the Effective Date, unless
-13-
<PAGE>
earlier terminated pursuant to the terms of this Agreement. The word "Term"
shall include such initial term and, where applicable, any extension of such
initial term (whether extended pursuant to Section 6.2(a) or otherwise), subject
to earlier termination pursuant to the provisions of this Agreement.
6.2 Termination and Extension.
-------------------------
(a) Automatic Extension. At the end of the initial term and any subsequent
-------------------
term, this Agreement shall automatically be renewed for a five (5) year term
unless one of the parties provides the other party with written notice of intent
not to renew, not less than one hundred eighty (180) day prior to the expiration
of the then current term.
(b) Early Termination. This Agreement may be terminated according to the
-----------------
provisions of this Section.
(1) Material Breach. In the event either party materially breaches this
---------------
Agreement and such breach is not cured to the reasonable satisfaction of the
non-breaching party within thirty (30) days after the non-breaching party serves
written notice of the default upon the defaulting party (the "Default Notice"),
the Agreement shall automatically terminate at the election of the non-breaching
party upon the giving of a written notice of termination to the defaulting party
not later than forty-five (45) days after service of the Default Notice;
provided that if such uncured breach is only capable of being cured within a
reasonable period of time in excess of thirty (30) days, the non-breaching party
shall not be entitled to terminate this Agreement so long as the defaulting
party has commenced such cure and thereafter diligently pursue such cure to
completion.
(2) Refusal To Comply. In the event that Dental Group or Manager refuses
-----------------
or fails to comply with a decision of the Joint Operations Committee, the
aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if the parties participate in such dispute between Dental Group
and Manager continues for sixty (60) days after the date the aggrieved party
exercises its option regarding mediation, and the mediator finds in favor of the
aggrieved party, the non-complying party shall have thirty (30) days in which to
comply with the decision of the Joint Operations Committee. If the non-
complying party has not complied by the end of such thirty (30) day period, the
aggrieved party shall have the option to terminate this Agreement upon fifteen
(15) days' prior written notice. During such mediation, Manager and Dental
Group shall continue to operate and manage the Practice in good faith.
(3) Bankruptcy. A party may, upon three (3) days' prior written notice,
----------
terminate this Agreement if the other party:
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<PAGE>
(A) Applies for or consents to the appointment of a receiver, trustee
or liquidator of all or a substantial part of its assets, files a voluntary
petition in bankruptcy or consents to an involuntary petition, makes a general
assignment for the benefit of its creditors, files a petition or answer seeking
reorganization or arrangement with its creditors, or admits in writing its
inability to pay its debts when due, or
(B) Suffers any order, judgment or decree to be entered by any court
of competent jurisdiction, adjudicating such party bankrupt or approving a
petition seeking its reorganization or the appointment of a receiver, trustee or
liquidator of such party or of all or a substantial part of its assets, and such
order, judgment or decree continues unstayed and in effect for ninety (90) days
after its entry.
(4) Nonperformance. Manager may terminate this Agreement in the event that
--------------
in any two consecutive fiscal quarters the Manager has not been paid the
Management Fee and, in the sole discretion of the Manager, it is not reasonably
likely that the Management Fee will be paid in the next fiscal quarter. Any
such termination shall be effective as of the last day of such third fiscal
quarter provided at least 60 days notice shall have been given; otherwise, such
termination shall be effective on the sixtieth day after notice is given.
(5) Change in Law. In the event of any material change in federal or state
-------------
law that has a significant adverse impact on either party hereto in connection
with their performance under this Agreement, or if performance by a party of any
duties under this Agreement be deemed illegal by any court or administrative
agency or in a formal opinion rendered to Dental Group or Manager by legal
counsel knowledgeable in health law matters retained by Dental Group or the
Manager, the affected party shall have the right to require that the other party
renegotiate the terms of this Agreement. Unless the parties otherwise mutually
agree in writing, such renegotiated terms shall be effective not later than
twenty (20) days after receipt of written notice of such request for
renegotiation. If the parties fail to reach such an agreement within thirty
(30) days of the request for renegotiation, either party may (subject to the
severability provision of this Agreement) terminate this Agreement upon thirty
(30) days' prior written notice to the other party.
(c) Effect of Termination. Upon termination of this Agreement:
---------------------
(1) Dental Group shall surrender to Manager all of Manager's property used
primarily in the operation of the Practice in the same condition as received,
reasonable wear and tear excepted.
(2) Manager shall deliver to Dental Group all records related to the
business of and provision of dental care through the Practice including, without
limitation, patient records and
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<PAGE>
any corporate, personnel and financial records maintained for the Practice and
Providers, provided, that except as limited by law, including, but not limited
to laws governing the confidentiality of patient records, Manager shall have the
option to copy (or otherwise duplicate) at its sole cost and expense such
records of Dental Group and to retain and utilize such records for its own use;
(3) Manager shall deliver to Dental Group any other property of Dental
Group in Manager's possession;
(4) Both parties shall cooperate to ensure the provision of appropriate
dental care to Group Patients and Beneficiaries;
(5) Dental Group shall promptly deliver to Manager any Revenues that it may
receive in payment for dental services rendered by Dental Group prior to
termination; and
(6) Both parties shall cooperate to ensure the appropriate billing and
collections for dental services rendered by Dental Group prior to the effective
date of termination, and any such cash collected shall be retained by Dental
Group and/or paid to Manager pursuant to Article 7.
ARTICLE 7
MANAGEMENT FEE
--------------
For its services hereunder, which shall include the providing of all
facilities and furniture, fixtures and equipment at the Practice, all non-
dentist employees of Manager who perform services at or for the Practice and all
management services provided hereunder, Manager shall retain as a Management Fee
(the "Management Fee")[*].
ARTICLE 8
INDEMNITY AND INSURANCE
-----------------------
8.1 Indemnity.
---------
(a) Indemnification. Each party shall indemnify, defend and hold harmless
---------------
the other party from any and all liability, loss, claim, lawsuit, injury, cost,
damage or expense whatsoever (including insurance deductibles, reasonable
attorneys' fees and court costs) arising out of, incident to or in any manner
occasioned by the performance or nonperformance of any duty or responsibility
under this Agreement by such indemnifying party, or any of their employees,
agents, contractors or subcontractors; provided, however, that neither party
shall be liable to the other party hereunder for any claim covered by insurance,
except to the
__________
[*] Confidential Treatment Requested.
-16-
<PAGE>
extent that the liability of such party exceeds the amount of such insurance
coverage. Specifically, and without limiting the generality of the foregoing,
Dental Group agrees to indemnify, defend and hold harmless Manager for all
liability, loss, claim, lawsuit, injury, cost, damage or expense whatsoever
(including reasonable attorneys' fees and court costs) arising out of the
professional negligence of Dental Group, its employees, agents, contractors or
subcontractors, including any amounts in excess of the professional liability
insurance coverage of Dental Group or its employees, agents, contractors or
subcontractors.
(b) Mutual Indemnity. Each party to this Agreement shall be indemnified by
----------------
the other party for any claim under this Agreement or otherwise against the
indemnified party for vacation pay, sick leave, retirement benefits, Social
Security benefits, workers' compensation benefits, disability or unemployment,
insurance benefits, or other employee benefits of any kind accrued during the
term of this Agreement by an employee of the indemnifying party.
8.2 Manager's Insurance. Manager shall, on its own behalf and at its sole
-------------------
cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
(a) Comprehensive general liability insurance covering the risks of
Manager, in an amount determined by the Joint Operations Committee;
(b) Workers' compensation insurance covering the employees of Manager, in
such amounts as is usual and customary under the circumstances;
(c) Property insurance covering the facilities, equipment and supplies
owned or leased by Manager or Dental Group for use in the operation of the
Practice.
8.3 Dental Group's Insurance. At Dental Group's sole cost and expense,
------------------------
and subject to the review of the Joint Operations Committee, Manager shall
obtain, and maintain on behalf of Dental Group in full force and effect during
the Term, policies in the following categories in the amount indicated:
(a) Comprehensive professional liability insurance coverage for Dental
Group and Dental Group's Employee Providers, in such amounts as Manager shall
reasonably deem necessary;
(b) Workers' compensation insurance covering the employees of Dental Group,
in such amounts as is usual and customary under the circumstances;
(c) Comprehensive general liability insurance covering the risks of Dental
Group, in an amount determined by the Joint Operations Committee;
-17-
<PAGE>
(d) Directors and officers liability insurance covering the directors and
officers of Dental Group.
ARTICLE 9
BOOKS AND RECORDS
-----------------
9.1 Ownership of Records. All business records and information relating
--------------------
exclusively to the business and activities of either party shall be the property
of that party, irrespective of identity of the party responsible for producing
or maintaining such records and information. Without limiting the foregoing,
all patient charts and records maintained by Manager relating to the dental
services of Dental Group shall be the property of Dental Group. Dental Group
also shall be entitled to a copy at Dental Group's sole cost of all business
records pertaining to Dental Group. Except as limited by law, including, but
not limited to laws governing the confidentiality of patient records, Manager
shall be entitled to a copy at Manager's sole cost of all records of Dental
Group.
ARTICLE 10
MISCELLANEOUS PROVISIONS
------------------------
10.1 Assignment. Neither party shall assign this Agreement to any other
----------
party or parties without the prior written consent of the other party, which
consent may be withheld arbitrarily or capriciously, for any reason or for no
reason whatsoever and any attempted assignment in violation of this Agreement
shall be null and void.
10.2 Headings. The article and section headings used in this Agreement
--------
are for purposes of convenience only. They shall not be construed to limit or
to extend the meaning of any part of this Agreement.
10.3 Waiver. Waiver by either Dental Group or Manager of any breach of
------
any provision of this Agreement shall not be deemed to be a waiver of such
provision or of any subsequent breach of the same or of any other provision of
this Agreement.
10.4 Notices. Any notice, demand, approval, consent, or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be deemed to have been given when five (5) business days have
elapsed from the date of deposit in the United States mails, certified and
postage prepaid, addressed to the party to be served at the following address or
such other address as may be given in writing to the parties.
-18-
<PAGE>
Dental Group: Dental Care Centers of Hawaii, Inc.
87-597 Farrington Highway
Maile, HI 96792
Attn: Dr. Victor G. Romley
Manager: GMS Dental Group Management of Hawaii, Inc.
c/o GMS Dental Group, Inc.
180 North Riverview Drive
Suite 255
Anaheim Hills, CA 92808
Attn: Mr. Grant M. Sadler
10.5 Attorneys' Fees. If any legal action or arbitration or other
---------------
proceeding is commenced, whether by Manager or Dental Group concerning this
Agreement, the prevailing party shall recover from the losing party reasonable
attorneys' fees and costs and expenses, including those of appeal and not
limited to taxable costs, incurred by the prevailing party, in addition to all
other remedies to which the prevailing party may be entitled. If a claim or
claims asserted by a third party against Manager or Dental Group or any of them
arise from an action or omission by the other, the party responsible for the
action or omission shall be the losing party, and the other party shall be the
prevailing party, for purposes of the foregoing sentence.
10.6 Successors. Without limiting or otherwise affecting any restrictions
----------
on assignments of this Agreement or rights or duties under this Agreement, this
Agreement shall be binding upon and inure to the benefit of the successors and
assigns of Dental Group and Manager.
10.7 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between Dental Group and Manager and supersedes all prior negotiations and
agreements, written or oral, concerning or relating to the subject matter of
this Agreement, and this Agreement may not be modified except by a writing
executed by all parties and subject to the provisions thereof.
10.8 Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereto shall be governed by, and construed according to, the laws of the
State of Hawaii.
10.9 Severability. If any provision of this Agreement is held to be
------------
invalid or unenforceable by any court or administrative agency of competent
jurisdiction, or in a written opinion to Dental Group or the Manager by legal
counsel knowledgeable in health law matters retained by Dental Group or the
Manager, such holding or opinion shall not affect the validity and
enforceability of the other provisions of this Agreement and the remainder of
this Agreement shall be considered valid and operative to the fullest extent
permitted by law, but only if and to the extent such enforcement would not
materially and adversely frustrate the parties essential objectives as expressed
herein.
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<PAGE>
10.10 Time is of the Essence. Time is of the essence in this Agreement.
----------------------
10.11 Authority. Any Person signing this Agreement on behalf of any
---------
entity hereby represents and warrants in its individual capacity that it has
full authority to do so on behalf of such entity.
10.12 Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute on and the same instrument.
IN WITNESS WHEREOF, Dental Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
"DENTAL GROUP"
DENTAL CARE CENTERS OF HAWAII, INC., a Hawaii
professional dental corporation
By: /s/ Victor G. Romley
-----------------------
Its: President
"MANAGER"
GMS DENTAL GROUP MANAGEMENT OF HAWAII, INC., a
Hawaii corporation
By: /s/ Grant M. Sadler
----------------------
Its: President
-20-
<PAGE>
ADDENDUM 1.
----------
For purposes of this Agreement, the following terms shall have the meaning
indicated below or defined at the indicated section:
(1) Accounts. See Section 2.5(a).
--------
(2) Affiliate. "Affiliate" shall mean, with respect to any Person, (i) any
---------
individual or entity directly or indirectly owned or controlled by such Person,
(ii) any individual or entity directly or indirectly owning or controlling such
Person or (iii) any individual or entity directly or indirectly owned or
controlled by the same family member, individual or entity as owns or controls
such Person. For purposes of this Agreement, neither Dental Group nor Manager
shall be deemed an Affiliate of the other.
(3) Agreement. "Agreement" means this Dental Group Management Agreement.
---------
(4) Annual Budget. See Section 3.6, first sentence.
-------------
(5) Beneficiaries. See Recital A.
-------------
(6) Books and Records. "Books and Records" means Dental Group's books of
-----------------
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
(7) Capital Costs. "Capital Costs" shall mean any and all investments that
-------------
are or would be capitalized pursuant to GAAP.
(8) Committee Members. See Section 3.5(a).
-----------------
(9) Default Notice. See Section 6.2(b)(1).
--------------
(10) Effective Date. See Section 6.1.
--------------
(11) Employee Providers. See Recital B.
------------------
(12) Employment Agreements. See Recital B.
---------------------
(13) GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with GAAP, and all financial
computations hereunder shall be computed unless otherwise specifically provided
-21-
<PAGE>
herein, in accordance with GAAP as consistently applied and using the same
method of valuation as used in the preparation of Manager's financial
statements.
(14) Group Patients. See Recital A.
--------------
(15) Joint Operations Committee. See Section 3.4(b).
--------------------------
(16) Management Fee. See Article 7.
--------------
(17) Manager. See first paragraph of this Agreement.
-------
(18) Manager Members. See Section 3.5(a).
---------------
(19) Manager's Costs. "Manager's Costs" means all costs incurred by
---------------
Manager including amortization associated with costs acquiring assets of the
Dental Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which are
attributable to Manager's business operations in accordance with Manager's
corporate allocation policies.
(20) Marks. See Section 2.3(a).
-----
(21) Dental Group. See first paragraph of this Agreement.
------------
(22) Dental Group Members. See Section 3.5(a).
--------------------
(23) Dental Expenses. See Section 2.6(b).
---------------
(24) Net Revenues. "Net Revenues" means all Revenues net of allowances for
------------
uncollectible accounts.
(25) Payor Contracts. See Recital A.
---------------
(26) Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
(27) Plans. See Recital A.
-----
(28) Practice. See Recital A.
--------
(29) Preliminary Budget. See Section 3.7(b).
------------------
(30) Programs. See Section 2.3(b).
--------
(31) Providers. "Providers" shall mean individuals or organizations
---------
licensed to practice dentistry (including specialists) as well as other dental
professionals who provide ancillary reimbursable dental services.
-22-
<PAGE>
(32) Provider Subcontracts. See Recital A.
---------------------
(33) Revenues. "Revenues" means all amounts assigned hereunder by Dental
--------
Group to Manager pursuant to Section 2.6(a).
(34) Subcontract Providers. See Recital B.
---------------------
(35) Term. See Section 6.1.
----
-23-
<PAGE>
EXHIBIT 10.36[*]
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
THIS DENTAL GROUP MANAGEMENT AGREEMENT (this "Agreement") is dated as of
October 11, 1996 and is effective as of the date set forth in Section 6.1
("Effective Date") by and between HENRY J. LERIAN, TRUSTEE OF THE HENRY J.
----------------------------------------
LERIAN AND JEANETTE P. LERIAN IRREVOCABLE MARITAL TRUST U/D/T 03/23/94 (the
- ----------------------------------------------------------------------
"Lerian Marital Trust"), HENRY J. LERIAN, TRUSTEE OF THE HENRY J. LERIAN AND
---------------------------------------------------
JEANETTE P. LERIAN REVOCABLE SURVIVOR'S TRUST U/D/T 03/23/94 (the "Lerian
- ------------------------------------------------------------
Survivor Trust"), HENRY J. LERIAN, DDS, an individual (collectively, "Manager")
--------------------
and LERIAN DENTAL CORPORATION, a California professional corporation ("Dental
-------------------------
Group").
RECITALS:
A. Prior to the execution of this Agreement, pursuant to the terms of that
certain Assignment Agreement, dated as of October 11, 1996, all of Manager's
right, title and interest in all contracts and agreements with dentist employees
and independent contractors and other licensed health professional employees
and independent contractors, all independent physician association and managed
care plan contracts, all patient records, and any and all other assets required
by statute, rule or regulation to be owned or held by an entity licensed to
practice dentistry, together with all goodwill associated with the foregoing
(collectively, the "Dental Practice Assets") were assigned to Dental Group.
B. Dental Group engages in the practice of dentistry by providing dental
services to patients of Dental Group ("Group Patients") and to enrollees
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
between Dental Group and Plans or between Beneficiaries and Plans.
C. Dental Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
arrangements may include contracts ("Employment Agreements") with dentist
employees and allied health professional employees (collectively "Employee
Providers") and agreements ("Provider Subcontracts") with independent contractor
dentists and non-dentist providers of various dental care services (collectively
"Subcontract Providers").
D. All activities of Dental Group subject to this Agreement are referenced
as the "Practice." All references to "dental" care and services include general
and specialist dental services. All references to "dentists" include
generalists and specialists.
E. Manager desires to provide certain support services for the Practice.
__________
[*] Confidential Treatment Requested.
-1-
<PAGE>
F. Dental Group desires to retain Manager on an independent contractor
basis to provide management services that are more particularly described below,
and Manager desires to provide such management services under the terms and
conditions set forth in this Agreement.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the covenants and conditions contained
herein, Manager and Dental Group agree as follows:
ARTICLE 1
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
ARTICLE 2
SCOPE OF AGREEMENT
------------------
2.1 General Scope of Agreement. This Agreement shall apply to the
--------------------------
Practice, including, without limitation, all professional, administrative and
technical services, marketing, contracting, case management, ancillary dental
services, outpatient services and dental care facilities, equipment, supplies
and items, except as otherwise specifically provided in this Agreement. Dental
Group's Employment Agreements shall encompass substantially all such activities
of Employee Providers and shall provide that all revenues derived from such
activities (and not excluded below) are Revenues. Nothing in this Agreement
shall be construed to alter or in any way affect the legal, ethical and
professional relationship between and among Providers and Providers' patients,
nor shall anything contained in this Agreement abrogate any right or obligation
arising out of or applicable to the dentist-patient relationship.
2.2 License. Dental Group grants Manager an exclusive license to use any
-------
and all of Dental Group's assets, whether tangible or intangible, in carrying
out Manager's duties and responsibilities under the provisions of this
Agreement.
2.3 Intellectual Property. Dental Group hereby grants to Manager a non-
---------------------
exclusive, perpetual, royalty-free, worldwide license to use and sublicense the
use of any intellectual property owned by Dental Group. This license shall
cover, but not be limited to, use of the following:
-2-
<PAGE>
(a) Service Mark. Dental Group hereby grants Manager the right to use all
------------
service marks and trademarks of Dental Group (the "Marks") for marketing and
promotional materials in connection with Dental Group's offering of dental
services. Manager agrees to use the Marks solely in the design format used by
Dental Group as of the date of this Agreement or another design format approved
in advance in writing by Dental Group. Dental Group shall have the opportunity
to review any marketing or other materials using the Marks in advance of any
public distribution. Manager agrees that it will include these restrictions on
use in any sublicense of the Marks.
(b) Copyrighted Materials. Dental Group hereby grants Manager the right
---------------------
to use, reproduce, prepare derivative works based upon and distribute copies of
any and all copyrighted materials authored or owned by Dental Group including,
specifically, the Dental Group dental management system software programs (the
"Programs"). This license includes the right to sublicense the Programs and the
right to prepare and own derivative works based on the Programs, all without a
duty of accounting to Dental Group. Dental Group shall execute all documents
required to enable Manager to own, use and exploit all such rights.
2.4 Revenues. "Revenues" shall mean all of Dental Group's accounts
--------
receivable (net of contractual adjustments and bad debt), and cash collections.
Revenues shall include all funds collected by, or legally due to, Dental Group
or any Affiliate of Dental Group, including, without limitation, the following:
(a) all fee-for-service payments for services to Group Patients or
Beneficiaries; (b) all payments established under Payor Contracts; (c) all
coordination of benefits or deductibles and third-party liability recoveries
related to the Group's services; (d) all payments, dues, fees or other
compensation to Dental Group, (e) any income, profits, dividends, distributions
or other payments from Dental Group's investments; and (f) any interest or other
non-operating income of Dental Group.
2.5 Deposit Accounts. All cash received by Dental Group from whatever
----------------
source shall be deposited into an account or accounts ("Accounts") in the name
of Dental Group at a banking institution selected by Dental Group and approved
by Manager. Dental Group authorizes Manager to bill and collect, in Dental
Group's name, all charges and reimbursements for Dental Group's dental related
activities and to deposit such collections in the Accounts. Dental Group agrees
to assist and cooperate with Manager in the billing and collection process and
to immediately deliver to Manager for deposit any monies Dental Group may
receive.
2.6 Assignment.
----------
(a) Assets. Except as prohibited by contract or by law, Dental Group
------
hereby assigns, sells, conveys, transfers, and delivers to Manager, and Manager
hereby accepts from Dental Group,
-3-
<PAGE>
all of the assets and properties of Dental Group of every kind, character and
description, whether tangible, intangible, real, personal, or mixed, and
wherever located, including, but not limited to, all Revenues, cash, accounts
receivable, advances, prepaid expenses, deposits, equipment and improvements.
The assets shall be valued at their fair market value which has been determined
to be their respective book values. Manager shall have the authority, and
Dental Group shall execute any and all documents as may be necessary or
appropriate to transfer the assets to Manager, authorize Manager to transfer the
funds in the Accounts to a separate account in the name of Manager, and
effectuate the intention of this provision.
(b) Liabilities. Manager shall be responsible for paying all claims and
-----------
obligations associated with the operation of Dental Group pursuant to this
Agreement; provided, Manager shall be deemed to fully discharge its
responsibility to Dental Group for the liabilities described in this
subparagraph by its timely payment on Dental Group's behalf of, or delivery to
Dental Group of an amount sufficient to discharge, all of Dental Group's
obligations and liabilities now existing or arising in the future, including
those under Provider Subcontracts, Employment Agreements, Dental Group's
professional liability insurance and any other operational expenses for which
Dental Group retains respon sibility or that are delegated to Dental Group,
whether pursuant to this Agreement or any other agreement of the parties or
action of the Joint Operations Committee ("Dental Expenses"). Notwithstanding
the foregoing, Manager does not assume any liabilities of Dental Group which are
unrelated to the dental business or any liabilities for income taxes.
ARTICLE 3
GOVERNANCE AND CONTROL
----------------------
3.1 Appointment. Dental Group hereby appoints Manager as its sole and
-----------
exclusive manager for the operation of the Practice and covenants not to enter
into an agreement with any Person other than Manager to perform or assume any of
Manager's rights, duties or responsibilities as provided herein. Manager hereby
accepts full responsibility for such management as more fully set forth herein.
3.2 Professional Matters. Pursuant to applicable laws and requirements
--------------------
governing the practice of dentistry, Dental Group shall retain ultimate
responsibility for all activities of Dental Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's non-
licensed status. The parties understand and agree that during the term of this
Agreement, Dental Group shall be the provider of dental services for all
purposes, including, but not limited to, licensure and reimbursement.
-4-
<PAGE>
3.3 Relationship of Parties. In the performance of its duties and
-----------------------
obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Dental Group. Except as provided in this Agreement or as
required by law, Dental Group shall neither have nor exercise any control or
direction over the methods by which Manager shall perform its obligation
thereunder; nor shall Manager have or exercise any control or direction over the
methods by which Dental Group shall practice dentistry. It is expressly agreed
by the parties that no work, act, commission or omission of Manager pursuant to
the terms and conditions of this Agreement shall be construed to make or render
Manager or Manager's employees or agents, the employees of Dental Group.
Manager and Dental Group are not partners or joint venturers with each other and
nothing herein shall be construed so as to make them partners or joint venturers
or impose upon either of them any liability as partners or joint venturers.
Dental Group's responsibility is to assure that the services covered by this
Agreement shall be performed and rendered in a competent, efficient and
satisfactory manner.
3.4 Authority and Control. Strategic planning, overall direction and
---------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group shall be accomplished as follows:
(a) Exclusive Authority.
-------------------
(i) Dental Group. Dental Group shall have the sole responsibility and
------------
authority for all aspects of the practice of dentistry and delivery of dental
services by Providers. Dental Group shall consult with Manager or the Joint
Operations Committee to the extent reasonable and not inconsistent with the
licensure of dentists.
(ii) Manager. After reasonable consultation with Dental Group or the
-------
Joint Operations Committee, Manager shall have the sole responsibility and
authority for decisions related to the administration of the Practice.
(b) Joint Authority. All other decision-making authority related to the
---------------
business and affairs of Dental Group shall be vested in a joint operations
committee (the "Joint Operations Committee"). Nothing herein shall be construed
as preventing the Joint Operations Committee from appointing representatives and
delegating authority to such representatives so long as the Joint Operations
Committee shall have the power to revoke such appointment and delegation at any
time and so long as the Joint Operations Committee retains ultimate
responsibility for the decisions of such representatives.
3.5 Joint Operations Committee. Strategic planning, overall direction and
--------------------------
control of the business and affairs of Dental Group,
-5-
<PAGE>
and authority over the day-to-day activities of Dental Group shall be overseen
by the Joint Operations Committee as follows:
(a) Joint Operations Committee Membership. The Joint Operations
-------------------------------------
Committee shall consist initially of three (3) individuals (the "Committee
Members"). Dental Group shall designate one (1) Committee Member (the "Dental
Group Member") and the remaining two (2) Committee Members (the "Manager
Members") shall be appointed by Manager. The number of Committee Members may be
increased by agreement of the parties. Each party shall continue to direct the
appointment of the same percentage of Committee Members as described above.
Each Committee Member shall serve at the pleasure of the party designating such
Committee Member and may be replaced, with or without cause, at any time by such
party upon the delivery of written notice thereof to the other Committee
Members. Manager, Dental Group and their respective Committee Members shall
diligently pursue any preliminary activities that are necessary to allow the
Joint Operations Committee to take an action. Where Committee Members are
required to consult with the organization appointing such Committee Members, the
Committee shall establish and agree on a deadline for accomplishing such
consultation.
(b) Joint Operations Committee Action.
---------------------------------
(i) Joint Action. Except as otherwise expressly set forth above, the
------------
Joint Operations Committee shall take all other actions that have been approved
by a majority of the Committee Members.
(ii) Consultation Forum. Consultation between Dental Group and Manager,
------------------
if any, shall take place at a meeting of the Joint Operations Committee, and
Dental Group and Manager hereby agree to be bound by the decision of their
Dental Group Member or Manager Members, as the case may be.
(c) Joint Operations Committee Meetings. Meetings of the Joint Operations
-----------------------------------
Committee may be held by telephone or similar communications equipment so long
as all Committee Members participating in a meeting can hear and speak to each
other. The Joint Operations Committee shall prepare and maintain written
minutes of all meetings and shall provide a copy of the minutes to the parties
within fifteen (15) business days following each meeting.
(i) Regular Meetings. The Joint Operations Committee shall hold not
----------------
less than four (4) regular meetings each year, at such specific times and
places as the Committee Members may determine.
(ii) Special Meetings. A special meeting of the Joint Operations
----------------
Committee may be called by a majority of the Committee Members.
(iii) Notice Requirement. A Committee Member calling a special
------------------
meeting must provide all other
-6-
<PAGE>
Committee Members with ten (10) days advance written or telephonic notice.
Notice must be given or sent to the Committee Member's address or telephone
number as shown on the records of the Joint Operations Committee. Notice
may delivered directly to each Committee Member or to a person at the
Committee Member's principal place of business who would reasonably be
expected to communicate that notice promptly to the Committee Member.
(iv) Waiver of Notice Requirement.
----------------------------
(A) Written Waiver, Consent or Approval. Notice of a special
-----------------------------------
meeting need not be given to any Committee Member who, either before
or after the meeting, signs a waiver of notice or a written consent to
the holding of the special meeting, or an approval of the minutes of
the special meeting. Such waiver, consent or approval need not
specify the purpose of the special meeting. All such waivers,
consents, and approvals shall be filed with the Joint Operations
Committee records or made a part of the minutes of the special
meetings.
(B) Failure to Object. Notice of a special meeting need not be
-----------------
given to any Committee Member who attends the special meeting and does
not protest before or at the commencement of the special meeting such
lack of notice.
(v) Quorum. The smallest number of Committee Members that exceed
------
fifty percent (50%) of all Committee Members shall constitute a quorum of
the Joint Operations Committee.
(vi) Proxies. The Joint Operations Committee shall provide for the
-------
use of proxies, telephonic conference calls, written consents or other
appropriate methods by which the full participation of the Dental Group
Members and Manager Members can be assured.
(d) Limitation of Responsibility. Notwithstanding any other provisions
----------------------------
hereof, Committee Members shall be liable to the parties only for actions
constituting bad faith, gross negligence or breach of an express provision of
this Agreement (so long as such breach remains uncured after ten (10) days of
receiving notice of the nature of such breach). In all other respects,
Committee Members shall not be liable for negligence or mistakes of judgment.
3.6 Budgets. A capital and operating budget ("Annual Budget") shall be
-------
established regarding all financial aspects of the Practice. The Annual Budget
shall include the following elements and other items, as appropriate:
-7-
<PAGE>
(a) A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
(b) An operating budget setting forth an estimate of Revenues and
expenses for the next succeeding fiscal year, together with an explanation of
anticipated changes or modifications, if any, in the Practice's utilization,
rates, charges to patients or third party payors, salaries, costs of Providers,
non-wage cost increases, and all other similar factors expected to differ
significantly from those prevailing during the current fiscal year;
(c) Other expenses of operation;
(d) The amount of a reasonable reserve to satisfy possible shortfalls from
operations. The allocation of such reserve shall be made by the Joint
Operations Committee as and when necessary; and
(e) The Management Fee, as defined below, for the next succeeding fiscal
year.
3.7 Budget Process.
--------------
(a) Initial Annual Budget. Prior to the Effective Date, the parties have
---------------------
or will have agreed on the initial Annual Budget for the first fiscal year
(which shall initially be the calendar year) during the term of this Agreement.
If the Effective Date is other than the first day of a fiscal year, then such
initial Annual Budget shall encompass only such portion of the then current
fiscal year as remains, or, at the option of the parties, such portion of the
then current fiscal year plus the immediately subsequent fiscal year.
(b) Preliminary Budget. Not later than forty-five (45) days prior to the
------------------
end of each fiscal year during the term of this Agreement, the Manager shall
prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
(c) Joint Operations Committee Approval. The Joint Operations Committee
-----------------------------------
shall review and suggest modifications to the Preliminary Budget within ten (10)
days of receipt. Manager shall prepare a revised budget based upon the Joint
Operations Committee's recommendations and the Preliminary Budget as revised
shall become the Annual Budget.
(d) Adjustments. In the event of a material deviation between financial
-----------
forecasts and financial performance during a fiscal year, Manager or Dental
Group may propose adjustments to the Annual Budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
-8-
<PAGE>
3.8 Personnel.
---------
(a) Providers. Except in unusual circumstances approved by the Joint
---------
Operations Committee, Manager shall not employ or contract with any Providers
for the provision of dental services. All Providers who provide dental services
to Group Patients or to Beneficiaries shall be either (i) Employee Providers,
(ii) Subcontract Providers or (iii) employees of Subcontract Providers.
(b) Non-Providers. With the exception of employees of Subcontract
-------------
Providers, Manager shall employ all non-Provider personnel necessary for the
operation of the Practice.
(c) Salary and Benefits. Each party to this Agreement shall remain liable
-------------------
for the salary and benefits paid to such party's own employees and shall be
ultimately responsible for compliance with state and federal laws pertaining to
employment taxes, workers' compensation, unemployment compensation and other
employment-related statutes pertaining to the party's own employees.
(d) Payments to Subcontract Providers. Dental Group shall be liable for
---------------------------------
any payments due Subcontract Providers under Provider Subcontracts after receipt
of funds from Manager.
ARTICLE 4
MANAGEMENT SERVICES
-------------------
4.1 General Description of Services. Within the limitations set out
-------------------------------
elsewhere in this Agreement, Manager shall provide or arrange for the provision
to Dental Group of all support services reasonably necessary and appropriate for
the efficient operation of the Practice. Such services include all
administrative services necessary to Dental Group's performance of its
obligations under Payor Contracts, contracting, marketing, capital formation and
assistance with long term strategic planning.
4.2 Facilities. When appropriate, Manager shall secure and maintain
----------
facilities, including, without limitation, office space, improvements,
furnishings, equipment, supplies and personal property, of a nature and in a
condition necessary and appropriate for the efficient and effective operations
of the Practice subject to the general approval of the Joint Operations
Committee. Manager shall secure and maintain said facilities in the name of
Dental Group.
4.3 Purchased Items and Services. Manager shall serve as the purchasing
----------------------------
agent for Dental Group and shall arrange for personnel benefits, insurance, and
any other items and services required for the proper operation of the Practice.
-9-
<PAGE>
4.4 Manager Personnel.
-----------------
(a) Management Team. Subject to any approval or consulting rights of the
---------------
Joint Operations Committee, Manager shall engage or designate one or more
individuals experienced in dental group management and direction, including,
but not limited to, an administrator, who will be responsible for the overall
administration of the Practice including day-to-day operations and strategic
development activities.
(b) Other Manager Personnel. Manager shall select, hire, train,
-----------------------
supervise, monitor and terminate all non-Provider personnel necessary for the
operation and management of the Practice.
4.5 Day-to-Day Management and Supervision. Subject to any approval or
-------------------------------------
consulting rights of the Joint Operations Committee, Manager shall provide
general management including, but not limited to, day-to-day supervision of:
(a) Manager personnel;
(b) Equipment and supply acquisition;
(c) Office space and facility maintenance;
(d) Patient records organization and retention;
(e) Third party payor contracting;
(f) Case management tracking;
(g) Billing, collections and accounting activities as set forth below;
(h) All operating aspects and policies of the Practice including, but not
limited to, hours of operation, work schedules, standard duties and job
descriptions, for all nondentist personnel; and
(i) Other related and incidental matters.
4.6 Billing and Collection Payment of Expenses. Manager shall be
------------------------------------------
responsible for all billing and collecting activities required by Dental Group.
Manager shall also be responsible for reviewing and paying accounts payable of
Dental Group. Dental Group hereby appoints the Manager its true and lawful
attorney-in-fact to take the following actions for and on behalf of and in the
name of Dental Group:
(a) Bill and collect in Dental Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Dental Group. Dental
Group shall give Manager all necessary access to Patient records to accomplish
all billing and collection. In so doing, Manager will use its best efforts but
does not
-10-
<PAGE>
guarantee any specific level of collections, and Manager will comply with
Dental Group's reasonable and lawful policies regarding courtesy discounts;
(b) Take possession of and endorse in the name of Dental Group any and all
instruments received as payment of accounts receivable;
(c) Deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
(d) Place accounts for collection, settle and compromise claims, and
institute legal action for the recovery of accounts.
4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
(a) Financial Reporting. Manager shall prepare, analyze, and deliver to
-------------------
the Joint Operations Committee financial reports to the extent necessary or
appropriate for the operation of the Practice, including the following:
(i) Financial statements, including balance sheets and statements of
cash flow and income;
(ii) Accounts payable and accounts receivable analysis;
(iii) Billing status including any Medicaid remittances; and
(iv) Reconciliation of assets, liabilities and major expenses.
(b) Audits. Dental Group shall have the right to review and, at its sole
------
cost and expense, obtain an audit (separate from any annual audit or review of
Dental Group's financial statements performed at the direction of the Manager)
of Dental Group's financial books and records maintained by the Manager. Upon
two (2) days prior written notice, Manager shall allow Dental Group access
during reasonable business hours to all information and documents reasonably
required for such review or audit. Upon Dental Group's request and at Dental
Group's expense, Manager shall also provide copies of such documents.
4.8 Marketing and Public Relations Services. Manager shall provide such
---------------------------------------
marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Dental Group.
Manager shall provide Dental Group with marketing materials and activities.
-11-
<PAGE>
4.9 Dental Group Agreements. On behalf of Dental Group, Manager shall
-----------------------
review, evaluate and negotiate Payor Contracts and Provider Subcontracts and any
other contracts or agreements regarding the provision of dental related items or
services by Dental Group or Providers.
4.10 Utilization Review Quality Improvement and Outcomes Monitoring.
--------------------------------------------------------------
Manager shall be responsible for providing administrative support for Dental
Group's utilization review, quality improvement and outcomes monitoring
activities, including, without limitation, data collection, analysis and
reporting for Group Patients and Beneficiaries. Manager shall also support the
development and implementation of relevant policies, procedures, protocols,
practice guidelines and other interventions based on such activities.
4.11 Applicable Law. Manager and Dental Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE 5
DENTAL GROUP SERVICES
---------------------
5.1 Provision of Dental Services by Dental Group. Dental Group shall
--------------------------------------------
operate the Practice during the Term as a dental practice in accordance with
terms of this Agreement and the Annual Budget.
5.2 Providers.
---------
(a) Professional Dental Services. Dental Group shall employ or contract
----------------------------
with the number of Providers Dental Group deem necessary for the efficient and
effective operation of the Practice and in accordance with quality assurance,
credentialing and utilization management protocols approved by Manager. Dental
Group shall provide full and prompt dental coverage for the Practice, including
emergency service twenty-four (24) hours per day, seven (7) days per week,
including holidays according to policies and schedules approved by the Joint
Operations Committee.
(b) Provider Subcontracts and Employment Agreements. Dental Group shall
-----------------------------------------------
not negotiate or execute any Provider Subcontract, Employment Agreement, or any
amendment thereto, without the approval of the Joint Operations Committee. The
Joint Operations Committee shall have the right of review and reasonable
approval of any Provider Subcontract and Employment Agreement. Dental Group
shall be responsible for the payment, in accordance with the Annual Budget, of
all Employee and Subcontract Providers.
-12-
<PAGE>
5.3 Peer Review. Dental Group, after consultation with the Joint
-----------
Operations Committee, shall implement, regularly review, modify as necessary or
appropriate and obtain the commitment of Providers to actively participate in
peer review procedures for Providers. Dental Group shall assist Manager in the
production of periodic reports describing the results of such procedures.
Dental Group shall provide Manager with prompt notice of any information that
raises a reasonable risk to the health and safety of Group Patients or
Beneficiaries. In any event, after consultation with the Joint Operations
Committee, Dental Group shall take such action as may be reasonably warranted
under the facts and circumstances.
5.4 Billing Information and Assignments. Dental Group shall promptly
-----------------------------------
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Dental Group's
services. Dental Group shall use reasonable efforts to procure consents to
assignments and other approvals and documents necessary to enable Manager to
obtain payment or reimbursement from third party payors and patients. With the
assistance of Manager, Dental Group shall obtain all provider numbers necessary
to obtain payment or reimbursement for its services.
5.5 Third Party Contracts. Dental Group shall be in compliance with all
---------------------
contracts, agreements and arrangements, including any contracts that exist on
the Effective Date, between Dental Group and third parties.
5.6 Use of Manager's Goods and Services. Dental Group shall not use any
-----------------------------------
goods or services provided by Manager pursuant to this Agreement for any purpose
other than the provision of and management of dental services as contemplated
by this Agreement and purposes incidental thereto.
5.7 Negative Covenants. During the Term, Dental Group shall not, without
------------------
the prior approval of the Joint Operations Committee, (a) assign, pledge,
mortgage or otherwise encumber any of its property, (b) transfer substantially
all of its assets, including its goodwill, (c) merge or consolidate with any
other entity, (d) allow the transfer or issuance of any of its stock (other than
in accordance with the terms and provisions of that certain Share Acquisition
Agreement dated as of October 11, 1996, between GMS Dental Group Management,
Inc., a Delaware corporation and Henry J. Lerian, as Trustee of the Henry J.
Lerian and Jeanette P. Lerian Irrevocable Marital Trust and the Henry J. Lerian
and Jeanette P. Lerian Revocable Survivor's Trust U/T/D 03/23/94), or (e) take
or allow any act that would materially impair the ability of Dental Group to
carry on the business of the Practice or to fulfill its obligations under this
Agreement.
-13-
<PAGE>
ARTICLE 6
TERM
----
6.1 Term. This Agreement shall be effective as of October 11, 1996 (the
----
"Effective Date"), and shall remain in effect for an initial term of forty (40)
years from the Effective Date, expiring on the fortieth (40th) anniversary of
the Effective Date, unless earlier terminated pursuant to the terms of this
Agreement. The word "Term" shall include such initial term and, where
applicable, any extension of such initial term (whether extended pursuant to
Section 6.2(a) or otherwise), subject to earlier termination pursuant to the
provisions of this Agreement.
6.2 Termination and Extension.
-------------------------
(a) Automatic Extension. At the end of the initial term and any
-------------------
subsequent term, this Agreement shall be automatically renewed for a five (5)
year term unless one of the parties provides the other party with written notice
of intent not to renew, not less than one hundred eighty (180) days prior to the
expiration of the then current term.
(b) Early Termination. This Agreement may be terminated according to the
-----------------
provisions of this Section.
(i) Material Breach. In the event either party materially breaches
---------------
this Agreement and such breach is not cured to the reasonable satisfaction
of the non-breaching party within thirty (30) days after the non-breaching
party serves written notice of the default upon the defaulting party (the
"Default Notice"), the Agreement shall automatically terminate at the
election of the non-breaching party upon the giving of a written notice of
termination to the defaulting party not later than forty-five (45) days
after service of the Default Notice; provided that if such uncured breach
is only capable of being cured within a reasonable period of time in excess
of thirty (30) days, the non-breaching party shall not be entitled to
terminate this Agreement so long as the defaulting party has commenced such
cure and thereafter diligently has pursued such cure to completion.
(ii) Refusal To Comply. In the event that Dental Group or Manager
-----------------
refuses or fails to comply with a decision of the Joint Operations
Committee, the aggrieved party shall have the option to require the non-
complying party to participate in good faith mediation under the auspices
of the American Mediation Association, and if such dispute between Dental
Group and Manager continues for sixty (60) days after the date the
aggrieved party exercises its option regarding mediation, the non-complying
party shall have thirty
-14-
<PAGE>
(30) days in which to comply with the decision of the Joint Operations
Committee. If the non-complying party has not complied by the end of such
thirty (30) day period, the aggrieved party shall have the option to
terminate this Agreement upon fifteen (15) days prior written notice.
During such mediation, Manager and Dental Group shall continue to operate
and manage the Practice in good faith.
(iii) Bankruptcy. A party may, upon three (3) days prior written
----------
notice, terminate this Agreement if the other party:
(A) Applies for or consents to the appointment of a receiver,
trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary
petition, makes a general assignment for the benefit of its creditors,
files a petition or answer seeking reorganization or arrangement with
its creditors, or admits in writing its inability to pay its debts
when due, or
(B) Suffers any order, judgment or decree to be entered by any
court of competent jurisdiction, adjudicating such party bankrupt or
approving a petition seeking its reorganization or the appointment of
a receiver, trustee or liquidator of such party or of all or a
substantial part of its assets, and such order, judgment or decree
continues unstayed and in effect for ninety (90) days after its entry.
(iv) Nonperformance. Manager may terminate this Agreement in the
--------------
event that in any two consecutive fiscal quarters the Manager has not been
paid the Management Fee and, in the sole discretion of the Manager, it is
not reasonably likely that the Management Fee will be paid in the next
fiscal quarter. Any such termination shall be effective as of the last day
of such third fiscal quarter provided at least sixty (60) days notice shall
have been given; otherwise, such termination shall be effective on the
sixtieth day after notice is given.
(v) Change in Law. In the event of any material change in federal or
-------------
state law that has a significant adverse impact on either party hereto in
connection with their performance under this Agreement, or if performance
by a party of any duties under this Agreement be deemed illegal by any
administrative agency or in a formal opinion rendered to Manager by legal
counsel knowledgeable in health law matters retained by the Manager, the
affected party shall have the right to require that the other party
renegotiate the terms of
-15-
<PAGE>
this Agreement. Unless the parties otherwise mutually agree in writing,
such renegotiated terms shall be effective not later than twenty (20) days
after receipt of written notice of such request for renegotiation. Solely
in the event of illegality, if the parties fail to reach an agreement
within thirty (30) days of the request for renegotiation, either party may
(subject to the severability provision of this Agreement) terminate this
Agreement upon thirty (30) days prior written notice to the other party.
(c) Effect of Termination. Upon termination of this Agreement:
---------------------
(i) Dental Group shall surrender to Manager all of Manager's property
used primarily in the operation of the Practice in the same condition as
received, reasonable wear and tear excepted.
(ii) Manager shall deliver to Dental Group all records related to the
business of and provision of dental care through the Practice including,
without limitation, patient records and any corporate, personnel and
financial records maintained for the Practice and Providers, provided, that
except as limited by law, including, but not limited to laws governing the
confidentiality of patient records, Manager shall have the option to copy
(or otherwise duplicate) at its sole cost and expense such records of
Dental Group and to retain and utilize such records for its own use;
(iii) Manager shall deliver to Dental Group any other property of
Dental Group in Manager's possession;
(iv) Both parties shall cooperate to ensure the provision of
appropriate dental care to Group Patients and Beneficiaries;
(v) Dental Group shall promptly deliver to Manager any Revenues that
it may receive in payment for dental services rendered by Dental Group
prior to termination; and
(vi) Both parties shall cooperate to ensure the appropriate billing
and collections for dental services rendered by Dental Group prior to the
effective date of termination, and any such cash collected shall be
retained by Dental Group and/or paid to Manager pursuant to Article 8.
-16-
<PAGE>
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF DENTAL GROUP
----------------------------------------------
Dental Group hereby represents and warrants to Manager as of the date
hereof as follows:
7.1 Organization. Dental Group is a professional corporation duly
------------
organized, validly existing and in good standing under the laws of the State of
California. Dental Group does not need to be qualified in any jurisdiction
other than where it is currently qualified except where the failure to be so
qualified will not have a material adverse effect on Dental Group. Dental Group
has all requisite power to own, lease and operate its properties and assets, and
to carry on its business as presently conducted. Complete and correct copies of
the Articles of Incorporation and Bylaws of Dental Group have been delivered to
the Manager. Such copies are true, correct, complete and properly executed and
contain all amendments through the date of this Agreement.
7.2 Capitalization. The authorized capital stock of Dental Group consists
--------------
of 1,000 shares of Common Stock, of which 100 shares are issued and outstanding
and owned of record and beneficially by Henry J. Lerian, DDS.
7.3 Subsidiaries; Conduct of Business. The sole activity of Dental Group
---------------------------------
is the operation of dental care centers and ancillary activities associated
therewith, and Dental Group is not now and has not engaged in any other
activities of any nature. Dental Group has no subsidiaries, nor any long-term
or short-term investments in, nor ownership of securities of, any business,
corporation, partnership, enterprise, entity or organization, public or private.
7.4 Authority. Dental Group has all requisite power and authority to
---------
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
all necessary action on the part of Dental Group. This Agreement has been duly
executed and delivered by Dental Group and constitutes a valid and binding
obligation of Dental Group, enforceable in accordance with its terms, subject to
the effect of applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar federal or state laws affecting the
rights of creditors and the effect or availability of rules of law governing
specific performance, injunctive relief or other equitable remedies (regardless
of whether any such remedy is considered in a proceeding at law or in equity).
No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instru-
-17-
<PAGE>
mentality (a "Governmental Entity"), is required by or with respect to Dental
Group in connection with the execution and delivery of this Agreement by Dental
Group or the consummation by Dental Group of the transactions contemplated
hereby.
7.5 No Conflict. The execution, delivery and performance of this
-----------
Agreement by Dental Group and the consummation of the transactions contemplated
hereby and the conduct of the business of Dental Group as currently conducted
will not result in any violation of, be in conflict with, or constitute a
default or give rise to a right of termination, cancellation or acceleration
under any provision of (a) any judgment, decree or order or any material
agreement, contract, understanding, indenture or other instrument to which
Dental Group is a party or by which it is bound; or (b) any statute, rule or
governmental regulation applicable to Dental Group.
7.6 Providers. A list of all agreements between Dental Group and
---------
dentists, nurses, hygienists, and other dental care providers (the "Providers")
are set forth on Schedule A hereto. The Providers have all necessary
credentials, licenses and permits required for the work performed for Dental
Group. All Providers carry malpractice insurance in amounts adequate for their
performance of services for Dental Group.
ARTICLE 8
MANAGEMENT FEE
--------------
For its services hereunder, which shall include the providing of all
facilities and furniture, fixtures and equipment at the Practice, all non-
dentist employees of Manager who perform services at or for the Practice and
all management services provided hereunder, Manager shall retain as a Management
Fee (the "Management Fee") the following:
8.1 Base Management Fee. As a base management fee (the "Base Management
-------------------
Fee") Manager shall retain that portion of Revenues equal to the sum of the
amount of Manager's Costs plus [*] percent ([*]%) of Revenues.
8.2 Performance Management Fee. As a bonus for meeting performance
--------------------------
standards goals as set by the Joint Operations Committee, Manager shall be
eligible for a Performance Management Bonus that is calculated in accordance
with the applicable exhibit to the Annual Budget.
8.3 Adjustments. If there are not sufficient funds to pay the Base
-----------
Management Fee, all unpaid amounts shall accumulate and carry over until paid or
until the termination of this Agreement, in which case such unpaid amounts shall
be immediately due and payable as of the date of termination.
__________
[*] Confidential Treatment Requested.
-18-
<PAGE>
8.4 Reasonable Value. Payment of the Base Management Fee and the
----------------
Performance Management Fee is acknowledged as the parties' negotiated agreement
as to the reasonable fair market value of the services furnished by Manager
pursuant to this Agreement, considering the nature and volume of the services
required and risks assumed by Manager.
ARTICLE 9
INDEMNITY AND INSURANCE
-----------------------
9.1 Indemnity.
---------
(a) Indemnification. Each party shall indemnify, defend and hold harmless
---------------
the other party from any and all liability, loss, claim, lawsuit, injury, cost,
damage or expense whatsoever (including reasonable attorneys' fees and court
costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Dental
Group agrees to indemnify, defend and hold harmless Manager for all liability,
loss, claim, lawsuit, injury, cost, damage or expense whatsoever (including
reasonable attorneys' fees and court costs) arising out of the professional
negligence of Dental Group, its employees, agents, contractors or
subcontractors, including any amounts in excess of the professional liability
insurance coverage of Dental Group or its employees, agents, contractors or
subcontractors.
(b) Mutual Indemnity. Each party to this Agreement shall be indemnified
----------------
by the other party for any claim under this Agreement or otherwise against the
indemnified party for vacation pay, sick leave, retirement benefits, Social
Security benefits, workers' compensation benefits, disability or unemployment,
insurance benefits, or other employee benefits of any kind accrued during the
term of this Agreement by an employee of the indemnifying party.
9.2 Manager's Insurance. Manager shall, on its own behalf and at its sole
-------------------
cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
(a) Comprehensive general liability insurance covering the risks of
Manager, in an amount determined by the Joint Operations Committee;
-19-
<PAGE>
(b) Workers' compensation insurance covering the employees of Manager, in
such amounts as is usual and customary under the circumstances;
(c) Property insurance covering the facilities, equipment and supplies
owned or leased by Manager or Dental Group for use in the operation of the
Practice.
9.3 Dental Group's Insurance. At Dental Group's sole cost and expense,
------------------------
Manager shall obtain, and maintain on behalf of Dental Group in full force and
effect during the Term, policies in the following categories in the amount
indicated:
(a) Comprehensive professional liability insurance coverage for Dental
Group and Dental Group's Employee Providers, in such amounts as Manager shall
reasonably deem necessary;
(b) Workers' compensation insurance covering the employees of Dental
Group, in such amounts as is usual and customary under the circumstances;
(c) Comprehensive general liability insurance covering the risks of Dental
Group, in an amount determined by the Joint Operations Committee.
ARTICLE 10
BOOKS AND RECORDS
-----------------
10.1 Ownership of Records. All business records and information relating
--------------------
exclusively to the business and activities of either party shall be the property
of that party, irrespective of identity of the party responsible for producing
or maintaining such records and information. Without limiting the foregoing,
all patient charts and records maintained by Manager relating to the dental
services of Dental Group shall be the property of Dental Group. Dental Group
also shall be entitled to a copy at Dental Group's sole cost of all business
records pertaining to Dental Group. Except as limited by law, including, but
not limited to laws governing the confidentiality of patient records, Manager
shall be entitled to a copy at Manager's sole cost of all records of Dental
Group.
ARTICLE 11
MISCELLANEOUS PROVISIONS
------------------------
11.1 Assignment. Except for an assignment by Manager to GMS Dental Group
----------
Management, Inc., or an affiliate of GMS Dental Group Management, Inc., neither
party shall assign this Agreement to any other party or parties without the
prior written consent of the other party, which consent may be withheld
arbitrarily or
-20-
<PAGE>
capriciously, for any reason or for no reason whatsoever and any attempted
assignment in violation of this Agreement shall be null and void.
11.2 Headings. The article and section headings used in this Agreement
--------
are for purposes of convenience only. They shall not be construed to limit or
to extend the meaning of any part of this Agreement.
11.3 Waiver. Waiver by either Dental Group or Manager of any breach of
------
any provision of this Agreement shall not be deemed to be a waiver of such
provision or of any subsequent breach of the same or of any other provision of
this Agreement.
11.4 Notices. Any notice, demand, approval, consent, or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail,
and if mailed, shall be deemed to have been given when five (5) business days
have elapsed from the date of deposit in the United States mails, certified and
postage prepaid, addressed to the party to be served at the following address or
such other address as may be given in writing to the parties.
Dental Group: Lerian Dental Corporation
555 West Benjamin Holt, No. 100
Stockton, CA 95204
Attn: Henry J. Lerian, D.D.S.
Manager: Henry J. Lerian, Trustee
555 West Benjamin Holt, No. 100
Stockton, CA 95204
11.5 Attorneys' Fees. If any legal action or arbitration or other
---------------
proceeding is commenced, whether by Manager or Dental Group concerning this
Agreement, the prevailing party shall recover from the losing party reasonable
attorneys' fees and costs and expenses, including those of appeal and not
limited to taxable costs, incurred by the prevailing party, in addition to all
other remedies to which the prevailing party may be entitled. If a claim or
claims asserted by a third party against Manager or Dental Group or any of them
arise from an action or omission by the other, the party responsible for the
action or omission shall be the losing party, and the other party shall be the
prevailing party, for purposes of the foregoing sentence.
11.6 Successors. Without limiting or otherwise affecting any restrictions
----------
on assignments of this Agreement or rights or duties under this Agreement, this
Agreement shall be binding upon and inure to the benefit of the successors and
assigns of Dental Group and Manager.
11.7 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between Dental Group and Manager and supersedes all
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<PAGE>
prior negotiations and agreements, written or oral, concerning or relating to
the subject matter of this Agreement, and this Agreement may not be modified
except by a writing executed by all parties and subject to the provisions
thereof.
11.8 Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereto shall be governed by, and construed according to, the laws of the
State of California.
11.9 Severability. If any provision of this Agreement is held to be
------------
invalid or unenforceable by any court or administrative agency of competent
jurisdiction, or in a written opinion to the Manager by legal counsel
knowledgeable in health law matters retained by the Manager, such holding or
opinion shall not affect the validity and enforceability of the other provisions
of this Agreement and the remainder of this Agreement shall be considered valid
and operative to the fullest extent permitted by law, but only if and to the
extent such enforcement would not materially and adversely frustrate the parties
essential objectives as expressed herein.
11.10 Time is of the Essence. Time is of the essence in this Agreement.
----------------------
11.11 Authority. Any Person signing this Agreement on behalf of any
---------
entity hereby represents and warrants in its individual capacity that it has
full authority to do so on behalf of such entity.
11.12 Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute on and the same instrument.
IN WITNESS WHEREOF, Dental Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
DENTAL GROUP:
------------
LERIAN DENTAL CORPORATION, a California
professional corporation
By /s/ Henry J. Lerian, DDS
--------------------------------------------
Its President
-------------------------------------------
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<PAGE>
MANAGER:
-------
HENRY J. LERIAN AND JEANETTE P. LERIAN
IRREVOCABLE MARITAL TRUST
U/D/T 03/23/94
By /s/ Henry J. Lerian/Trustee
--------------------------------------------
Henry J. Lerian, Trustee
HENRY J. LERIAN AND JEANETTE P. LERIAN
REVOCABLE SURVIVOR'S TRUST
U/D/T 03/23/94
By /s/ Henry J. Lerian/Trustee
--------------------------------------------
Henry J. Lerian, Trustee
/s/ Henry J. Lerian
--------------------------------------------
Henry J. Lerian
-23-
<PAGE>
ADDENDUM 1
----------
For purposes of this Agreement, the following terms shall have the meaning
indicated below or defined at the indicated section:
1. Accounts. See Section 2.5(a).
--------
2. Affiliate. "Affiliate" shall mean, with respect to any Person, (a) any
---------
individual or entity directly or indirectly owned or controlled by such Person,
(b) any individual or entity directly or indirectly owning or controlling such
Person or (c) any individual or entity directly or indirectly owned or
controlled by the same family member, individual or entity as owns or controls
such Person. For purposes of this Agreement, neither Dental Group nor Manager
shall be deemed an Affiliate of the other.
3. Agreement. "Agreement" means this Dental Group Management Agreement.
---------
4. Annual Budget. See Section 3.6, first sentence.
-------------
5. Beneficiaries. See Recital A.
-------------
6. Books and Records. "Books and Records" means Dental Group's books of
-----------------
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
7. Capital Costs. "Capital Costs" shall mean any and all investments that
-------------
are or would be capitalized pursuant to GAAP.
8. Committee Members. See Section 3.5(a).
-----------------
9. Default Notice. See Section 6.2(b)(1).
--------------
10. Dental Group. See first paragraph of this Agreement.
------------
11. Dental Group Members. See Section 3.5(a).
--------------------
12. Dental Expenses. See Section 2.6(b).
---------------
13. Effective Date. See Section 6.1.
--------------
14. Employee Providers. See Recital B.
------------------
15. Employment Agreements. See Recital B.
---------------------
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<PAGE>
16. GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with 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 Manager's financial
statements.
17. Group Patients. See Recital A.
--------------
18. Joint Operations Committee. See Section 3.4(b).
--------------------------
19. Management Fee. See Article 8.
--------------
20. Manager. See first paragraph of this Agreement.
-------
21. Manager Members. See Section 3.5(a).
---------------
22. Manager's Costs. "Manager's Costs" means all costs incurred by
---------------
Manager including amortization associated with costs acquiring assets of the
Dental Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which are
attributable to Manager's business operations in accordance with Manager's
corporate allocation policies.
23. Marks. See Section 2.3(a).
-----
24. Payor Contracts. See Recital A.
---------------
25. Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
26. Plans. See Recital A.
-----
27. Practice. See Recital A.
--------
28. Preliminary Budget. See Section 3.7(b).
------------------
29. Programs. See Section 2.3(b).
--------
30. Providers. "Providers" shall mean individuals or organizations
---------
licensed to practice dentistry (including specialists) as well as other dental
professionals who provide ancillary reimbursable dental services.
31. Provider Subcontracts. See Recital A.
---------------------
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<PAGE>
32. Revenues. "Revenues" means all amounts assigned hereunder by Dental
--------
Group to Manager pursuant to Section 2.6(a).
33. Subcontract Providers. See Recital B.
---------------------
34. Term. See Section 6.1.
----
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<PAGE>
EXHIBIT 10.37[*]
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
THIS DENTAL GROUP MANAGEMENT AGREEMENT (this "Agreement") is dated as of
June 30, 1997 and is effective as of the date set forth in Section 6.1
("Effective Date") by and between WARREN M. FRANCIS, JR. D.D.S., INC, a
----------------------------------
California professional corporation ("Manager") and FRANCIS DENTAL CORPORATION,
--------------------------
a California professional dental corporation ("Dental Group").
RECITALS:
A. Prior to the execution of this Agreement and pursuant to the terms of
that certain Assignment Agreement, dated June 19, 1997, by and between Manager
and Dental Group, all of Manager's right, title and interest in the "Dental
Practice Assets" relating to its Santa Rosa California dental center ("Doctors
Park Facility(ies)") were assigned to the Dental Group, which Dental Practice
Assets consist of all contracts and agreements with dentist employees and
independent contractors and other licensed health professional employees and
independent contractors, all independent practitioner association and managed
care plan contracts, all patient records, and any and all other assets required
by statute, rule or regulation to be owned or held by an entity licensed to
practice dentistry, together with all goodwill associated with the foregoing.
Dental Group operates a dental practice at the Doctors Park Facility(ies) and
may operate a dental practice at one or more additional sites in the future.
B. Dental Group engages in the practice of dentistry by providing dental
services to patients of Dental Group ("Group Patients") and to enrollees
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
between Dental Group and Plans or between Beneficiaries and Plans.
C. Dental Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
arrangements may include contracts ("Employment Agreements") with dentist
employees and allied health professional employees (collectively "Employee
Providers") and agreements ("Provider Subcontracts") with independent contractor
dentists and non-dentist providers of various dental care services (collectively
"Subcontract Providers").
D. All activities of Dental Group subject to this Agreement are
referenced as the "Practice." All references to "dental" care and services
include general and specialist dental services. All references to "dentists"
include generalists and specialists.
E. Manager desires to provide certain support services for the Practice.
__________
[*] Confidential Treatment Requested.
-1-
<PAGE>
F. Dental Group desires to retain Manager on an independent contractor
basis to provide management services that are more particularly described below,
and Manager desires to provide such management services under the terms and
conditions set forth in this Agreement.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the covenants and conditions contained
herein, Manager and Dental Group agree as follows:
ARTICLE 1
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
ARTICLE 2
SCOPE OF AGREEMENT
------------------
2.1 General Scope of Agreement. This Agreement shall apply to the
--------------------------
Practice, including, without limitation, all professional, administrative and
technical services, marketing, contracting, case management, ancillary dental
services, outpatient services and dental care facilities, equipment, supplies
and items, except as otherwise specifically provided in this Agreement. Dental
Group's Employment Agreements shall encompass substantially all such activities
of Employee Providers and shall provide that all revenues derived from such
activities (and not excluded below) are Revenues. Nothing in this Agreement
shall be construed to alter or in any way affect the legal, ethical and
professional relationship between and among Providers and Providers' patients,
nor shall anything contained in this Agreement abrogate any right or obligation
arising out of or applicable to the dentist-patient relationship.
2.2 License. Dental Group grants Manager an exclusive license to use any
-------
and all of Dental Group's assets, whether tangible or intangible, in carrying
out Manager's duties and responsibilities under the provisions of this
Agreement.
2.3 Intellectual Property. Dental Group hereby grants to Manager a non-
---------------------
exclusive, perpetual, royalty-free, worldwide license to use and sublicense the
use of any intellectual property owned by Dental Group. This license shall
cover, but not be limited to, use of the following:
-2-
<PAGE>
(a) Service Mark. Dental Group hereby grants Manager the right to use all
------------
service marks and trademarks of Dental Group (the "Marks") for marketing and
promotional materials in connection with Dental Group's offering of dental
services. Manager agrees to use the Marks solely in the design format used by
Dental Group as of the date of this Agreement or another design format approved
in advance in writing by Dental Group. Dental Group shall have the opportunity
to review any marketing or other materials using the Marks in advance of any
public dis tribution. Manager agrees that it will include these restrictions
on use in any sublicense of the Marks.
(b) Copyrighted Materials. Dental Group hereby grants Manager the right
---------------------
to use any and all copyrighted materials authored or owned by Dental Group
including, specifically, the Dental Group dental management system software
programs (the "Programs"). This license includes the right to sublicense the
Programs and the right to prepare and own derivative works based on the
Programs, all without a duty of accounting to Dental Group. Dental Group shall
execute all documents required to enable Manager to own, use and exploit all
such rights.
2.4 Revenues. "Revenues" shall mean all of Dental Group's accounts
--------
receivable (net of contractual adjustments and bad debt), and cash collections
which exist at the Effective Date or which are acquired after the Effective Date
and during the Term. Revenues shall include all funds collected by, or legally
due to, Dental Group or any Affiliate of Dental Group, including, without
limitation, the following: (a) all fee-for-service payments for services to
Group Patients or Beneficiaries; (b) all payments established under Payor
Contracts; (c) all coordination of benefits or deductibles and third-party
liability recoveries related to the Group's services; (d) all pay ments, dues,
fees or other compensation to Dental Group, (e) any income, profits, dividends,
distributions or other payments from Dental Group's investments; and (f) any
interest or other non-operating income of Dental Group.
2.5 Deposit Accounts. All cash received by Dental Group from whatever
----------------
source shall be deposited into an account or accounts ("Accounts") in the name
of Dental Group at a banking institution selected by Dental Group and approved
by Manager. Dental Group authorizes Manager to bill and collect, in Dental
Group's name, all charges and reimbursements for Dental Group's dental related
activities and to deposit such collections in the Accounts. Dental Group agrees
to assist and cooperate with Manager in the billing and collection process and
to immediately deliver to Manager for deposit any monies Dental Group may
receive.
2.6 Assignment.
----------
(a) Assets. Except as prohibited by contract or by law, Dental Group
------
hereby assigns, sells, conveys, transfers, and
-3-
<PAGE>
delivers to Manager, and Manager hereby accepts from Dental Group, all of the
assets and properties of Dental Group of every kind, character and description,
whether tangible, intangible, real, personal, or mixed, and wherever located,
including, but not limited to, all Revenues, cash, accounts receivable,
advances, prepaid expenses, deposits, equipment and improvements which exist on
the Effective Date or which are acquired after the Effective Date and during the
Term. Dental Group hereby grants to Manager a security interest in all such
assets to secure the performance of its obligation to assign such assets to
Manager and to secure the performance of its other obligations under this
Agreement. The assets shall be valued at their fair market value which has been
determined to be their respective book values. Manager shall have the
authority, and Dental Group shall execute any and all documents as may be
necessary or appropriate to transfer the assets to Manager, authorize Manager to
transfer the funds in the Accounts to a separate account in the name of Manager,
and effectuate the intention of this provision. Dental Group shall execute and
deliver any and all financing statements and other documents as may be necessary
or appropriate to effectuate and perfect the grant of the security interest in
such assets made by Dental Group to Manager under this provision.
(b) Liabilities. Manager shall be responsible for paying all claims and
-----------
obligations associated with the operation of Dental Group pursuant to this
Agreement; provided, Manager shall be deemed to fully discharge its
responsibility to Dental Group for the liabilities described in this
subparagraph by its timely payment on Dental Group's behalf of, or delivery to
Dental Group of an amount sufficient to discharge, all of Dental Group's
obligations and liabilities now existing or arising in the future, including
those under Provider Subcontracts, Employment Agreements, Dental Group's
professional liability insurance and any other operational expenses for which
Dental Group retains responsibility or that are delegated to Dental Group,
whether pursuant to this Agreement or any other agreement of the parties or
action of the Joint Operations Committee ("Dental Expenses"). Notwithstanding
the foregoing, Manager does not assume any liabilities of Dental Group which are
unrelated to the dental business or any liabilities for income taxes.
ARTICLE 3
GOVERNANCE AND CONTROL
----------------------
3.1 Appointment. Dental Group hereby appoints Manager as its sole and
-----------
exclusive manager for the operation of the Practice and covenants not to enter
into an agreement with any Person other than Manager to perform or assume any of
Manager's rights, duties or responsibilities as provided herein. Manager hereby
accepts full responsibility for such management as more fully set forth herein.
-4-
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3.2 Professional Matters. Pursuant to applicable laws and requirements
--------------------
governing the practice of dentistry, Dental Group shall retain ultimate
responsibility for all activities of Dental Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's non-
licensed status. The parties understand and agree that during the term of this
Agreement, Dental Group shall be the provider of dental services for all
purposes, including, but not limited to, licensure and reimbursement.
3.3 Relationship of Parties. In the performance of its duties and
-----------------------
obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Dental Group. Except as provided in this Agreement or as
required by law, Dental Group shall neither have nor exercise any control or
direction over the methods by which Manager shall perform its obligation
thereunder; nor shall Manager have or exercise any control or direction over the
methods by which Dental Group shall practice dentistry. It is expressly agreed
by the parties that no work, act, commission or omission of Manager pursuant to
the terms and conditions of this Agreement shall be construed to make or render
Manager or Manager's employees or agents, the employees of Dental Group.
Manager and Dental Group are not partners or joint venturers with each other and
nothing herein shall be construed so as to make them partners or joint venturers
or impose upon either of them any liability as partners or joint venturers.
Dental Group's responsibility is to assure that the services covered by this
Agreement shall be performed and rendered in a competent, efficient and
satisfactory manner.
3.4 Authority and Control. Strategic planning, overall direction and
---------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group shall be accomplished as follows:
(a) Exclusive Authority.
-------------------
(i) Dental Group. Dental Group shall have the sole responsibility and
------------
authority for all aspects of the practice of dentistry and delivery of dental
services by Providers. Dental Group shall consult with Manager or the Joint
Operations Committee to the extent reasonable and not inconsistent with the
licensure of dentists.
(ii) Manager. After reasonable consultation with Dental Group or the
-------
Joint Operations Committee, Manager shall have the sole responsibility and
authority for decisions related to the administration of the Practice.
(b) Joint Authority. All other decision-making authority related to the
---------------
business and affairs of Dental Group shall be vested in a joint operations
committee (the "Joint Operations
-5-
<PAGE>
Committee"). Nothing herein shall be construed as preventing the Joint
Operations Committee from appointing representatives and delegating authority to
such representatives so long as the Joint Operations Committee may revoke such
appointment and delegation at any time and so long as the Joint Operations
Committee retains ultimate responsibility for the decisions of such
representatives.
3.5 Joint Operations Committee. Strategic planning, overall direction and
--------------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group, excluding the delivery of professional dental
services, shall be overseen by the Joint Operations Committee as follows:
(a) Joint Operations Committee Membership. The Joint Operations Committee
-------------------------------------
shall consist initially of three (3) individuals (the "Committee Members").
Dental Group shall designate one (1) Committee Member (the "Dental Group
Member") and the remaining two (2) Committee Members (the "Manager Members")
shall be appointed by Manager. The number of Committee Members may be increased
by agreement of the parties. Each party shall continue to direct the
appointment of the same percentage of Committee Members as described above.
Each Committee Member shall serve at the pleasure of the party designating such
Committee Member and may be replaced, with or without cause, at any time by such
party upon the delivery of written notice thereof to the other Committee
Members. Manager, Dental Group and their respective Committee Members shall
diligently pursue any preliminary activities that are necessary to allow the
Joint Operations Committee to take an action. Where Committee Members are
required to consult with the organization appointing such Committee Members, the
Committee shall establish and agree on a deadline for accomplishing such
consultation.
(b) Joint Operations Committee Action.
---------------------------------
(i) Joint Action. Except as otherwise expressly set forth above, the
------------
Joint Operations Committee shall take all other actions that have been approved
by a majority of the Committee Members.
(ii) Consultation Forum. Consultation between Dental Group and Manager,
------------------
if any, shall take place at a meeting of the Joint Operations Committee, and
Dental Group and Manager hereby agree to be bound by the decision of their
Dental Group Members or Manager Members, as the case may be.
(c) Joint Operations Committee Meetings. Meetings of the Joint Operations
-----------------------------------
Committee may be held by telephone or similar communications equipment so long
as all Committee Members participating in a meeting can hear and speak to each
other. The Joint Operations Committee shall prepare and maintain
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<PAGE>
written minutes of all meetings and shall provide a copy of the minutes to the
parties within fifteen (15) business days following each meeting.
(i) Regular Meetings. The Joint Operations Committee shall hold
----------------
not less than four (4) regular meetings each year, at such specific times
and places as the Committee Members may determine.
(ii) Special Meetings. A special meeting of the Joint Operations
----------------
Committee may be called by a majority of the Committee Members.
(iii) Notice Requirement. A Committee Member calling a special
------------------
meeting must provide all other Committee Members with ten (10) days'
advance written or telephonic notice. Notice must be given or sent to the
Committee Member's address or telephone number as shown on the records of
the Joint Operations Committee. Notice may be delivered directly to each
Committee Member or to a person at the Committee Member's principal place
of business who would reasonably be expected to communicate that notice
promptly to the Committee Member.
(iv) Waiver of Notice Requirement.
----------------------------
(A) Written Waiver, Consent or Approval. Notice of a special
-----------------------------------
meeting need not be given to any Committee Member who, either before
or after the meeting, signs a waiver of notice or a written consent to
the holding of the special meeting, or an approval of the minutes of
the special meeting. Such waiver, consent or approval need not
specify the purpose of the special meeting. All such waivers,
consents, and approvals shall be filed with the Joint Operations
Committee records or made a part of the minutes of the special
meetings.
(B) Failure to Object. Notice of a special meeting need not be
-----------------
given to any Committee Member who attends the special meeting and does
not protest before or at the commencement of the special meeting such
lack of notice.
(v) Quorum. The smallest number of Committee Members that exceed
------
fifty percent (50%) of all Committee Members shall constitute a quorum of
the Joint Operations Committee.
(vi) Proxies. The Joint Operations Committee shall provide for the
-------
use of proxies, telephonic conference calls, written consents or other
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<PAGE>
appropriate methods by which the full participation of the Dental Group
Members and Manager Members can be assured.
(d) Limitation of Responsibility. Notwithstanding any other provisions
----------------------------
hereof, Committee Members shall be liable to the parties only for actions
constituting bad faith, gross negligence or breach of an express provision of
this Agreement (so long as such breach remains uncured after ten (10) days of
receiving notice of the nature of such breach). In all other respects,
Committee Members shall not be liable for negligence or mistakes of judgment.
3.6 Budgets. A capital and operating budget ("Annual Budget") shall be
-------
established regarding all financial aspects of the Practice. The Annual Budget
shall include the following elements and other items, as appropriate:
(a) A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
(b) An operating budget setting forth an estimate of Revenues and expenses
for the next succeeding fiscal year, together with an explanation of anticipated
changes or modifications, if any, in the Practice's utilization, rates, charges
to patients or third party payors, salaries, costs of Providers, non-wage cost
increases, and all other similar factors expected to differ significantly from
those prevailing during the current fiscal year;
(c) Other expenses of operation;
(d) The amount of a reasonable reserve to satisfy possible shortfalls from
operations. The allocation of such reserve shall be made by the Joint
Operations Committee as and when necessary; and
(e) The Management Fee, as defined below, for the next succeeding fiscal
year.
3.7 Budget Process.
--------------
(a) Initial Annual Budget. Not later than forty-five (45) days after the
---------------------
Effective Date, the Joint Operations Committee will have prepared the initial
Annual Budget for the first fiscal year (which shall initially be the calendar
year) during the term of this Agreement. If the Effective Date is other than
the first day of a fiscal year, then such initial Annual Budget shall encompass
only such portion of the then current fiscal year as remains, or, at the option
of the parties, such portion of the then current fiscal year plus the
immediately subsequent fiscal year.
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<PAGE>
(b) Preliminary Budget. Not later than forty-five (45) days prior to the
------------------
end of each fiscal year during the term of this Agreement, the Manager shall
prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
(c) Joint Operations Committee Approval. The Joint Operations Committee
-----------------------------------
shall review and suggest modifications to the Preliminary Budget within ten (10)
days of receipt. Manager shall prepare a revised budget based upon the Joint
Operations Committee's recommendations and the Preliminary Budget as revised
shall become the Annual Budget.
(d) Adjustments. In the event of a material deviation between financial
-----------
forecasts and financial performance during a fiscal year, Manager or Dental
Group may propose adjustments to the Annual Budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
3.8 Personnel.
---------
(a) Providers. Except in unusual circumstances approved by the Joint
---------
Operations Committee and as permitted by law, Manager shall not employ or
contract with any Providers for the provision of dental services. All Providers
who provide dental services to Group Patients or to Beneficiaries shall be
either (i) Employee Providers, (ii) Subcontract Providers or (iii) employees of
Subcontract Providers.
(b) Non-Providers. With the exception of employees of Subcontract
-------------
Providers, Manager shall employ all non-Provider personnel necessary for the
operation of the Practice.
(c) Salary and Benefits. Each party to this Agreement shall remain liable
-------------------
for the salary and benefits paid to such party's own employees and shall be
ultimately responsible for compliance with state and federal laws pertaining to
employment taxes, workers' compensation, unemployment compensation and other
employment-related statutes pertaining to the party's own employees.
(d) Payments to Subcontract Providers. Dental Group shall be liable for
---------------------------------
any payments due Subcontract Providers under Provider Subcontracts after receipt
of funds from Manager.
ARTICLE 4
MANAGEMENT SERVICES
-------------------
4.1 General Description of Services. Within the limitations set out
-------------------------------
elsewhere in this Agreement, Manager shall provide or arrange for the provision
to Dental Group of all support services reasonably necessary and appropriate for
the efficient
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<PAGE>
operation of the Practice. Such services include all administrative services
necessary to Dental Group's performance of its obligations under Payor
Contracts, contracting, marketing, capital formation and assistance with long
term strategic planning.
4.2 Facilities. When appropriate, Manager shall secure and maintain
----------
facilities, including, without limitation, office space, improvements,
furnishings, equipment, supplies and personal property, of a nature and in a
condition necessary and appropriate for the efficient and effective operations
of the Practice subject to the general approval of the Joint Operations
Committee. Manager shall secure and maintain said facilities in the name of
Dental Group.
4.3 Purchased Items and Services. Manager shall serve as the purchasing
----------------------------
agent for Dental Group and shall arrange for personnel benefits, insurance, and
any other items and services required for the proper operation of the Practice.
4.4 Manager Personnel.
-----------------
(a) Management Team. Subject to any approval or consulting rights of the
---------------
Joint Operations Committee, Manager shall engage or designate one or more
individuals experienced in dental group management and direction, including, but
not limited to, an administrator, who will be responsible for the overall
administration of the Practice including day-to-day operations and strategic
development activities.
(b) Other Manager Personnel. Manager shall select, hire, train,
-----------------------
supervise, monitor and terminate all non-Provider personnel necessary for the
operation and management of the Practice.
4.5 Day-to-Day Management and Supervision. Subject to any approval or
-------------------------------------
consulting rights of the Joint Operations Committee, Manager shall provide
general management including, but not limited to, day-to-day supervision of:
(a) Manager personnel;
(b) Equipment and supply acquisition;
(c) Office space and facility maintenance;
(d) Patient records organization and retention;
(e) Third party payor contracting;
(f) Case management tracking;
(g) Billing, collections and accounting activities as set forth below;
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<PAGE>
(h) All operating aspects and policies of the Practice including, but not
limited to, hours of operation, work schedules, standard duties and job
descriptions, for all nondentist personnel; and
(i) Other related and incidental matters.
4.6 Billing and Collection Payment of Expenses. Manager shall be
------------------------------------------
responsible for all billing and collecting activities required by Dental Group.
Manager shall also be responsible for reviewing and paying accounts payable of
Dental Group. Dental Group hereby appoints the Manager its true and lawful
attorney-in-fact to take the following actions for and on behalf of and in the
name of Dental Group:
(a) Bill and collect in Dental Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Dental Group. Dental
Group shall give Manager all necessary access to Patient records to accomplish
all billing and collection. In so doing, Manager will use its best efforts but
does not guarantee any specific level of collections, and Manager will comply
with Dental Group's reasonable and lawful policies regarding courtesy discounts;
(b) Take possession of and endorse in the name of Dental Group any and all
instruments received as payment of accounts receivable;
(c) Deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
(d) Place accounts for collection, settle and compromise claims, and
institute legal action for the recovery of accounts.
4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
(a) Financial Reporting. Manager shall prepare, analyze, and deliver to
-------------------
the Joint Operations Committee financial reports to the extent necessary or
appropriate for the operation of the Practice, including the following:
(i) Financial statements, including balance sheets and statements
of cash flow and income;
(ii) Accounts payable and accounts receivable analysis;
(iii) Billing status including any Medicaid remittances; and
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<PAGE>
(iv) Reconciliation of assets, liabilities and major expenses.
(b) Audits. Dental Group shall have the right to review and, at its sole
------
cost and expense, obtain an audit (separate from any annual audit or review of
Dental Group's financial statements performed at the direction of the Manager)
of Dental Group's financial books and records maintained by the Manager. Upon
five (5) days' prior written notice, Manager shall allow Dental Group access
during reasonable business hours to all information and documents reasonably
required for such review or audit. Upon Dental Group's request and at Dental
Group's expense, Manager shall also provide copies of such documents.
4.8 Marketing and Public Relations Services. Manager shall provide such
---------------------------------------
marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Dental Group.
Manager shall provide Dental Group with marketing materials and activities.
4.9 Dental Group Agreements. On behalf of Dental Group, Manager shall
-----------------------
review, evaluate and negotiate Payor Contracts and Provider Subcontracts and any
other contracts or agreements regarding the provision of dental related items or
services by Dental Group or Providers.
4.10 Utilization Review Quality Improvement and Outcomes Monitoring.
--------------------------------------------------------------
Manager shall be responsible for providing administrative support for Dental
Group's utilization review, quality improvement and outcomes monitoring
activities, including, without limitation, data collection, analysis and
reporting for Group Patients and Beneficiaries. Manager shall also support the
development and implementation of relevant policies, procedures, protocols,
practice guidelines and other interventions based on such activities.
4.11 Applicable Law. Manager and Dental Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE 5
DENTAL GROUP SERVICES
---------------------
5.1 Provision of Dental Services by Dental Group. Dental Group shall
--------------------------------------------
operate the Practice during the Term as a dental practice in accordance with
terms of this Agreement and the Annual Budget.
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<PAGE>
5.2 Providers.
---------
(a) Professional Dental Services. Dental Group shall employ or contract
----------------------------
with the number of Providers Dental Group deems necessary for the efficient and
effective operation of the Practice and in accordance with quality assurance,
credentialing and utilization management protocols approved by Manager. Dental
Group shall provide full and prompt dental coverage for the Practice, including
emergency service twenty-four (24) hours per day, seven (7) days per week,
including holidays according to policies and schedules approved by the Joint
Operations Committee.
(b) Provider Subcontracts and Employment Agreements. Dental Group shall
-----------------------------------------------
not negotiate or execute any Provider Subcontract, Employment Agreement, or any
amendment thereto, without the approval of the Joint Operations Committee. The
Joint Operations Committee shall have the right of review and reasonable
approval of any Provider Subcontract and Employment Agreement. Dental Group
shall be responsible for the payment, in accordance with the Annual Budget, of
all Employee and Subcontract Providers.
5.3 Peer Review. Dental Group, after consultation with the Joint
-----------
Operations Committee, shall implement, regularly review, modify as necessary or
appropriate and obtain the commitment of Providers to actively participate in
peer review procedures for Providers. Dental Group shall assist Manager in the
production of periodic reports describing the results of such procedures.
Dental Group shall provide Manager with prompt notice of any information that
raises a reasonable risk to the health and safety of Group Patients or
Beneficiaries. In any event, after consultation with the Joint Operations
Committee, Dental Group shall take such action as may be reasonably warranted
under the facts and circumstances.
5.4 Billing Information and Assignments. Dental Group shall promptly
-----------------------------------
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Dental Group's
services. Dental Group shall use reasonable efforts to procure consents to
assignments and other approvals and documents necessary to enable Manager to
obtain payment or reimbursement from third party payors and patients. With the
assistance of Manager, Dental Group shall obtain all provider numbers necessary
to obtain payment or reimbursement for its services.
5.5 Third Party Contracts. Dental Group shall be in compliance with all
---------------------
contracts, agreements and arrangements, including any contracts that exist on
the Effective Date, between Dental Group and third parties.
5.6 Use of Manager's Goods and Services. Dental Group shall not use any
-----------------------------------
goods or services provided by Manager pursuant
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<PAGE>
to this Agreement for any purpose other than the provision of and management of
dental services as contemplated by this Agreement and purposes incidental
thereto.
5.7 Negative Covenants. During the Term, Dental Group shall not, without
------------------
the prior approval of the Joint Operations Committee, (a) assign, pledge,
mortgage or otherwise encumber any of its property, (b) transfer substantially
all of its assets, including its goodwill, (c) merge or consolidate with any
other entity, (d) allow the transfer or issuance of any of its stock (other than
in accordance with the terms and provisions of that certain Share Acquisition
Agreement dated June 19, 1997, between GMS Dental Group Management, Inc., a
Delaware corporation and Warren M. Francis, Jr., D.D.S.), or (e) take or allow
any act that would materially impair the ability of Dental Group to carry on the
business of the Practice or to fulfill its obligations under this Agreement.
ARTICLE 6
TERM
----
6.1 Term. This Agreement shall be effective as of June 19, 1997 (the
----
"Effective Date"), and shall remain in effect for an initial term of forty (40)
years from the Effective Date, expiring on the fortieth (40th) anniversary of
the Effective Date, unless earlier terminated pursuant to the terms of this
Agreement. The word "Term" shall include such initial term and, where
applicable, any extension of such initial term (whether extended pursuant to
Section 6.2(a) or otherwise), subject to earlier termination pursuant to the
provisions of this Agreement.
6.2 Termination and Extension.
-------------------------
(a) Automatic Extension. At the end of the initial term and any
-------------------
subsequent term, this Agreement shall automatically renewed for a five (5) year
term unless one of the parties provides the other party with written notice of
intent not to renew, not less than one hundred eighty (180) day prior to the
expiration of the then current term.
(b) Early Termination. This Agreement may be terminated according to the
-----------------
provisions of this Section.
(i) Material Breach. In the event either party materially breaches
---------------
this Agreement and such breach is not cured to the reasonable satisfaction
of the non-breaching party within thirty (30) days after the non-breaching
party serves written notice of the default upon the defaulting party (the
"Default Notice"), the Agreement shall automatically terminate at the
election of the non-breaching party upon the giving of a
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<PAGE>
written notice of termination to the defaulting party not later than forty-
five (45) days after service of the Default Notice; provided that if such
uncured breach is only capable of being cured within a reasonable period
of time in excess of thirty (30) days, the non-breaching party shall not be
entitled to terminate this Agreement so long as the defaulting party has
commenced such cure and thereafter diligently pursue such cure to
completion.
(ii) Refusal To Comply. In the event that Dental Group or Manager
-----------------
refuses or fails to comply with a decision of the Joint Operations
Committee, the aggrieved party shall have the option to require the non-
complying party to participate in good faith mediation under the auspices
of the American Mediation Association, and if such dispute between Dental
Group and Manager continues for sixty (60) days after the date the
aggrieved party exercises its option regarding mediation, the non-
complying party shall have thirty (30) days in which to comply with the
decision of the Joint Operations Committee. If the non-complying party has
not complied by the end of such thirty (30) day period, the aggrieved party
shall have the option to terminate this Agreement upon fifteen (15) days
prior written notice. During such mediation, Manager and Dental Group
shall continue to operate and manage the Practice in good faith. Neither
Dental Group nor Manager shall be required to participate in such good
faith mediation if it reasonably concludes that the delay associated with
pursuing such mediation likely would cause harm or injury to it or the
Practice.
(iii) Bankruptcy. A party may, upon three (3) days' prior written
----------
notice, terminate this Agreement if the other party:
(A) Applies for or consents to the appointment of a receiver,
trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary
petition, makes a general assignment for the benefit of its
creditors, files a petition or answer seeking reorganization or
arrangement with its creditors, or admits in writing its inability to
pay its debts when due, or
(B) Suffers any order, judgment or decree to be entered by any
court of competent jurisdiction, adjudicating such party bankrupt or
approving a petition seeking its reorganization or the appointment of
a receiver, trustee or liquidator
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<PAGE>
of such party or of all or a substantial part of its assets, and such
order, judgment or decree continues unstayed and in effect for ninety
(90) days after its entry.
(iv) Nonperformance. Manager may terminate this Agreement in the
--------------
event that in any two (2) consecutive fiscal quarters the Manager has not
been paid the Management Fee and, in the sole discretion of the Manager, it
is not reasonably likely that the Management Fee will be paid in the next
fiscal quarter. Any such termination shall be effective as of the last day
of such third fiscal quarter provided at least ninety (90) days notice
shall have been given; otherwise, such termination shall be effective on
the sixtieth day after notice is given.
(v) Change in Law. In the event of any material change in federal
-------------
or state law that has a significant adverse impact on either party hereto
in connection with their performance under this Agreement, or if
performance by a party of court or any duties under this Agreement be
deemed illegal by any administrative agency or in a formal opinion rendered
to Manager by legal counsel knowledgeable in health law matter retained by
the Manager, the affected party shall have the right to require that the
other party renegotiate the terms of this Agreement. Unless the parties
otherwise mutually agree in writing, such renegotiated terms shall be
effective not later than twenty (20) days after receipt of written notice
of such request for renegotiation. Solely in the event of illegality, if
the parties fail to reach an agreement within thirty (30) days of the
request for renegotiation, either party may (subject to the severability
provision of this Agreement) terminate this Agreement upon thirty (30)
days' prior written notice to the other party.
(c) Effect of Termination. Upon termination of this Agreement:
---------------------
(i) Dental Group shall surrender to Manager all of Manager's
property used primarily in the operation of the Practice in the same
condition as received, reasonable wear and tear excepted.
(ii) Manager shall deliver to Dental Group all records related to the
business of and provision of dental care through the Practice including,
without limitation, patient records and any corporate, personnel and
financial records maintained for the Practice and Providers, provided, that
except as limited by law, including, but not limited to laws
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<PAGE>
governing the confidentiality of patient records, Manager shall have the
option to copy (or otherwise duplicate) at its sole cost and expense such
records of Dental Group and to retain and utilize such records for its own
use;
(iii) Manager shall deliver to Dental Group any other property of
Dental Group in Manager's possession;
(iv) Both parties shall cooperate to ensure the provision of
appropriate dental care to Group Patients and Beneficiaries;
(v) Dental Group shall promptly deliver to Manager any Revenues
that it may receive in payment for dental services rendered by Dental Group
prior to termination; and
(vi) Both parties shall cooperate to ensure the appropriate billing
and collections for dental services rendered by Dental Group prior to the
effective date of termination, and any such cash collected shall be
retained by Dental Group and/or paid to Manager pursuant to Article 8.
(d) Manager's Option. Upon the termination of this Agreement pursuant to
----------------
Section 6.2(b), Manager shall have the option exercisable within one hundred
eighty (180) days after the effective date of termination to require Dental
Group to: (i) assume the accounts payable and other liabilities and obligations
under facilities leases, equipment leases and other contracts, and (ii) purchase
the accounts receivable, inventories and supplies, furniture, fixtures and
equipment, leasehold improvements and intangible assets, in each case which
relate solely to the performance by Manager of its obligations under this
Agreement, at their respective fair market values. The fair market value of the
assumed liabilities and acquired assets shall be determined in each case based
upon their respective book values as reflected on the books and records of
Manager in accordance with GAAP, except that the fair market value of equipment
shall be the greater of its book value as so determined or its appraised value
as determined in good faith by a reputable appraiser selected by Manager. The
consideration to be paid by Dental Group shall consist of (A) the amount of the
liabilities assumed by Dental Group in the transaction as valued based on their
book values, and (B) cash for the balance. Dental Group shall indemnify and
hold harmless Manager from and against and to the extent practicable arrange for
the release of Manager from any and all labilities and obligations assumed by
Dental Group. The option shall be exercisable by Manager by giving written
notice to Dental Group. If Manager exercises its option pursuant to this
Section prior to the effective date of termination of this Agreement, then the
effective date of termi-
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<PAGE>
nation of this Agreement shall be continued until the closing date of the
acquisition transaction provided for under this Section. The closing of the
transaction shall take place at the principal office of Manager not more than
thirty (30) days following the exercise of the option by Manager.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF DENTAL GROUP
----------------------------------------------
Dental Group hereby represents and warrants to Manager as of the date
hereof as follows:
7.1 Organization. Dental Group is a professional corporation duly
------------
organized, validly existing and in good standing under the laws of the State of
California. Dental Group does not need to be qualified in any jurisdiction
other than where it is currently qualified except where the failure to be so
qualified will not have a material adverse effect on Dental Group. Dental Group
has all requisite power to own, lease and operate its properties and assets, and
to carry on its business as presently conducted. Complete and correct copies of
the Articles of Incorporation and Bylaws of Dental Group have been delivered to
the Manager. Such copies are true, correct, complete and properly executed and
contain all amendments through the date of this Agreement.
7.2 Capitalization. The authorized capital stock of Dental Group consists
--------------
of 1,000 shares of Common Stock, of which 100 shares are issued and outstanding
and owned of record and beneficially by Warren M. Francis, Jr., D.D.S.
7.3 Subsidiaries; Conduct of Business. The sole activity of Dental Group
---------------------------------
is the operation of dental care centers and ancillary activities associated
therewith, and Dental Group is not now and has not engaged in any other
activities of any nature. Dental Group has no subsidiaries, nor any long-term
or short-term investments in, nor ownership of securities of, any business,
corporation, partnership, enterprise, entity or organization, public or private.
7.4 Authority. Dental Group has all requisite power and authority to
---------
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
all necessary action on the part of Dental Group. This Agreement has been duly
executed and delivered by Dental Group and constitutes a valid and binding
obligation of Dental Group, enforceable in accordance with its terms, subject to
the effect of applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar federal or state laws affecting the
rights of creditors and the effect or availability of rules of
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<PAGE>
law governing specific performance, injunctive relief or other equitable
remedies (regardless of whether any such remedy is considered in a proceeding at
law or in equity).
No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality is required by or with respect
to Dental Group in connection with the execution and delivery of this Agreement
by Dental Group or the consummation by Dental Group of the transactions
contemplated hereby.
7.5 No Conflict. The execution, delivery and performance of this
-----------
Agreement by Dental Group and the consummation of the transactions contemplated
hereby and the conduct of the business of Dental Group as currently conducted
will not result in any violation of, be in conflict with, or constitute a
default or give rise to a right of termination, cancellation or acceleration
under any provision of (a) any judgment, decree or order or any material
agreement, contract, understanding, indenture or other instrument to which
Dental Group is a party or by which it is bound; or (b) any statute, rule or
governmental regulation applicable to Dental Group.
7.6 Providers. A list of all agreements between Dental Group and
---------
dentists, nurses, hygienists, and other dental care Providers are set forth on
the schedule delivered by Dental Group to Manager concurrently with the
execution hereof. The Providers have all necessary credentials, licenses and
permits required for the work performed for Dental Group. All Providers carry
malpractice insurance in amounts adequate for their per formance of services for
Dental Group.
ARTICLE 8
MANAGEMENT FEE
--------------
For its services hereunder, which shall include the providing of all
facilities and furniture, fixtures and equipment at the Practice, all non-
dentist employees of Manager who perform services at or for the Practice and all
management services provided hereunder but shall not include providing
professional dental services, Manager shall retain as a management fee
(collectively, the "Management Fee") the following:
8.1 Base Management Fee. As a base management fee (the "Base Management
-------------------
Fee") Manager shall retain that portion of Revenues equal to the sum of the
amount of Manager's Costs plus [*] percent ([*]%) of Revenues.
8.2 Performance Management Fee. As a bonus for meeting performance
--------------------------
standards goals as set by the Joint Operations Committee, Manager shall be
eligible for a Performance Manage-
__________
[*] Confidential Treatment Requested.
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<PAGE>
ment Bonus that is calculated in accordance with the applicable exhibit to the
Annual Budget.
8.3 Adjustments. If there are not sufficient funds to pay the Base
-----------
Management Fee, all unpaid amounts shall accumulate and carry over until paid or
until the termination of this Agreement, in which case such unpaid amounts
shall be immediately due and payable as of the date of termination.
8.4 Priorities. Notwithstanding anything to the contrary contained in
----------
this Article 8, the Dental Expenses shall be paid prior to the payment of the
Base Management Fee or Performance Management Fee. In addition, any accruals
pursuant to Section 8.3 will be eliminated prior to the payment of any
Performance Management Fee.
8.5 Reasonable Value. Payment of the Base Management Fee and the
----------------
Performance Management Fee is acknowledged as the parties' negotiated agreement
as to the reasonable fair market value of the services furnished by Manager
pursuant to this Agreement, considering the nature and volume of the services
required and risks assumed by Manager.
ARTICLE 9
INDEMNITY AND INSURANCE
-----------------------
9.1 Indemnity.
---------
(a) Indemnification. Each party shall indemnify, defend and hold harmless
---------------
the other party from any and all liability, loss, claim, lawsuit, injury, cost,
damage or expense whatsoever (including reasonable attorneys' fees and court
costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Dental Group
agrees to indemnify, defend and hold harmless Manager for all liability, loss,
claim, lawsuit, injury, cost, damage or expense whatsoever (including reasonable
attorneys' fees and court costs) arising out of the professional negligence of
Dental Group, its employees, agents, contractors or subcontractors, including
any amounts in excess of the professional liability insurance coverage of Dental
Group or its employees, agents, contractors or subcontractors.
(b) Mutual Indemnity. Each party to this Agreement shall be indemnified
----------------
by the other party for any claim under this Agreement or otherwise against the
indemnified party for vaca-
-20-
<PAGE>
tion pay, sick leave, retirement benefits, Social Security benefits, workers'
compensation benefits, disability or unemployment, insurance benefits, or other
employee benefits of any kind accrued during the term of this Agreement by an
employee of the indemnifying party.
9.2 Manager's Insurance. Manager shall, on its own behalf and at its sole
-------------------
cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
(a) Comprehensive general liability insurance covering the risks of
Manager, in an amount determined by the Joint Operations Committee;
(b) Workers' compensation insurance covering the employees of Manager, in
such amounts as is usual and customary under the circumstances;
(c) Property insurance covering the facilities, equipment and supplies
owned or leased by Manager or Dental Group for use in the operation of the
Practice.
9.3 Dental Group's Insurance. At Dental Group's sole cost and expense,
------------------------
Manager shall obtain, and maintain on behalf of Dental Group in full force and
effect during the Term, policies in the following categories in the amount
indicated:
(a) Comprehensive professional liability insurance coverage for Dental
Group and Dental Group's Employee Providers, in such amounts as Manager shall
reasonably deem necessary;
(b) Workers' compensation insurance covering the employees of Dental
Group, in such amounts as is usual and customary under the circumstances;
(c) Comprehensive general liability insurance covering the risks of Dental
Group, in an amount determined by the Joint Operations Committee.
ARTICLE 10
PROPRIETARY INFORMATION AND UNFAIR COMPETITION
----------------------------------------------
10.1 Protection of Proprietary Information. Dental Group recognizes that
-------------------------------------
due to the nature of this Agreement, Dental Group will have access to trade
secrets and other confidential information of a proprietary nature owned by
Manager ("Proprietary Information"). "Proprietary Information" includes all
information and any idea which a reasonable person would believe is
confidential, in whatever form, tangible or intangible, pertaining in any
manner to the business of Manager or any subsidiary or affiliate of Manager,
unless (a) the information is or
-21-
<PAGE>
becomes publicly known through lawful means, (b) the information was rightfully
in Dental Group's possession or part of its general knowledge prior to the
Effective Date or (c) the information is subsequently disclosed to Dental Group
by a third party without breach of this Agreement and without restriction on its
use. Proprietary Information includes, but is not limited to, any and all
computer programs (whether or not completed or in use) and any and all
operating manuals or similar materials which constitute the non-medical systems,
policies and procedures, and methods of doing business developed by or for the
operation of facilities managed by Manager. Dental Group acknowledges and
agrees that Manager has a proprietary interest in all such Proprietary
Information and that all such information constitutes confidential and
proprietary information and is the trade secret property of Manager. Dental
Group hereby waives any and all right, title and interest in and to such
Proprietary Information and agrees to return all copies thereof and Proprietary
Information related thereto to Manager, at Dental Group's expense, upon the
termination of this Agreement.
Dental Group further acknowledges and agrees that Manager is entitled to
prevent its competitors from obtaining and utilizing its Proprietary
Information. Therefore, Dental Group agrees to hold Manager's Proprietary
Information in strictest confidence and not to disclose it or allow it to be
disclosed, directly or indirectly, to any person or entity other than those
persons or entities who are employed by or affiliated with Manager or Dental
Group, without the prior written consent of Manager. Dental Group shall not,
either during the term of this Agreement, or at any time after the expiration or
earlier termination of this Agreement, disclose to anyone other than persons or
entities who are employed by or affiliated with Manager or Dental Group any
Proprietary Information obtained by Dental Group from Manager, except as
otherwise required by law.
10.2 Restrictions on Unfair Competition. Dental Group agrees that during
----------------------------------
the term of this Agreement and for a period of two (2) years after termination
of this Agreement Dental Group shall not (a) solicit in any way on behalf of
itself or in conjunction with others for the purpose of providing management
services any dental group being managed by or being or having been solicited by
Manager or any subsidiary, affiliate or successor in interest thereof, and (b)
solicit in any way or make offers of employment to, on behalf of itself or in
conjunction with others, any person employed by Manager or any subsidiary,
affiliate or successor in interest thereof. Dental Group acknowledges and
agrees that these restrictions are reasonable and necessary to protect Manager's
Proprietary Information and to ensure that it will not be subject to unfair
competition.
10.3 Enforcement. Dental Group agrees to require each independent
-----------
contractor and employee of the Dental Group, and any persons or entities to whom
such Proprietary Information is disclosed for the purpose of performance of
Manager's or Dental
-22-
<PAGE>
Group's obligations under this Agreement, to execute a proprietary information
agreement in the form supplied by or approved by Manager pursuant to which they
agree to abide by the restrictions on Dental Group's activities set forth in
this Article 10. Dental Group acknowledges and agrees that a breach of the
provisions of this Article 10 will result in irreparable harm to Manager which
cannot be reasonably or adequately compensated in damages, and therefore Manager
shall be entitled to injunctive and/or equitable relief to prevent a breach and
to secure enforcement thereof, in addition to any of the relief or award to
which Manager may be entitled.
ARTICLE 11
BOOKS AND RECORDS
-----------------
11.1 Ownership of Records. All business records and information relating
--------------------
exclusively to the business and activities of either party shall be the property
of that party, irrespective of identity of the party responsible for producing
or maintaining such records and information. Without limiting the foregoing,
all patient charts and records maintained by Manager relating to the dental
services of Dental Group shall be the property of Dental Group. Dental Group
also shall be entitled to a copy at Dental Group's sole cost of all business
records pertaining to Dental Group. Except as limited by law, including, but
not limited to laws governing the confidentiality of patient records, Manager
shall be entitled to a copy at Manager's sole cost of all records of Dental
Group.
ARTICLE 12
MISCELLANEOUS PROVISIONS
------------------------
12.1 Assignment. Neither party shall assign this Agreement to any other
----------
party or parties without the prior written consent of the other party, which
consent may be withheld arbitrarily or capriciously, for any reason or for no
reason whatsoever and any attempted assignment in violation of this Agreement
shall be null and void provided, however, that Dental Group hereby consents in
advance to the assignment by Manager of this agreement to GMS Dental Group, Inc.
("Company") or any affiliate of Company, and to the assignment of this agreement
for the purpose of securing any and all obligations arising in connection with
the extension of credit to Company or any affiliate of Company, including,
without limitation, those obligations arising under that certain Credit
Agreement between Company and Imperial Bank dated October 10, 1996, and that
certain Security Agreement referenced therein (the "Loan Documents"), and Dental
Group hereby agrees that (a) upon receipt of a notice from the Agent that a
"Default" or an "Event of Default" under the Loan Documents has occurred, Dental
Group
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<PAGE>
will make all payments required to be made under this Agreement directly to the
Agent and the Agent shall be entitled to exercise any and all rights and
remedies of Manager under this Agreement and (b) Dental Group will not, without
the prior written consent of the Agent, terminate (except pursuant to the terms
thereof) or amend or otherwise modify this Agreement.
12.2 Headings. The article and section headings used in this Agreement
--------
are for purposes of convenience only. They shall not be construed to limit or
to extend the meaning of any part of this Agreement.
12.3 Waiver. Waiver by either Dental Group or Manager of any breach of
------
any provision of this Agreement shall not be deemed to be a waiver of such
provision or of any subsequent breach of the same or of any other provision of
this Agreement.
12.4 Notices. Any notice, demand, approval, consent, or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be deemed to have been given when five (5) business days have
elapsed from the date of deposit in the United States mails, certified and
postage prepaid, addressed to the party to be served at the following address or
such other address as may be given in writing to the parties.
Dental Group: Francis Dental Corporation
42 Doctors Park Drive
Santa Rosa, CA 95405
Attn: President
Manager: Warren M. Francis, Jr. D.D.S., Inc.
42 Doctor's Park Drive
Santa Rosa, CA 95405
Attn: President
12.5 Attorneys' Fees. If any legal action, arbitration, mediation or
---------------
other proceeding is commenced, whether by Manager or Dental Group concerning
this Agreement, the prevailing party shall recover from the losing party
reasonable attorneys' fees and costs and expenses, including those of appeal and
not limited to taxable costs, incurred by the prevailing party, in addition to
all other remedies to which the prevailing party may be entitled. If a claim or
claims asserted by a third party against Manager or Dental Group or any of them
arise from an action or omission by the other, the party responsible for the
action or omission shall be the losing party, and the other party shall be the
prevailing party, for purposes of the foregoing sentence.
12.6 Successors. Without limiting or otherwise affecting any restrictions
----------
on assignments of this Agreement or rights or duties under this Agreement, this
Agreement shall be binding
-24-
<PAGE>
upon and inure to the benefit of the successors and assigns of Dental Group and
Manager.
12.7 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between Dental Group and Manager and supersedes all prior negotiations and
agreements, written or oral, concerning or relating to the subject matter of
this Agreement, and this Agreement may not be modified except by a writing
executed by all parties and subject to the provisions thereof.
12.8 Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereto shall be governed by, and construed according to, the laws of the
State of California.
12.9 Severability. If any provision of this Agreement is held to be
------------
invalid or unenforceable by any court or administrative agency of competent
jurisdiction, or in a written opinion to the Manager by legal counsel
knowledgeable in health law matters retained by the Manager, such holding or
opinion shall not affect the validity and enforceability of the other provisions
of this Agreement and the remainder of this Agreement shall be considered valid
and operative to the fullest extent permitted by law, but only if and to the
extent such enforcement would not materially and adversely frustrate the parties
essential objectives as expressed herein.
12.10 Time is of the Essence. Time is of the essence in this Agreement.
----------------------
12.11 Authority. Any Person signing this Agreement on behalf of any
---------
entity hereby represents and warrants in its individual capacity that it has
full authority to do so on behalf of such entity.
12.12 Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute on and the same instrument.
IN WITNESS WHEREOF, Dental Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
DENTAL GROUP
------------
FRANCIS DENTAL CORPORATION, a California
professional dental corporation
By /s/ Warren M. Francis, Jr.
-------------------------------------
Warren M. Francis, President
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<PAGE>
MANAGER
-------
WARREN M. FRANCIS, JR. D.D.S., INC.
a California professional corporation
By /s/ Warren M Francis, Jr.
-------------------------------------
Warren M. Francis, President
-26-
<PAGE>
ADDENDUM 1
----------
For purposes of this Agreement, the following terms shall have the meaning
indicated below or defined at the indicated section:
1. Accounts. See Section 2.5(a).
--------
2. Affiliate. "Affiliate" shall mean, with respect to any Person, any
---------
individual or entity directly or indirectly owned or controlled by such Person,
any individual or entity directly or indirectly owning or controlling such
Person or any individual or entity directly or indirectly owned or controlled
by the same family member, individual or entity as owns or controls such Person.
For purposes of this Agreement, neither Dental Group nor Manager shall be deemed
an Affiliate of the other.
3. Agreement. "Agreement" means this Dental Group Management Agreement.
---------
4. Annual Budget. See Section 3.6, first sentence.
-------------
5. Beneficiaries. See Recital C.
-------------
6. Books and Records. "Books and Records" means Dental Group's books of
-----------------
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
7. Capital Costs. "Capital Costs" shall mean any and all investments that
-------------
are or would be capitalized pursuant to GAAP.
8. Committee Members. See Section 3.5(a).
-----------------
9. Default Notice. See Section 6.2(b)(1).
--------------
10. Dental Group. See first paragraph of this Agreement.
------------
11. Dental Group Members. See Section 3.5(a).
--------------------
12. Dental Expenses. See Section 2.6(b).
---------------
13. Effective Date. See Section 6.1.
--------------
14. Employee Providers. See Recital D.
------------------
15. Employment Agreements. See Recital D.
---------------------
A-1
<PAGE>
16. GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with 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 Manager's financial
statements.
17. Group Patients. See Recital C.
--------------
18. Joint Operations Committee. See Section 3.4(b).
--------------------------
19. Management Fee. See Article 8.
--------------
20. Manager. See first paragraph of this Agreement.
-------
21. Manager Members. See Section 3.5(a).
---------------
22. Manager's Costs. "Manager's Costs" means all costs incurred by
---------------
Manager including amortization associated with costs of acquiring assets of the
Dental Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which are
attributable to Manager's business operations in accordance with Manager's
corporate allocation policies.
23. Marks. See Section 2.3(a).
-----
24. Payor Contracts. See Recital C.
---------------
25. Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
26. Plans. See Recital C.
-----
27. Practice. See Recital E.
--------
28. Preliminary Budget. See Section 3.7(b).
------------------
29. Programs. See Section 2.3(b).
--------
30. Proprietary Information. See Section 10.1.
-----------------------
31. Providers. "Providers" shall mean individuals or organizations
---------
licensed to practice dentistry (including specialists) as well as other dental
professionals who provide ancillary reimbursable dental services.
32. Provider Subcontracts. See Recital D.
---------------------
A-2
<PAGE>
33. Revenues. "Revenues" means all amounts assigned hereunder by Dental
--------
Group to Manager pursuant to Section 2.6(a).
34. Subcontract Providers. See Recital D.
---------------------
35. Term. See Section 6.1.
----
A-3
<PAGE>
EXHIBIT 10.38[*]
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
THIS DENTAL GROUP MANAGEMENT AGREEMENT (this "Agreement") is dated as
of June 30, 1997 and is effective as of the date set forth in Section 6.1
("Effective Date) by and between WARREN M. FRANCIS, JR. D.D.S., INC, a
----------------------------------
California professional corporation ("Manager") and BURRELL DENTAL CORPORATION,
---------------------------
a California professional dental corporation ("Dental Group.)
RECITALS:
A. Prior to the execution of this Agreement and pursuant to the terms of
that certain Assignment Agreement, dated June 19, 1997, by and between Manager
and Dental Group, all of Manager's right, title and interest in the "Dental
Practice Assets" relating to its Santa Rosa California dental center ("Doctors
Park Facility(ies)") were assigned to the Dental Group, which Dental Practice
Assets consist of all contracts and agreements with dentist employees and
independent contractors and other licensed health professional employees and
independent contractors, all independent practitioner association and managed
care plan contracts, all patient records, and any and all other assets required
by statute, rule or regulation to be owned or held by an entity licensed to
practice dentistry, together with all goodwill associated with the foregoing.
Dental Group operates a dental practice at the Doctors Park Facility(ies) and
may operate a dental practice at one or more additional sites in the future.
B. Dental Group engages in the practice of dentistry by Providing dental
services to patients of Dental Group ("Group Patients") and to enrollees
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
between Dental Group and Plans or between Beneficiaries and Plans.
C. Dental Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
arrangements may include contracts ("Employment Agreements") with dentist
employees and allied health professional employees (collectively "Employee
Providers") and agreements ("Provider Subcontracts") with independent contractor
dentists and non-dentist providers of various dental care services (collectively
"Subcontract Providers").
D. All activities of Dental Group subject to this Agreement are
referenced as the "Practice." All references to "dental" care and services
include general and specialist dental services. All references to "dentists"
include generalists and specialists.
E. Manager desires to provide certain support services for the Practice.
__________
[*] Confidential Treatment Requested.
-1-
<PAGE>
F. Dental Group desires to retain Manager on an independent contractor
basis to provide management services that are more particularly described
below, and Manager desires to provide such management services under the terms
and conditions set forth in this Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the covenants and conditions contained
herein, Manager and Dental Group agree as follows:
ARTICLE 1
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
ARTICLE 2
SCOPE OF AGREEMENT
------------------
2.1 General Scope of Agreement. This Agreement shall apply to the
--------------------------
Practice, including, without limitation, all professional, administrative and
technical services, marketing, contracting, case management, ancillary dental
services, outpatient services and dental care facilities, equipment, supplies
and items, except as otherwise specifically provided in this Agreement. Dental
Group's Employment Agreements shall encompass substantially all such activities
of Employee Providers and shall provide that all revenues derived from such
activities (and not excluded below) are Revenues. Nothing in this Agreement
shall be construed to alter or in any way affect the legal, ethical and
professional relationship between and among Providers and Providers' patients,
nor shall anything contained in this Agreement abrogate any right or obligation
arising out of or applicable to the dentist-patient relationship.
2.2 License. Dental Group grants Manager an exclusive license to use any
-------
and all of Dental Group's assets, whether tangible or intangible, in carrying
out Manager's duties and responsibilities under the provisions of this
Agreement.
2.3 Intellectual Property. Dental Group hereby grants to Manager a non-
---------------------
exclusive, perpetual, royalty-free, worldwide license to use and sublicense the
use of any intellectual property owned by Dental Group. This license shall
cover, but not be limited to, use of the following:
-2-
<PAGE>
(a) Service Mark. Dental Group hereby grants Manager the right to use all
------------
service marks and trademarks of Dental Group (the "Marks") for marketing and
promotional materials in connection with Dental Group's offering of dental
services. Manager agrees to use the Marks solely in the design format used by
Dental Group as of the date of this Agreement or another design format approved
in advance in writing by Dental Group. Dental Group shall have the opportunity
to review any marketing or other materials using the Marks in advance of any
public distribution. Manager agrees that it will include these restrictions on
use in any sublicense of the Marks.
(b) Copyrighted Materials. Dental Group hereby grants Manager the right to
---------------------
use any and al1 copyrighted materials authored or owned by Dental Group
including, specifically, the Dental Group dental management system software
programs (the "Programs"). This license includes the right to sublicense the
Programs and the right to prepare and own derivative works based on the
Programs, all without a duty of accounting to Dental Group. Dental Group shall
execute all documents required to enable Manager to own, use and exploit all
such rights.
2.4 Revenues. "Revenues" shall mean all of Dental Group's accounts
--------
receivable (net of contractual adjustments and bad debt), and cash collections
which exist at the Effective Date or which are acquired after the Effective Date
and during the Term. Revenues shall include all funds collected by, or legally
due to, Dental Group or any Affiliate of Dental Group, including, without
limitation, the following: (a) all fee-for-service payments for services to
Group Patients or Beneficiaries; (b) all payments established under Payor
Contracts; (c) all coordination of benefits or deductibles and third-party
liability recoveries related to the Group,s services; (d) all payments, dues,
fees or other compensation to Dental Group, (e) any income, profits, dividends,
distributions or other payments from Dental Group's investments, and (f) any
interest or other non-operating income of Dental Group.
2.5 Deposit Accounts. All cash received by Dental Group from whatever
----------------
source shall be deposited into an account or accounts ("Accounts") in the name
of Dental Group at a banking institution selected by Dental Group and approved
by Manager. Dental Group authorizes Manager to bill and collect, in Dental
Group's name, all charges and reimbursements for Dental Group's dental related
activities and to deposit such collections in the Accounts. Dental Group agrees
to assist and cooperate with Manager in the billing and collection process and
to immediately deliver to Manager for deposit any monies Dental Group may
receive.
2.6 Assignment.
----------
(a) Assets. Except as prohibited by contract or by law, Dental Group
------
hereby assigns, sells, conveys, transfers, and
-3-
<PAGE>
delivers to Manager, and Manager hereby accepts from Dental Group, all of the
assets and properties of Dental Group of every kind, character and description,
whether tangible, intangible, real, personal, or mixed, and wherever located,
including, but not limited to all Revenues, cash, accounts receivable,
advances, prepaid expenses, deposits, equipment and improvements which exist
on the Effective Date or which are acquired after the Effective Date and during
the Term. Dental Group hereby grants to Manager a security interest in all such
assets to secure the performance of its obligation to assign such assets to
Manager and to secure the performance of its other obligations under this
Agreement. The assets shall be valued at their fair market value which has been
determined to be their respective book values. Manager shall have the
authority, and Dental Group shall execute any and all documents as may be
necessary or appropriate to transfer the assets to Manager, authorize Manager to
transfer the funds in the Accounts to a separate account in the name of Manager,
and effectuate the intention of this provision. Dental Group shall execute and
deliver any and all financing statements and other documents as may be necessary
or appropriate to effectuate and perfect the grant of the security interest in
such assets made by Dental Group to Manager under this provision.
(b) Liabilities. Manager shall be responsible for paying all claims and
-----------
obligations associated with the operation of Dental Group pursuant to this
Agreement; provided, Manager shall be deemed to fully discharge its
responsibility to Dental Group for the liabilities described in this
subparagraph by its timely payment on Dental Group's behalf of, or delivery to
Dental Group of an amount sufficient to discharge, all of Dental Groups
obligations and liabilities now existing or arising in the future, including
those under Provider Subcontracts, Employment Agreements, Dental Group's
professional liability insurance and any other operational expenses for which
Dental Group retains responsibility or that are delegated to Dental Group,
whether pursuant to this Agreement or any other agreement of the parties or
action of the Joint Operations Committee ("Dental Expenses"). Notwithstanding
the foregoing, Manager does not assume any liabilities of Dental Group which are
unrelated to the dental business or any liabilities for income taxes.
ARTICLE 3
GOVERNANCE AND CONTROL
----------------------
3.1 Appointment. Dental Group hereby appoints Manager as its sole and
-----------
exclusive manager for the operation of the Practice and covenants not to enter
into an agreement with any Person other than Manager to perform or assume any of
Manager's rights, duties or responsibilities as provided herein. Manager hereby
accepts full responsibility for such management as more fully set forth herein.
-4-
<PAGE>
3.2 Professional Matters. Pursuant to applicable laws and requirements
--------------------
governing the practice of dentistry, Dental Group shall retain ultimate
responsibility for all activities of Dental Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's non-
licensed status. The parties understand and agree that during the term of this
Agreement, Dental Group shall be the provider of dental services for all
purposes, including, but not limited to, licensure and reimbursement.
3.3 Relationship of Parties. In the performance of its duties and
------------------------
obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Dental Group. Except as provided in this Agreement or as
required by law, Dental Group shall neither have nor exercise any control or
direction over the methods by which Manager shall perform its obligation
thereunder; nor shall Manager have or exercise any control or direction over the
methods by which Dental Group shall practice dentistry. It is expressly agreed
by the parties that no work, act, commission or omission of Manager pursuant to
the terms and conditions of this Agreement shall be construed to make or render
Manager or Manager's employees or agents, the employees of Dental Group. Manager
and Dental Group are not partners or joint venturers with each other and nothing
herein shall be construed so as to make them partners or joint venturers or
impose upon either of them any liability as partners or joint venturers. Dental
Group's responsibility is to assure that the services covered by this Agreement
shall be performed and rendered in a competent, efficient and satisfactory
manner.
3.4 Authority and Control. Strategic planning, overall direction and
---------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group shall be accomplished as follows:
(a) Exclusive Authority.
-------------------
(i) Dental Group. Dental Group shall have the sole responsibility and
------------
authority for all aspects of the practice of dentistry and delivery of dental
services by Providers. Dental Group shall consult with Manager or the Joint
Operations Committee to the extent reasonable and not inconsistent with the
licensure of dentists.
(ii) Manager. After reasonable consultation with Dental Group or the Joint
-------
Operations Committee, Manager shall have the sole responsibility and authority
for decisions related to the administration of the Practice.
(b) Joint Authority. All other decision-making authority related to the
---------------
business and affairs of Dental Group shall be vested in a joint operations
committee (the "Joint Operations
-5-
<PAGE>
Committee"). Nothing herein shall be construed as preventing the Joint
Operations Committee from appointing representatives and delegating authority to
such representatives so long as the Joint Operations Committee may revoke such
appointment and delegation at any time and so long as the Joint Operations
Committee retains ultimate responsibility for the decisions of such
representatives.
3.5 Joint Operations Committee. Strategic planning, overall direction and
--------------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group, excluding the delivery of professional dental
services, shall be overseen by the Joint Operations Committee as follows:
(a) Joint Operations Committee Membership. The Joint Operations
-------------------------------------
Committee shall consist initially of three (3) individuals (the "Committee
Members"). Dental Group shall designate one (1) Committee Member (the "Dental
Group Member") and the remaining two (2) Committee Members (the "Manager
Members") shall be appointed by Manager. The number of Committee Members may be
increased by agreement of the parties. Each party shall continue to direct the
appointment of the same percentage of Committee Members as described above. Each
Committee Member shall serve at the pleasure of the party designating such
Committee Member and may be replaced, with or without cause, at any time by such
party upon the delivery of written notice thereof to the other Committee
Members. Manager, Dental Group and their respective Committee Members shall
diligently pursue any preliminary activities that are necessary to allow the
Joint Operations Committee to take an action. Where Committee Members are
required to consult with the organization appointing such Committee Members,
the Committee shall establish and agree on a deadline for accomplishing such
consultation.
(b) Joint Operations Committee Action.
---------------------------------
(i) Joint Action. Except as otherwise expressly set forth above, the
------------
Joint Operations Committee shall take all other actions that have been approved
by a majority of the Committee Members.
(ii) Consultation Forum. Consultation between Dental Group and Manager, if
------------------
any, shall take place at a meeting of the Joint Operations Committee, and Dental
Group and Manager hereby agree to be bound by the decision of their Dental Group
Members or Manager Members, as the case may be.
(c) Joint Operations Committee Meetings. Meetings of the Joint Operations
-----------------------------------
Committee may be held by telephone or similar communications equipment so long
as all Committee Members participating in a meeting can hear and speak to each
other. The Joint Operations Committee shall prepare and maintain
-6-
<PAGE>
written minutes of all meetings and shall provide a copy of the minutes to the
parties within fifteen (15) business days following each meeting.
(i) Regular Meetings. The Joint Operations Committee shall hold not
----------------
less than four (4) regular meetings each year, at such specific times and
places as the Committee Members may determine.
(ii) Special Meetings. A special meeting of the Joint Operations
----------------
Committee may be called by a majority of the Committee Members.
(iii) Notice Requirement. A Committee Member calling a special
------------------
meeting must provide all other Committee Members with ten (10) days'
advance written or telephonic notice. Notice must be given or sent to the
Committee Member's address or telephone number as shown on the records of
the Joint Operations Committee. Notice may be delivered directly to
each Committee Member or to a person at the Committee Member's principal
place of business who would reasonably be expected to communicate that
notice promptly to the Committee Member.
(iv) Waiver of Notice Requirement.
----------------------------
(A) Written Waiver, Consent or Approval. Notice of a special
-----------------------------------
meeting need not be given to any Committee Member who, either before
or after the meeting, signs a waiver of notice or a written consent to
the holding of the special meeting, or an approval of the minutes of
the special meeting. Such waiver, consent or approval need not specify
the purpose of the special meeting. All such waivers, consents, and
approvals shall be filed with the Joint Operations Committee records
or made a part of the minutes of the special meetings.
(B) Failure to Object. Notice of a special meeting need not
-----------------
be given to any Committee Member who attends the special meeting and
does not protest before or at the commencement of the special meeting
such lack of notice.
(v) Quorum. The smallest number of Committee Members that exceed
------
fifty percent (50%) of all Committee Members shall constitute a quorum of
the Joint Operations Committee.
(vi) Proxies. The Joint Operations Committee shall provide for the
-------
use of proxies, telephonic conference calls, written consents or other
-7-
<PAGE>
appropriate methods by which the full participation of the Dental Group
Members and Manager Members can be assured.
(d) Limitation of Responsibility. Notwithstanding any other provisions
----------------------------
hereof, Committee Members shall be liable to the parties only for actions
constituting bad faith, gross negligence or breach of an express provision of
this Agreement (so long as such breach remains uncured after ten (10) days of
receiving notice of the nature of such breach). In all other respects, Committee
Members shall not be liable for negligence or mistakes of judgment.
3.6 Budgets. A capital and operating budget ("Annual Budget") shall be
-------
established regarding all financial aspects of the Practice. The Annual Budget
shall include the following elements and other items, as appropriate:
(a) A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
(b) An operating budget setting forth an estimate of Revenues and expenses
for the next succeeding fiscal year, together with an explanation of anticipated
changes or modifications, if any, in the Practice's utilization, rates, charges
to patients or third party payors, salaries, costs of Providers, non-wage cost
increases, and all other similar factors expected to differ significantly from
those prevailing during the current fiscal year;
(c) Other expenses of operation;
(d) The amount of a reasonable reserve to satisfy possible shortfalls from
operations. The allocation of such reserve shall be made by the Joint Operations
Committee as and when necessary; and
(e) The Management Fee, as defined below, for the next succeeding fiscal
year.
3.7 Budget Process.
--------------
(a) Initial Annual Budget. Not later than forty-five (45) days after
---------------------
the Effective Date, the Joint Operations Committee will have prepared the
initial Annual Budget for the first fiscal year (which shall initially be the
calendar year) during the term of this Agreement. If the Effective Date is other
than the first day of a fiscal year, then such initial Annual Budget shall
encompass only such portion of the then current fiscal year as remains, or, at
the option of the parties, such portion of the then current fiscal year plus the
immediately subsequent fiscal year.
-8-
<PAGE>
(b) Preliminary Budget. Not later than forty-five (45) days prior to the
------------------
end of each fiscal year during the term of this Agreement, the Manager shall
prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
(c) Joint Operations Committee Approval. The Joint Operations Committee
-----------------------------------
shall review and suggest modifications to the Preliminary Budget within ten (10)
days of receipt. Manager shall prepare a revised budget based upon the Joint
Operations Committee's recommendations and the Preliminary Budget as revised
shall become the Annual Budget.
(d) Adjustments. In the event of a material deviation between financial
-----------
forecasts and financial performance during a fiscal year, Manager or Dental
Group may propose adjustments to the Annual Budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
3.8 Personnel.
---------
(a) Providers. Except in unusual circumstances approved by the Joint
---------
Operations Committee and as permitted by law, Manager shall not employ or
contract with any Providers for the provision of dental services. All Providers
who provide dental services to Group Patients or to Beneficiaries shall be
either (i) Employee Providers, (ii) Subcontract Providers or (iii) employees of
Subcontract Providers.
(b) Non-Providers. With the exception of employees of Subcontract
-------------
Providers, Manager shall employ all non-Provider personnel necessary for the
operation of the Practice.
(c) Salary and Benefits. Each party to this Agreement shall remain
-------------------
liable for the salary and benefits paid to such party's own employees and shall
be ultimately responsible for compliance with state and federal laws pertaining
to employment taxes, workers' compensation, unemployment compensation and other
employment-related statutes pertaining to the party's own employees.
(d) Payments to Subcontract Providers. Dental Group shall be liable
----------------------------------
for any payments due Subcontract Providers under Provider Subcontracts after
receipt of funds from Manager.
ARTICLE 4
MANAGEMENT SERVICES
-------------------
4.1 General Description of Services. Within the limitations set out
-------------------------------
elsewhere in this Agreement, Manager shall provide or arrange for the provision
to Dental Group of all support services reasonably necessary and appropriate for
the efficient
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<PAGE>
operation of the Practice. Such services include all administrative services
necessary to Dental Group's performance of its obligations under Payor
Contracts, contracting, marketing, capital formation and assistance with long
term strategic planning.
4.2 Facilities. When appropriate, Manager shall secure and maintain
----------
facilities, including, without limitation, office space, improvements,
furnishings, equipment, supplies and personal property, of a nature and in a
condition necessary and appropriate for the efficient and effective operations
of the Practice subject to the general approval of the Joint Operations
Committee. Manager shall secure and maintain said facilities in the name of
Dental Group.
4.3 Purchased Items and Services. Manager shall serve as the purchasing
----------------------------
agent for Dental Group and shall arrange for personnel benefits, insurance, and
any other items and services required for the proper operation of the Practice.
4.4 Manager Personnel.
-----------------
(a) Management Team. Subject to any approval or consulting rights of the
---------------
Joint Operations Committee, Manager shall engage or designate one or more
individuals experienced in dental group management and direction, including, but
not limited to, an administrator, who will be responsible for the overall
administration of the Practice including day-to-day operations and strategic
development activities.
(b) Other Manager Personnel. Manager shall select, hire, train,
-----------------------
supervise, monitor and terminate all non-Provider personnel necessary for the
operation and management of the Practice.
4.5 Day-to-Day Management and Supervision. Subject to any approval or
-------------------------------------
consulting rights of the Joint Operations Committee, Manager shall provide
general management including, but not limited to, day-to-day supervision of:
(a) Manager personnel;
(b) Equipment and supply acquisition;
(c) Office space and facility maintenance;
(d) Patient records organization and retention;
(e) Third party payor contracting;
(f) Case management tracking;
(g) Billing, collections and accounting activities as set forth below;
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<PAGE>
(h) All operating aspects and policies of the Practice including, but not
limited to, hours of operation, work schedules, standard duties and job
descriptions, for all nondentist personnel; and
(i) Other related and incidental matters.
4.6 Billing and Collection Payment of Expenses. Manager shall be
------------------------------------------
responsible for all billing and collecting activities required by Dental Group.
Manager shall also be responsible for reviewing and paying accounts payable of
Dental Group. Dental Group hereby appoints the Manager its true and lawful
attorney-in-fact to take the following actions for and on behalf of and in the
name of Dental Group:
(a) Bill and collect in Dental Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Dental Group. Dental
Group shall give Manager all necessary access to Patient records to accomplish
all billing and collection. In so doing, Manager will use its best efforts but
does not guarantee any specific level of collections, and Manager will comply
with Dental Group's reasonable and lawful policies regarding courtesy discounts;
(b) Take possession of and endorse in the name of Dental Group any and all
instruments received as payment of accounts receivable;
(c) Deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
(d) Place accounts for collection, settle and compromise claims, and
institute legal action for the recovery of accounts.
4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
(a) Financial Reporting. Manager shall prepare, analyze, and deliver to
-------------------
the Joint Operations Committee financial reports to the extent necessary or
appropriate for the operation of the Practice, including the following:
(i) Financial statements, including balance sheets and statements
of cash flow and income;
(ii) Accounts payable and accounts receivable analysis;
(iii) Billing status including any Medicaid remittances; and
-11-
<PAGE>
(iv) Reconciliation of assets, liabilities and major expenses.
(b) Audits. Dental Group shall have the right to review and, at its sole
------
cost and expense, obtain an audit (separate from any annual audit or review of
Dental Group's financial statements performed at the direction of the Manager)
of Dental Group's financial books and records maintained by the Manager. Upon
five (5) days' prior written notice, Manager shall allow Dental Group access
during reasonable business hours to all information and documents reasonably
required for such review or audit. Upon Dental Group's request and at Dental
Group's expense, Manager shall also provide copies of such documents.
4.8 Marketing and Public Relations Services. Manager shall provide such
---------------------------------------
marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Dental Group.
Manager shall provide Dental Group with marketing materials and activities.
4.9 Dental Group Agreements. On behalf of Dental Group, Manager shall
-----------------------
review, evaluate and negotiate Payor Contracts and Provider Subcontracts and any
other contracts or agreements regarding the provision of dental related items or
services by Dental Group or Providers.
4.10 Utilization Review Quality Improvement and Outcomes Monitoring.
---------------------------------------------------------------
Manager shall be responsible for providing administrative support for Dental
Group's utilization review, quality improvement and outcomes monitoring
activities, including, without limitation, data collection, analysis and
reporting for Group Patients and Beneficiaries. Manager shall also support the
development and implementation of relevant policies, procedures, protocols,
practice guidelines and other interventions based on such activities.
4.11 Applicable Law. Manager and Dental Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE 5
DENTAL GROUP SERVICES
---------------------
5.1 Provision of Dental Services by Dental Group. Dental Group shall
--------------------------------------------
operate the Practice during the Term as a dental practice in accordance with
terms of this Agreement and the Annual Budget.
-12-
<PAGE>
5.2 Providers
---------
(a) Professional Dental Services. Dental Group shall employ or contract
----------------------------
with the number of Providers Dental Group deems necessary for the efficient and
effective operation of the Practice and in accordance with quality assurance,
credentialing and utilization management protocols approved by Manager. Dental
Group shall provide full and prompt dental coverage for the Practice, including
emergency service twenty-four (24) hours per day, seven (7) days per week,
including holidays according to policies and schedules approved by the Joint
Operations Committee.
(b) Provider Subcontracts and Employment Agreements. Dental Group shall
-----------------------------------------------
not negotiate or execute any Provider Subcontract, Employment Agreement, or any
amendment thereto, without the approval of the Joint Operations Committee. The
Joint Operations Committee shall have the right of review and reasonable
approval of any Provider Subcontract and Employment Agreement. Dental Group
shall be responsible for the payment, in accordance with the Annual Budget, of
all Employee and Subcontract Providers.
5.3 Peer Review. Dental Group, after consultation with the Joint
-----------
Operations Committee, shall implement, regularly review, modify as necessary or
appropriate and obtain the commitment of Providers to actively participate in
peer review procedures for Providers. Dental Group shall assist Manager in the
production of periodic reports describing the results of such procedures. Dental
Group shall provide Manager with prompt notice of any information that raises a
reasonable risk to the health and safety of Group Patients or Beneficiaries. In
any event, after consultation with the Joint Operations Committee, Dental Group
shall take such action as may be reasonably warranted under the facts and
circumstances.
5.4 Billing Information and Assignments. Dental Group shall promptly
-----------------------------------
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Dental Group's
services. Dental Group shall use reasonable efforts to procure consents to
assignments and other approvals and documents necessary to enable Manager to
obtain payment or reimbursement from third party payors and patients. With the
assistance of Manager, Dental Group shall obtain all provider numbers necessary
to obtain payment or reimbursement for its services.
5.5 Third Party Contracts. Dental Group shall be in compliance with all
----------------------
contracts, agreements and arrangements, including any contracts that exist on
the Effective Date, between Dental Group and third parties.
5.6 Use of Manager's Goods and Services. Dental Group shall not use any
-----------------------------------
goods or services provided by Manager pursuant
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<PAGE>
to this Agreement for any purpose other than the provision of and management of
dental services as contemplated by this Agreement and purposes incidental
thereto.
5.7 Negative Covenants. During the Term, Dental Group shall not, without
------------------
the prior approval of the Joint Operations Committee, (a) assign, pledge,
mortgage or otherwise encumber any of its property, (b) transfer substantially
all of its assets, including its goodwill, (c) merge or consolidate with any
other entity, (d) allow the transfer or issuance of any of its stock (other
than in accordance with the terms and provisions of that certain Share
Acquisition Agreement dated June 19, 1997, between GMS Dental Group Management,
Inc., a Delaware corporation and Warren M. Francis, Jr., D.D.S.), or (e) take or
allow any act that would materially impair the ability of Dental Group to carry
on the business of the Practice or to fulfill its obligations under this
Agreement.
ARTICLE 6
TERM
----
6.1 Term. This Agreement shall be effective as of June 30, 1997 (the
----
"Effective Date"), and shall remain in effect for an initial term of forty (40)
years from the Effective Date, expiring on the fortieth (40th) anniversary of
the Effective Date, unless earlier terminated pursuant to the terms of this
Agreement. The word "Term" shall include such initial term and, where
applicable, any extension of such initial term (whether extended pursuant to
Section 6.2(a) or otherwise), subject to earlier termination pursuant to the
provisions of this Agreement.
6.2 Termination and Extension.
-------------------------
(a) Automatic Extension. At the end of the initial term and any subsequent
-------------------
term, this Agreement shall automatically renewed for a five (5) year term unless
one of the parties provides the other party with written notice of intent not to
renew, not less than one hundred eighty (180) day prior to the expiration of the
then current term.
(b) Early Termination. This Agreement may be terminated according to the
-----------------
provisions of this Section.
(i) Material Breach. In the event either party materially breaches
---------------
this Agreement and such breach is not cured to the reasonable satisfaction
of the non-breaching party within thirty (30) days after the non-breaching
party party serves written notice of the default upon the defaulting party
(the" Default Notice"), the Agreement shall automatically terminate at the
election of the non-breaching party upon the giving of a
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<PAGE>
written notice of termination to the defaulting party not later than forty-
five (45) days after service of the Default Notice; provided that if such
uncured breach is only capable of being cured within a reasonable period
of time in excess of thirty (30) days, the non-breaching party shall not be
entitled to terminate this Agreement so long as the defaulting party has
commenced such cure and thereafter diligently pursue such cure to
completion.
(ii) Refusal To Comply. In the event that Dental Group or Manager
-----------------
refuses or fails to comply with a decision of the Joint Operations
Committee, the aggrieved party shall have the option to require the non-
complying party to participate in good faith mediation under the auspices
of the American Mediation Association, and if such dispute between Dental
Group and Manager continues for sixty (60) days after the date the
aggrieved party exercises its option regarding mediation, the non-complying
party shall have thirty (30) days in which to comply with the decision of
the Joint Operations Committee. If the non complying party has not complied
by the end of such thirty (30) day period, the aggrieved party shall have
the option to terminate this Agreement upon fifteen (15) days prior written
notice. During such mediation, Manager and Dental Group shall continue to
operate and manage the Practice in good faith. Neither Dental Group nor
Manager shall be required to participate in such good faith mediation if it
reasonably concludes that the delay associated with pursuing such mediation
likely would cause harm or injury to it or the Practice.
(iii) Bankruptcy. A party may, upon three (3) days, prior written
----------
notice, terminate this Agreement if the other party:
(A) Applies for or consents to the appointment of a receiver,
trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary
petition, makes a general assignment for the benefit of its creditors,
files a petition or answer seeking reorganization or arrangement with
its creditors, or admits in writing its inability to pay its debts
when due, or
(B) Suffers any order, judgment or decree to be entered by any
court of competent jurisdiction, adjudicating such party bankrupt or
approving a petition seeking its reorganization or the appointment of
a receiver, trustee or liquidator
-15-
<PAGE>
of such party or of all or a substantial part of its assets,
and such order, judgment or decree continues unstayed and in
effect for ninety (90) days after its entry.
(iv) Nonperformance. Manager may terminate this Agreement
--------------
in the event that in any two (2) consecutive fiscal quarters the
Manager has not been paid the Management Fee and, in the sole
discretion of the Manager, it is not reasonably likely that the
Management Fee will be paid in the next fiscal quarter. Any such
termination shall be effective as of the last day of such third
fiscal quarter provided at least ninety (90) days notice shall
have been given; otherwise, such termination shall be effective
on the sixtieth day after notice is given.
(v) Change in Law. In the event of any material change in
-------------
federal or state law that has a significant adverse impact on
either party hereto in connection with their performance under
this Agreement, or if performance by a party of court or any
duties under this Agreement be deemed illegal by any
administrative agency or in a formal opinion rendered to Manager
by legal counsel knowledgeable in health law matter retained by
the Manager, the affected party shall have the right to require
that the other party renegotiate the terms of this Agreement.
Unless the parties otherwise mutually agree in writing, such
renegotiated terms shall be effective not later than twenty (20)
days after receipt of written notice of such request for
renegotiation. Solely in the event of illegality, if the parties
fail to reach an agreement within thirty (30) days of the request
for renegotiation, either party may (subject to the severability
provision of this Agreement) terminate this Agreement upon thirty
(30) days' prior written notice to the other party.
(c) Effect of Termination. Upon termination of this Agreement:
---------------------
(i) Dental Group shall surrender to Manager all of
Manager's property used primarily in the operation of the
Practice in the same condition as received, reasonable wear and
tear excepted.
(ii) Manager shall deliver to Dental Group all records
related to the business of and provision of dental care through
the Practice including, without limitation, patient records and
any corporate, personnel and financial records maintained for the
Practice and Providers, provided, that except as limited by law,
including, but not limited to laws
-16-
<PAGE>
governing the confidentiality of patient records, Manager shall
have the option to copy (or otherwise duplicate) at its sole cost
and expense such records of Dental Group and to retain and
utilize such records for its own use;
(iii) Manager shall deliver to Dental Group any other
property of Dental Group in Manager's possession;
(iv) Both parties shall cooperate to ensure the provision
of appropriate dental care to Group Patients and Beneficiaries;
(v) Dental Group shall promptly deliver to Manager any
Revenues that it may receive in payment for dental services
rendered by Dental Group prior to termination; and
(vi) Both parties shall cooperate to ensure the
appropriate billing and collections for dental services rendered
by Dental Group prior to the effective date of termination, and
any such cash collected shall be retained by Dental Group and/or
paid to Manager pursuant to Article 8.
(d) Manager's Option. Upon the termination of this Agreement pursuant
----------------
to Section 6.2(b), Manager shall have the option exercisable within one hundred
eighty (180) days after the effective date of termination to require Dental
Group to: (i) assume the accounts payable and other liabilities and obligations
under facilities leases, equipment leases and other contracts, and (ii) purchase
the accounts receivable, inventories and supplies, furniture, fixtures and
equipment, lease-hold improvements and intangible assets, in each case which
relate solely to the performance by Manager of its obligations under this
Agreement, at their respective fair market values. The fair market value of the
assumed liabilities and acquired assets shall be determined in each case based
upon their respective book values as reflected on the books and records of
Manager in accordance with GAAP, except that the fair market value of equipment
shall be the greater of its book value as so determined or its appraised value
as determined in good faith by a reputable appraiser selected by Manager. The
consideration to be paid by Dental Group shall consist of (A) the amount of the
liabilities assumed by Dental Group in the transaction as valued based on their
book values, and (B) cash for the balance. Dental Group shall indemnify and hold
harmless Manager from and against and to the extent practicable arrange for the
release of Manager from any and all labilities and obligations assumed by Dental
Group. The option shall be exercisable by Manager by giving written notice to
Dental Group. If Manager exercises its option pursuant to this Section prior to
the effective date of termination of this Agreement, then the effective date of
termi-
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<PAGE>
nation of this Agreement shall be continued until the closing date of the
acquisition transaction provided for under this Section. The closing of the
transaction shall take place at the principal office of Manager not more than
thirty (30) days following the exercise of the option by Manager.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF DENTAL GROUP
----------------------------------------------
Dental Group hereby represents and warrants to Manager as of the date
hereof as follows:
7.1 Organization. Dental Group is a professional corporation duly
-------------
organized, validly existing and in good standing under the laws of the State of
California. Dental Group does not need to be qualified in any jurisdiction other
than where it is currently qualified except where the failure to be so qualified
will not have a material adverse effect on Dental Group. Dental Group has all
requisite power to own, lease and operate its properties and assets, and to
carry on its business as presently conducted. Complete and correct copies of the
Articles of Incorporation and Bylaws of Dental Group have been delivered to the
Manager. Such copies are true, correct, complete and properly executed and
contain all amendments through the date of this Agreement.
7.2 Capitalization. The authorized capital stock of Denta1 Group
---------------
consists of 1,000 shares of Common Stock, of which 100 shares are issued and
outstanding and owned of record and beneficially by Warren M. Francis, Jr.,
D.D.S.
7.3 Subsidiaries; Conduct of Business. The sole activity of Dental
---------------------------------
Group is the operation of dental care centers and ancillary activities
associated therewith, and Dental Group is not now and has not engaged in any
other activities of any nature. Dental Group has no subsidiaries, nor any long-
term or short-term investments in, nor ownership of securities of, any business,
corporation, partnership, enterprise, entity or organization, public or private.
7.4 Authority. Dental Group has all requisite power and authority to
----------
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of Dental Group. This Agreement has been duly
executed and delivered by Dental Group and constitutes a valid and binding
obligation of Dental Group, enforceable in accordance with its terms, subject to
the effect of applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar federal or state laws affecting the
rights of creditors and the effect or availability of rules of
-18-
<PAGE>
law governing specific performance, injunctive relief or other equitable
remedies (regardless of whether any such remedy is considered in a proceeding at
law or in equity).
No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality is required by or with respect
to Dental Group in connection with the execution and delivery of this Agreement
by Dental Group or the consummation by Dental Group of the transactions
contemplated hereby.
7.5 No Conflict. The execution, delivery and performance of this Agreement
-----------
by Dental Group and the consummation of the transactions contemplated hereby and
the conduct of the business of Dental Group as currently conducted will not
result in any violation of, be in conflict with, or constitute a default or give
rise to a right of termination, cancellation or acceleration under any provision
of (a) any judgment, decree or order or any material agreement, contract,
understanding, indenture or other instrument to which Dental Group is a party or
by which it is bound; or (b) any statute, rule or governmental regulation
applicable to Dental Group.
7.6 Providers. A list of all agreements between Dental Group and dentists,
---------
nurses, hygienists, and other dental care Providers are set forth on the
schedule delivered by Dental Group to Manager concurrently with the execution
hereof. The Providers have all necessary credentials, licenses and permits
required for the work performed for Dental Group. All Providers carry
malpractice insurance in amounts adequate for their performance of services
for Dental Group.
ARTICLE 8
MANAGEMENT FEE
--------------
For its services hereunder, which shall include the providing of all
facilities and furniture, fixtures and equipment at the Practice, all non-
dentist employees of Manager who perform services at or for the Practice and all
management services provided hereunder but shall not include providing
professional dental services, Manager shall retain as a management fee
(collectively, the "Management Fee") the following:
8.1 Base Management Fee. As a base management fee (the "Base Management
-------------------
Fee") Manager shall retain that portion of Revenues equal to the sum of the
amount of Manager's Costs plus [*] percent ([*]%) of Revenues.
8.2 Performance Management Fee. As a bonus for meeting performance
--------------------------
standards goals as set by the Joint Operations Committee, Manager shall be
eligible for a Performance Manage-
__________
[*] Confidential Treatment Requested.
-19-
<PAGE>
ment Bonus that is calculated in accordance with the applicable exhibit to the
Annual Budget.
8.3 Adjustments. If there are not sufficient funds to pay the Base
-----------
Management Fee, all unpaid amounts shall accumulate and carry over until paid or
until the termination of this Agreement, in which case such unpaid amounts shall
be immediately due and payable as of the date of termination.
8.4 Priorities. Notwithstanding anything to the contrary contained in
----------
this Article 8, the Dental Expenses shall be paid prior to the payment of the
Base Management Fee or Performance Management Fee. In addition, any accruals
pursuant to Section 8.3 will be eliminated prior to the payment of any
Performance Management Fee.
8.5 Reasonable Value. Payment of the Base Management Fee and the
----------------
Performance Management Fee is acknowledged as the parties' negotiated agreement
as to the reasonable fair market value of the services furnished by Manager
pursuant to this Agreement, considering the nature and volume of the services
required and risks assumed by Manager.
ARTICLE 9
INDEMNITY AND INSURANCE
-----------------------
9.1 Indemnity.
---------
(a) Indemnification. Each party shall indemnify, defend and hold harmless
---------------
the other party from any and all liability, loss, claim, lawsuit, injury, cost,
damage or expense whatsoever (including reasonable attorneys' fees and court
costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Dental Group
agrees to indemnify, defend and hold harmless Manager for all liability, loss,
claim, lawsuit, injury, cost, damage or expense whatsoever (including reasonable
attorneys' fees and court costs) arising out of the professional negligence of
Dental Group, its employees, agents, contractors or subcontractors, including
any amounts in excess of the professional liability insurance coverage of Dental
Group or its employees, agents, contractors or subcontractors.
(b) Mutual Indemnity. Each party to this Agreement shall be indemnified
----------------
by the other party for any claim under this Agreement or otherwise against the
indemnified party for vaca-
-20-
<PAGE>
tion pay, sick leaver retirement benefits, Social Security benefits, workers'
compensation benefits, disability or unemployment, insurance benefits, or other
employee benefits of any kind accrued during the term of this Agreement by an
employee of the indemnifying party.
9.2 Manager's Insurance. Manager shall, on its own behalf and at its sole
-------------------
cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
(a) Comprehensive general liability insurance covering the risks of
Manager, in an amount determined by the Joint Operations Committee;
(b) Workers' compensation insurance covering the employees of Manager, in
such amounts as is usual and customary under the circumstances;
(c) Property insurance covering the facilities, equipment and supplies
owned or leased by Manager or Dental Group for use in the operation of the
Practice.
9.3 Dental Group's Insurance. At Dental Group's sole cost and expense,
------------------------
Manager shall obtain, and maintain on behalf of Dental Group in full force and
effect during the Term, policies in the following categories in the amount
indicated:
(a) Comprehensive professional liability insurance coverage for Dental
Group and Dental Group's Employee Providers, in such amounts as Manager shall
reasonably deem necessary;
(b) Workers' compensation insurance covering the employees of Dental
Group, in such amounts as is usual and customary under the circumstances;
(c) Comprehensive general liability insurance covering the risks of
Dental Group, in an amount determined by the Joint Operations Committee.
ARTICLE 10
PROPRIETARY INFORMATION AND UNFAIR COMPETITION
----------------------------------------------
10.1 Protection of Proprietary Information. Dental Group recognizes
------------------------------------
that due to the nature this Agreement, Dental Group will have access to trade
secrets and other confidential information of a proprietary nature owned by
Manager ("Proprietary Information"). "Proprietary Information" includes all
information and any idea which a reasonable person would believe is
confidential, in whatever form, tangible or intangible, pertaining in any manner
to the business of Manager or any subsidiary or affiliate of Manager, unless (a)
the information is or
-21-
<PAGE>
becomes publicly known through lawful means, (b) the information was rightfully
in Dental Group's possession or part of its general knowledge prior to the
Effective Date or (c) the information is subsequently disclosed to Dental Group
by a third party without breach of this Agreement and without restriction on its
use. Proprietary Information includes, but is not limited to, any and all
computer programs (whether or not completed or in use) and any and all operating
manuals or similar materials which constitute the non-medical systems, policies
and procedures, and methods of doing business developed by or for the operation
of facilities managed by Manager. Dental Group acknowledges and agrees that
Manager has a proprietary interest in all such Proprietary Information and that
all such information constitutes confidential and proprietary information and is
the trade secret property of Manager. Dental Group hereby waives any and all
right, title and interest in and to such Proprietary Information and agrees to
return all copies thereof and Proprietary Information related thereto to
Manager, at Dental Group's expense, upon the termination of this Agreement.
Dental Group further acknowledges and agrees that Manager is entitled to
prevent its competitors from obtaining and utilizing its Proprietary
Information. Therefore, Dental Group agrees to hold Manager's Proprietary
Information in strictest confidence and not to disclose it or allow it to be
disclosed, directly or indirectly, to any person or entity other than those
persons or entities who are employed by or affiliated with Manager or Dental
Group, without the prior written consent of Manager. Dental Group shall not,
either during the term of this Agreement, or at any time after the expiration or
earlier termination of this Agreement, disclose to anyone other than persons or
entities who are employed by or affiliated with Manager or Dental Group any
Proprietary Information obtained by Dental Group from Manager, except as
otherwise required by law.
10.2 Restrictions on Unfair Competition. Dental Group agrees that during
----------------------------------
the term of this Agreement and for a period of two (2) years after termination
of this Agreement Dental Group shall not (a) solicit in any way on behalf of
itself or in conjunction with others for the purpose of providing management
services any dental group being managed by or being or having been solicited by
Manager or any subsidiary, affiliate or successor in interest thereof, and (b)
solicit in any way or make offers of employment to, on behalf of itself or in
conjunction with others, any person employed by Manager or any subsidiary,
affiliate or successor in interest thereof. Dental Group acknowledges and agrees
that these restrictions are reasonable and necessary to protect Manager's
Proprietary Information and to ensure that it will not be subject to unfair
competition.
10.3 Enforcement. Dental Group agrees to require each independent
-----------
contractor and employee of the Dental Group, and any persons or entities to whom
such Proprietary Information is disclosed for the purpose of performance of
Manager's or Dental
-22-
<PAGE>
Group's obligations under this Agreement,to execute a proprietary information
agreement in the form supplied by or approved by Manager pursuant to which they
agree to abide by the restrictions on Dental Group's activities set forth in
this Article 10. Dental Group acknowledges and agrees that a breach of the
provisions of this Article 10 will result in irreparable harm to Manager which
cannot be reasonably or adequately compensated in damages, and therefore Manager
shall be entitled to injunctive and/or equitable relief to prevent a breach and
to secure enforcement thereof, in addition to any of the relief or award to
which Manager may be entitled.
ARTICLE 11
BOOKS AND RECORDS
-----------------
11.1 Ownership of Records. All business records and information relating
--------------------
exclusively to the business and activities of either party shall be the property
of that party, irrespective of identity of the party responsible for producing
or maintaining such records and information. Without limiting the foregoing, all
patient charts and records maintained by Manager relating to the dental services
of Dental Group shall be the property of Dental Group. Dental Group also shall
be entitled to a copy at Dental Group's sole cost of all business records
pertaining to Dental Group. Except as limited by law, including, but not limited
to laws governing the confidentiality of patient records, Manager shall be
entitled to a copy at Manager's sole cost of all records of Dental Group.
ARTICLE 12
MISCELLANEOUS PROVISIONS
------------------------
12.1 Assignment. Neither party shall assign this Agreement to any other
----------
party or parties without the prior written consent of the other party, which
consent may be withheld arbitrarily or capriciously, for any reason or for no
reason whatsoever and any attempted assignment in violation of this Agreement
shall be null and void provided, however, that Dental Group hereby consents in
advance to the assignment by Manager of this agreement to GMS Dental Group, Inc.
("Company") or any affiliate of Company, and to the assignment of this agreement
for the purpose of securing any and all obligations arising in connection with
the extension of credit to Company or any affiliate of Company, including,
without limitation, those obligations arising under that certain Credit
Agreement between Company and Imperial Bank dated October 10, 1996, and that
certain Security Agreement referenced therein (the "Loan Documents"), and Dental
Group hereby agrees that (a) upon receipt of a notice from the Agent that a
"Default" or an "Event of Default" under the Loan Documents has occurred, Dental
Group
-23-
<PAGE>
will make all payments required to be made under this Agreement directly to the
Agent and the Agent shall be entitled to exercise any and all rights and
remedies of Manager under this Agreement and (b) Dental Group will not, without
the prior written consent of the Agent, terminate (except pursuant to the terms
thereof) or amend or otherwise modify this Agreement.
12.2 Headings. The article and section headings used in this Agreement
--------
are for purposes of convenience only. They shall not be construed to limit or to
extend the meaning of any part of this Agreement.
12.3 Waiver. Waiver by either Dental Group or Manager of any breach of
------
any provision of this Agreement shall not be deemed to be a waiver of such
provision or of any subsequent breach of the same or of any other provision of
this Agreement.
12.4 Notices. Any notice, demand, approval, consent, or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be deemed to have been given when five (5) business days have
elapsed from the date of deposit in the United States mails, certified and
postage prepaid, addressed to the party to be served at the following address or
such other address as may be given in writing to the parties.
Dental Group: Burrell Dental Corporation
229 North McDowell
Petaluma, CA 94954
Attn: President
Manager: Warren M. Francis, Jr. D.D.S., Inc.
42 Doctor's Park Drive
Santa Rosa, CA 95405
Attn: President
12.5 Attorneys' Fees. If any legal action, arbitration, mediation or other
---------------
proceeding is commenced, whether by Manager or Dental Group concerning this
Agreement, the prevailing party shall recover from the losing party reasonable
attorneys' fees and costs and expenses, including those of appeal and not
limited to taxable costs, incurred by the prevailing party, in addition to all
other remedies to which the prevailing party may be entitled. If a claim or
claims asserted by a third party against Manager or Dental Group or any of them
arise from an action or omission by the other, the party responsible for the
action or omission shall be the losing party, and the other party shall be the
prevailing party, for purposes of the foregoing sentence.
12.6 Successors. Without limiting or otherwise affecting any restrictions
----------
on assignments of this Agreement or rights or duties under this Agreement, this
Agreement shall be binding
-24-
<PAGE>
upon and inure to the benefit of the successors and assigns of Dental Group and
Manager.
12.7 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between Dental Group and Manager and supersedes all prior negotiations and
agreements, written or oral, concerning or relating to the subject matter of
this Agreement, and this Agreement may not be modified except by a writing
executed by all parties and subject to the provisions thereof.
12.8 Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereto shall be governed by, and construed according to, the laws of the
State of California.
12.9 Severability. If any provision of this Agreement is held to be
------------
invalid or unenforceable by any court or administrative agency of competent
jurisdiction, or in a written opinion to the Manager by legal counsel
knowledgeable in health law matters retained by the Manager, such holding or
opinion shall not affect the validity and enforceability of the other provisions
of this Agreement and the remainder of this Agreement shall be considered valid
and operative to the fullest extent permitted by law, but only if and to the
extent such enforcement would not materially and adversely frustrate the parties
essential objectives as expressed herein.
12.10 Time is of the Essence. Time is of the essence in this Agreement.
----------------------
12.11 Authority. Any Person signing this Agreement on behalf of any entity
---------
hereby represents and warrants in its individual capacity that it has full
authority to do so on behalf of such entity.
12.12 Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute on and the same instrument.
IN WITNESS WHEREOF, Dental Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
DENTAL GROUP
------------
BURRELL DENTAL CORPORATION,
a California professional
dental corporation
By /s/ E Ronald Burrell
----------------------------------
Earl R. Burrell, President
-25-
<PAGE>
MANAGER
-------
WARREN M. FRANCIS, JR. D.D.S.,
INC. a California professional
corporation
By: /s/ Warren M. Francis
----------------------------
Warren M. Francis, President
-26-
<PAGE>
ADDENDUM 1
----------
For purposes of this Agreement the following terms shall have the meaning
indicated below or defined at the indicated section:
1. Accounts. See Section 2.5(a).
--------
2. Affiliate. "Affiliate" shall mean, with respect to any Person, any
---------
individual or entity directly or indirectly owned or controlled by such Person,
any individual or entity directly or indirectly owning or controlling such
Person or any individual or entity directly or indirectly owned or controlled by
the same family member, individual or entity as owns or controls such Person.
For purposes of this Agreement, neither Dental Group nor Manager shall be deemed
an Affiliate of the other.
3. Agreement. "Agreement" means this Dental Group Management Agreement.
---------
4. Annual Budget. See Section 3.6, first sentence.
-------------
5. Beneficiaries. See Recital C.
-------------
6. Books and Records. "Books and Records" means Dental Group's books of
-----------------
account, accounting and financial records and all other records relating to
and used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
7. Capital Costs. "Capital Costs" shall mean any and all investments that
-------------
are or would be capitalized pursuant to GAAP.
8. Committee Members. See Section 3.5(a).
-----------------
9. Default Notice. See Section 6.2(b)(1).
--------------
10. Dental Group. See first paragraph of this Agreement.
------------
11. Dental Group Members. See Section 3.5(a).
--------------------
12. Dental Expenses. See Section 2.6(b).
---------------
13. Effective Date. See Section 6.1.
--------------
14. Employee Providers. See Recital D.
------------------
15. Employment Agreements. See Recital D.
---------------------
A-1
<PAGE>
16. GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with 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 Manager's financial
statements.
17. Group Patients. See Recital C.
--------------
18. Joint Operations Committee. See Section 3.4(b).
--------------------------
19. Management Fee. See Article 8.
--------------
20. Manager. See first paragraph of this Agreement.
--------
21. Manager Members. See Section 3.5(a).
---------------
22. Manager's Costs. "Manager's Costs" means all costs incurred by
---------------
Manager including amortization associated with costs of acquiring assets of the
Dental Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which
are attributable to Manager's business operations in accordance with Manager's
corporate allocation policies.
23. Marks. See Section 2.3(a).
-----
24. Payor Contracts. See Recital C.
---------------
25. Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
26. Plans. See Recital C.
-----
27. Practice. See Recital E.
--------
28. Preliminary Budget. See Section 3.7(b).
------------------
29. Programs. See Section 2.3(b).
--------
30. Proprietary Information. See Section 10.1.
-----------------------
31. Providers. "Providers" shall mean individuals or organizations
---------
licensed to practice dentistry (including specialists) as well as other dental
professionals who provide ancillary reimbursable dental services.
32. Provider Subcontracts. See Recital D.
---------------------
A-2
<PAGE>
33. Revenues. "Revenues" means all amounts assigned hereunder by Dental
--------
Group to Manager pursuant to Section 2.6 (a).
34. Subcontract Providers. See Recital D.
---------------------
35. Term. See Section 6.1.
----
A-3
<PAGE>
EXHIBIT 10.39[*]
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
THIS DENTAL GROUP MANAGEMENT AGREEMENT (this "Agreement") is dated as of
June 30, 1997 and is effective as of the date set forth in Section 6.1
("Effective Date") by and between WARREN M. FRANCIS, JR. D.D.S., INC, a
----------------------------------
California professional corporation ("Manager") and ASHRAFI DENTAL CORPORATION,
--------------------------
a California professional dental corporation ("Dental Group").
RECITALS:
A. Prior to the execution of this Agreement and pursuant to the terms of
that certain Assignment Agreement, dated June 19, 1997, by and between Manager
and Dental Group, all of Manager's right, title and interest in the "Dental
Practice Assets" relating to its Santa Rosa California dental center ("Doctors
Park Facility(ies)") were assigned to the Dental Group, which Dental Practice
Assets consist of all contracts and agreements with dentist employees and
independent contractors and other licensed health professional employees and
independent contractors, all independent practitioner association and managed
care plan contracts, all patient records, and any and all other assets required
by statute, rule or regulation to be owned or held by an entity licensed to
practice dentistry, together with all goodwill associated with the foregoing.
Dental Group operates a dental practice at the Doctors Park Facility(ies) and
may operate a dental practice at one or more additional sites in the future.
B. Dental Group engages in the practice of dentistry by providing dental
services to patients of Dental Group ("Group Patients") and to enrollees
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
between Dental Group and Plans or between Beneficiaries and Plans.
C. Dental Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
arrangements may include contracts ("Employment Agreements") with dentist
employees and allied health professional employees (collectively "Employee
Providers") and agreements ("Provider Subcontracts") with independent contractor
dentists and non-dentist providers of various dental care services (collectively
"Subcontract Providers").
D. All activities of Dental Group subject to this Agreement are
referenced as the "Practice." All references to "dental" care and services
include general and specialist dental services. All references to "dentists"
include generalists and specialists.
E. Manager desires to provide certain support services for the Practice.
__________
[*] Confidential Treatment Requested.
-1-
<PAGE>
F. Dental Group desires to retain Manager on an independent contractor
basis to provide management services that are more particularly described
below, and Manager desires to provide such management services under the terms
and conditions set forth in this Agreement.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the covenants and conditions contained
herein, Manager and Dental Group agree as follows:
ARTICLE 1
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
ARTICLE 2
SCOPE OF AGREEMENT
------------------
2.1 General Scope of Agreement. This Agreement shall apply to the
--------------------------
Practice, including, without limitation, all professional, administrative and
technical services, marketing, contracting, case management, ancillary dental
services, outpatient services and dental care facilities, equipment, supplies
and items, except as otherwise specifically provided in this Agreement. Dental
Group's Employment Agreements shall encompass substantially all such activities
of Employee Providers and shall provide that all revenues derived from such
activities (and not excluded below) are Revenues. Nothing in this Agreement
shall be construed to alter or in any way affect the legal, ethical and
professional relationship between and among Providers and Providers' patients,
nor shall anything contained in this Agreement abrogate any right or obligation
arising out of or applicable to the dentist-patient relationship.
2.2 License. Dental Group grants Manager an exclusive license to use any
-------
and all of Dental Group's assets, whether tangible or intangible, in carrying
out Manager's duties and responsibilities under the provisions of this
Agreement.
2.3 Intellectual Property. Dental Group hereby grants to Manager a non-
---------------------
exclusive, perpetual, royalty-free, worldwide license to use and sublicense the
use of any intellectual property owned by Dental Group. This license shall
cover, but not be limited to, use of the following:
-2-
<PAGE>
(a) Service Mark. Dental Group hereby grants Manager the right to use all
------------
service marks and trademarks of Dental Group (the "Marks") for marketing and
promotional materials in connection with Dental Group's offering of dental
services. Manager agrees to use the Marks solely in the design format used by
Dental Group as of the date of this Agreement or another design format approved
in advance in writing by Dental Group. Dental Group shall have the opportunity
to review any marketing or other materials using the Marks in advance of any
public distribution. Manager agrees that it will include these restrictions on
use in any sublicense of the Marks.
(b) Copyrighted Materials. Dental Group hereby grants Manager the right to
---------------------
use any and al1 copyrighted materials authored or owned by Dental Group
including, specifically, the Dental Group dental management system software
programs (the "Programs"). This license includes the right to sublicense the
Programs and the right to prepare and own derivative works based on the
Programs, all without a duty of accounting to Dental Group. Dental Group shall
execute all documents required to enable Manager to own, use and exploit all
such rights.
2.4 Revenues. "Revenues" shall mean all of Dental Group's accounts
--------
receivable (net of contractual adjustments and bad debt), and cash collections
which exist at the Effective Date or which are acquired after the Effective Date
and during the Term. Revenues shall include all funds collected by, or legally
due to, Dental Group or any Affiliate of Dental Group, including, without
limitation, the following: (a) all fee-for-service payments for services to
Group Patients or Beneficiaries; (b) all payments established under Payor
Contracts; (c) all coordination of benefits or deductibles and third-party
liability recoveries related to the Group's services; (d) all payments, dues,
fees or other compensation to Dental Group, (e) any income, profits, dividends,
distributions or other payments from Dental Group's investments; and (f) any
interest or other non-operating income of Dental Group.
2.5 Deposit Accounts. All cash received by Dental Group from whatever
----------------
source shall be deposited into an account or accounts ("Accounts") in the name
of Dental Group at a banking institution selected by Dental Group and approved
by Manager. Dental Group authorizes Manager to bill and collect, in Dental
Group's name, all charges and reimbursements for Dental Group's dental related
activities and to deposit such collections in the Accounts. Dental Group agrees
to assist and cooperate with Manager in the billing and collection process and
to immediately deliver to Manager for deposit any monies Dental Group may
receive.
2.6 Assignment.
----------
(a) Assets. Except as prohibited by contract or by law, Dental Group
------
hereby assigns, sells, conveys, transfers, and
-3-
<PAGE>
delivers to Manager, and Manager hereby accepts from Dental Group, all of the
assets and properties of Dental Group of every kind, character and description,
whether tangible, intangible, real, personal, or mixed, and wherever located,
including, but not limited to, all Revenues, cash, accounts receivable,
advances, prepaid expenses, deposits, equipment and improvements which exist
on the Effective Date or which are acquired after the Effective Date and during
the Term. Dental Group hereby grants to Manager a security interest in all such
assets to secure the performance of its obligation to assign such assets to
Manager and to secure the performance of its other obligations under this
Agreement. The assets shall be valued at their fair market value which has been
determined to be their respective book values. Manager shall have the
authority, and Dental Group shall execute any and all documents as may be
necessary or appropriate to transfer the assets to Manager, authorize Manager to
transfer the funds in the Accounts to a separate account in the name of Manager,
and effectuate the intention of this provision. Dental Group shall execute and
deliver any and all financing statements and other documents as may be necessary
or appropriate to effectuate and perfect the grant of the security interest in
such assets made by Dental Group to Manager under this provision.
(b) Liabilities. Manager shall be responsible for paying all claims and
-----------
obligations associated with the operation of Dental Group pursuant to this
Agreement; provided, Manager shall be deemed to fully discharge its
responsibility to Dental Group for the liabilities described in this
subparagraph by its timely payment on Dental Group's behalf of, or delivery to
Dental Group of an amount sufficient to discharge, all of Dental Group's
obligations and liabilities now existing or arising in the future, including
those under Provider Subcontracts, Employment Agreements, Dental Group's
professional liability insurance and any other operational expenses for which
Dental Group retains responsibility or that are delegated to Dental Group,
whether pursuant to this Agreement or any other agreement of the parties or
action of the Joint Operations Committee ("Dental Expenses"). Notwithstanding
the foregoing, Manager does not assume any liabilities of Dental Group which are
unrelated to the dental business or any liabilities for income taxes.
ARTICLE 3
GOVERNANCE AND CONTROL
----------------------
3.1 Appointment. Dental Group hereby appoints Manager as its sole and
-----------
exclusive manager for the operation of the Practice and covenants not to enter
into an agreement with any Person other than Manager to perform or assume any of
Manager's rights, duties or responsibilities as provided herein. Manager hereby
accepts full responsibility for such management as more fully set forth herein.
-4-
<PAGE>
3.2 Professional Matters. Pursuant to applicable laws and requirements
--------------------
governing the practice of dentistry, Dental Group shall retain ultimate
responsibility for all activities of Dental Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's non-
licensed status. The parties understand and agree that during the term of this
Agreement, Dental Group shall be the provider of dental services for all
purposes, including, but not limited to, licensure and reimbursement.
3.3 Relationship of Parties. In the performance of its duties and
-----------------------
obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Dental Group. Except as provided in this Agreement or as
required by law, Dental Group shall neither have nor exercise any control or
direction over the methods by which Manager shall perform its obligation
thereunder; nor shall Manager have or exercise any control or direction over the
methods by which Dental Group shall practice dentistry. It is expressly agreed
by the parties that no work, act, commission or omission of Manager pursuant to
the terms and conditions of this Agreement shall be construed to make or render
Manager or Manager's employees or agents, the employees of Dental Group. Manager
and Dental Group are not partners or joint venturers with each other and nothing
herein shall be construed so as to make them partners or joint venturers or
impose upon either of them any liability as partners or joint venturers. Dental
Group's responsibility is to assure that the services covered by this Agreement
shall be performed and rendered in a competent, efficient and satisfactory
manner.
3.4 Authority and Control. Strategic planning, overall direction and
---------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group shall be accomplished as follows:
(a) Exclusive Authority.
-------------------
(i) Dental Group. Dental Group shall have the sole responsibility and
------------
authority for all aspects of the practice of dentistry and delivery of dental
services by Providers. Dental Group shall consult with Manager or the Joint
Operations Committee to the extent reasonable and not inconsistent with the
licensure of dentists.
(ii) Manager. After reasonable consultation with Dental Group or the Joint
-------
Operations Committee, Manager shall have the sole responsibility and authority
for decisions related to the administration of the Practice.
(b) Joint Authority. All other decision-making authority related to the
---------------
business and affairs of Dental Group shall be vested in a joint operations
committee (the "Joint Operations
-5-
<PAGE>
Committee"). Nothing herein shall be construed as preventing the Joint
Operations Committee from appointing representatives and delegating authority to
such representatives so long as the Joint Operations Committee may revoke such
appointment and delegation at any time and so long as the Joint Operations
Committee retains ultimate responsibility for the decisions of such
representatives.
3.5 Joint Operations Committee. Strategic planning, overall direction and
--------------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group, excluding the delivery of professional dental
services, shall be overseen by the Joint Operations Committee as follows:
(a) Joint Operations Committee Membership. The Joint Operations
-------------------------------------
Committee shall consist initially of three (3) individuals (the "Committee
Members"). Dental Group shall designate one (1) Committee Member (the "Dental
Group Member") and the remaining two (2) Committee Members (the "Manager
Members") shall be appointed by Manager. The number of Committee Members may be
increased by agreement of the parties. Each party shall continue to direct the
appointment of the same percentage of Committee Members as described above. Each
Committee Member shall serve at the pleasure of the party designating such
Committee Member and may be replaced, with or without cause, at any time by such
party upon the delivery of written notice thereof to the other Committee
Members. Manager, Dental Group and their respective Committee Members shall
diligently pursue any preliminary activities that are necessary to allow the
Joint Operations Committee to take an action. Where Committee Members are
required to consult with the organization appointing such Committee Members,
the Committee shall establish and agree on a deadline for accomplishing such
consultation.
(b) Joint Operations Committee Action.
---------------------------------
(i) Joint Action. Except as otherwise expressly set forth above, the
------------
Joint Operations Committee shall take all other actions that have been approved
by a majority of the Committee Members.
(ii) Consultation Forum. Consultation between Dental Group and manager, if
------------------
any, shall take place at a meeting of the Joint Operations Committee, and Dental
Group and Manager hereby agree to be bound by the decision of their Dental Group
Members or Manager Members, as the case may be.
(c) Joint Operations Committee Meetings. Meetings of the Joint Operations
-----------------------------------
Committee may be held by telephone or similar communications equipment so long
as all Committee Members participating in a meeting can hear and speak to each
other. The Joint Operations Committee shall prepare and maintain
-6-
<PAGE>
written minutes of all meetings and shall provide a copy of the minutes to the
parties within fifteen (15) business days following each meeting.
(i) Regular Meetings. The Joint Operations Committee shall hold not
-----------------
less than four (4) regular meetings each year, at such specific times and
places as the Committee Members may determine.
(ii) Special Meetings. A special meeting of the Joint Operations
----------------
Committee may be called by a majority of the Committee Members.
(iii) Notice Requirement. A Committee Member calling a special,
-----------------
meeting must provide all other Committee Members with ten (10) days'
advance written or telephonic notice. Notice must be given or sent to the
Committee Member's address or telephone number as shown on the records of
the Joint Operations Committee. Notice may be delivered directly to
each Committee Member or to a person at the Committee Member's principal
place of business who would reasonably be expected to communicate that
notice promptly to the Committee Member.
(iv) Waiver of Notice Requirement.
----------------------------
(A) Written Waiver, Consent or Approval. Notice of a special
-----------------------------------
meeting need not be given to any Committee Member who, either before
or after the meeting, signs a waiver of notice or a written consent to
the holding of the special meeting, or an approval of the minutes of
the special meeting. Such waiver, consent or approval need not specify
the purpose of the special meeting. All such waivers, consents, and
approvals shall be filed with the Joint Operations Committee records
or made a part of the minutes of the special meetings.
(B) Failure to Object. Notice of a special meeting need not
-----------------
be given to any Committee Member who attends the special meeting and
does not protest before or at the commencement of the special meeting
such lack of notice.
(v) Quorum. The smallest number of Committee Members that exceed
------
fifty percent (50%) of all Committee Members shall constitute a quorum of
the Joint Operations Committee.
(vi) Proxies. The Joint Operations Committee shall provide for the
-------
use of proxies, telephonic conference calls, written consents or other
-7-
<PAGE>
appropriate methods by which the full participation of the Dental Group
Members and Manager Members can be assured.
(d) Limitation of Responsibility. Notwithstanding any other provisions
----------------------------
hereof, Committee Members shall be liable to the parties only for actions
constituting bad faith, gross negligence or breach of an express provision of
this Agreement (so long as such breach remains uncured after ten (10) days of
receiving notice of the nature of such breach). In all other respects, Committee
Members shall not be liable for negligence or mistakes of judgment.
3.6 Budgets. A capital and operating budget ("Annual Budget") shall be
-------
established regarding all financial aspects of the Practice. The Annual Budget
shall include the following elements and other items, as appropriate:
(a) A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
(b) An operating budget setting forth an estimate of Revenues and expenses
for the next succeeding fiscal year, together with an explanation of anticipated
changes or modifications, if any, in the Practice's utilization, rates, charges
to patients or third party payors, salaries, costs of Providers, non-wage cost
increases, and all other similar factors expected to differ significantly from
those prevailing during the current fiscal year;
(c) Other expenses of operation;
(d) The amount of a reasonable reserve to satisfy possible shortfalls from
operations. The allocation of such reserve shall be made by the Joint Operations
Committee as and when necessary; and
(e) The Management Fee, as defined below, for the next succeeding fiscal
year.
3.7 Budget Process.
--------------
(a) Initial Annual Budget. Not later than forty-five (45) days after
---------------------
the Effective Date, the Joint Operations Committee will have prepared the
initial Annual Budget for the first fiscal year (which shall initially be the
calendar year) during the term of this Agreement. If the Effective Date is other
than the first day of a fiscal year, then such initial Annual Budget shall
encompass only such portion of the then current fiscal year as remains, or, at
the option of the parties, such portion of the then current fiscal year plus the
immediately subsequent fiscal year.
-8-
<PAGE>
(b) Preliminary Budget. Not later than forty-five (45) days prior to the
------------------
end of each fiscal year during the term of this Agreement, the Manager shall
prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
(c) Joint Operations Committee Approval. The Joint operations Committee
-----------------------------------
shall review and suggest modifications to the Preliminary Budget within ten (10)
days of receipt. Manager shall prepare a revised budget based upon the Joint
Operations Committee's recommendations and the Preliminary Budget as revised
shall become the Annual Budget.
(d) Adjustments. In the event of a material deviation between financial
-----------
forecasts and financial performance during a fiscal year, Manager or Dental
Group may propose adjustments to the Annual Budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
3.8 Personnel.
---------
(a) Providers. Except in unusual circumstances approved by the Joint
---------
Operations Committee and as permitted by law, Manager shall not employ or
contract with any Providers for the provision of dental services. All Providers
who provide dental services to Group Patients or to Beneficiaries shall be
either (i) Employee Providers, (ii) Subcontract Providers or (iii) employees of
Subcontract Providers.
(b) Non-Providers. With the exception of employees of Subcontract
-------------
Providers, Manager shall employ all non-Provider personnel necessary for the
operation of the Practice.
(c) Salary and Benefits. Each party to this Agreement shall remain
-------------------
liable for the salary and benefits paid to such party's own employees and shall
be ultimately responsible for compliance with state and federal laws pertaining
to employment taxes, workers' compensation, unemployment compensation and other
employment-related statutes pertaining to the party's own employees.
(d) Payments to Subcontract Providers. Dental Group shall be liable
----------------------------------
for any payments due Subcontract Providers under Provider Subcontracts after
receipt of funds from Manager.
ARTICLE 4
MANAGEMENT SERVICES
-------------------
4.1 General Description of Services. Within the limitations set out
-------------------------------
elsewhere in this Agreement, Manager shall provide or arrange for the provision
to Dental Group of all support services reasonably necessary and appropriate for
the efficient
-9-
<PAGE>
operation of the Practice. Such services include all administrative services
necessary to Dental Group's performance of its obligations under Payor
Contracts, contracting, marketing, capital formation and assistance with long
term strategic planning.
4.2 Facilities. When appropriate, Manager shall secure and maintain
----------
facilities, including, without limitation, office space, improvements,
furnishings, equipment, supplies and personal property, of a nature and in a
condition necessary and appropriate for the efficient and effective operations
of the Practice subject to the general approval of the Joint Operations
Committee. Manager shall secure and maintain said facilities in the name of
Dental Group.
4.3 Purchased Items and Services. Manager shall serve as the purchasing
----------------------------
agent for Dental Group and shall arrange for personnel benefits, insurance, and
any other items and services required for the proper operation of the Practice.
4.4 Manager Personnel.
-----------------
(a) Management Team. Subject to any approval or consulting rights of the
---------------
Joint Operations Committee, Manager shall engage or designate one or more
individuals experienced in dental group management and direction, including, but
not limited to, an administrator, who will be responsible for the overall
administration of the Practice including day-to-day operations and strategic
development activities.
(b) Other Manager Personnel. Manager shall select, hire, train,
-----------------------
supervise, monitor and terminate all non-Provider personnel necessary for the
operation and management of the Practice.
4.5 Day-to-Day Management and Supervision. Subject to any approval or
-------------------------------------
consulting rights of the Joint Operations Committee, Manager shall provide
general management including, but not limited to, day-to-day supervision of:
(a) Manager personnel;
(b) Equipment and supply acquisition;
(c) Office space and facility maintenance;
(d) Patient records organization and retention;
(e) Third party payor contracting;
(f) Case management tracking;
(g) Billing, collections and accounting activities as set forth below;
-10-
<PAGE>
(h) All operating aspects and policies of the Practice including, but not
limited to, hours of operation, work schedules, standard duties and job
descriptions, for all nondentist personnel; and
(i) Other related and incidental matters.
4.6 Billing and Collection Payment of Expenses. Manager shall be
------------------------------------------
responsible for all billing and collecting activities required by Dental Group.
Manager shall also be responsible for reviewing and paying accounts payable of
Dental Group. Dental Group hereby appoints the Manager its true and lawful
attorney-in-fact to take the following actions for and on behalf of and in the
name of Dental Group:
(a) Bill and collect in Dental Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Dental Group. Dental
Group shall give Manager all necessary access to Patient records to accomplish
all billing and collection. In so doing, Manager will use its best efforts but
does not guarantee any specific level of collections, and Manager will comply
with Dental Group's reasonable and lawful policies regarding courtesy
discounts;
(b) Take possession of and endorse in the name of Dental Group any and all
instruments received as payment of accounts receivable;
(c) Deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
(d) Place accounts for collection, settle and compromise claims, and
institute legal action for the recovery of accounts.
4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
(a) Financial Reporting. Manager shall prepare, analyze, and deliver to
-------------------
the Joint Operations Committee financial reports to the extent necessary or
appropriate for the operation of the Practice, including the following:
(i) Financial statements, including balance sheets and statements
of cash flow and income;
(ii) Accounts payable and accounts receivable analysis;
(iii) Billing status including any Medicaid remittances; and
-11-
<PAGE>
(iv) Reconciliation of assets, liabilities and major expenses.
(b) Audits. Dental Group shall have the right to review and, at its sole
------
cost and expense, obtain an audit (separate from any annual audit or review of
Dental Group's financial statements performed at the direction of the Manager)
of Dental Group's financial books and records maintained by the Manager. Upon
five (5) days' prior written notice, Manager shall allow Dental Group access
during reasonable business hours to all information and documents reasonably
required for such review or audit. Upon Dental Group's request and at Dental
Group's expense, Manager shall also provide copies of such documents.
4.8 Marketing and Public Relations Services. Manager shall provide such
---------------------------------------
marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Dental Group.
Manager shall provide Dental Group with marketing materials and activities.
4.9 Dental Group Agreements. On behalf of Dental Group, Manager shall
-----------------------
review, evaluate and negotiate Payor Contracts and Provider Subcontracts and any
other contracts or agreements regarding the provision of dental related items or
services by Dental Group or Providers.
4.10 Utilization Review Quality Improvement and Outcomes Monitoring.
--------------------------------------------------------------
Manager shall be responsible for providing administrative support for Dental
Group's utilization review, quality improvement and outcomes monitoring
activities, including, without limitation, data collection, analysis and
reporting for Group Patients and Beneficiaries. Manager shall also support the
development and implementation of relevant policies, procedures, protocols,
practice guidelines and other interventions based on such activities.
4.11 Applicable Law. Manager and Dental Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE 5
DENTAL GROUP SERVICES
---------------------
5.1 Provision of Dental Services by Dental Group. Dental Group shall
--------------------------------------------
operate the Practice during the Term as a dental practice in accordance with
terms of this Agreement and the Annual Budget.
-12-
<PAGE>
5.2 Providers
---------
(a) Professional Dental Services. Dental Group shall employ or contract
----------------------------
with the number of Providers Dental Group deems necessary for the efficient and
effective operation of the Practice and in accordance with quality assurance,
credentialing and utilization management protocols approved by Manager. Dental
Group shall provide full and prompt dental coverage for the Practice, including
emergency service twenty-four (24) hours per day, seven (7) days per week,
including holidays according to policies and schedules approved by the Joint
Operations Committee.
(b) Provider Subcontracts and Employment Agreements. Dental Group shall
-----------------------------------------------
not negotiate or execute any Provider Subcontract, Employment Agreement, or any
amendment thereto, without the approval of the Joint Operations Committee. The
Joint Operations Committee shall have the right of review and reasonable
approval of any Provider Subcontract and Employment Agreement. Dental Group
shall be responsible for the payment, in accordance with the Annual Budget, of
all Employee and Subcontract Providers.
5.3 Peer Review. Dental Group, after consultation with the Joint
-----------
Operations Committee, shall implement, regularly review, modify as necessary or
appropriate and obtain the commitment of Providers to actively participate in
peer review procedures for Providers. Dental Group shall assist Manager in the
production of periodic reports describing the results of such procedures. Dental
Group shall provide Manager with prompt notice of any information that raises a
reasonable risk to the health and safety of Group Patients or Beneficiaries. In
any event, after consultation with the Joint Operations Committee, Dental Group
shall take such action as may be reasonably warranted under the facts and
circumstances.
5.4 Billing Information and Assignments. Dental Group shall promptly
-----------------------------------
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Dental Group's
services. Dental Group shall use reasonable efforts to procure consents to
assignments and other approvals and documents necessary to enable Manager to
obtain payment or reimbursement from third party payors and patients. With the
assistance of Manager, Dental Group shall obtain all provider numbers necessary
to obtain payment or reimbursement for its services.
5.5 Third Party Contracts. Dental Group shall be in compliance with all
---------------------
contracts, agreements and arrangements, including any contracts that exist on
the Effective Date, between Dental Group and third parties.
5.6 Use of Manager's Goods and Services. Dental Group shall not use any
-----------------------------------
goods or services provided by Manager pursuant
-13-
<PAGE>
to this Agreement for any purpose other than the provision of and management of
dental services as contemplated by this Agreement and purposes incidental
thereto.
5.7 Negative Covenants. During the Term, Dental Group shall not, without
------------------
the prior approval of the Joint Operations Committee, (a) assign, pledge,
mortgage or otherwise encumber any of its property, (b) transfer substantially
all of its assets, including its goodwill, (c) merge or consolidate with any
other entity, (d) allow the transfer or issuance of any of its stock (other
than in accordance with the terms and provisions of that certain Share
Acquisition Agreement dated June 19, 1997, between GMS Dental Group Management,
Inc., a Delaware corporation and Warren M. Francis, Jr., D.D.S.), or (e) take or
allow any act that would materially impair the ability of Dental Group to carry
on the business of the Practice or to fulfill its obligations under this
Agreement.
ARTICLE 6
TERM
----
6.1 Term. This Agreement shall be effective as of June 30, 1997 (the
----
"Effective Date"), and shall remain in effect for an initial term of forty (40)
years from the Effective Date, expiring on the fortieth (40th) anniversary of
the Effective Date, unless earlier terminated pursuant to the terms of this
Agreement. The word "Term" shall include such initial term and, where
applicable, any extension of such initial term (whether extended pursuant to
Section 6.2(a) or otherwise), subject to earlier termination pursuant to the
provisions of this Agreement.
6.2 Termination and Extension.
-------------------------
(a) Automatic Extension. At the end of the initial term and any subsequent
-------------------
term, this Agreement shall automatically renewed for a five (5) year term unless
one of the parties provides the other party with written notice of intent not to
renew, not less than one hundred eighty (180) day prior to the expiration of the
then current term.
(b) Early Termination. This Agreement may be terminated according to the
-----------------
provisions of this Section.
(i) Material Breach. In the event either party materially
---------------
breaches this Agreement and such breach is not cured to the reasonable
satisfaction of the non-breaching party within thirty (30) days after the
non-breaching party serves written notice of the default upon the
defaulting party (the "Default Notice"), the Agreement shall automatically
terminate at the election of the non-breaching party upon the giving of a
-14-
<PAGE>
written notice of termination to the defaulting party not later than forty-
five (45) days after service of the Default Notice; provided that if such
uncured breach is only capable of being cured within a reasonable period of
time in excess of thirty (30) days, the non-breaching party shall not be
entitled to terminate this Agreement so long as the defaulting party has
commenced such cure and thereafter diligently pursue such cure to
completion.
(ii) Refusal To Comply. In the event that Dental Group or Manager
-----------------
refuses or fails to comply with a decision of the Joint Operations
Committee, the aggrieved party shall have the option to require the non-
complying party to participate in good faith mediation under the auspices
of the American Mediation Association, and if such dispute between Dental
Group and Manager continues for sixty (60) days after the date the
aggrieved party exercises its option regarding mediation, the non-complying
party shall have thirty (30) days in which to comply with the decision of
the Joint Operations Committee. If the non-complying party has not complied
by the end of such thirty (30) day period, the aggrieved party shall have
the option to terminate this Agreement upon fifteen (15) days prior written
notice. During such mediation, Manager and Dental Group shall continue to
operate and manage the Practice in good faith. Neither Dental Group nor
Manager shall be required to participate in such good faith mediation if it
reasonably concludes that the delay associated with pursuing such mediation
likely would cause harm or injury to it or the Practice.
(iii) Bankruptcy. A party may, upon three (3) days, prior written
----------
notice, terminate this Agreement if the other party:
(A) Applies for or consents to the appointment of a receiver,
trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary
petition, makes a general assignment for the benefit of its
creditors, files a petition or answer seeking reorganization or
arrangement with its creditors, or admits in writing its inability to
pay its debts when due, or
(B) Suffers any order, judgment or decree to be entered by any
court of competent jurisdiction, adjudicating such party bankrupt or
approving a petition seeking its reorganization or the appointment of
a receiver, trustee or liquidator
-15-
<PAGE>
of such party or of all or a substantial part of its assets, and such
order, judgment or decree continues unstayed and in effect for ninety
(90) days after its entry.
(iv) Nonperformance. Manager may terminate this Agreement in the event
--------------
that in any two (2) consecutive fiscal quarters the Manager has not been
paid the Management Fee and, in the sole discretion of the Manager, it is
not reasonably likely that the Management Fee will be paid in the next
fiscal quarter. Any such termination shall be effective as of the last day
of such third fiscal quarter provided at least ninety (90) days notice
shall have been given; otherwise, such termination shall be effective on
the sixtieth day after notice is given.
(v) Change in Law. In the event of any material change in federal or
-------------
state law that has a significant adverse impact on either party hereto in
connection with their performance under this Agreement, or if performance
by a party of court or any duties under this Agreement be deemed illegal by
any administrative agency or in a formal opinion rendered to Manager by
legal counsel knowledgeable in health law matter retained by the Manager,
the affected party shall have the right to require that the other party
renegotiate the terms of this Agreement. Unless the parties otherwise
mutually agree in writing, such renegotiated terms shall be effective not
later than twenty (20) days after receipt of written notice of such request
for renegotiation. Solely in the event of illegality, if the parties fail
to reach an agreement within thirty (30) days of the request for
renegotiation, either party may (subject to the severability provision of
this Agreement) terminate this Agreement upon thirty (30) days' prior
written notice to the other party.
(c) Effect of Termination. Upon termination of this Agreement:
---------------------
(i) Dental Group shall surrender to Manager all of Manager's
property used primarily in the operation of the Practice in the same
condition as received, reasonable wear and tear excepted.
(ii) Manager shall deliver to Dental Group all records related to
the business of and provision of dental care through the Practice
including, without limitation, patient records and any corporate, personnel
and financial records maintained for the Practice and Providers, provided,
that except as limited by law, including, but not limited to laws
-16-
<PAGE>
governing the confidentiality of patient records, Manager shall
have the option to copy (or otherwise duplicate) at its sole cost
and expense such records of Dental Group and to retain and
utilize such records for its own use;
(iii) Manager shall deliver to Dental Group any other
property of Dental Group in Manager's possession;
(iv) Both parties shall cooperate to ensure the provision
of appropriate dental care to Group Patients and Beneficiaries;
(v) Dental Group shall promptly deliver to Manager any
Revenues that it may receive in payment for dental services
rendered by Dental Group prior to termination; and
(vi) Both parties shall cooperate to ensure the
appropriate billing and collections for dental services rendered
by Dental Group prior to the effective date of termination, and
any such cash collected shall be retained by Dental Group and/or
paid to Manager pursuant to Article 8.
(d) Manager's Option. Upon the termination of this Agreement pursuant
----------------
to Section 6.2(b), Manager shall have the option exercisable within one hundred
eighty (180) days after the effective date of termination to require Dental
Group to: (i) assume the accounts payable and other liabilities and obligations
under facilities leases, equipment leases and other contracts, and (ii) purchase
the accounts receivable, inventories and supplies, furniture, fixtures and
equipment, leasehold improvements and intangible assets, in each case which
relate solely to the performance by Manager of its obligations under this
Agreement, at their respective fair market values. The fair market value of the
assumed liabilities and acquired assets shall be determined in each case based
upon their respective book values as reflected on the books and records of
Manager in accordance with GAAP, except that the fair market value of equipment
shall be the greater of its book value as so determined or its appraised value
as determined in good faith by a reputable appraiser selected by Manager. The
consideration to be paid by Dental Group shall consist of (A) the amount of the
liabilities assumed by Dental Group in the transaction as valued based on their
book values, and (B) cash for the balance. Dental Group shall indemnify and hold
harmless Manager from and against and to the extent practicable arrange for the
release of Manager from any and all labilities and obligations assumed by Dental
Group. The option shall be exercisable by Manager by giving written notice to
Dental Group. If Manager exercises its option pursuant to this Section prior to
the effective date of termination of this Agreement, then the effective date of
termi-
-17-
<PAGE>
nation of this Agreement shall be continued until the closing date of the
acquisition transaction provided for under this Section. The closing of the
transaction shall take place at the principal office of Manager not more than
thirty (30) days following the exercise of the option by Manager.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF DENTAL GROUP
----------------------------------------------
Dental Group hereby represents and warrants to Manager as of the date
hereof as follows:
7.1 Organization. Dental Group is a professional corporation duly
-------------
organized, validly existing and in good standing under the laws of the State of
California. Dental Group does not need to be qualified in any jurisdiction other
than where it is currently qualified except where the failure to be so qualified
will not have a material adverse effect on Dental Group. Dental Group has all
requisite power to own, lease and operate its properties and assets, and to
carry on its business as presently conducted. Complete and correct copies of the
Articles of Incorporation and Bylaws of Dental Group have been delivered to the
Manager. Such copies are true, correct, complete and properly executed and
contain all amendments through the date of this Agreement.
7.2 Capitalization. The authorized capital stock of Denta1 Group
---------------
consists of 1,000 shares of Common Stock, of which 100 shares are issued and
outstanding and owned of record and beneficially by Warren M. Francis, Jr.,
D.D.S.
7.3 Subsidiaries; Conduct of Business. The sole activity of Dental
---------------------------------
Group is the operation of dental care centers and ancillary activities
associated therewith, and Dental Group is not now and has not engaged in any
other activities of any nature. Dental Group has no subsidiaries, nor any long-
term or short-term investments in, nor ownership of securities of, any business,
corporation, partnership, enterprise, entity or organization, public or private.
7.4 Authority. Dental Group has all requisite power and authority to
----------
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of Dental Group. This Agreement has been duly
executed and delivered by Dental Group and constitutes a valid and binding
obligation of Dental Group, enforceable in accordance with its terms, subject to
the effect of applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar federal or state laws affecting the
rights of creditors and the effect or availability of rules of
-18-
<PAGE>
law governing specific performance, injunctive relief or other equitable
remedies (regardless of whether any such remedy is considered in a proceeding at
law or in equity).
No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality is required by or with respect
to Dental Group in connection with the execution and delivery of this Agreement
by Dental Group or the consummation by Dental Group of the transactions
contemplated hereby.
7.5 No Conflict. The execution, delivery and performance of this
-----------
Agreement by Dental Group and the consummation of the transactions contemplated
hereby and the conduct of the business of Dental Group as currently conducted
will not result in any violation of, be in conflict with, or constitute a
default or give rise to a right of termination, cancellation or acceleration
under any provision of (a) any judgment, decree or order or any material
agreement, contract, understanding, indenture or other instrument to which
Dental Group is a party or by which it is bound; or (b) any statute, rule or
governmental regulation applicable to Dental Group.
7.6 Providers. A list of all agreements between Dental Group and dentists,
---------
nurses, hygienists, and other dental care Providers are set forth on the
schedule delivered by Dental Group to Manager concurrently with the execution
hereof. The Providers have all necessary credentials, licenses and permits
required for the work performed for Dental Group. All Providers carry
malpractice insurance in amounts adequate for their performance of services
for Dental Group.
ARTICLE 8
MANAGEMENT FEE
--------------
For its services hereunder, which shall include the providing of all
facilities and furniture, fixtures and equipment at the Practice, all non-
dentist employees of Manager who perform services at or for the Practice and all
management services provided hereunder but shall not include providing
professional dental services, Manager shall retain as a management fee
(collectively, the" Management Fee") the following:
8.1 Base Management Fee. As a base management fee (the "Base Management
-------------------
Fee") Manager shall retain that portion of Revenues equal to the sum of the
amount of Manager's Costs plus [*] percent ([*]%) of Revenues.
8.2 Performance Management Fee. As a bonus for meeting performance
--------------------------
standards goals as set by the Joint Operations Committee, Manager shall be
eligible for a Performance Manage-
__________
[*] Confidential Treatment Requested.
-19-
<PAGE>
ment Bonus that is calculated in accordance with the applicable exhibit to the
Annual Budget.
8.3 Adjustments. If there are not sufficient funds to pay the Base
-----------
Management Fee, all unpaid amounts shall accumulate and carry over until paid or
until the termination of this Agreement, in which case such unpaid amounts shall
be immediately due and payable as of the date of termination.
8.4 Priorities. Notwithstanding anything to the contrary contained in
----------
this Article 8, the Dental Expenses shall be paid prior to the payment of the
Base Management Fee or Performance Management Fee. In addition, any accruals
pursuant to Section 8.3 will be eliminated prior to the payment of any
Performance Management Fee.
8.5 Reasonable Value. Payment of the Base Management Fee and the
----------------
Performance Management Fee is acknowledged as the parties' negotiated agreement
as to the reasonable fair market value of the services furnished by Manager
pursuant to this Agreement, considering the nature and volume of the services
required and risks assumed by Manager.
ARTICLE 9
INDEMNITY AND INSURANCE
-----------------------
9.1 Indemnity.
---------
(a) Indemnification. Each party shall indemnify, defend and hold harmless
---------------
the other party from any and all liability, loss, claim, lawsuit, injury, cost,
damage or expense whatsoever (including reasonable attorneys' fees and court
costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Dental Group
agrees to indemnify, defend and hold harmless Manager for all liability, loss,
claim, lawsuit, injury, cost, damage or expense whatsoever (including reasonable
attorneys' fees and court costs) arising out of the professional negligence of
Dental Group, its employees, agents, contractors or subcontractors, including
any amounts in excess of the professional liability insurance coverage of Dental
Group or its employees, agents, contractors or subcontractors.
(b) Mutual Indemnity. Each party to this Agreement shall be indemnified
----------------
by the other party for any claim under this Agreement or otherwise against the
indemnified party for vaca-
-20-
<PAGE>
tion pay, sick leave retirement benefits, Social Security benefits, workers'
compensation benefits, disability or unemployment, insurance benefits, or other
employee benefits of any kind accrued during the term of this Agreement by an
employee of the indemnifying party.
9.2 Manager's Insurance. Manager shall, on its own behalf and at its sole
-------------------
cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
(a) Comprehensive general liability insurance covering the risks of
Manager, in an amount determined by the Joint Operations Committee;
(b) Workers' compensation insurance covering the employees of Manager, in
such amounts as is usual and customary under the circumstances;
(c) Property insurance covering the facilities, equipment and supplies
owned or leased by Manager or Dental Group for use in the operation of the
Practice.
9.3 Dental Group's Insurance. At Dental Group's sole cost and expense,
------------------------
Manager shall obtain and maintain on behalf of Dental Group in full force and
effect during the Term, policies in the following categories in the amount
indicated:
(a) Comprehensive professional liability insurance coverage for Dental
Group and Dental Group's Employee Providers, in such amounts as Manager shall
reasonably deem necessary;
(b) Workers' compensation insurance covering the employees of Dental
Group, in such amounts as is usual and customary under the circumstances;
(c) Comprehensive general liability insurance covering the risks of
Dental Group, in an amount determined by the Joint Operations Committee.
ARTICLE 10
PROPRIETARY INFORMATION AND UNFAIR COMPETITION
----------------------------------------------
10.1 Protection of Proprietary Information. Dental Group recognizes
-------------------------------------
that due to the nature this Agreement, Dental Group will have access to trade
secrets and other confidential information of a proprietary nature owned by
Manager ("Proprietary Information"). "Proprietary Information" includes all
information and any idea which a reasonable person would believe is
confidential, in whatever form, tangible or intangible, pertaining in any manner
to the business of Manager or any subsidiary or affiliate of Manager, unless (a)
the information is or
-21-
<PAGE>
becomes publicly known through lawful means, (b) the information was rightfully
in Dental Group's possession or part of its general knowledge prior to the
Effective Date or (c) the information is subsequently disclosed to Dental Group
by a third party without breach of this Agreement and without restriction on its
use. Proprietary Information includes, but is not limited to, any and all
computer programs (whether or nor completed or in use) and any and all operating
manuals or similar materials which constitute the non-medical systems, policies
and procedures, and methods of doing business developed by or for the operation
of facilities managed by Manager. Dental Group acknowledges and agrees that
Manager has a proprietary interest in all such Proprietary Information and that
all such information constitutes confidential and proprietary information and is
the trade secret property of Manager. Dental Group hereby waives any and all
right, title and interest in and to such Proprietary Information and agrees to
return all copies thereof and Proprietary Information related thereto to
Manager, at Dental Group's expense, upon the termination of this Agreement.
Dental Group further acknowledges and agrees that Manager is entitled to
prevent its competitors from obtaining and utilizing its Proprietary
Information. Therefore, Dental Group agrees to hold Manager's Proprietary
Information in strictest confidence and not to disclose it or allow it to be
disclosed, directly or indirectly, to any person or entity other than those
persons or entities who are employed by or affiliated with Manager or Dental
Group, without the prior written consent of Manager. Dental Group shall not,
either during the term of this Agreement, or at any time after the expiration or
earlier termination of this Agreement, disclose to anyone other than persons or
entities who are employed by or affiliated with Manager or Dental Group any
Proprietary Information obtained by Dental Group from Manager, except as
otherwise required by law.
10.2 Restrictions on Unfair Competition. Dental Group agrees that during
----------------------------------
the term of this Agreement and for a period of two (2) years after termination
of this Agreement Dental Group shall not (a) solicit in any way on behalf of
itself or in conjunction with others for the purpose of providing management
services any dental group being managed by or being or having been solicited by
Manager or any subsidiary, affiliate or successor in interest thereof, and (b)
solicit in any way or make offers of employment to, on behalf of itself or in
conjunction with others, any person employed by Manager or any subsidiary,
affiliate or successor in interest thereof. Dental Group acknowledges and agrees
that these restrictions are reasonable and necessary to protect Manager's
Proprietary Information and to ensure that it will not be subject to unfair
competition.
10.3 Enforcement. Dental Group agrees to require each independent
-----------
contractor and employee of the Dental Group, and any persons or entities to whom
such Proprietary Information is disclosed for the purpose of performance of
Manager's or Dental
-22-
<PAGE>
Group's obligations under this Agreement, to execute a proprietary information
agreement in the form supplied by or approved by Manager pursuant to which they
agree to abide by the restrictions on Dental Group's activities set forth in
this Article 10. Dental Group acknowledges and agrees that a breach of the
provisions of this Article 10 will result in irreparable harm to Manager which
cannot be reasonably or adequately compensated in damages, and therefore Manager
shall be entitled to injunctive and/or equitable relief to prevent a breach and
to secure enforcement thereof, in addition to any of the relief or award to
which Manager may be entitled.
ARTICLE 11
BOOKS AND RECORDS
-----------------
11.1 Ownership of Records. All business records and information relating
--------------------
exclusively to the business and activities of either party shall be the property
of that party, irrespective of identity of the party responsible for producing
or maintaining such records and information. Without limiting the foregoing, all
patient charts and records maintained by Manager relating to the dental services
of Dental Group shall be the property of Dental Group. Dental Group also shall
be entitled to a copy at Dental Group's sole cost of all business records
pertaining to Dental Group. Except as limited by law, including, but not limited
to laws governing the confidentiality of patient records, Manager shall be
entitled to a copy at Manager's sole cost of all records of Dental Group.
ARTICLE 12
MISCELLANEOUS PROVISIONS
------------------------
12.1 Assignment. Neither party shall assign this Agreement to any other
----------
party or parties without the prior written consent of the other party, which
consent may be withheld arbitrarily or capriciously, for any reason or for no
reason whatsoever and any attempted assignment in violation of this Agreement
shall be null and void provided, however, that Dental Group hereby consents in
advance to the assignment by Manager of this agreement to GMS Dental Group, Inc.
("Company") or any affiliate of Company, and to the assignment of this agreement
for the purpose of securing any and all obligations arising in connection with
the extension of credit to Company or any affiliate of Company, including,
without limitation, those obligations arising under that certain Credit
Agreement between Company and Imperial Bank dated October 10, 1996, and that
certain Security Agreement referenced therein (the "Loan Documents"), and Dental
Group hereby agrees that (a) upon receipt of a notice from the Agent that a
"Default" or an "Event of Default" under the Loan Documents has occurred, Dental
Group
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<PAGE>
will make all payments required to be made under this Agreement directly to the
Agent and the Agent shall be entitled to exercise any and all rights and
remedies of Manager under this Agreement and (b) Dental Group will not, without
the prior written consent of the Agent, terminate (except pursuant to the terms
thereof) or amend or otherwise modify this Agreement.
12.2 Headings. The article and section headings used in this Agreement
---------
are for purposes of convenience only. They shall not be construed to limit or to
extend the meaning of any part of this Agreement.
12.3 Waiver. Waiver by either Dental Group or Manager of any breach of
------
any provision of this Agreement shall not be deemed to be a waiver of such
provision or of any subsequent breach of the same or of any other provision of
this Agreement.
12.4 Notices. Any notice, demand, approval, consent, or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be deemed to have been given when five (5) business days have
elapsed from the date of deposit in the United States mails, certified and
postage prepaid, addressed to the party to be served at the following address or
such other address as may be given in writing to the parties.
Dental Group: Ashrafi Dental Corporation
1405 Fulton Road
Santa Rosa, CA 95405
Attn: President
Manager: Warren M. Francis, Jr. D.D.S., Inc.
42 Doctor's Park Drive
Santa Rosa, CA 95405
Attn; President
12.5 Attorneys' Fees. If any legal action, arbitration, mediation or other
---------------
proceeding is commenced, whether by Manager or Dental Group concerning this
Agreement, the prevailing party shall recover from the losing party reasonable
attorneys' fees and costs and expenses, including those of appeal and not
limited to taxable costs, incurred by the prevailing party, in addition to all
other remedies to which the prevailing party may be entitled. If a claim or
claims asserted by a third party against Manager or Dental Group or any of them
arise from an action or omission by the other, the party responsible for the
action or omission shall be the losing party, and the other party shall be the
prevailing party, for purposes of the foregoing sentence.
12.6 Successors. Without limiting or otherwise affecting any restrictions
----------
on assignments of this Agreement or rights or duties under this Agreement, this
Agreement shall be binding
-24-
<PAGE>
upon and inure to the benefit of the successors and assigns of Dental Group and
Manager.
12.7 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between Dental Group and Manager and supersedes all prior negotiations and
agreements, written or oral, concerning or relating to the subject matter of
this Agreement, and this Agreement may not be modified except by a writing
executed by all parties and subject to the provisions thereof.
12.8 Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereto shall be governed by, and construed according to, the laws of the
State of California.
12.9 Severability. If any provision of this Agreement is held to be
------------
invalid or unenforceable by any court or administrative agency of competent
jurisdiction, or in a written opinion to the Manager by legal counsel
knowledgeable in health law matters retained by the Manager, such holding or
opinion shall not affect the validity and enforceability of the other provisions
of this Agreement and the remainder of this Agreement shall be considered valid
and operative to the fullest extent permitted by law, but only if and to the
extent such enforcement would not materially and adversely frustrate the parties
essential objectives as expressed herein.
12.10 Time is of the Essence. Time is of the essence in this Agreement.
----------------------
12.11 Authority. Any Person signing this Agreement on behalf of any entity
---------
hereby represents and warrants in its individual capacity that it has full
authority to do so on behalf of such entity.
12.12 Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute on and the same instrument.
IN WITNESS WHEREOF, Dental Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
DENTAL GROUP
------------
ASHRAFI DENTAL CORPORATION,
a California professional
dental corporation
By /s/ Mark Ashrafi
----------------------------------
Mark Ashrafi, President
-25-
<PAGE>
MANAGER
-------
WARREN M.FRANCIS, JR. D.D.S.,
INC. a California professional
corporation
By: /s/ Warren M. Francis,
----------------------------
Warren M. Francis, Presdent
-26-
<PAGE>
ADDENDUM 1
----------
For purposes of this Agreement, the following terms shall have the meaning
indicated below or defined at the indicated section:
1. Accounts. See Section 2.5(a).
--------
2. Affiliate. "Affiliate" shall mean, with respect to any Person, any
---------
individual or entity directly or indirectly owned or controlled by such Person,
any individual or entity directly or indirectly owning or controlling such
Person or any individual or entity directly or indirectly owned or controlled by
the same family member, individual or entity as owns or controls such Person.
For purposes of this Agreement, neither Dental Group nor Manager shall be deemed
an Affiliate of the other.
3. Agreement. "Agreement" means this Dental Group Management Agreement.
----------
4. Annual Budget. See Section 3.6, first sentence.
--------------
5. Beneficiaries. See Recital C.
--------------
6. Books and Records. "Books and Records" means Dental Group's books
-----------------
of account, accounting and financial records and all other records relating to
and used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
7. Capital Costs. "Capital Costs" shall mean any and all investments that
-------------
are or would be capitalized pursuant to GAAP.
8. Committee Members. See Section 3.5(a).
-----------------
9. Default Notice. See Section 6.2(b)(1).
--------------
10. Dental Group. See first paragraph of this Agreement.
------------
11. Dental Group Members. See Section 3.5 (a).
--------------------
12. Dental Expenses. See Section 2.6(b).
---------------
13. Effective Date. See Section 6.1.
--------------
14. Employee Providers. See Recital D.
------------------
15. Employment Agreements. See Recital D.
---------------------
A-1
<PAGE>
16. GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with 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 Manager's financial
statements.
17. Group Patients. See Recital C.
--------------
18. Joint Operations Committee. See Section 3.4(b).
--------------------------
19. Management Fee. See Article 8.
--------------
20. Manager. See first paragraph of this Agreement.
--------
21. Manager Members. See Section 3.5(a).
---------------
22. Manager's Costs. "Manager's Costs" means all costs incurred by
---------------
Manager including amortization associated with costs of acquiring assets of the
Dental Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which
are attributable to Manager's business operations in accordance with Manager's
corporate allocation policies.
23. Marks. See Section 2.3(a).
-----
24. Payor Contracts. See Recital C.
---------------
25. Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
26. Plans. See Recital C.
-----
27. Practice. See Recital E.
--------
28. Preliminary Budget. See Section 3.7 (b).
------------------
29. Programs. See Section 2.3(b).
--------
30. Proprietary Information. See Section 10.1.
-----------------------
31. Providers. "Providers" shall mean individuals or organizations
---------
licensed to practice dentistry (including specialists) as well as other dental
professionals who provide ancillary reimbursable dental services.
32. Provider Subcontracts. See Recital D.
---------------------
A-2
<PAGE>
33. Revenues. "Revenues" means all amounts assigned hereunder by Dental
--------
Group to Manager pursuant to Section 2.5 (a).
34. Subcontract Providers. See Recital D.
---------------------
35. Term. See Section 6.1.
-----
A-3
<PAGE>
EXHIBIT 10.40[*]
DENTAL GROUP MANAGEMENT AGREEMENT
THIS DENTAL GROUP MANAGEMENT AGREEMENT (this "Agreement") is dated as of
October 11, 1996 and is effective as of the date set forth in Section 6.1
("Effective Date") by and between GMS DENTAL GROUP MANAGEMENT OF HAWAII, INC., a
-------------------------------------------
Hawaii corporation (formerly known as Dental Care Management, Inc.) ("Manager")
which is wholly-owned by GMS Dental Group Management, Inc., a Delaware
corporation (the "Company") and HUALALAI DENTAL SERVICES, INC., a Hawaii
------------------------------
professional dental corporation ("Dental Group").
RECITALS
--------
A. Dental Group engages in the practice of dentistry by providing dental
services to patients of Dental Group ("Group Patients") and to enrollees
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
between Dental Group and Plans or between Beneficiaries and Plans.
B. Dental Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
arrangements may include contracts ("Employment Agreements") with dentist
employees and allied health professional employees (collectively "Employee
Providers") and agreements ("Provider Subcontracts") with independent contractor
dentists and non-dentist providers of various dental care services (collectively
"Subcontract Providers").
C. All activities of Dental Group subject to this Agreement are
referenced as the "Practice." All references to "dental" care and services
include general and specialist dental services. All references to "dentists"
include generalists and specialists.
D. Manager is a management services company that provides certain support
services for the Practice and for other dental groups. Manager is in the
business of providing or arranging for management services, facilities,
equipment and certain personnel necessary for the operation of the Practice.
E. Dental Group desires to retain Manager on an independent contractor
basis to provide management services that are more particularly described below,
and Manager desires to provide such management services under the terms and
conditions set forth in this Agreement.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the covenants and conditions contained
herein, Manager and Dental Group agree as follows:
__________
[*] Confidential Treatment Requested.
<PAGE>
ARTICLE 1
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
ARTICLE 2
SCOPE OF AGREEMENT
------------------
2.1 General Scope of Agreement. This Agreement shall apply to the
--------------------------
Practice, including, without limitation, all professional, administrative and
technical services, marketing, contracting, case management, ancillary dental
services, outpatient services and dental care facilities, equipment, supplies
and items, except as otherwise specifically provided in this Agreement. Dental
Group's Employment Agreements shall encompass substantially all such activities
of Employee Providers and shall provide that all revenues derived from such
activities (and not excluded below) are Revenues. Nothing in this Agreement
shall be construed to alter or in any way affect the legal, ethical and
professional relationship between and among Providers and Provider's patients,
nor shall anything contained in this Agreement abrogate any right or obligation
arising out of or applicable to the dentist-patient relationship.
2.2 License. Dental Group grants Manager an exclusive license to use any
-------
and all of Dental Group's assets, whether tangible or intangible, in carrying
out Manager's duties and responsibilities under the provisions of this
Agreement.
2.3 Intellectual Property. Dental Group hereby grants to Manager a non-
---------------------
exclusive, perpetual, royalty-free, worldwide license to use and sublicense the
use of any intellectual property owned by Dental Group to the extent necessary
in carrying out Manager's duties and responsibilities under the provisions of
this Agreement. This license shall cover, but not be limited to, use of the
following:
(a) Service Mark. Dental Group hereby grants Manager the right to use all
------------
service marks and trademarks of Dental Group (the "Marks") for marketing and
promotional materials in connection with Dental Group's offering of dental
services. Manager agrees to use the Marks solely in the design format used by
Dental Group as of the date of this Agreement or another design format approved
in advance in writing by Dental Group. Dental Group shall have the opportunity
to review any marketing or other materials using the Marks in advance of any
public distribution. Manager agrees that it will include these restrictions on
use in any sublicense of the Marks.
-2-
<PAGE>
(b) Copyrighted Materials. Dental Group hereby grants Manager the right to
---------------------
use any and all copyrighted materials authored or owned by Dental Group
including, specifically, the Dental Group dental management system software
programs (the "Programs"). This license includes the right to sublicense the
Programs and the right to prepare and own derivative works based on the
Programs, all without a duty of accounting to Dental Group. Dental Group shall
execute all documents required to enable Manager to own, use and exploit all
such rights.
2.4 Revenues. "Revenues" shall mean all of Dental Group's accounts
--------
receivable (net of contractual adjustments and bad debt), and cash collections.
Revenues shall include all funds collected by, or legally due to, Dental Group
or any Affiliate of Dental Group, including, without limitation, the following:
(a) all fee-for-service payments for services to Group Patients or
Beneficiaries; (b) all payments established under Payor Contracts; (c) all
coordination of benefits or deductibles and third-party liability recoveries
related to the Group's services; (d) all payments, dues, fees or other
compensation to Dental Group, (e) any income, profits, dividends, distributions
or other payments from Dental Group's investments; and (f) any interest or other
non-operating income of Dental Group.
2.5 Deposit Accounts. All cash received by Dental Group from whatever
----------------
source shall be deposited into an account or accounts ("Accounts") in the name
of Dental Group at a banking institution selected by Dental Group and approved
by Manager. Dental Group authorizes Manager to bill and collect, in Dental
Group's name, all charges and reimbursements for Dental Group's dental related
activities and to deposit such collections in the Accounts. Dental Group agrees
to assist and cooperate, at no cost or expense to Dental Group, with Manager in
the billing and collection process and to immediately deliver to Manager for
deposit any monies Dental Group may receive.
2.6 Assignment.
----------
(a) Assets. Except as prohibited by contract or by law, Dental Group
------
hereby assigns, sells, conveys, transfers, and delivers to Manager, and Manager
hereby accepts from Dental Group, all of the assets and properties of Dental
Group of every kind, character and description, whether tangible, intangible,
real, personal, or mixed, and wherever located, including, but not limited to,
all Revenues, cash, accounts receivable, advances, prepaid expenses, deposits,
equipment and improvements. The assets shall be valued at their fair market
value which has been determined to be their respective book values. Manager
shall have the authority, and Dental Group shall execute any and all documents
as may be necessary or appropriate to transfer the assets to Manager, authorize
Manager to transfer the funds in the Accounts to a separate account in the name
of Manager, and effectuate the intention of this provision.
-3-
<PAGE>
(b) Liabilities. Manager shall be responsible for paying all claims and
-----------
obligations associated with the operation of Dental Group pursuant to this
Agreement; provided, Manager shall be deemed to fully discharge its
responsibility to Dental Group for the liabilities described in this
subparagraph by its timely payment on Dental Group's behalf of, or timely
delivery to Dental Group of an amount sufficient to discharge, all of Dental
Group's obligations and liabilities now existing or arising in the future,
including, but not limited to, those under Provider Subcontracts, Employment
Agreements, Dental Group's professional liability insurance and any other
operational expenses for which Dental Group retains responsibility or that are
delegated to Dental Group, whether pursuant to this Agreement or any other
agreement of the parties or action of the Joint Operations Committee ("Dental
Expenses"). Notwithstanding the foregoing, Manager does not assume any
liabilities of Dental Group which are unrelated to the dental business or any
liabilities for income taxes which are unrelated to the dental business.
ARTICLE 3
GOVERNANCE AND CONTROL
----------------------
3.1 Appointment. Dental Group hereby appoints Manager as its sole and
-----------
exclusive manager for the operation of the Practice and covenants not to enter
into an agreement with any Person other than Manager to perform or assume any of
Manager's rights, duties or responsibilities as provided herein. Manager hereby
accepts full responsibility for such management as more fully set forth herein.
3.2 Professional Matters. Pursuant to applicable laws and requirements
--------------------
governing the practice of dentistry, Dental Group shall retain ultimate
responsibility for all activities of Dental Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's non-
licensed status. The parties understand and agree that during the term of this
Agreement, Dental Group shall be the provider of dental services for all
purposes, including, but not limited to, licensure and reimbursement.
3.3 Relationship of Parties. In the performance of its duties and
-----------------------
obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Dental Group. Except as provided in this Agreement or as
required by law, Dental Group shall neither have nor exercise any control or
direction over the methods by which Manager shall perform its obligation
thereunder; nor shall Manager have or exercise any control or direction over the
methods by which Dental Group shall practice dentistry. It is expressly agreed
by the parties that no work, act, commission or omission of Manager pursuant to
the terms and conditions of this Agreement shall be construed to make or
-4-
<PAGE>
render Manager or Manager's employees or agents, the employees of Dental Group.
Manager and Dental Group are not partners or joint venturers with each other and
nothing herein shall be construed so as to make them partners or joint venturers
or impose upon either of them any liability as partners or joint venturers.
Dental Group's responsibility is to assure that the services covered by this
Agreement shall be performed and rendered in a competent, efficient and
satisfactory manner.
3.4 Authority and Control. Strategic planning, overall direction and
---------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group shall be accomplished as follows:
(a) Exclusive Authority.
-------------------
(1) Dental Group. Dental Group shall be solely and exclusively in control
------------
of all aspects of the practice of dentistry and delivery of dental services by
Providers. The rendition of all dental professional services, including, but
not limited to, diagnosis, treatment, surgery, therapy and prescription medicine
and drugs, and the supervision and preparation of dental reports shall be the
responsibility of Dental Group. Notwithstanding, the foregoing, Dental Group
shall consult with Manager or the Joint Operations Committee to the extent
reasonable and not inconsistent with the licensure of dentists.
(2) Manager. After reasonable consultation with Dental Group or the Joint
-------
Operations Committee, Manager shall have the sole responsibility and authority
for decisions related to the administration of the Practice.
(b) Joint Authority. All other decision-making authority related to the
---------------
business and affairs of Dental Group shall be vested in a joint operations
committee (the "Joint Operations Committee"). Nothing herein shall be construed
as preventing the Joint Operations Committee from appointing representatives and
delegating authority to such representatives so long as the Joint Operations
Committee may revoke such appointment and delegation at any time and so long as
the Joint Operations Committee retains ultimate responsibility for the decisions
of such representatives.
3.5 Joint Operations Committee. Strategic planning, overall direction and
--------------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group shall be overseen by the Joint Operations
Committee as follows:
(a) Joint Operations Committee Membership. The Joint Operations Committee
-------------------------------------
shall consist initially of three (3) individuals (the "Committee Members").
Dental Group shall designate one (1) Committee Member (the "Dental Group
Member") and the remaining two (2) Committee Members (the "Manager Members")
shall be appointed by Manager. The number of Committee Members may be increased
by agreement of the parties. Each party shall
-5-
<PAGE>
continue to direct the appointment of the same percentage of Committee Members
as described above. Each Committee Member shall serve at the pleasure of the
party designating such Committee Member and may be replaced, with or without
cause, at any time by such party upon the delivery of written notice thereof to
the other Committee Members. Manager, Dental Group and their respective
Committee Members shall diligently pursue any prelimi nary activities that are
necessary to allow the Joint Operations Committee to take an action. Where
Committee Members are required to consult with the organization appointing such
Committee Members, the Committee shall establish and agree on a deadline for
accomplishing such consultation.
(b) Joint Operations Committee Action.
---------------------------------
(1) Joint Action. Except as otherwise expressly set forth above, the Joint
------------
Operations Committee shall take all other actions that have been approved by a
majority of the Committee Members.
(2) Consultation Forum. Consultation between Dental Group and Manager, if
------------------
any, shall take place at a meeting of the Joint Operations Committee, and Dental
Group and Manager hereby agree to be bound by the decision of the Joint
Operations Committee.
(c) Joint Operations Committee Meetings. Meetings of the Joint Operations
-----------------------------------
Committee may be held by telephone or similar communications equipment so long
as all Committee Members participating in a meeting can hear and speak to each
other. The Joint Operations Committee shall prepare and maintain written
minutes of all meetings and shall provide a copy of the minutes to the parties
within fifteen (15) business days following each meeting.
(1) Regular Meetings. The Joint Operations Committee shall hold not less
----------------
than four (4) regular meetings each year, at such specific times and places as
the Committee Members may determine.
(2) Special Meetings. A special meeting of the Joint Operations Committee
----------------
may be called by a majority of the Committee Members.
(3) Notice Requirement. A Committee Member calling a special meeting must
------------------
provide all other Committee Members with ten (10) days' advance written or
telephonic notice. Notice must be given or sent to the Committee Member's
address or telephone number as shown on the records of the Joint Operations
Committee. Notice may delivered directly to each Committee Member or to a
person at the Committee Member's principal place of business who would
reasonably be expected to communicate that notice promptly to the Committee
Member.
-6-
<PAGE>
(4) Waiver of Notice Requirement.
----------------------------
(A) Written Waiver, Consent or Approval. Notice of a special meeting need
-----------------------------------
not be given to any Committee Member who, either before or after the meeting,
signs a waiver of notice or a written consent to the holding of the special
meeting, or an approval of the minutes of the special meeting. Such waiver,
consent or approval need not specify the purpose of the special meeting. All
such waivers, consents, and approvals shall be filed with the Joint Operations
Committee records or made a part of the minutes of the special meetings.
(B) Failure to Object. Notice of a special meeting need not be given to
-----------------
any Committee Member who attends the special meeting and does not protest before
or at the commencement of the special meeting such lack of notice.
(5) Quorum. The smallest number of Committee Members that exceed fifty
------
percent (50%) of all Committee Members shall constitute a quorum of the Joint
Operations Committee.
(6) Proxies. The Joint Operations Committee shall provide for the use of
-------
proxies, telephonic conference calls, written consents or other appropriate
methods by which the full participation of the Dental Group Members and Manager
Members can be assured.
(d) Limitation of Responsibility. Notwithstanding any other provisions
----------------------------
hereof, Committee Members shall be liable to the parties only for actions
constituting bad faith, gross negligence or breach of an express provision of
this Agreement (so long as such breach remains uncured after ten (10) days of
receiving notice of the nature of such breach). In all other respects,
Committee Members shall not be liable for negligence or mistakes of judgment.
3.6 Budgets. A capital and operating budget ("Annual Budget") shall be
-------
established regarding all financial aspects of the Practice. The Annual Budget
shall include the following elements and other items, as appropriate:
(a) A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
(b) An operating budget setting forth an estimate of Revenues and expenses
for the next succeeding fiscal year, together with an explanation of anticipated
changes or modifications, if any, in the Practice's utilization, rates, charges
to patients or third party payors, salaries, costs of Providers, non-wage cost
increases, and all other similar factors expected to differ significantly from
those prevailing during the current fiscal year;
-7-
<PAGE>
(c) Other expenses of operation;
(d) The amount of a reasonable reserve to satisfy possible shortfalls from
operations. The allocation of such reserve shall be made by the Joint
Operations Committee as and when necessary; and
(e) The Management Fee, as defined below, for the next succeeding fiscal
year.
3.7 Budget Process.
--------------
(a) Initial Annual Budget. Not later than 45 days after the Effective
---------------------
Date, the Joint Operations Committee will have prepared the initial Annual
Budget for the first fiscal year (which shall initially be the calendar year)
during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains, or, at the option of
the parties, such portion of the then current fiscal year plus the immediately
subsequent fiscal year.
(b) Preliminary Budget. Not later than forty-five (45) days prior to the
------------------
end of each fiscal year during the term of this Agreement, the Manager shall
prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
(c) Joint Operations Committee Approval. The Joint Operations Committee
-----------------------------------
shall review and suggest modifications to the Preliminary Budget within ten (10)
days of receipt. Manager shall prepare a revised budget based upon the Joint
Operations Committee's recommendations and the Preliminary Budget as revised
shall become the Annual Budget.
(d) Adjustments. In the event of a material deviation between financial
-----------
forecasts and financial performance during a fiscal year, Manager or Dental
Group may propose adjustments to the Annual Budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
3.8 Personnel.
---------
(a) Providers. Manager shall not employ or contract with any Providers for
---------
the provision of dental services. All Providers who provide dental services to
Group Patients or to Beneficiaries shall be either (1) Employee Providers, (2)
Subcontract Providers or (3) employees of Subcontract Providers.
(b) Non-Providers. With the exception of employees of Subcontract
-------------
Providers, Manager shall employ all non-Provider personnel necessary for the
operation of the Practice.
-8-
<PAGE>
(c) Salary and Benefits. Each party to this Agreement shall remain liable
-------------------
for the salary and benefits paid to such party's own employees and shall be
ultimately responsible for compliance with state and federal laws pertaining to
employment taxes, workers' compensation, unemployment compensation and other
employment-related statutes pertaining to the party's own employees.
(d) Payments to Subcontract Providers. Dental Group shall be liable for
---------------------------------
any payments due Subcontract Providers under Provider Subcontracts after timely
receipt of funds from Manager.
ARTICLE 4
MANAGEMENT SERVICES
-------------------
4.1 General Description of Services. Within the limitations set out
-------------------------------
elsewhere in this Agreement, Manager shall provide or arrange for the provision
to Dental Group of all support services reasonably necessary and appropriate for
the efficient operation of the Practice. Such services include all
administrative services necessary to Dental Group's performance of its
obligations under Payor Contracts, contracting, marketing, capital formation and
assistance with long term strategic planning.
4.2 Facilities. When appropriate, Manager shall secure and maintain
----------
facilities, including, without limitation, office space, improvements,
furnishings, equipment, supplies and personal property, of a nature and in a
condition necessary and appropriate for the efficient and effective operations
of the Practice subject to the general approval of the Joint Operations
Committee. Manager shall secure and maintain said facilities in the name of
Dental Group. Manager shall ensure that said facilities are reasonably safe and
free of hazards.
4.3 Purchased Items and Services. Manager shall serve as the purchasing
----------------------------
agent for Dental Group and shall arrange for personnel benefits, insurance, and
any other items and services required for the proper operation of the Practice.
4.4 Manager Personnel.
-----------------
(a) Management Team. Subject to any approval or consulting rights of the
---------------
Joint Operations Committee, Manager shall engage or designate one or more
individuals experienced in dental group management and direction, including, but
not limited to, an administrator, who will be responsible for the overall
administration of the Practice including day-to-day operations and strategic
development activities.
(b) Other Manager Personnel. Manager shall select, hire, train, supervise,
-----------------------
monitor and terminate all non-Provider personnel necessary for the operation and
management of the Practice.
-9-
<PAGE>
4.5 Day-to-Day Management and Supervision. Subject to any approval or
-------------------------------------
consulting rights of the Joint Operations Committee, Manager shall provide
general management including, but not limited to, day-to-day supervision of:
(a) Manager personnel;
(b) Equipment and supply acquisition;
(c) Office space and facility maintenance;
(d) Patient records organization and retention;
(e) Third party payor contracting;
(f) Case management;
(g) Billing, collections and accounting activities as set forth below;
(h) All operating aspects and policies of the Practice including, but
not limited to, hours of operation, work schedules, standard duties and job
descriptions, for all nondentist personnel; and
(i) Other related and incidental matters.
4.6 Billing and Collection Payment of Expenses. Manager shall be
------------------------------------------
responsible for all billing and collecting activities required by Dental Group.
Manager shall also be responsible for reviewing and paying accounts payable of
Dental Group. Dental Group hereby appoints the Manager its true and lawful
attorney-in-fact to take the following actions for and on behalf of and in the
name of Dental Group:
(a) Bill and collect in Dental Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Dental Group. Dental
Group shall give Manager all necessary access to Patient records to accomplish
all billing and collection. In so doing, Manager will use its best efforts but
does not guarantee any specific level of collections, and Manager will comply
with Dental Group's reasonable and lawful policies regarding courtesy discounts;
(b) Take possession of and endorse in the name of Dental Group any and all
instruments received as payment of accounts receivable;
(c) Deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
(d) Place accounts for collection, settle and compromise claims, and
institute legal action for the recovery of accounts.
-10-
<PAGE>
4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
(a) Financial Reporting. Manager shall prepare, analyze, and deliver to
-------------------
the Joint Operations Committee financial reports to the extent necessary or
appropriate for the operation of the Practice, including the following:
(1) Financial statements, including balance sheets and statements of
cash flow and income;
(2) Accounts payable and accounts receivable analysis;
(3) Billing status including any Medicaid remit tances; and
(4) Reconciliation of assets, liabilities and major expenses.
(b) Audits. Dental Group shall have the right to review and, at its sole
------
cost and expense, obtain an audit (separate from any annual audit or review of
Dental Group's financial statements performed at the direction of the Manager)
of Dental Group's financial books and records maintained by the Manager;
provided, however, that in the event there is a material discrepancy between the
information set forth in an audit performed at the direction of the Manager and
the information set forth in an audit performed at the direction of Dental
Group, and such discrepancy is materially adverse to Dental Group, then the cost
of the audit performed at the direction of Dental Group shall be borne by
Manager. Upon five (5) days' prior written notice, Manager shall allow Dental
Group access during reasonable business hours to all information and documents
reasonably required for such review or audit. Upon Dental Group's request and
at Dental Group's expense, Manager shall also provide copies of such documents.
4.8 Marketing and Public Relations Services. Manager shall provide such
---------------------------------------
marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Dental Group.
Manager shall provide Dental Group with marketing materials and activities.
4.9 Dental Group Agreements. On behalf of Dental Group, Manager shall
-----------------------
review, evaluate and negotiate Payor Contracts and Provider Subcontracts and any
other contracts or agreements regarding the provision of dental related items or
services by Dental Group or Providers.
4.10 Utilization Review Quality Improvement and Outcomes Monitoring.
--------------------------------------------------------------
Manager shall be responsible for providing administrative support for Dental
Group's utilization review, quality
-11-
<PAGE>
improvement and outcomes monitoring activities, including, without limitation,
data collection, analysis and reporting for Group Patients and Beneficiaries.
Manager shall also support the development and implementation of relevant
policies, procedures, protocols, practice guidelines and other interventions
based on such activities.
4.11 Applicable Law. Manager and Dental Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
4.12 Third Party Contracts. Manager shall be in substantial compliance
---------------------
with all contracts, agreements and arrangements, including any contracts that
exist on the Effective Date, between Manager and third parties.
ARTICLE 5
DENTAL GROUP SERVICES
---------------------
5.1 Provision of Dental Services by Dental Group. Dental Group shall
--------------------------------------------
operate the Practice during the Term as a dental practice in accordance with
terms of this Agreement and the Annual Budget.
5.2 Providers.
---------
(a) Professional Dental Services. Dental Group shall employ or contract
----------------------------
with the number of Providers Dental Group deems necessary for the efficient and
effective operation of the Practice and in accordance with quality assurance,
credentialing and utilization management protocols approved by the Joint
Operations Committee. Dental Group shall provide full and prompt dental
coverage for the Practice, including emergency service twenty-four hours per
day, seven days per week, including holidays according to policies and schedules
approved by the Joint Operations Committee.
(b) Provider Subcontracts and Employment Agreements. Dental Group shall not
-----------------------------------------------
negotiate or execute any Provider Subcontract, Employment Agreement, or any
amendment thereto, without the approval of the Joint Operations Committee. The
Joint Operations Committee shall have the right of review and reasonable
approval of any Provider Subcontract and Employment Agreement. Dental Group
shall be responsible for the payment, in accordance with the Annual Budget, of
all Employee and Subcontract Providers.
5.3 Peer Review. Dental Group, after consultation with the Joint
-----------
Operations Committee, shall implement, regularly review, modify as necessary or
appropriate and obtain the commitment of
-12-
<PAGE>
Providers to actively participate in peer review procedures for Providers.
Dental Group shall assist Manager in the production of periodic reports
describing the results of such procedures. Dental Group shall provide Manager
with prompt notice of any information that raises a reasonable risk to the
health and safety of Group Patients or Beneficiaries. In any event, after
consultation with the Joint Operations Committee, Dental Group shall take such
action as may be reasonably warranted under the facts and circumstances.
5.4 Billing Information and Assignments. Dental Group shall promptly
-----------------------------------
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Dental Group's
services. Dental Group shall use reasonable efforts to procure consents to
assignments and other approvals and documents necessary to enable Manager to
obtain payment or reimbursement from third party payors and patients. With the
assistance of Manager, Dental Group shall obtain all provider numbers necessary
to obtain payment or reimbursement for its services.
5.5 Third Party Contracts. Dental Group shall be in substantial
---------------------
compliance with all contracts, agreements and arrangements, including any
contracts that exist on the Effective Date, between Dental Group and third
parties.
5.6 Use of Manager's Goods and Services. Dental Group shall not use any
-----------------------------------
goods or services provided by Manager pursuant to this Agreement for any purpose
other than the provision of and management of dental services as contemplated by
this Agreement and purposes incidental thereto.
5.7 Negative Covenants. During the Term, Dental Group shall not, without
------------------
the prior approval of the Joint Operations Committee, (a) assign, pledge,
mortgage or otherwise encumber any of its property, (b) transfer substantially
all of its assets, including its goodwill, (c) merge or consolidate with any
other entity, (d) allow the transfer or issuance of any of its stock (other than
in accordance with the terms and provisions of that certain Share Ownership
Agreement dated October __, 1996, between an affiliate of Manager, GMS Dental
Group Management, Inc. and L. Thomas Miller), or (e) take or allow any act that
would materially impair the ability of Dental Group to carry on the business of
the Practice or to fulfill its obligations under this Agreement.
ARTICLE 6
TERM
----
6.1 Term. This Agreement shall be effective as of October __, 1996 (the
----
"Effective Date"), and shall remain in effect for an initial term of forty (40)
years from the Effective Date, expiring on the fortieth (40th) anniversary of
the Effective
-13-
<PAGE>
Date, unless earlier terminated pursuant to the terms of this Agreement. The
word "Term" shall include such initial term and, where applicable, any extension
of such initial term (whether extended pursuant to Section 6.2(a) or otherwise),
subject to earlier termination pursuant to the provisions of this Agreement.
6.2 Termination and Extension.
-------------------------
(a) Automatic Extension. At the end of the initial term and any subsequent
-------------------
term, this Agreement shall automatically be renewed for a five (5) year term
unless one of the parties provides the other party with written notice of intent
not to renew, not less than one hundred eighty (180) day prior to the expiration
of the then current term.
(b) Early Termination. This Agreement may be terminated according to the
-----------------
provisions of this Section.
(1) Material Breach. In the event either party materially breaches this
---------------
Agreement and such breach is not cured to the reasonable satisfaction of the
non-breaching party within thirty (30) days after the non-breaching party serves
written notice of the default upon the defaulting party (the "Default Notice"),
the Agreement shall automatically terminate at the election of the non-breaching
party upon the giving of a written notice of termination to the defaulting party
not later than forty-five (45) days after service of the Default Notice;
provided that if such uncured breach is only capable of being cured within a
reasonable period of time in excess of thirty (30) days, the non-breaching party
shall not be entitled to terminate this Agreement so long as the defaulting
party has commenced such cure and thereafter diligently pursue such cure to
completion.
(2) Refusal To Comply. In the event that Dental Group or Manager refuses
-----------------
or fails to comply with a decision of the Joint Operations Committee, the
aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if the parties participate in such dispute between Dental
Group and Manager continues for sixty (60) days after the date the aggrieved
party exercises its option regarding mediation, and the mediator finds in favor
of the aggrieved party, the non-complying party shall have thirty (30) days in
which to comply with the decision of the Joint Operations Committee. If the
non-complying party has not complied by the end of such thirty (30) day period,
the aggrieved party shall have the option to terminate this Agreement upon
fifteen (15) days' prior written notice. During such mediation, Manager and
Dental Group shall continue to operate and manage the Practice in good faith.
(3) Bankruptcy. A party may, upon three (3) days' prior written notice,
----------
terminate this Agreement if the other party:
-14-
<PAGE>
(A) Applies for or consents to the appointment of a receiver, trustee
or liquidator of all or a substantial part of its assets, files a voluntary
petition in bankruptcy or consents to an involuntary petition, makes a general
assignment for the benefit of its creditors, files a petition or answer seeking
reorganization or arrangement with its creditors, or admits in writing its
inability to pay its debts when due, or
(B) Suffers any order, judgment or decree to be entered by any court
of competent jurisdiction, adjudicating such party bankrupt or approving a
petition seeking its reorganization or the appointment of a receiver, trustee or
liquidator of such party or of all or a substantial part of its assets, and such
order, judgment or decree continues unstayed and in effect for ninety (90) days
after its entry.
(4) Nonperformance. Manager may terminate this Agreement in the event that
--------------
in any two consecutive fiscal quarters the Manager has not been paid the
Management Fee and, in the sole discretion of the Manager, it is not reasonably
likely that the Management Fee will be paid in the next fiscal quarter. Any
such termination shall be effective as of the last day of such third fiscal
quarter provided at least 60 days notice shall have been given; otherwise, such
termination shall be effective on the sixtieth day after notice is given.
(5) Change in Law. In the event of any material change in federal or state
-------------
law that has a significant adverse impact on either party hereto in connection
with their performance under this Agreement, or if performance by a party of any
duties under this Agreement be deemed illegal by any court or administrative
agency or in a formal opinion rendered to Dental Group or Manager by legal
counsel knowledgeable in health law matters retained by Dental Group or the
Manager, the affected party shall have the right to require that the other party
renegotiate the terms of this Agreement. Unless the parties otherwise mutually
agree in writing, such renegotiated terms shall be effective not later than
twenty (20) days after receipt of written notice of such request for
renegotiation. If the parties fail to reach such an agreement within thirty
(30) days of the request for renegotiation, either party may (subject to the
severability provision of this Agreement) terminate this Agreement upon thirty
(30) days' prior written notice to the other party.
(c) Effect of Termination. Upon termination of this Agreement:
---------------------
(1) Dental Group shall surrender to Manager all of Manager's property used
primarily in the operation of the Practice in the same condition as received,
reasonable wear and tear excepted.
(2) Manager shall deliver to Dental Group all records related to the
business of and provision of dental care through the Practice including, without
limitation, patient records and
-15-
<PAGE>
any corporate, personnel and financial records maintained for the Practice and
Providers, provided, that except as limited by law, including, but not limited
to laws governing the confidentiality of patient records, Manager shall have the
option to copy (or otherwise duplicate) at its sole cost and expense such
records of Dental Group and to retain and utilize such records for its own use;
(3) Manager shall deliver to Dental Group any other property of Dental
Group in Manager's possession;
(4) Both parties shall cooperate to ensure the provision of appropriate
dental care to Group Patients and Beneficiaries;
(5) Dental Group shall promptly deliver to Manager any Revenues that it may
receive in payment for dental services rendered by Dental Group prior to
termination; and
(6) Both parties shall cooperate to ensure the appropriate billing and
collections for dental services rendered by Dental Group prior to the effective
date of termination, and any such cash collected shall be retained by Dental
Group and/or paid to Manager pursuant to Article 7.
ARTICLE 7
MANAGEMENT FEE
--------------
For its services hereunder, which shall include the providing of all
facilities and furniture, fixtures and equipment at the Practice, all non-
dentist employees of Manager who perform services at or for the Practice and all
management services provided hereunder, Manager shall retain as a Management Fee
(the "Management Fee")[*].
ARTICLE 8
INDEMNITY AND INSURANCE
-----------------------
8.1 Indemnity.
---------
(a) Indemnification. Each party shall indemnify, defend and hold harmless
---------------
the other party from any and all liability, loss, claim, lawsuit, injury, cost,
damage or expense whatsoever (including insurance deductibles, reasonable
attorneys' fees and court costs) arising out of, incident to or in any manner
occasioned by the performance or nonperformance of any duty or responsibility
under this Agreement by such indemnifying party, or any of their employees,
agents, contractors or subcontractors; provided, however, that neither party
shall be liable to the other party hereunder for any claim covered by insurance,
except to the
__________
[*] Confidential Treatment Requested.
-16-
<PAGE>
extent that the liability of such party exceeds the amount of such insurance
coverage. Specifically, and without limiting the generality of the foregoing,
Dental Group agrees to indemnify, defend and hold harmless Manager for all
liability, loss, claim, lawsuit, injury, cost, damage or expense whatsoever
(including reasonable attorneys' fees and court costs) arising out of the
professional negligence of Dental Group, its employees, agents, contractors or
subcontractors, including any amounts in excess of the professional liability
insurance coverage of Dental Group or its employees, agents, contractors or
subcontractors.
(b) Mutual Indemnity. Each party to this Agreement shall be indemnified by
----------------
the other party for any claim under this Agreement or otherwise against the
indemnified party for vacation pay, sick leave, retirement benefits, Social
Security benefits, workers' compensation benefits, disability or unemployment,
insurance benefits, or other employee benefits of any kind accrued during the
term of this Agreement by an employee of the indemnifying party.
8.2 Manager's Insurance. Manager shall, on its own behalf and at its sole
-------------------
cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
(a) Comprehensive general liability insurance covering the risks of
Manager, in an amount determined by the Joint Operations Committee;
(b) Workers' compensation insurance covering the employees of Manager, in
such amounts as is usual and customary under the circumstances;
(c) Property insurance covering the facilities, equipment and supplies
owned or leased by Manager or Dental Group for use in the operation of the
Practice.
8.3 Dental Group's Insurance. At Dental Group's sole cost and expense,
------------------------
and subject to the review of the Joint Operations Committee, Manager shall
obtain, and maintain on behalf of Dental Group in full force and effect during
the Term, policies in the following categories in the amount indicated:
(a) Comprehensive professional liability insurance coverage for Dental
Group and Dental Group's Employee Providers, in such amounts as Manager shall
reasonably deem necessary;
(b) Workers' compensation insurance covering the employees of Dental Group,
in such amounts as is usual and customary under the circumstances;
(c) Comprehensive general liability insurance covering the risks of Dental
Group, in an amount determined by the Joint Operations Committee;
-17-
<PAGE>
(d) Directors and officers liability insurance covering the directors and
officers of Dental Group.
ARTICLE 9
BOOKS AND RECORDS
-----------------
9.1 Ownership of Records. All business records and information relating
--------------------
exclusively to the business and activities of either party shall be the property
of that party, irrespective of identity of the party responsible for producing
or maintaining such records and information. Without limiting the foregoing,
all patient charts and records maintained by Manager relating to the dental
services of Dental Group shall be the property of Dental Group. Dental Group
also shall be entitled to a copy at Dental Group's sole cost of all business
records pertaining to Dental Group. Except as limited by law, including, but
not limited to laws governing the confidentiality of patient records, Manager
shall be entitled to a copy at Manager's sole cost of all records of Dental
Group.
ARTICLE 10
MISCELLANEOUS PROVISIONS
------------------------
10.1 Assignment. Neither party shall assign this Agreement to any other
----------
party or parties without the prior written consent of the other party, which
consent may be withheld arbitrarily or capriciously, for any reason or for no
reason whatsoever and any attempted assignment in violation of this Agreement
shall be null and void.
10.2 Headings. The article and section headings used in this Agreement
--------
are for purposes of convenience only. They shall not be construed to limit or
to extend the meaning of any part of this Agreement.
10.3 Waiver. Waiver by either Dental Group or Manager of any breach of
------
any provision of this Agreement shall not be deemed to be a waiver of such
provision or of any subsequent breach of the same or of any other provision of
this Agreement.
10.4 Notices. Any notice, demand, approval, consent, or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be deemed to have been given when five (5) business days have
elapsed from the date of deposit in the United States mails, certified and
postage prepaid, addressed to the party to be served at the following address or
such other address as may be given in writing to the parties.
-18-
<PAGE>
Dental Group: Hualalai Dental Services, Inc.
75-5995 Kanakini Hwy
Pottery Terrace, Fern Bldg. #421
Kailua-Kona, HI 96740
Attn: Dr. L. Thomas Miller
Manager: GMS Dental Group Management of Hawaii, Inc.
c/o GMS Dental Group, Inc.
180 North Riverview Drive
Suite 255
Anaheim Hills, CA 92808
Attn: Mr. Grant M. Sadler
10.5 Attorneys' Fees. If any legal action or arbitration or other
---------------
proceeding is commenced, whether by Manager or Dental Group concerning this
Agreement, the prevailing party shall recover from the losing party reasonable
attorneys' fees and costs and expenses, including those of appeal and not
limited to taxable costs, incurred by the prevailing party, in addition to all
other remedies to which the prevailing party may be entitled. If a claim or
claims asserted by a third party against Manager or Dental Group or any of them
arise from an action or omission by the other, the party responsible for the
action or omission shall be the losing party, and the other party shall be the
prevailing party, for purposes of the foregoing sentence.
10.6 Successors. Without limiting or otherwise affecting any restrictions
----------
on assignments of this Agreement or rights or duties under this Agreement, this
Agreement shall be binding upon and inure to the benefit of the successors and
assigns of Dental Group and Manager.
10.7 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between Dental Group and Manager and supersedes all prior negotiations and
agreements, written or oral, concerning or relating to the subject matter of
this Agreement, and this Agreement may not be modified except by a writing
executed by all parties and subject to the provisions thereof.
10.8 Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereto shall be governed by, and construed according to, the laws of the
State of Hawaii.
10.9 Severability. If any provision of this Agreement is held to be
------------
invalid or unenforceable by any court or administrative agency of competent
jurisdiction, or in a written opinion to Dental Group or the Manager by legal
counsel knowledgeable in health law matters retained by Dental Group or the
Manager, such holding or opinion shall not affect the validity and
enforceability of the other provisions of this Agreement and the remainder of
this Agreement shall be considered valid and operative to the fullest extent
permitted by law, but only if and to the extent
-19-
<PAGE>
such enforcement would not materially and adversely frustrate the parties
essential objectives as expressed herein.
10.10 Time is of the Essence. Time is of the essence in this Agreement.
----------------------
10.11 Authority. Any Person signing this Agreement on behalf of any
---------
entity hereby represents and warrants in its individual capacity that it has
full authority to do so on behalf of such entity.
10.12 Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute on and the same instrument.
IN WITNESS WHEREOF, Dental Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
"DENTAL GROUP"
HUALALAI DENTAL SERVICES, INC., a Hawaii
professional dental corporation
By: /s/ L. Thomas Miller
--------------------------
Its: President
"MANAGER"
GMS DENTAL GROUP MANAGEMENT OF HAWAII,
INC., a Hawaii corportion
By: /s/ Grant M. Sadler
----------------------------
Its: President
-20-
<PAGE>
ADDENDUM 1.
----------
For purposes of this Agreement, the following terms shall have the meaning
indicated below or defined at the indicated section:
(1) Accounts. See Section 2.5(a).
--------
(2) Affiliate. "Affiliate" shall mean, with respect to any Person, (i) any
---------
individual or entity directly or indirectly owned or controlled by such Person,
(ii) any individual or entity directly or indirectly owning or controlling such
Person or (iii) any individual or entity directly or indirectly owned or
controlled by the same family member, individual or entity as owns or controls
such Person. For purposes of this Agreement, neither Dental Group nor Manager
shall be deemed an Affiliate of the other.
(3) Agreement. "Agreement" means this Dental Group Management Agreement.
---------
(4) Annual Budget. See Section 3.6, first sentence.
-------------
(5) Beneficiaries. See Recital A.
-------------
(6) Books and Records. "Books and Records" means Dental Group's books of
-----------------
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
(7) Capital Costs. "Capital Costs" shall mean any and all investments that
-------------
are or would be capitalized pursuant to GAAP.
(8) Committee Members. See Section 3.5(a).
-----------------
(9) Default Notice. See Section 6.2(b)(1).
--------------
(10) Effective Date. See Section 6.1.
--------------
(11) Employee Providers. See Recital B.
------------------
(12) Employment Agreements. See Recital B.
---------------------
(13) GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with GAAP, and all financial
computations hereunder shall be computed unless otherwise specifically provided
-21-
<PAGE>
herein, in accordance with GAAP as consistently applied and using the same
method of valuation as used in the preparation of Manager's financial
statements.
(14) Group Patients. See Recital A.
--------------
(15) Joint Operations Committee. See Section 3.4(b).
--------------------------
(16) Management Fee. See Article 7.
--------------
(17) Manager. See first paragraph of this Agreement.
-------
(18) Manager Members. See Section 3.5(a).
---------------
(19) Manager's Costs. "Manager's Costs" means all costs incurred by
---------------
Manager including amortization associated with costs acquiring assets of the
Dental Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which are
attributable to Manager's business operations in accordance with Manager's
corporate allocation policies.
(20) Marks. See Section 2.3(a).
-----
(21) Dental Group. See first paragraph of this Agreement.
------------
(22) Dental Group Members. See Section 3.5(a).
--------------------
(23) Dental Expenses. See Section 2.6(b).
---------------
(24) Net Revenues. "Net Revenues" means all Revenues net of allowances for
------------
uncollectible accounts.
(25) Payor Contracts. See Recital A.
---------------
(26) Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
(27) Plans. See Recital A.
-----
(28) Practice. See Recital A.
--------
(29) Preliminary Budget. See Section 3.7(b).
------------------
(30) Programs. See Section 2.3(b).
--------
(31) Providers. "Providers" shall mean individuals or organizations
---------
licensed to practice dentistry (including specialists) as well as other dental
professionals who provide ancillary reimbursable dental services.
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<PAGE>
(32) Provider Subcontracts. See Recital A.
---------------------
(33) Revenues. "Revenues" means all amounts assigned hereunder by Dental
--------
Group to Manager pursuant to Section 2.6(a).
(34) Subcontract Providers. See Recital B.
---------------------
(35) Term. See Section 6.1.
----
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<PAGE>
EXHIBIT 10.41[*]
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
THIS DENTAL GROUP MANAGEMENT AGREEMENT (this "Agreement") is dated as of
February 24, 1997 and is effective as of the date set forth in Section 6.1
("Effective Date") by and between NAISMITH DENTAL CORPORATION, a California
---------------------------
professional dental corporation ("Manager") and YEP DENTAL CORPORATION, a
----------------------
California professional dental corporation ("Dental Group").
RECITALS:
A. Prior to the execution of this Agreement, pursuant to the terms of
that certain Assignment Agreement ("Assignment Agreement") dated as of January
20, 1997 all of Manager's right, title and interest in the "Dental Practice
Assets" relating to its Oakland, California dental center ("Oakland
Facility(ies)") were assigned to Dental Group, which Dental Practice Assets
consist of all contracts with dentist employees and independent contractors and
other licensed health professional employees and independent contractors, all
independent practitioner association and managed care plan contracts, all
patient records, and any and all other assets required by statute, rule or
regulation to be owned or held by an entity licensed to practice dentistry,
together with all goodwill associated with the foregoing. Dental Group operates
a dental practice at the Oakland Facility(ies) and may operate a dental practice
at one or more additional sites in the future.
B. Dental Group engages in the practice of dentistry by providing dental
services to patients of Dental Group ("Group Patients") and to enrollees
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
between Dental Group and Plans or between Beneficiaries and Plans.
C. Dental Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
arrangements may include contracts ("Employment Agreements") with dentist
employees and allied health professional employees (collectively "Employee
Providers") and agreements ("Provider Subcontracts") with independent contractor
dentists and non-dentist providers of various dental care services (collectively
"Subcontract Providers").
D. All activities of Dental Group subject to this Agreement are
referenced as the "Practice." All references to "dental" care and services
include general and specialist dental services. All references to "dentists"
include generalists and specialists.
E. Manager desires to provide certain support services for the Practice.
__________
[*] Confidential Treatment Requested.
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<PAGE>
F. Dental Group desires to retain Manager on an independent contractor
basis to provide management services that are more particularly described below,
and Manager desires to provide such management services under the terms and
conditions set forth in this Agreement.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the covenants and conditions contained
herein, Manager and Dental Group agree as follows:
ARTICLE 1
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
ARTICLE 2
SCOPE OF AGREEMENT
------------------
2.1 General Scope of Agreement. This Agreement shall apply to the
--------------------------
Practice, including, without limitation, all professional, administrative and
technical services, marketing, contracting, case management, ancillary dental
services, outpatient services and dental care facilities, equipment, supplies
and items, except as otherwise specifically provided in this Agreement. Dental
Group's Employment Agreements shall encompass substantially all such activities
of Employee Providers and shall provide that all revenues derived from such
activities (and not excluded below) are Revenues. Nothing in this Agreement
shall be construed to alter or in any way affect the legal, ethical and
professional relationship between and among Providers and Providers' patients,
nor shall anything contained in this Agreement abrogate any right or obligation
arising out of or applicable to the dentist-patient relationship.
2.2 License. Dental Group grants Manager an exclusive license to use any
-------
and all of Dental Group's assets, whether tangible or intangible, in carrying
out Manager's duties and responsibilities under the provisions of this
Agreement.
2.3 Intellectual Property. Dental Group hereby grants to Manager a non-
---------------------
exclusive, perpetual, royalty-free, worldwide license to use and sublicense the
use of any intellectual property owned by Dental Group. This license shall
cover, but not be limited to, use of the following:
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<PAGE>
(a) Service Mark. Dental Group hereby grants Manager the right to use all
------------
service marks and trademarks of Dental Group (the "Marks") for marketing and
promotional materials in connection with Dental Group's offering of dental
services. Manager agrees to use the Marks solely in the design format used by
Dental Group as of the date of this Agreement or another design format approved
in advance in writing by Dental Group. Dental Group shall have the opportunity
to review any marketing or other materials using the Marks in advance of any
public distribution. Manager agrees that it will include these restrictions
on use in any sublicense of the Marks.
(b) Copyrighted Materials. Dental Group hereby grants Manager the right to
---------------------
use any and all copyrighted materials authored or owned by Dental Group
including, specifically, the Dental Group dental management system software
programs (the "Programs"). This license includes the right to sublicense the
Programs and the right to prepare and own derivative works based on the
Programs, all without a duty of accounting to Dental Group. Dental Group shall
execute all documents required to enable Manager to own, use and exploit all
such rights.
2.4 Revenues. "Revenues" shall mean all of Dental Group's accounts
--------
receivable (net of contractual adjustments and bad debt), and cash collections
which exist at the Effective Date of which are acquired after the Effective Date
and during the Term. Revenues shall include all funds collected by, or legally
due to, Dental Group or any Affiliate of Dental Group, including, without
limitation, the following: (a) all fee-for-service payments for services to
Group Patients or Beneficiaries; (b) all payments established under Payor
Contracts; (c) all coordination of benefits or deductibles and third-party
liability recoveries related to the Group's services; (d) all payments, dues,
fees or other compensation to Dental Group, (e) any income, profits, dividends,
distributions or other payments from Dental Group's investments; and (f) any
interest or other non-operating income of Dental Group.
2.5 Deposit Accounts. All cash received by Dental Group from whatever
----------------
source shall be deposited into an account or accounts ("Accounts") in the name
of Dental Group at a banking institution selected by Dental Group and approved
by Manager. Dental Group authorizes Manager to bill and collect, in Dental
Group's name, all charges and reimbursements for Dental Group's dental related
activities and to deposit such collections in the Accounts. Dental Group agrees
to assist and cooperate with Manager in the billing and collection process and
to immediately deliver to Manager for deposit any monies Dental Group may
receive.
2.6 Assignment.
----------
(a) Assets. Except as prohibited by contract or by law, Dental Group
------
hereby assigns, sells, conveys, transfers, and
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<PAGE>
delivers to Manager, and Manager hereby accepts from Dental Group, all of the
assets and properties of Dental Group of every kind, character and description,
whether tangible, intangible, real, personal, or mixed, and wherever located,
including, but not limited to, all Revenues, cash, accounts receivable,
advances, prepaid expenses, deposits, equipment and improvements which exist on
the Effective Date or which are acquired after the Effective Date and during the
Term. Dental Group hereby grants to Manager a security interest in all such
assets to secure the performance of its obligation to assign such assets to
Manager and to secure the performance of its other obligations under this
Agreement. The assets shall be valued at their fair market value which has been
determined to be their respective book values. Manager shall have the authority,
and Dental Group shall execute any and all documents as may be necessary or
appropriate to transfer the assets to Manager, authorize Manager to transfer the
funds in the Accounts to a separate account in the name of Manager, and
effectuate the intention of this provision. Dental Group shall execute and
deliver any and all financing statements and other documents as may be necessary
or appropriate to effectuate and perfect the grant of the security interest in
such assets made by Dental Group to Manager under this provision.
(b) Liabilities. Manager shall be responsible for paying all claims and
-----------
obligations associated with the operation of Dental Group pursuant to this
Agreement; provided, Manager shall be deemed to fully discharge its
responsibility to Dental Group for the liabilities described in this
subparagraph by its timely payment on Dental Group's behalf of, or delivery to
Dental Group of an amount sufficient to discharge, all of Dental Group's
obligations and liabilities now existing or arising in the future, including
those under Provider Subcontracts, Employment Agreements, Dental Group's
professional liability insurance and any other operational expenses for which
Dental Group retains responsibility or that are delegated to Dental Group,
whether pursuant to this Agreement or any other agreement of the parties or
action of the Joint Operations Committee ("Dental Expenses"). Notwithstanding
the foregoing, Manager does not assume any liabilities of Dental Group which are
unrelated to the dental business or any liabilities for income taxes.
ARTICLE 3
GOVERNANCE AND CONTROL
----------------------
3.1 Appointment. Dental Group hereby appoints Manager as its sole and
-----------
exclusive manager for the operation of the Practice and covenants not to enter
into an agreement with any Person other than Manager to perform or assume any of
Manager's rights, duties or responsibilities as provided herein. Manager hereby
accepts full responsibility for such management as more fully set forth herein.
-4-
<PAGE>
3.2 Professional Matters. Pursuant to applicable laws and requirements
--------------------
governing the practice of dentistry, Dental Group shall retain ultimate
responsibility for all activities of Dental Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's non-
licensed status. The parties understand and agree that during the term of this
Agreement, Dental Group shall be the provider of dental services for all
purposes, including, but not limited to, licensure and reimbursement.
3.3 Relationship of Parties. In the performance of its duties and
-----------------------
obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Dental Group. Except as provided in this Agreement or as
required by law, Dental Group shall neither have nor exercise any control or
direction over the methods by which Manager shall perform its obligation
thereunder; nor shall Manager have or exercise any control or direction over the
methods by which Dental Group shall practice dentistry. It is expressly agreed
by the parties that no work, act, commission or omission of Manager pursuant to
the terms and conditions of this Agreement shall be construed to make or render
Manager or Manager's employees or agents, the employees of Dental Group.
Manager and Dental Group are not partners or joint venturers with each other and
nothing herein shall be construed so as to make them partners or joint venturers
or impose upon either of them any liability as partners or joint venturers.
Dental Group's responsibility is to assure that the services covered by this
Agreement shall be performed and rendered in a competent, efficient and
satisfactory manner.
3.4 Authority and Control. Strategic planning, overall direction and
---------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group shall be accomplished as follows:
(a) Exclusive Authority.
-------------------
(1) Dental Group. Dental Group shall have the sole responsibility and
------------
authority for all aspects of the practice of dentistry and delivery of dental
services by Providers. Dental Group shall consult with Manager or the Joint
Operations Committee to the extent reasonable and not inconsistent with the
licensure of dentists.
(2) Manager. After reasonable consultation with Dental Group or the
-------
Joint Operations Committee, Manager shall have the sole responsibility and
authority for decisions related to the administration of the Practice.
(b) Joint Authority. All other decision-making authority related to the
---------------
business and affairs of Dental Group shall be vested in a joint operations
committee (the "Joint Operations
-5-
<PAGE>
Committee"). Nothing herein shall be construed as preventing the Joint
Operations Committee from appointing representatives and delegating authority to
such representatives so long as the Joint Operations Committee may revoke such
appointment and delegation at any time and so long as the Joint Operations
Committee retains ultimate responsibility for the decisions of such
representatives.
3.5 Joint Operations Committee. Strategic planning, overall direction and
--------------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group shall be overseen by the Joint Operations
Committee as follows:
(a) Joint Operations Committee Membership. The Joint Operations Committee
-------------------------------------
shall consist initially of three (3) individuals (the "Committee Members").
Dental Group shall designate one (1) Committee Member (the "Dental Group
Member") and the remaining two (2) Committee Members (the "Manager Members")
shall be appointed by Manager. The number of Committee Members may be increased
by agreement of the parties. Each party shall continue to direct the
appointment of the same percentage of Committee Members as described above.
Each Committee Member shall serve at the pleasure of the party designating such
Committee Member and may be replaced, with or without cause, at any time by such
party upon the delivery of written notice thereof to the other Committee
Members. Manager, Dental Group and their respective Committee Members shall
diligently pursue any preliminary activities that are necessary to allow the
Joint Operations Committee to take an action. Where Committee Members are
required to consult with the organization appointing such Committee Members, the
Committee shall establish and agree on a deadline for accomplishing such
consultation.
(b) Joint Operations Committee Action.
---------------------------------
(1) Joint Action. Except as otherwise expressly set forth above, the
------------
Joint Operations Committee shall take all other actions that have been approved
by a majority of the Committee Members.
(2) Consultation Forum. Consultation between Dental Group and
------------------
Manager, if any, shall take place at a meeting of the Joint Operations
Committee, and Dental Group and Manager hereby agree to be bound by the decision
of their Dental Group Members or Manager Members, as the case may be.
(c) Joint Operations Committee Meetings. Meetings of the Joint Operations
-----------------------------------
Committee may be held by telephone or similar communications equipment so long
as all Committee Members participating in a meeting can hear and speak to each
other. The Joint Operations Committee shall prepare and maintain written
minutes of all meetings and shall provide a copy of the
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<PAGE>
minutes to the parties within fifteen (15) business days following each meeting.
(1) Regular Meetings. The Joint Operations Committee shall hold not
----------------
less than four (4) regular meetings each year, at such specific times and places
as the Committee Members may determine.
(2) Special Meetings. A special meeting of the Joint Operations
----------------
Committee may be called by a majority of the Committee Members.
(3) Notice Requirement. A Committee Member calling a special meeting
------------------
must provide all other Committee Members with ten (10) days' advance written or
telephonic notice. Notice must be given or sent to the Committee Member's
address or telephone number as shown on the records of the Joint Operations
Committee. Notice may be delivered directly to each Committee Member or to a
person at the Committee Member's principal place of business who would
reasonably be expected to communicate that notice promptly to the Committee
Member.
(4) Waiver of Notice Requirement.
----------------------------
(A) Written Waiver, Consent or Approval. Notice of a special
-----------------------------------
meeting need not be given to any Committee Member who, either before or after
the meeting, signs a waiver of notice or a written consent to the holding of the
special meeting, or an approval of the minutes of the special meeting. Such
waiver, consent or approval need not specify the purpose of the special meeting.
All such waivers, consents, and approvals shall be filed with the Joint
Operations Committee records or made a part of the minutes of the special
meetings.
(B) Failure to Object. Notice of a special meeting need not be
-----------------
given to any Committee Member who attends the special meeting and does not
protest before or at the commencement of the special meeting such lack of
notice.
(5) Quorum. The smallest number of Committee Members that exceed
------
fifty percent (50%) of all Committee Members shall constitute a quorum of the
Joint Operations Committee.
(6) Proxies. The Joint Operations Committee shall provide for the use
-------
of proxies, telephonic conference calls, written consents or other appropriate
methods by which the full participation of the Dental Group Members and Manager
Members can be assured.
(d) Limitation of Responsibility. Notwithstanding any other provisions
----------------------------
hereof, Committee Members shall be liable to the parties only for actions
constituting bad faith, gross negligence or breach of an express provision of
this Agreement (so long as such breach remains uncured after ten (10) days of
-7-
<PAGE>
receiving notice of the nature of such breach). In all other respects,
Committee Members shall not be liable for negligence or mistakes of judgment.
3.6 Budgets. A capital and operating budget ("Annual Budget") shall be
-------
established regarding all financial aspects of the Practice. The Annual Budget
shall include the following elements and other items, as appropriate:
(a) A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
(b) An operating budget setting forth an estimate of Revenues and expenses
for the next succeeding fiscal year, together with an explanation of anticipated
changes or modifications, if any, in the Practice's utilization, rates, charges
to patients or third party payors, salaries, costs of Providers, non-wage cost
increases, and all other similar factors expected to differ significantly from
those prevailing during the current fiscal year;
(c) Other expenses of operation;
(d) The amount of a reasonable reserve to satisfy possible shortfalls from
operations. The allocation of such reserve shall be made by the Joint
Operations Committee as and when necessary; and
(e) The Management Fee, as defined below, for the next succeeding fiscal
year.
3.7 Budget Process.
--------------
(a) Initial Annual Budget. Not later than 45 days after the Effective
---------------------
Date, the Joint Operations Committee will have prepared the initial Annual
Budget for the first fiscal year (which shall initially be the calendar year)
during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains, or, at the option of
the parties, such portion of the then current fiscal year plus the immediately
subsequent fiscal year.
(b) Preliminary Budget. Not later than forty-five (45) days prior to the
------------------
end of each fiscal year during the term of this Agreement, the Manager shall
prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
(c) Joint Operations Committee Approval. The Joint Operations Committee
-----------------------------------
shall review and suggest modifications to the Preliminary Budget within ten (10)
days of receipt. Manager
-8-
<PAGE>
shall prepare a revised budget based upon the Joint Operations Committee's
recommendations and the Preliminary Budget as revised shall become the Annual
Budget.
(d) Adjustments. In the event of a material deviation between financial
-----------
forecasts and financial performance during a fiscal year, Manager or Dental
Group may propose adjustments to the Annual Budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
3.8 Personnel.
---------
(a) Providers. Except in unusual circumstances approved by the Joint
---------
Operations Committee, Manager shall not employ or contract with any Providers
for the provision of dental services. All Providers who provide dental services
to Group Patients or to Beneficiaries shall be either (1) Employee Providers,
(2) Subcontract Providers or (3) employees of Subcontract Providers.
(b) Non-Providers. With the exception of employees of Subcontract
-------------
Providers, Manager shall employ all non-Provider personnel necessary for the
operation of the Practice.
(c) Salary and Benefits. Each party to this Agreement shall remain liable
-------------------
for the salary and benefits paid to such party's own employees and shall be
ultimately responsible for compliance with state and federal laws pertaining to
employment taxes, workers' compensation, unemployment compensation and other
employment-related statutes pertaining to the party's own employees.
(d) Payments to Subcontract Providers. Dental Group shall be liable for
---------------------------------
any payments due Subcontract Providers under Provider Subcontracts after receipt
of funds from Manager.
ARTICLE 4
MANAGEMENT SERVICES
-------------------
4.1 General Description of Services. Within the limitations set out
-------------------------------
elsewhere in this Agreement, Manager shall provide or arrange for the provision
to Dental Group of all support services reasonably necessary and appropriate for
the efficient operation of the Practice. Such services include all
administrative services necessary to Dental Group's performance of its
obligations under Payor Contracts, contracting, marketing, capital formation
and assistance with long term strategic planning.
4.2 Facilities. When appropriate, Manager shall secure and maintain
----------
facilities, including, without limitation, office space, improvements,
furnishings, equipment, supplies and personal property, of a nature and in a
condition necessary and
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<PAGE>
appropriate for the efficient and effective operations of the Practice subject
to the general approval of the Joint Operations Committee. Manager shall secure
and maintain said facilities in the name of Dental Group.
4.3 Purchased Items and Services. Manager shall serve as the purchasing
----------------------------
agent for Dental Group and shall arrange for personnel benefits, insurance, and
any other items and services required for the proper operation of the Practice.
4.4 Manager Personnel.
-----------------
(a) Management Team. Subject to any approval or consulting rights of the
---------------
Joint Operations Committee, Manager shall engage or designate one or more
individuals experienced in dental group management and direction, including, but
not limited to, an administrator, who will be responsible for the overall
administration of the Practice including day-to-day operations and strategic
development activities.
(b) Other Manager Personnel. Manager shall select, hire, train, supervise,
-----------------------
monitor and terminate all non-Provider personnel necessary for the operation and
management of the Practice. During the two year period following the date of
this Agreement, Manager shall maintain in effect for the benefit of all non-
Provider personnel of Manager assigned to the operation and management of the
Practice, the following programs and benefits currently being provided by
Manager: holiday bonus program; health club membership; and annual incentive
trip for employees and family.
4.5 Day-to-Day Management and Supervision. Subject to any approval or
-------------------------------------
consulting rights of the Joint Operations Committee, Manager shall provide
general management including, but not limited to, day-to-day supervision of:
(a) Manager personnel;
(b) Equipment and supply acquisition;
(c) Office space and facility maintenance;
(d) Patient records organization and retention;
(e) Third party payor contracting;
(f) Case management tracking;
(g) Billing, collections and accounting activities as set forth below;
(h) All operating aspects and policies of the Practice including, but not
limited to, hours of operation, work
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<PAGE>
schedules, standard duties and job descriptions, for all nondentist personnel;
and
(i) Other related and incidental matters.
4.6 Billing and Collection Payment of Expenses. Manager shall be
------------------------------------------
responsible for all billing and collecting activities required by Dental Group.
Manager shall also be responsible for reviewing and paying accounts payable of
Dental Group. Dental Group hereby appoints the Manager its true and lawful
attorney-in-fact to take the following actions for and on behalf of and in the
name of Dental Group:
(a) Bill and collect in Dental Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Dental Group. Dental
Group shall give Manager all necessary access to Patient records to accomplish
all billing and collection. In so doing, Manager will use its best efforts but
does not guarantee any specific level of collections, and Manager will comply
with Dental Group's reasonable and lawful policies regarding courtesy discounts;
(b) Take possession of and endorse in the name of Dental Group any and all
instruments received as payment of accounts receivable;
(c) Deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
(d) Place accounts for collection, settle and compromise claims, and
institute legal action for the recovery of accounts.
4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
(a) Financial Reporting. Manager shall prepare, analyze, and deliver to
-------------------
the Joint Operations Committee financial reports to the extent necessary or
appropriate for the operation of the Practice, including the following:
(1) Financial statements, including balance sheets and statements of
cash flow and income;
(2) Accounts payable and accounts receivable analysis;
(3) Billing status including any Medicaid remittances; and
(4) Reconciliation of assets, liabilities and major expenses.
-11-
<PAGE>
(b) Audits. Dental Group shall have the right to review and, at its sole
------
cost and expense, obtain an audit (separate from any annual audit or review of
Dental Group's financial statements performed at the direction of the Manager)
of Dental Group's financial books and records maintained by the Manager. Upon
five (5) days' prior written notice, Manager shall allow Dental Group access
during reasonable business hours to all information and documents reasonably
required for such review or audit. Upon Dental Group's request and at Dental
Group's expense, Manager shall also provide copies of such documents.
4.8 Marketing and Public Relations Services. Manager shall provide such
---------------------------------------
marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Dental Group.
Manager shall provide Dental Group with marketing materials and activities.
4.9 Dental Group Agreements. On behalf of Dental Group, Manager shall
-----------------------
review, evaluate and negotiate Payor Contracts and Provider Subcontracts and any
other contracts or agreements regarding the provision of dental related items or
services by Dental Group or Providers.
4.10 Utilization Review Quality Improvement and Outcomes Monitoring.
--------------------------------------------------------------
Manager shall be responsible for providing administrative support for Dental
Group's utilization review, quality improvement and outcomes monitoring
activities, including, without limitation, data collection, analysis and
reporting for Group Patients and Beneficiaries. Manager shall also support the
development and implementation of relevant policies, procedures, protocols,
practice guidelines and other interventions based on such activities.
4.11 Applicable Law. Manager and Dental Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE 5
DENTAL GROUP SERVICES
---------------------
5.1 Provision of Dental Services by Dental Group. Dental Group shall
--------------------------------------------
operate the Practice during the Term as a dental practice in accordance with
terms of this Agreement and the Annual Budget.
5.2 Providers.
---------
(a) Professional Dental Services. Dental Group shall employ or contract
----------------------------
with the number of Providers Dental Group
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<PAGE>
deems necessary for the efficient and effective operation of the Practice and in
accordance with quality assurance, credentialing and utilization management
protocols approved by Manager. Dental Group shall provide full and prompt dental
coverage for the Practice, including emergency service twenty-four hours per
day, seven days per week, including holidays according to poli cies and
schedules approved by the Joint Operations Committee.
(b) Provider Subcontracts and Employment Agreements. Dental Group shall not
-----------------------------------------------
negotiate or execute any Provider Subcontract, Employment Agreement, or any
amendment thereto, without the approval of the Joint Operations Committee. The
Joint Operations Committee shall have the right of review and reasonable
approval of any Provider Subcontract and Employment Agreement. Dental Group
shall be responsible for the payment, in accordance with the Annual Budget, of
all Employee and Subcontract Providers.
5.3 Peer Review. Dental Group, after consultation with the Joint
-----------
Operations Committee, shall implement, regularly review, modify as necessary or
appropriate and obtain the commitment of Providers to actively participate in
peer review procedures for Providers. Dental Group shall assist Manager in the
production of periodic reports describing the results of such procedures.
Dental Group shall provide Manager with prompt notice of any information that
raises a reasonable risk to the health and safety of Group Patients or
Beneficiaries. In any event, after consultation with the Joint Operations
Committee, Dental Group shall take such action as may be reasonably warranted
under the facts and circumstances.
5.4 Billing Information and Assignments. Dental Group shall promptly
-----------------------------------
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Dental Group's
services. Dental Group shall use reasonable efforts to procure consents to
assignments and other approvals and documents necessary to enable Manager to
obtain payment or reimbursement from third party payors and patients. With the
assistance of Manager, Dental Group shall obtain all provider numbers necessary
to obtain payment or reimbursement for its services.
5.5 Third Party Contracts. Dental Group shall be in compliance with all
---------------------
contracts, agreements and arrangements, including any contracts that exist on
the Effective Date, between Dental Group and third parties.
5.6 Use of Manager's Goods and Services. Dental Group shall not use any
-----------------------------------
goods or services provided by Manager pursuant to this Agreement for any purpose
other than the provision of and management of dental services as contemplated by
this Agreement and purposes incidental thereto.
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<PAGE>
5.7 Negative Covenants. During the Term, Dental Group shall not, without
------------------
the prior approval of the Joint Operations Committee, (a) assign, pledge,
mortgage or otherwise encumber any of its property, (b) transfer substantially
all of its assets, including its goodwill, (c) merge or consolidate with any
other entity, (d) allow the transfer or issuance of any of its stock (other than
in accordance with the terms and provisions of that certain Share Acquisition
Agreement dated February 24, 1997, between GMS Dental Group Management, Inc., a
Delaware corporation and William Yep, D.D.S.), or (e) take or allow any act that
would materially impair the ability of Dental Group to carry on the business of
the Practice or to fulfill its obligations under this Agreement.
ARTICLE 6
TERM
----
6.1 Term. This Agreement shall be effective as of February 24, 1997 (the
----
"Effective Date"), and shall remain in effect for an initial term of forty (40)
years from the Effective Date, expiring on the fortieth (40th) anniversary of
the Effective Date, unless earlier terminated pursuant to the terms of this
Agreement. The word "Term" shall include such initial term and, where
applicable, any extension of such initial term (whether extended pursuant to
Section 6.2(a) or otherwise), subject to earlier termination pursuant to the
provisions of this Agreement.
6.2 Termination and Extension.
-------------------------
(a) Automatic Extension. At the end of the initial term and any subsequent
-------------------
term, this Agreement shall automatically renewed for a five (5) year term unless
one of the parties provides the other party with written notice of intent not to
renew, not less than one hundred eighty (180) day prior to the expiration of the
then current term.
(b) Early Termination. This Agreement may be terminated according to the
-----------------
provisions of this Section.
(1) Material Breach. In the event either party materially breaches
---------------
this Agreement and such breach is not cured to the reasonable satisfaction of
the non-breaching party within thirty (30) days after the non-breaching party
serves written notice of the default upon the defaulting party (the "Default
Notice"), the Agreement shall automatically terminate at the election of the
non-breaching party upon the giving of a written notice of termination to the
defaulting party not later than forty-five (45) days after service of the
Default Notice; provided that if such uncured breach is only capable of being
cured within a reasonable period of time in excess of thirty (30) days, the non-
breaching party shall not be entitled to
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<PAGE>
terminate this Agreement so long as the defaulting party has commenced such cure
and thereafter diligently pursue such cure to completion.
(2) Refusal To Comply. In the event that Dental Group or Manager
-----------------
refuses or fails to comply with a decision of the Joint Operations Committee,
the aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if such dispute between Dental Group and Manager continues for
sixty (60) days after the date the aggrieved party exercises its option
regarding mediation, the non-complying party shall have thirty (30) days in
which to comply with the decision of the Joint Operations Committee. If the
non-complying party has not complied by the end of such thirty (30) day period,
the aggrieved party shall have the option to terminate this Agreement upon
fifteen (15) days prior written notice. During such mediation, Manager and
Dental Group shall continue to operate and manage the Practice in good faith.
Neither Dental Group nor Manager shall be required to participate in such good
faith mediation if it reasonably concludes that the delay associated with
pursuing such mediation likely would cause harm or injury to it or the Practice.
(3) Bankruptcy. A party may, upon three (3) days' prior written
----------
notice, terminate this Agreement if the other party:
(A) Applies for or consents to the appointment of a receiver,
trustee or liquidator of all or a substantial part of its assets, files a
voluntary petition in bankruptcy or consents to an involuntary petition, makes a
general assignment for the benefit of its creditors, files a petition or answer
seeking reorganization or arrangement with its creditors, or admits in writing
its inability to pay its debts when due, or
(B) Suffers any order, judgment or decree to be entered by any
court of competent jurisdiction, adjudicating such party bankrupt or approving a
petition seeking its reorganization or the appointment of a receiver, trustee or
liquidator of such party or of all or a substantial part of its assets, and such
order, judgment or decree continues unstayed and in effect for ninety (90) days
after its entry.
(4) Nonperformance. Manager may terminate this Agreement in the event
--------------
that in any two consecutive fiscal quarters the Manager has not been paid the
Management Fee and, in the sole discretion of the Manager, it is not reasonably
likely that the Management Fee will be paid in the next fiscal quarter. Any
such termination shall be effective as of the last day of such third fiscal
quarter provided at least ninety (90) days notice shall have been given;
otherwise, such termination shall be effective on the sixtieth day after notice
is given.
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<PAGE>
(5) Change in Law. In the event of any material change in federal or
-------------
state law that has a significant adverse impact on either party hereto in
connection with their performance under this Agreement, or if performance by a
party of court or any duties under this Agreement be deemed illegal by any
administrative agency or in a formal opinion rendered to Manager by legal
counsel knowledgeable in health law matter retained by the Manager, the affected
party shall have the right to require that the other party renegotiate the terms
of this Agreement. Unless the parties otherwise mutually agree in writing, such
renegotiated terms shall be effective not later than twenty (20) days after
receipt of written notice of such request for renegotiation. Solely in the
event of illegality, if the parties fail to reach an agreement within thirty
(30) days of the request for renegotiation, either party may (subject to the
severability provision of this Agreement) terminate this Agreement upon thirty
(30) days' prior written notice to the other party.
(c) Effect of Termination. Upon termination of this Agreement:
---------------------
(1) Dental Group shall surrender to Manager all of Manager's property
used primarily in the operation of the Practice in the same condition as
received, reasonable wear and tear excepted.
(2) Manager shall deliver to Dental Group all records related to the
business of and provision of dental care through the Practice including, without
limitation, patient records and any corporate, personnel and financial records
maintained for the Practice and Providers, provided, that except as limited by
law, including, but not limited to laws governing the confidentiality of patient
records, Manager shall have the option to copy (or otherwise duplicate) at its
sole cost and expense such records of Dental Group and to retain and utilize
such records for its own use;
(3) Manager shall deliver to Dental Group any other property of Dental
Group in Manager's possession;
(4) Both parties shall cooperate to ensure the provision of
appropriate dental care to Group Patients and Beneficiaries;
(5) Dental Group shall promptly deliver to Manager any Revenues that
it may receive in payment for dental services rendered by Dental Group prior to
termination; and
(6) Both parties shall cooperate to ensure the appropriate billing and
collections for dental services rendered by Dental Group prior to the effective
date of termination, and any such cash collected shall be retained by Dental
Group and/or paid to Manager pursuant to Article 7.
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<PAGE>
(d) Manager's Option. Upon the termination of this Agreement pursuant to
----------------
Section 6.2(b), Manager shall have the option exercisable within 180 days after
the effective date of termination to require Dental Group to: (i) assume the
accounts payable and other liabilities and obligations under facilities leases,
equipment leases and other contracts, and (ii) purchase the accounts receivable,
inventories and supplies, furniture, fixtures and equipment, leasehold
improvements and intangible assets, in each case which relate solely to the
performance by Manager of its obligations under this Agreement, at their
respective fair market values. The fair market value of the assumed liabilities
and acquired assets shall be determined in each case based upon their respective
book values as reflected on the books and records of Manager in accordance with
GAAP, except that the fair market value of equipment shall be the greater of its
book value as so determined or its appraised value as determined in good faith
by a reputable appraiser selected by Manager. The consideration to be paid by
Dental Group shall consist of (i) the amount of the liabilities assumed by
Dental Group in the transaction as valued based on their book values, and (ii)
cash for the balance. Dental Group shall indemnify and hold harmless Manager
from and against and to the extent practicable arrange for the release of
Manager from any and all labilities and obligations assumed by Dental Group.
The option shall be exercisable by Manager by giving written notice to Dental
Group. If Manager exercises its option pursuant to this section prior to the
effective date of termination of this Agreement, then the effective date of
termination of this Agreement shall be continued until the closing date of the
acquisition transaction provided for under this section. The closing of the
transaction shall take place at the principal office of Manager not more than
thirty (30) days following the exercise of the option by Manager.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF DENTAL GROUP
----------------------------------------------
Dental Group hereby represents and warrants to Manager as of the date
hereof as follows:
7.1 Organization. Dental Group is a professional corporation duly
------------
organized, validly existing and in good standing under the laws of the State of
California. Dental Group does not need to be qualified in any jurisdiction
other than where it is currently qualified except where the failure to be so
qualified will not have a material adverse effect on Dental Group. Dental Group
has all requisite power to own, lease and operate its properties and assets, and
to carry on its business as presently conducted. Complete and correct copies of
the Articles of Incorporation and Bylaws of Dental Group have been delivered to
the Manager. Such copies are true, correct, complete and
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<PAGE>
properly executed and contain all amendments through the date of this Agreement.
7.2 Capitalization. The authorized capital stock of Dental Group consists
--------------
of 1,000 shares of Common Stock, of which 100 shares are issued and outstanding
and owned of record and beneficially by William Yep, D.D.S.
7.3 Subsidiaries; Conduct of Business. The sole activity of Dental Group
---------------------------------
is the operation of dental care centers and ancillary activities associated
therewith, and Dental Group is not now and has not engaged in any other
activities of any nature. Dental Group has no subsidiaries, nor any long-term
or short-term investments in, nor ownership of securities of, any business,
corporation, partnership, enterprise, entity or organization, public or private.
7.4 Authority. Dental Group has all requisite power and authority to
---------
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
all necessary action on the part of Dental Group. This Agreement has been duly
executed and delivered by Dental Group and constitutes a valid and binding
obligation of Dental Group, enforceable in accordance with its terms, subject to
the effect of applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar federal or state laws affecting the
rights of creditors and the effect or availability of rules of law governing
specific performance, injunctive relief or other equitable remedies (regardless
of whether any such remedy is considered in a proceeding at law or in equity).
No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality is required by or with respect
to Dental Group in connection with the execution and delivery of this Agreement
by Dental Group or the consummation by Dental Group of the transactions
contemplated hereby.
7.5 No Conflict. The execution, delivery and performance of this
-----------
Agreement by Dental Group and the consummation of the transactions contemplated
hereby and the conduct of the business of Dental Group as currently conducted
will not result in any violation of, be in conflict with, or constitute a
default or give rise to a right of termination, cancellation or acceleration
under any provision of (a) any judgment, decree or order or any material
agreement, contract, understanding, indenture or other instrument to which
Dental Group is a party or by which it is bound; or (b) any statute, rule or
governmental regulation applicable to Dental Group.
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<PAGE>
7.6 Providers. A list of all agreements between Dental Group and
---------
dentists, nurses, hygienists, and other dental care Providers are set forth on
the schedule delivered by Dental Group to Manager concurrently with the
execution hereof. The Providers have all necessary credentials, licenses and
permits required for the work performed for Dental Group. All Providers carry
malpractice insurance in amounts adequate for their performance of services for
Dental Group.
ARTICLE 8
MANAGEMENT FEE
--------------
For its services hereunder, which shall include the providing of all
facilities and furniture, fixtures and equipment at the Practice, all non-
dentist employees of Manager who perform services at or for the Practice and all
management services provided hereunder, Manager shall retain as a management fee
(collectively, the "Management Fee") the following:
8.1 Base Management Fee. As a base management fee (the "Base Management
-------------------
Fee") Manager shall retain that portion of Revenues equal to the sum of the
amount of Manager's Costs plus [*]% of Revenues.
8.2 Performance Management Fee. As a bonus for meeting performance
--------------------------
standards goals as set by the Joint Operations Committee, Manager shall be
eligible for a Performance Management Bonus that is calculated in accordance
with the applicable exhibit to the Annual Budget.
8.3 Adjustments. If there are not sufficient funds to pay the Base
-----------
Management Fee, all unpaid amounts shall accumulate and carry over until paid or
until the termination of this Agreement, in which case such unpaid amounts shall
be immediately due and payable as of the date of termination.
8.4 Reasonable Value. Payment of the Base Management Fee and the
----------------
Performance Management Fee is acknowledged as the parties' negotiated agreement
as to the reasonable fair market value of the services furnished by Manager
pursuant to this Agreement, considering the nature and volume of the services
required and risks assumed by Manager.
ARTICLE 9
INDEMNITY AND INSURANCE
-----------------------
9.1 Indemnity.
---------
(a) Indemnification. Each party shall indemnify, defend and hold harmless
---------------
the other party from any and all liability,
__________
[*] Confidential Treatment Requested.
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<PAGE>
loss, claim, lawsuit, injury, cost, damage or expense whatsoever (including
reasonable attorneys' fees and court costs) arising out of, incident to or in
any manner occasioned by the performance or nonperformance of any duty or
responsibility under this Agreement by such indemnifying party, or any of their
employees, agents, contractors or subcontractors; provided, however, that
neither party shall be liable to the other party hereunder for any claim covered
by insurance, except to the extent that the liability of such party exceeds the
amount of such insurance coverage. Specifically, and without limiting the
generality of the foregoing, Dental Group agrees to indemnify, defend and hold
harmless Manager for all liability, loss, claim, lawsuit, injury, cost, damage
or expense whatsoever (including reasonable attorneys' fees and court costs)
arising out of the professional negligence of Dental Group, its employees,
agents, contractors or subcontractors, including any amounts in excess of the
professional liability insurance coverage of Dental Group or its employees,
agents, contractors or subcontractors.
(b) Mutual Indemnity. Each party to this Agreement shall be indemnified by
----------------
the other party for any claim under this Agreement or otherwise against the
indemnified party for vacation pay, sick leave, retirement benefits, Social
Security benefits, workers' compensation benefits, disability or unemployment,
insurance benefits, or other employee benefits of any kind accrued during the
term of this Agreement by an employee of the indemnifying party.
9.2 Manager's Insurance. Manager shall, on its own behalf and at its sole
-------------------
cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
(a) Comprehensive general liability insurance covering the risks of
Manager, in an amount determined by the Joint Operations Committee;
(b) Workers' compensation insurance covering the employees of Manager, in
such amounts as is usual and customary under the circumstances;
(c) Property insurance covering the facilities, equipment and supplies
owned or leased by Manager or Dental Group for use in the operation of the
Practice.
9.3 Dental Group's Insurance. At Dental Group's sole cost and expense,
------------------------
Manager shall obtain, and maintain on behalf of Dental Group in full force and
effect during the Term, policies in the following categories in the amount
indicated:
(a) Comprehensive professional liability insurance coverage for Dental
Group and Dental Group's Employee Providers, in such amounts as Manager shall
reasonably deem necessary;
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<PAGE>
(b) Workers' compensation insurance covering the employees of Dental Group,
in such amounts as is usual and customary under the circumstances;
(c) Comprehensive general liability insurance covering the risks of Dental
Group, in an amount determined by the Joint Operations Committee.
ARTICLE 10
PROPRIETARY INFORMATION AND UNFAIR COMPETITION
----------------------------------------------
10.1 Protection of Proprietary Information. Dental Group recognizes that
-------------------------------------
due to the nature of this Agreement, Dental Group will have access to trade
secrets and other confidential information of a proprietary nature owned by
Manager ("Proprietary Information"). "Proprietary Information" includes all
information and any idea which a reasonable person would believe is
confidential, in whatever form, tangible or intangible, pertaining in any
manner to the business of Manager or any subsidiary or affiliate of Manager,
unless (i) the information is or becomes publicly known through lawful means,
(ii) the information was rightfully in Dental Group's possession or part of its
general knowledge prior to the Effective Date or (iii) the information is
subsequently disclosed to Dental Group by a third party without breach of this
Agreement and without restriction on its use. Proprietary Information includes,
but is not limited to, any and all computer programs (whether or not completed
or in use) and any and all operating manuals or similar materials which
constitute the non-medical systems, policies and procedures, and methods of
doing business developed by or for the operation of facilities managed by
Manager. Dental Group acknowledges and agrees that Manager has a proprietary
interest in all such Proprietary Information and that all such information
constitutes confidential and proprietary information and is the trade secret
property of Manager. Dental Group hereby waives any and all right, title and
interest in and to such Proprietary Information and agrees to return all copies
thereof and Proprietary Information related thereto to Manager, at Dental
Group's expense, upon the termination of this Agreement.
Dental Group further acknowledges and agrees that Manager is entitled to
prevent its competitors from obtaining and utilizing its Proprietary
Information. Therefore, Dental Group agrees to hold Manager's Proprietary
Information in strictest confidence and not to disclose it or allow it to be
disclosed, directly or indirectly, to any person or entity other than those
persons or entities who are employed by or affiliated with Manager or Dental
Group, without the prior written consent of Manager. Dental Group shall not,
either during the term of this Agreement, or at any time after the expiration or
earlier termination of this Agreement, disclose to anyone other than persons or
entities who are employed by or affiliated with Manager or
-21-
<PAGE>
Dental Group any Proprietary Information obtained by Dental Group from Manager,
except as otherwise required by law.
10.2 Restrictions on Unfair Competition. Dental Group agrees that during
----------------------------------
the term of this Agreement and for a period of two (2) years after termination
of this Agreement Dental Group shall not (a) solicit in any way on behalf of
itself or in conjunction with others for the purpose of providing management
services any dental group being managed by or being or having been solicited by
Manager or any subsidiary, affiliate or successor in interest thereof, and (b)
solicit in any way or make offers of employment to, on behalf of itself or in
conjunction with others, any person employed by Manager or any subsidiary,
affiliate or successor in interest thereof. Dental Group acknowledges and
agrees that these restrictions are reasonable and necessary to protect Manager's
Proprietary Information and to ensure that it will not be subject to unfair
competition.
10.3 Enforcement. Dental Group agrees to require each independent
-----------
contractor and employee of the Dental Group, and any persons or entities to whom
such Proprietary Information is disclosed for the purpose of performance of
Manager's or Dental Group's obligations under this Agreement, to execute a
proprietary information agreement in the form supplied by or approved by
Manager pursuant to which they agree to abide by the restrictions on Dental
Group's activities set forth in this Article 9. Dental Group acknowledges and
agrees that a breach of the provisions of this Article 9 will result in
irreparable harm to Manager which cannot be reasonably or adequately compensated
in damages, and therefore Manager shall be entitled to injunctive and/or
equitable relief to prevent a breach and to secure enforcement thereof, in
addition to any of the relief or award to which Manager may be entitled.
ARTICLE 11
BOOKS AND RECORDS
-----------------
11.1 Ownership of Records. All business records and information relating
--------------------
exclusively to the business and activities of either party shall be the property
of that party, irrespective of identity of the party responsible for producing
or maintaining such records and information. Without limiting the foregoing,
all patient charts and records maintained by Manager relating to the dental
services of Dental Group shall be the property of Dental Group. Dental Group
also shall be entitled to a copy at Dental Group's sole cost of all business
records pertaining to Dental Group. Except as limited by law, including, but
not limited to laws governing the confidentiality of patient records, Manager
shall be entitled to a copy at Manager's sole cost of all records of Dental
Group.
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<PAGE>
ARTICLE 12
MISCELLANEOUS PROVISIONS
------------------------
12.1 Assignment. Except for an assignment by Manager to GMS Dental Group
----------
Management, Inc., or an affiliate of GMS Dental Group Management, Inc., neither
party shall assign this Agreement to any other party or parties without the
prior written consent of the other party, which consent may be withheld
arbitrarily or capriciously, for any reason or for no reason whatsoever and any
attempted assignment in violation of this Agreement shall be null and void.
12.2 Headings. The article and section headings used in this Agreement
--------
are for purposes of convenience only. They shall not be construed to limit or
to extend the meaning of any part of this Agreement.
12.3 Waiver. Waiver by either Dental Group or Manager of any breach of
------
any provision of this Agreement shall not be deemed to be a waiver of such
provision or of any subsequent breach of the same or of any other provision of
this Agreement.
12.4 Notices. Any notice, demand, approval, consent, or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be deemed to have been given when five (5) business days have
elapsed from the date of deposit in the United States mails, certified and
postage prepaid, addressed to the party to be served at the following address or
such other address as may be given in writing to the parties.
Dental Group: Yep Dental Corporation
2364 Geary Boulevard
San Francisco, CA 94115
Attn: President
Manager: Naismith Dental Corporation, A Professional Corporation
235 West MacArthur Boulevard, Suite 700
Oakland, CA 94611
Attn: President
12.5 Attorneys' Fees. If any legal action, arbitration, mediation or
---------------
other proceeding is commenced, whether by Manager or Dental Group concerning
this Agreement, the prevailing party shall recover from the losing party
reasonable attorneys' fees and costs and expenses, including those of appeal and
not limited to taxable costs, incurred by the prevailing party, in addition to
all other remedies to which the prevailing party may be entitled. If a claim or
claims asserted by a third party against Manager or Dental Group or any of them
arise from an action or omission by the other, the party responsible for the
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<PAGE>
action or omission shall be the losing party, and the other party shall be the
prevailing party, for purposes of the foregoing sentence.
12.6 Successors. Without limiting or otherwise affecting any restrictions
----------
on assignments of this Agreement or rights or duties under this Agreement, this
Agreement shall be binding upon and inure to the benefit of the successors and
assigns of Dental Group and Manager.
12.7 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between Dental Group and Manager and supersedes all prior negotiations and
agreements, written or oral, concerning or relating to the subject matter of
this Agreement, and this Agreement may not be modified except by a writing
executed by all parties and subject to the provisions thereof.
12.8 Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereto shall be governed by, and construed according to, the laws of the
State of California.
12.9 Severability. If any provision of this Agreement is held to be
------------
invalid or unenforceable by any court or administrative agency of competent
jurisdiction, or in a written opinion to the Manager by legal counsel
knowledgeable in health law matters retained by the Manager, such holding or
opinion shall not affect the validity and enforceability of the other provisions
of this Agreement and the remainder of this Agreement shall be considered valid
and operative to the fullest extent permitted by law, but only if and to the
extent such enforcement would not materially and adversely frustrate the parties
essential objectives as expressed herein.
12.10 Time is of the Essence. Time is of the essence in this Agreement.
----------------------
12.11 Authority. Any Person signing this Agreement on behalf of any
---------
entity hereby represents and warrants in its individual capacity that it has
full authority to do so on behalf of such entity.
12.12 Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, each of which shall be deemed an
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<PAGE>
original, but all of which taken together shall constitute on and the same
instrument.
IN WITNESS WHEREOF, Dental Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
DENTAL GROUP
------------
YEP DENTAL CORPORATION,
a California professional
dental corporation
By /s/ William Yep
----------------------------
William Yep, D.D.S., President
MANAGER
-------
NAISMITH DENTAL CORPORATION,
a California professional
corporation
By /s/ John Burns
----------------------------
John Burns, D.M.D., President
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<PAGE>
ADDENDUM 1
----------
For purposes of this Agreement, the following terms shall have the meaning
indicated below or defined at the indicated section:
1. Accounts. See Section 2.5(a).
--------
2. Affiliate. "Affiliate" shall mean, with respect to any Person, any
---------
individual or entity directly or indirectly owned or controlled by such
Person, any individual or entity directly or indirectly owning or
controlling such Person or any individual or entity directly or indirectly
owned or controlled by the same family member, individual or entity as owns or
controls such Person. For purposes of this Agreement, neither Dental Group nor
Manager shall be deemed an Affiliate of the other.
3. Agreement. "Agreement" means this Dental Group Management Agreement.
---------
4. Annual Budget. See Section 3.6, first sentence.
-------------
5. Beneficiaries. See Recital A.
-------------
6. Books and Records. "Books and Records" means Dental Group's books of
-----------------
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
7. Capital Costs. "Capital Costs" shall mean any and all investments
-------------
that are or would be capitalized pursuant to GAAP.
8. Committee Members. See Section 3.5(a).
-----------------
9. Default Notice. See Section 6.2(b)(1).
--------------
10. Dental Group. See first paragraph of this Agreement.
------------
11. Dental Group Members. See Section 3.5(a).
--------------------
12. Dental Expenses. See Section 2.6(b).
---------------
13. Effective Date. See Section 6.1.
--------------
14. Employee Providers. See Recital B.
------------------
15. Employment Agreements. See Recital B.
---------------------
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<PAGE>
16. GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with 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 Manager's financial
statements.
17. Group Patients. See Recital A.
--------------
18. Joint Operations Committee. See Section 3.4(b).
--------------------------
19. Management Fee. See Article 8.
--------------
20. Manager. See first paragraph of this Agreement.
-------
21. Manager Members. See Section 3.5(a).
---------------
22. Manager's Costs. "Manager's Costs" means all costs incurred by
---------------
Manager including amortization associated with costs acquiring assets of the
Dental Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which are
attributable to Manager's business operations in accordance with Manager's
corporate allocation policies.
23. Marks. See Section 2.3(a).
-----
24. Payor Contracts. See Recital A.
---------------
25. Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
26. Plans. See Recital A.
-----
27. Practice. See Recital A.
--------
28. Preliminary Budget. See Section 3.7(b).
------------------
29. Programs. See Section 2.3(b).
--------
30. Proprietary Information. See Section 10.1.
-----------------------
31. Providers. "Providers" shall mean individuals or organizations
---------
licensed to practice dentistry (including specialists) as well as other dental
professionals who provide ancillary reimbursable dental services.
32. Provider Subcontracts. See Recital A.
---------------------
A-2
<PAGE>
33. Revenues. "Revenues" means all amounts assigned hereunder by Dental
--------
Group to Manager pursuant to Section 2.6(a).
34. Subcontract Providers. See Recital B.
---------------------
35. Term. See Section 6.1.
----
A-3
<PAGE>
EXHIBIT 10.42
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
THIS DENTAL GROUP MANAGEMENT AGREEMENT (this "Agreement") is dated as
of January 1, 1997 and is effective as of the date set forth in Section 6.1
("Effective Date") by and between GMS DENTAL GROUP MANAGEMENT, INC., a Delaware
---------------------------------
corporation ("Manager") and wholly-owned subsidiary of GMS Dental Group, Inc., a
Delaware corporation (the "Company") and IDAHO DENTAL GROUP, P.A., an Idaho
-------------------------
professional corporation ("Group").
RECITALS
--------
A. Group engages in the practice of dentistry by providing dental
services to patients of Group ("Group Patients") and to enrollees
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
between Group and Plans or between Beneficiaries and Plans.
B. Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
arrangements may include contracts ("Employment Agreements") with dentist
employees (collectively "Employee Providers") and agreements ("Provider
Subcontracts") with independent contractor dentists and non-dentist providers of
various dental care services (collectively "Subcontract Providers").
C. All activities of Group subject to this Agreement are referenced as
the "Practice." All references to "dental" care and services include general and
specialist dental services. All references to "dentists" include generalists and
specialists.
D. Manager is a management services company that has been organized to
provide certain support services for the Practice and for other dental groups.
Manager is in the business of providing or arranging for management services,
facilities, equipment and certain personnel necessary for the operation of the
Practice.
E. Group desires to retain manager on an independent contractor basis
to provide management services that are more particularly described below, and
Manager desires to provide such management services under the terms and
conditions set forth in this Agreement.
<PAGE>
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the covenants and conditions
contained herein, Manager and Group agrees as follows:
ARTICLE I
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
ARTICLE II
SCOPE OF AGREEMENT
------------------
2.1 General Scope of Agreement. This Agreement shall apply to the
--------------------------
Practice, including, without limitation, all professional, administrative and
technical services, marketing, contracting, case management, ancillary dental
services, outpatient services and dental care facilities, equipment, supplies
and items, except as otherwise specifically provided in this Agreement. Group's
Employment Agreements shall encompass substantially all such activities of
Employee Providers and shall provide that all revenues derived from such
activities (and not excluded below) are Revenues. Nothing in this Agreement
shall be construed to alter or in any way affect the legal, ethical and
professional relationship between and among Provider and Provider's patients,
nor shall anything contained in this Agreement abrogate any right or obligation
arising out of or applicable to the dentist-patient relationship.
2.2 License. Except as prohibited by contract or by applicable laws
-------
and requirements governing the practice of dentistry, Group grants Manager an
exclusive license to use any and all of Group's assets, whether tangible or
intangible, in carrying out Manager's duties and responsibilities under the
provisions of this Agreement.
2.3 Intellectual Property. Group hereby grants to manager a non-
---------------------
exclusive, perpetual, royalty-free, worldwide license to use and sublicense the
use of any intellectual property owned by Group. This license shall cover, but
not be limited to, use of the following:
a. Service Mark. Group hereby grants Manager the right to use all
------------
service marks and trademarks of Group (the "Marks") for marketing and
promotional materials in connection with Group's offering of dental services.
Manager agrees to use the Marks solely in the design format used by Group as of
the date of this Agreement or another design format approved in advance in
writing by Group. Group shall have the opportunity to
2.
<PAGE>
review any marketing or other materials using the Marks in advance of any public
distribution. Manager agrees that it will include these restrictions on use in
any sublicense of the Marks.
b. Copyrighted Materials. Group hereby grants Manager the right
---------------------
to use any and all copyrighted materials authored or owned by Group including,
specifically, the Group dental management system software programs (the
"Programs"). This license includes the right to sublicense the Programs and the
right to prepare and own derivative works based on the Programs, all without a
duty of accounting to Group. Group shall execute all documents required to
enable Manager to own, use and exploit all such rights.
2.4 Revenues. "Revenues" shall mean all of Group's accounts
--------
receivable (net of contractual adjustments and bad debt), and cash collections.
Revenues shall include all funds collected by, or legally due to, Group or any
Affiliate of Group, including, without limitation, the following: (a) all fee-
for-service payments for services to Group Patients or Beneficiaries; (b) all
payments established under Payor Contracts; (c) all coordination of benefits or
deductibles and third-party liability recoveries related to the Group's
services; (d) all payments, dues, fees or other compensation to Group; (e) any
income, profits, dividends, distributions or other payments from Group's
investments; and (f) any interest or other non-operating income of Group.
2.5 Deposit Accounts. All cash received by Group from whatever
----------------
source shall be deposited into an account or accounts ("Accounts") in the name
of Group at a banking institution selected by Group and approved by Manager.
Group authorizes Manager to bill and collect, in Group's name, all charges and
reimbursements for Group's dental related activities and to deposit such
collections in the Accounts. Group agrees to assist and cooperate with Manager
in the billing and collection process and to immediately deliver to Manager for
deposit any monies Group may receive. Manager shall manage the cash and cash
equivalents of the Group and Manager shall be entitled (and is hereby
authorized) to transfer such cash to the account of Manager and to use such cash
for purposes as Administrator deems appropriate, subject to and consistent with
the terms and provisions of this Agreement. Nothing in this Section 2.5 shall
be construed to limit or otherwise modify the requirement that manager disburse
funds in fulfillment of the obligations of the Group and Manager under this
Agreement.
ARTICLE III
OPERATION OF PRACTICES
----------------------
3.1 Appointment. Subject to applicable laws and requirements
-----------
governing the practice of dentistry, Group hereby appoints Manager as its sole
and exclusive Manager for the operation of the Practice and covenants not to
enter into an agreement with any Person other than Manager to perform or assume
any of Manager's rights, duties or
3.
<PAGE>
responsibilities as provided herein. Manager hereby accepts full responsibility
for such management as more fully set forth herein.
3.2 Professional Matters. Pursuant to applicable laws and
--------------------
requirements governing the practice of dentistry, Group shall retain ultimate
responsibility for all activities of Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's non-
licensed status.
3.3 Relationship of Parties. In the performance of its duties and
-----------------------
obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Group. Except as provided in this Agreement or as
required by laws, Group shall neither have nor exercise any control or direction
over the methods by which Manager shall perform its obligation thereunder; nor
shall Manager have or exercise any control or direction over the methods by
which Group shall practice dentistry. It is expressly agreed by the parties
that no work, act, commission or omission of manager pursuant to the terms and
conditions of this Agreement shall be construed to make or render Manager or
Manager's employees or agents, the employees of Group. Manager and Group are
not partners or joint venturers with each other and nothing herein shall be
construed so as to make them partners or joint venturers or impose upon either
of them any liability as partners or joint venturers. Group's responsibility is
to assure that the services covered by this Agreement shall be performed and
rendered in a competent, efficient and satisfactory manner.
3.4 Authority and Control. Strategic planning, overall direction and
---------------------
control of the business and affairs of Group, and authority over the day-to-day
activities of Group shall be accomplished as follows:
a. Exclusive Authority:
-------------------
(1) Group. Notwithstanding anything else to the contrary
-----
contained herein, Group shall have the sole responsibility and authority for all
aspects of the practice of dentistry and delivery of dental services by
Providers. Providers shall use and occupy at the practice sites ("Practice
Sites") the facilities provided by Manager hereunder exclusively for the
practice of dentistry ("Practice Site Facilities"). Group expressly acknowledges
that the Practice or Practices conducted at these Practice Site Facilities shall
be conducted solely by dentists and dental hygienists associated with Group as
Employee Providers or Subcontract Providers. Group shall consult with Manager or
the Joint Operations Committee to the extent reasonable and not inconsistent
with the laws governing the practice of dentistry.
b. Joint Authority. All other decision-making authority related
---------------
to the business and affairs of Group shall be vested in a joint operations
committee (the "Joint Operations Committee"). Nothing herein shall be construed
as preventing the Joint Operations Committee from appointing representatives and
delegating authority to such representatives so long as the Joint Operations
Committee may revoke such appointment and
4.
<PAGE>
delegation at any time and so long as the Joint Operations Committee retains
ultimate responsibility for the decisions of such representatives.
3.5 Joint Operations Committee. Subject to applicable laws and
--------------------------
requirements governing the practice of dentistry, the Joint Operations Committee
shall have authority and responsibility to provide strategic planning, overall
direction and authority over the day-to-day management and administrative
activities of the Group and shall manage the business operations of the Group as
follows:
a. Joint Operations Committee Membership. The Joint Operations
-------------------------------------
Committee shall consist initially of five (5) individuals (the "Committee
Members"). Group shall designate two (2) Committee Members who shall be
licensed dentists (the "Group Members") and the remaining three (3) Committee
Members (the "Manager Members") shall be appointed by Manager. The number of
Committee Members may be increased by agreement of the parties. Each party
shall continue to direct the appointment of the same percentage of Committee
Members as described above. Each Committee Member shall serve at the pleasure
of the party designating such Committee Member and may be replaced, with or
without cause, at any time by such party upon the delivery of written notice
thereof to the other Committee Members. Manager, Group and their respective
Committee Members shall diligently pursue any preliminary activities that are
necessary to allow the Joint Operations Committee to take an action. Where
Committee Members are required to consult with the organization appointing such
Committee Members, the Committee shall establish and agree on a deadline for
accomplishing such consultation.
b. Joint Operations Committee Action.
---------------------------------
(1) Joint Action. Except as otherwise expressly set forth
------------
above, the Joint Operations Committee shall take all other actions that have
been approved by a majority of the Committee Members.
(2) Consultation Forum. Consultation between Group and
------------------
Manager, if any, shall take place at a meeting of the Joint Operations
Committee, and Group and Manager hereby agree to be bound by the decision of
their Group Members or Manager Members, as the case may be.
c. Joint Operations Committee Meetings. Meetings of the Joint
-----------------------------------
Operations Committee may be held by telephone or similar communications
equipment so long as all Committee Members participating in a meeting can hear
and speak to each other. The Joint Operations Committee shall prepare and
maintain written minutes of all meetings and shall provide a copy of the minutes
to the parties within fifteen (15) business days following each meeting.
(1) Regular Meetings. The Joint Operations Committee shall
----------------
hold not less than four (4) regular meetings each year, at such specific times
and places as the Committee Members may determine.
5.
<PAGE>
(2) Special Meetings. A special meeting of the Joint
----------------
Operations Committee may be called by a majority of the Committee Members.
(3) Notice Requirement. A Committee Member calling a special
------------------
meeting must provide all other Committee Members with ten (10) days' advance
written or telephonic notice. Notice must be given or sent to the Committee
Member's address or telephone number as shown on the records of the Joint
Operations Committee. Notice may be delivered directly to each Committee Member
or to a person at the Committee Member's principal place of business who
reasonably would be expected to communicate that notice promptly to the
Committee Member.
(4) Waiver of Notice Requirement.
----------------------------
(a) Written Waiver, Consent or Approval. Notice of a
-----------------------------------
special meeting need not be given to any Committee Member who, either before or
after the meeting, signs a waiver of notice or a written consent of the holding
of the special meeting, or an approval of the minutes of the special meeting.
Such waiver, consent or approval need not specify the purpose of the special
meeting. All such waivers, consents and approvals shall be filed with the Joint
Operations Committee records or made a part of the minutes of the special
meetings.
(b) Failure to Object. Notice of a special meeting need
-----------------
not be given to any Committee Member who attends the special meeting and does
not protest before or at the commencement of the special meeting such lack of
notice.
(5) Quorum. The smallest number of Committee Members that
------
exceed fifty percent (50%) of all Committee Members shall constitute a quorum of
the Joint Operations Committee, provided, however, that such quorum shall
include at least one Group member and one Manager member.
(6) Proxies. The Joint Operations Committee shall provide
-------
for the use of proxies, telephonic conference calls, written consents or other
appropriate methods by which the full participation of the Group Members and
Manager Members can be assured.
d. Limitation of Responsibility. Notwithstanding any other
----------------------------
provisions hereof, Committee Members shall be liable to the parties only for
actions constituting bad faith, gross negligence or breach of an express
provision of this Agreement (so long as such breach remains uncured after ten
(10) days of receiving notice of the nature of such breach). In all other
respects, Committee Members shall not be liable for negligence or mistakes of
judgment.
3.6 Budgets. A capital and operating budget ("Annual Budget") shall
-------
be established regarding all financial aspects of the Practice. The Annual
Budget shall include the following elements and other items, as appropriate:
6.
<PAGE>
a. A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
b. An operating budget setting forth an estimate of Net Revenues
and expenses for the next succeeding fiscal year, together with an explanation
of anticipated changes or modifications, if any, in the Practice's utilization,
rates, charges to patients or third party payors, salaries, costs of Provider,
non-wage cost increases, and all other similar factors expected to differ
significantly from those prevailing during the current fiscal year;
c. Other expenses of operation;
d. The amount of a reasonable reserve to satisfy possible
shortfalls from operations. The allocation of such reserve shall be made by the
Joint Operations Committee as and when necessary; and
e. The Management Fee, as defined below, for the next succeeding
fiscal year.
3.7 Budget Process.
--------------
a. Initial Annual Budget. Not later than 45 days after the
---------------------
Effective Date, the Joint Operations Committee will have prepared the initial
Annual Budget for the first fiscal year (which shall initially be the calendar
year) during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains, or, at the option of
the parties, such portion of the then current fiscal year plus the immediately
subsequent fiscal year.
b. Preliminary Budget. Not later than forty-five (45) days prior
------------------
to the end of each fiscal year during the term of this Agreement, the Manager
shall prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
c. Joint Operations Committee Approval. The Joint Operations
-----------------------------------
Committee shall review and suggest modifications to the Preliminary Budget
within ten (10) days of receipt. Manager shall prepare a revised budget based
upon the Joint Operations Committee's recommendations and the Preliminary Budget
as revised shall become the Annual Budget.
d. Adjustments. In the event of a material deviation between
-----------
financial forecasts and financial performance during a fiscal year, Manager or
Group may propose adjustments to the Annual budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
7.
<PAGE>
3.8 Personnel.
---------
a. Providers. Except in unusual circumstances approved by the
---------
Joint Operations Committee, and as permitted by law, Manager shall not employ or
contract with any Provider for the provision of dental services. All Providers
who provide dental services to Group Patients or to Beneficiaries shall be
either (1) Employee Providers, (2) Subcontract Providers, or (3) employees of
Subcontract Providers. Group shall have complete control of and responsibility
for the hiring, engagement, compensation, training, scheduling, supervision,
evaluation, and termination of all Employee Providers and Subcontract Providers,
although at the request of Group, Manager shall consult with Group respecting
such matters and shall coordinate the advertising of positions available,
interviewing of candidates, and scheduling of clinical staff meetings and
training sessions.
b. Non-Providers. With the exception of employees of Subcontract
-------------
Providers, Manager shall employ all non-Provider personnel necessary for the
operation of the Practice.
c. Salary and Benefits. Subject to Manager's responsibilities
-------------------
under Article VII, each party to this Agreement shall remain liable for the
salary and benefits paid to such party's own employees and shall be ultimately
responsible for compliance with state and federal laws pertaining to employment
taxes, workers' compensation, unemployment compensation and other employment-
related statutes pertaining to the party's own employees.
d. Payments to Subcontract Providers. Subject to Manager's
---------------------------------
responsibilities under Article VII, Group shall be liable for any payments due
Subcontract Providers under Provider Subcontracts.
ARTICLE IV
MANAGEMENT SERVICES
-------------------
4.1 General Description of Services. Except as prohibited by law and
-------------------------------
within the limitations set out elsewhere in this Agreement, Manager shall
provide or arrange for the provision to Group of all support services reasonably
necessary and appropriate for the efficient operation of the Practice. Such
services include all administrative services necessary to Group's performance of
its obligations under Payor Contracts, contracting, marketing, capital formation
and assistance with long term strategic planning. Manager shall exercise its
best efforts to fulfill the administrative functions of a well managed dental
group and to maintain the Practice's status as the preeminent group practice in
Pocatello and the surrounding area.
4.2 Practice Site Facilities. When appropriate, Manager shall secure
------------------------
and maintain Practice Site Facilities, including, without limitation, office
space, improvements, furnishings, equipment, supplies, and personal property, of
a nature and in a condition
8.
<PAGE>
necessary and appropriate for the efficient and effective operations of the
Practice subject to the general approval of the Joint Operations Committee.
Manager shall secure and maintain said Practice Site Facilities in the name of
Group. Group hereby accepts and approves of the Practice Site Facilities
initially provided by Manager. However, Manager from time to time shall make
such Practice Site Facilities changes, including but not limited to dental
equipment purchases, as reasonably may be requested by Group so that Group may
conduct its Practice according to the level required to maintain the Practice's
status as the preeminent group practice in Pocatello and the surrounding area.
4.3 Purchased Items and Services. Manager shall serve as the
----------------------------
purchasing agent for Group and shall arrange for personnel benefits, insurance,
and any other items and services required for the proper operation of the
Practice.
4.4 Manager Personnel.
-----------------
a. Management Team. Subject to any approval or consulting rights
---------------
of the Joint Operations Committee, Manager shall engage or designate one or more
individuals experienced in dental group management and direction, including, but
not limited to, an administrator, who will be responsible for the overall
administration of the Practice including day-to-day operations and strategic
development activities.
b. Other Manager Personnel. Manager shall select, hire, train,
-----------------------
supervise, monitor and terminate all non-Provider personnel necessary for the
operation and management of the Practice; provided, however, with respect to the
selection, hiring and termination of non-Provider clinical staff, Manager shall
obtain the consent of the Group, which consent will not be unreasonably
withheld.
4.5 Day-to-Day Management and Supervision. Subject to any approval
-------------------------------------
or consulting rights of the Joint Operations Committee, Manager shall provide
general management including, but not limited to, day-to-day supervision of:
a. manager personnel;
b. equipment and supply acquisition;
c. office space and facility maintenance;
d. patient records organization and retention;
e. third party payor contracting;
f. case management;
g. billing, collections and accounting activities as set forth
below;
9.
<PAGE>
h. all operating aspects and policies of the Practice including,
but not limited to, hours of operation, work schedules, standard duties and job
descriptions, for all non-Group personnel; and
i. other related and incidental matters.
4.6 Billing and Collection Payment of Expenses. In addition to the
------------------------------------------
responsibilities of Manager under Article VII, Manager shall be responsible for
all billing and collecting activities required by Group. Manager shall also be
responsible for reviewing and paying accounts payable of Group. Group hereby
appoints the Manager its true and lawful attorney-in-fact to take the following
actions for and on behalf of and in the name of Group:
a. bill and collect in Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Group. Group shall give
Manager all necessary access to Patient records to accomplish all billing and
collection. In so doing, Manager will use its best efforts but does not
guarantee any specific level of collections, and Manager will comply with
Group's reasonable and lawful policies regarding courtesy discounts;
b. take possession of and endorse in the name of the Group any
and all instruments received as payment of accounts receivable;
c. deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
d. place accounts for collection, settle and compromise claims,
and institute legal action for the recovery of accounts.
4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
a. Financial Reporting. manager shall prepare, analyze and
-------------------
deliver to the Joint Operations Committee financial reports to the extent
necessary or appropriate for the operation of the Practice, including the
following:
(1) financial statements, including balance sheets and
statements of cash flow and income;
(2) accounts payable and accounts receivable analysis;
(3) billing status including any medicaid remittances; and
(4) reconciliation of assets, liabilities and major
expenses.
10.
<PAGE>
b. Audits. Group shall have the right to review and, at its sole
------
cost and expense, obtain an audit (separate from any annual audit or review of
Group's financial statements performed at the direction of the Manager) of
Group's financial books and records maintained by the Manager. Upon five (5)
days' prior written notice, Manager shall allow Group access during reasonable
business hours to all information and documents reasonably required for such
review or audit. Upon Group's request and at Group's expense, Manager shall also
provide copies of such documents.
4.8 Marketing and Public Relations Services. Subject to Group's
---------------------------------------
consent, which consent shall not be unreasonably withheld, Manager shall provide
such marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Group. Manager
shall provide Group with marketing materials and activities. Nothing in this
Agreement shall be construed to affect or limit in any way the professional
discretion of Group to select patients that may be effectively treated in the
Practice in accordance with professional standards of patient selection.
4.9 Group Agreements. Subject to Group's consent, which consent
----------------
shall not be unreasonably withheld, on behalf of Group, Manager shall review,
evaluate and negotiate Payor Contracts and Provider Subcontracts and any other
contracts or agreements regarding the provision of dental related items or
services by Group or Providers.
4.10 Utilization Review Quality Improvement and Outcomes Monitoring.
--------------------------------------------------------------
Manager shall be responsible for providing administrative support for Group's
utilization review, quality improvement and outcomes monitoring activities,
including, without limitation, data collection, analysis and reporting for Group
Patients and Beneficiaries. Manager shall also support the development and
implementation of relevant policies, procedures, protocols, practice guidelines
and other interventions based on such activities.
4.11 Patient Referrals. The parties agree that the benefits to Group
-----------------
hereunder do not require, are not payment for, and are not in any way contingent
upon the admission, referral or any other arrangements for the provision of any
item or service offered by Manager or any affiliate of Manager to any of Group's
Patients in any facility or laboratory controlled, managed or operated by
Manager or any affiliate of Manager.
4.12 Applicable Law. Manager and Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
11.
<PAGE>
ARTICLE V
GROUP RESPONSIBILITIES
----------------------
5.1 Diagnosis, Treatment Planning, Specific Patient Education and
-------------------------------------------------------------
Consultation. Group shall have sole responsibility for all professional dental
- ------------
services provided to Patients with regard to the diagnosis of the patient's
condition and the development of treatment plan alternatives, including, without
limitation, the following:
a. Diagnosis. Group shall have sole responsibility for all
---------
medical and dental history evaluation, examination, obtaining clinical records,
and diagnostic procedures appropriate for complete diagnosis.
b. Treatment Planning. Group shall have sole responsibility
------------------
for all determination of treatment alternatives that may be professionally
acceptable for the treatment of the patient's condition.
c. Specific Patient Education. Group shall have sole
--------------------------
responsibility for all discussion, recommendation, demonstration, and other
educational modalities intended to address the patient's specific condition, as
differentiated from general patient education intended to address the common
concerns of all patients presenting with similar conditions.
d. Consultation. Group shall have sole responsibility for all
------------
discussion of clinical advantages, disadvantages, complications, and risks of
each alternative treatment plan, and including the likely results of no
treatment.
e. Manager to Assist with Record Procurement. Notwithstanding
-----------------------------------------
the above, Manager shall be responsible for exercising reasonable efforts to
procure, at its own expense, medical and dental history information, previous
clinical records, and X-ray records prior to presentation of the patient for
treatment by Group, in accordance with protocols developed by Group in
consultation with Manager.
5.2 Dental Services. Group shall have sole responsibility for all
---------------
professional dental services provided to Patients with regard to the treatment
of the patient's condition, including, without limitation, the following:
a. Preventive Care. Group shall have sole responsibility for
---------------
all preventive care intended to delay, or intercept the development of
pathologic conditions.
b. Therapeutic Care. Group shall have sole responsibility for
----------------
all therapeutic care intended to ameliorate, or improve existing pathologic
conditions.
c. Referral to Specialists. Group shall have sole
-----------------------
responsibility for all referral to appropriate dental specialists and other
allied health care professionals in accordance with professional dental
standards of care.
12.
<PAGE>
d. Continuing Care. Group shall have sole responsibility for
---------------
all development and execution of continuing care protocols intended to maintain
the patient's condition over the course of time.
e. Manager to Assist with Patient Compliance Tracking.
--------------------------------------------------
Notwithstanding the above, Manager shall be responsible for exercising
reasonable efforts to facilitate, coordinate, and document the scheduling,
tracking, and confirmation of Group's recommendations for dental diagnostic and
therapeutic services, treatments, referrals, and continuing care in accordance
with protocols developed by Group in consultation with Manager.
5.3 Provision of Dental Services by Group. Group shall operate the
-------------------------------------
Practice during the Term as a dental practice in accordance with the terms of
this Agreement and the Annual Budget. However, nothing in this Agreement shall
be construed to affect or limit in any way the professional discretion or duty
of Group, insofar as such constitutes the practice of dentistry.
5.4 Providers.
---------
a. Professional Dental Services. Group shall employ or
----------------------------
contract with the number of Providers Group deems necessary for the efficient
and effective operation of the Practice and in accordance with the Annual Budget
and quality assurance, credentialing and utilization management protocols
approved by the Joint Operations Committee. Group shall provide full and prompt
dental coverage for the Practice, including emergency service twenty-four hours
per day, seven days per week, including holidays, according to policies and
schedules approved by the Joint Operations Committee.
b. Provider Subcontracts and Employment Agreements. Group
-----------------------------------------------
shall not negotiate or execute any Provider Subcontract, Employment Agreement,
or any amendment thereto, or terminate any Provider Subcontract or Employment
Agreement without first consulting with the Joint Operations Committee. Subject
to Manager's responsibilities under Article VII, Group shall be responsible for
the payment, in accordance with the Annual Budget, of all Employee and
Subcontract Providers.
5.5 Peer Review. Group, after consultation with the Joint Operations
-----------
Committee, shall implement, regularly review, modify as necessary or appropriate
and obtain the commitment of Providers to actively participate in peer review
procedures for Providers. Group shall assist Manager in the production of
periodic reports describing the results of such procedures. Group shall provide
Manager with prompt notice of any information that raises a reasonable risk to
the health and safety of Group Patients or Beneficiaries. In any event, after
consultation with the Joint Operations Committee, Group shall take such action
as may be reasonably warranted under the facts and circumstances.
5.6 Fees, Charges and Payor Agreements. Group shall, after
----------------------------------
consultation with Manager, determine the fees, charges, premiums, or other
amounts due in connection
13.
<PAGE>
with delivery of dental services to Patients. Such fees, charges, premiums, or
other amounts (regardless of whether determined on a fee-for-service, capitated,
prepaid, or other basis) shall be reasonable and consistent with the fees,
charges, premiums, and other amounts due to dental care providers for similar
services within the community under similar types of reimbursement programs
involved if such programs are currently offered within the community.
5.7 Hours of Clinical Operation. After consultation with the Joint
---------------------------
Operations Committee, Group shall establish hours of operation that are
consistent with good dental practice, and are appropriate to the need to timely
deliver professional dental care services to Group Patients.
5.8 Billing Information and Assignments. Group shall promptly
-----------------------------------
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Group's
services. Group shall use reasonable efforts to procure consents to assignments
and other approvals and documents necessary to enable Manager to obtain payment
or reimbursement from third party payors and patients. With the assistance of
Manager, Group shall obtain all provider numbers necessary to obtain payment or
reimbursement for its services.
5.9 Third Party Contracts. Group shall be in compliance with all
---------------------
contracts, agreements and arrangements, including any contracts that exist on
the Effective Date, between Group and third parties.
5.10 Use of Manager's Goods and Services. Group shall not use any
-----------------------------------
goods or services provided by Manager pursuant to this Agreement for any purpose
other than the provision of and management of dental services as contemplated by
this Agreement and purposes incidental thereto.
5.11 Negative Covenants. During the Term, Group shall not, without
------------------
the prior approval of the Joint Operations Committee, (a) assign, pledge,
mortgage or otherwise encumber any of its property, (b) transfer substantially
all of its assets, including its goodwill, (c) merge or consolidate with any
other entity, (d) allow the transfer or issuance of any of its stock (other than
in accordance with the terms and provisions of those certain Share Acquisition
Agreements dated October __, 1996 between manager and each of the persons set
forth on Schedule A hereto), or (e) take or allow any act that would materially
impair the ability of Group to carry on the business of the Practice or to
fulfill its obligations under this Agreement.
5.12 Group Maintains Full Professional Authority. Notwithstanding
-------------------------------------------
Manager's general and specific rights and responsibilities set forth in this
Agreement, Group shall have full authority and control with respect to all
dental, professional and ethical determinations over Group's Practice to the
extent required by federal, state and local laws, rules and regulation. Manager
shall not engage in activities which constitute the practice of dentistry under
applicable law. Manager shall neither exercise control over nor interfere
14.
<PAGE>
with the dentist-patient relationship, which shall be maintained strictly
between Group's Providers and their Patients.
ARTICLE VI
TERM
----
6.1 Term. This Agreement shall be effective as of January 1, 1997
----
(the "Effective Date"), and shall remain in effect for an initial term of forty
(40) years from the Effective Date, expiring on the fortieth (40th) anniversary
of the Effective Date, unless earlier terminated pursuant to the terms of this
Agreement. The word "Term" shall include such initial term and, where
applicable, any extension of such initial term (whether extended pursuant to
Section 6.2a or otherwise), subject to earlier termination pursuant to the
provisions of this Agreement.
6.2 Termination and Extension.
-------------------------
a. Automatic Extension. At the end of the initial term and any
-------------------
subsequent term, this Agreement shall automatically renew for a five (5) year
term unless one of the parties provides the other party with written notice of
intent not to renew, not less than one hundred eighty (180) days prior to the
expiration of the then current term.
b. Early Termination. This Agreement may be terminated
-----------------
according to the provisions of this Section.
(1) Material Breach. In the event either party materially
---------------
breaches this Agreement and such breach is not cured to the reasonable
satisfaction of the non-breaching party within thirty (30) days after the non-
breaching party serves written notice of the default upon the defaulting party
(the "Default Notice"), the Agreement shall automatically terminate at the
election of the non-breaching party upon the giving of a written notice of
termination to the defaulting party not later than fifteen (15) days after
termination of the 30-day cure period; provided that if such uncured breach is
only capable of being cured within a reasonable period of time in excess of
thirty (30) days, the non-breaching party shall not be entitled to terminate
this Agreement so long as the defaulting party has commenced such cure and
thereafter diligently pursues such cure to completion.
(2) Refusal to Comply. In the event that Group or Manager
-----------------
refuses or fails to comply with a decision of the Joint Operations Committee,
the aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if such dispute between Group and Manager continues for sixty
(60) days after the date the aggrieved party exercises its option regarding
mediation, the non-complying party shall have thirty (30) days in which to
comply with the decision of the Joint Operations Committee. If the non-complying
party has not complied by the end of such thirty (30) day period, the aggrieved
15.
<PAGE>
party shall have the option to terminate this Agreement upon fifteen (15) days'
prior written notice. During such mediation, Manager and Group shall continue
to operate and manage the practice in good faith.
(3) Bankruptcy. A party may, upon three (3) days' prior
----------
written notice, terminate this Agreement if the other party:
(a) Applies for or consents to the appointment of a
receiver, trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary petition,
makes a general assignment for the benefit of its creditors, files a petition or
answer seeking reorganization or arrangement with its creditors, or admits in
writing its inability to pay its debts when due, or
(b) Suffers any order, judgment or decree to be entered
by any court of competent jurisdiction, adjudicating such party bankrupt or
approving a petition seeking its reorganization or the appointment of a
receiver, trustee or liquidator of such party or of all or a substantial part of
its assets, and such order, judgment or decree continues unstayed and in effect
for ninety (90) days after its entry.
(4) Nonperformance. Manager may terminate this Agreement in
--------------
the event that in any two consecutive fiscal quarters the Manager has not been
paid the Management Fee and, in the sole discretion of the Manager, it is not
reasonably likely that the Management Fee will be paid in the next fiscal
quarter. Any such termination shall be effective as of the last day of such
third fiscal quarter provided at least 60 days notice shall have been given;
otherwise, such termination shall be effective on the sixtieth day after notice
is given.
(5) Change in Law. In the event of any material change in
-------------
federal or state law that has a significant adverse impact on either party
hereto in connection with their performance under this Agreement, or if
performance by a party of any duties under this Agreement be deemed illegal by
any administrative agency or in a formal opinion rendered to manager by legal
counsel knowledgeable in health law matter retained by the Manager, the affected
party shall have the right to require that the other party renegotiate the terms
of this Agreement. Unless the parties otherwise mutually agree in writing, such
renegotiated terms shall be effective not later than twenty (20) days after
receipt of written notice of such request for renegotiation. Solely in the event
of illegality, if the parties fail to reach an agreement within thirty (30) days
of the request for renegotiation, either party may (subject to the severability
provision of this Agreement) terminate this Agreement upon thirty (30) days'
prior written notice to the other party.
c. Effect of Termination. Upon termination of this Agreement:
---------------------
(1) Group shall surrender to Manager all of Manager's
property used primarily in the operation of the Practice in the same condition
as received, reasonable wear and tear excepted.
16.
<PAGE>
(2) Manager shall deliver to Group all records related to
the business of and provision of dental care through the Practice including,
without limitation, patient records and any corporate, personnel and financial
records maintained for the Practice and Providers, provided, that except as
limited by law, including, but not limited to laws governing the confidentiality
of patient records, Manager shall have the option to copy (or otherwise
duplicate) at its sole cost and expense such records of Group and to retain and
utilize such records for its own use;
(3) Manager shall deliver to Group any other property of
Group in Manager's possession'
(4) Both parties shall cooperate to ensure the provision of
appropriate dental care to Group Patients and Beneficiaries;
(5) Group shall promptly deliver to Manager any Revenues
that it may receive in payment for dental services rendered by Group prior to
termination; and
(6) Both parties shall cooperate to ensure the appropriate
billing and collections for dental services rendered by Group prior to the
effective date of termination, and any such cash collected shall be retained by
Group and/or paid to Manager pursuant to Article VII.
ARTICLE VII
FINANCIAL AND SECURITY ARRANGEMENTS
-----------------------------------
7.1 Management Fee. Group and Manager agree that the compensation
--------------
set forth in this Article VII is being paid to Manager in consideration of the
services provided and the substantial commitment and effort made by Manager
hereunder and that such fees have been negotiated at arms' length and are fair,
reasonable and consistent with fair market value. Manager shall be paid the
management fee (the "Management Fee") as set forth on Exhibit 7.1 hereto.
-----------
Payment of the Management Fee is not intended to and shall not be interpreted or
implied as permitting Manager to share in Group's fees for medical services but
is acknowledged as the negotiated fair market value compensation to Manager
considering the scope of services and the business risks assumed by Manager.
7.2 Payments. Except as otherwise set forth on Exhibit 7.1 hereto,
-------- -----------
the amounts to be paid to Manager under this Article VII shall be calculated by
Manager on the accrual basis of accounting and shall be payable monthly.
Payments due for any Management Fee shall be made by Group each calendar month
as provided herein and shall be paid on the 15th day following the end of such
month (or the first preceding day that is a business day if the 15th day is not
a business day) (a "Payment Date"). Such amounts paid shall be estimates based
upon available information for such month, and adjustments to the
17.
<PAGE>
estimated payments shall be made to reconcile final amounts due under Section
7.1 on the next Payment Date.
7.3 Advances.
--------
a. Group shall be entitled to an advance from Manager of such
additional sums, over and above Group's right to the amounts otherwise set forth
in this Article VII, as shall be required by Group to pay Practice Expenses
consistent with the Annual Budget of the Practice (prepared as provided in
Section 3.6 hereof), the Management Fee as provided in Exhibit 7.1 hereto and
-----------
Group Expenses at the discretion of Manager. Any amounts advanced to Group
pursuant to this Section 7.3 shall be repaid by Group in such priority as set
forth in Section 7.5 below and shall bear interest at a rate equal to one
percent (1%) above the prime rate reported by the Wall Street Journal as
adjusted on a quarterly basis, compounded monthly until all such amounts of
principal and interest are repaid to Manager as provided herein.
7.4 Security Agreement. In order to enforce its rights granted
------------------
hereunder and subject to applicable law, Group shall execute a Security
Agreement in substantially the form attached hereto as Exhibit 7.4 (the
-----------
"Security Agreement"), which Security Agreement grants a security interest in
all of Group's accounts receivable (as more fully described in the Security
Agreement) to Manager. In addition, Group shall cooperate with Manager and
execute all necessary documents in connection with the pledge of such accounts
receivable to Manager or at Manager's option, its lenders.
7.5 Priority of Payments. Manager shall administer and make
--------------------
disbursements from amounts deposited into the Accounts or transferred from the
Accounts to pay (including, without limitation the making of advances as
provided in Section 7.3) the Practice Expenses and Group Expenses as the same
become due and payable, and for which Group shall remain responsible. In
performing its obligations pursuant to Article IV, Manager shall apply funds of
Group in the following order of priority:
a. payment of all Group Expenses;
b. payment of all Practice Expenses;
c. payment of the Management Fee; and
d. payment of amounts advanced to Group, and applicable
interest thereon (as contemplated in Section 7.3).
If there are not sufficient funds to pay all amounts provided for
above, all unpaid amounts shall accumulate and carry over until paid or until
the termination of this Agreement, in which case such unpaid amounts shall be
immediately due and payable as of the date of termination. Any amounts which
remain following the payment of the expenses and fees set forth in subparagraphs
(a) through (d) above shall be retained in the Accounts.
18.
<PAGE>
7.6 Accounts Receivable. At the option of Manager, on the first
-------------------
business day of each month, Manager may purchase all or any portion the accounts
receivable of Group relating to Revenues arising during the previous month, by
payment of cash or other readily available funds into an account for Group or by
offset of amounts owed by Group to Manager. The consideration for the purchase
shall be an amount equal to all fees recorded each month (net of adjustments for
uncollectible accounts, professional courtesies and other such activities that
do not generate a collectible fee) less Management Fees due to Manager under
this Article VII. Manager's purchase shall be effective upon full payment of
the purchase price. In the event that such purchase shall be ineffective for
any reason, Group is concurrently herewith entering into the Security Agreement
to grant a security interest in the accounts receivable to Manager. In
addition, Group shall cooperate with Manager and execute all necessary documents
in connection with the pledge of such accounts receivable to Manager or at
Manager's option, its lenders. All collections in respect of such accounts
receivable shall be deposited in a bank account at a bank selected by mutual
agreement of Group and Manager. To the extent Group comes into possession of
any payments in respect of such accounts receivable, Group shall direct such
payments to Manager for deposit.
ARTICLE VIII
INDEMNITY AND INSURANCE
-----------------------
8.1 Indemnity.
---------
a. Indemnification. Each party shall indemnify, defend and
---------------
hold harmless the other party from any and all liability, loss, claim, lawsuit,
injury, cost, damage or expense whatsoever (including reasonable attorneys' fees
and court costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Group agrees
to indemnify, defend and hold harmless Manager for all liability, loss, claim,
lawsuit, injury, cost, damage or expense whatsoever (including reasonably
attorneys' fees and court costs) arising out of the professional negligence of
Group, its employees, agents, contractors or subcontractors, including any
amounts in excess of the professional liability insurance coverage of Group or
its employees, agents, contractors or subcontractors.
b. Mutual Indemnity. Subject to Manager's responsibilities
----------------
under Article VII, each party to this Agreement shall be indemnified by the
other party for any claim under this Agreement or otherwise against the
indemnified party for vacation pay, sick leave, retirement benefits, Social
Security benefits, workers' compensation benefits, disability or unemployment,
insurance benefits, or other employee benefits of any kind accrued during the
term of this Agreement by an employee of the indemnifying party.
19.
<PAGE>
8.2 Manager's Insurance. Manager shall, on its own behalf and at its
-------------------
sole cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
a. Comprehensive general liability insurance covering the risks
of Manager, in an amount determined by the Joint Operations Committee;
b. Workers' Compensation insurance covering the employees of
Manager, in such amounts as is usual and customary under the circumstances;
c. Property insurance covering the facilities, equipment and
supplies owned or leased by Manager or Group for use in the operation of the
Practice.
8.3 Group's Insurance. At Group's sole cost and expense, Manager
-----------------
shall obtain, and maintain on behalf of Group in full force and effect during
the Term, policies in the following categories in the amount indicated:
a. Comprehensive professional liability insurance coverage for
Group and Group's Employee Providers, in such amounts as Group shall reasonably
deem necessary; provided, however, such coverage shall be no greater than that
set forth on Schedule B hereto without the prior consent of the Joint Operations
Committee, which consent shall not be unreasonably withheld;
b. Workers' Compensation insurance covering the employees of
Group, in such amounts as is usual and customary under the circumstances;
c. Comprehensive general liability insurance covering the risks
of Group, in an amount determined by the Joint Operations Committee.
ARTICLE IX
BOOKS AND RECORDS
-----------------
9.1 Ownership of Records. All business records and information
--------------------
relating exclusively to the business and activities of either party shall be the
property of that party, irrespective of identity of the party responsible for
producing or maintaining such records and information. Without limiting the
foregoing, all patient charts and records maintained by Manager relating to the
dental services of Group shall be the property of Group. Group also shall be
entitled to a copy at Group's sole cost of all business records pertaining to
Group. Except as limited by law, including, but not limited to laws governing
the confidentiality of patient records, Manager shall be entitled to a copy at
Manager's sole cost of all records of Group.
20.
<PAGE>
ARTICLE X
RESTRICTIVE COVENANTS
---------------------
10.1 Covenant Regarding Proprietary Information. In the course of the
------------------------------------------
relationship created pursuant to this Agreement, Group will have access to
certain methods, trade secrets, processes, ideas, systems, procedures,
inventions, discoveries, concepts, software in various stages of development,
designs, drawings, specifications, models, data, documents, diagrams, flow
charts, research, economic and financial analysis, developments, procedures,
know-how, policy manuals, form contracts, marketing and other techniques, plans,
materials, forms, copyrightable materials and trade information (all of which is
referred to in this Agreement as "Proprietary Information") regarding the
operations of Manager and/or of its Affiliates (collectively, the "Protected
Parties"). Group shall maintain all such Proprietary Information in strict
secrecy and shall not divulge such information to any third parties, except as
may be necessary for the discharge of their obligations under this Agreement.
Group shall take all necessary and proper precautions against disclosure of any
Proprietary Information to unauthorized persons by any of its employees or
agents. Group and all employees, and agents of Group who will have access to
all or any part of the Proprietary Information may be required to execute an
agreement, at the request of Manager, valid under the law of the jurisdiction in
which such agreement is executed, and in a form acceptable to Manager and its
counsel, committing themselves to maintain the Proprietary Information in strict
confidence and not to disclose it to any unauthorized person or entity. The
Protected Parties not party to this Agreement are hereby specifically made third
party beneficiaries of this Section, with the power to enforce the provisions
hereof. Upon termination of this Agreement for any reason, Group and each of
its Employee Providers and Subcontract Providers shall cease all use of any of
the Proprietary Information and, at the request of Manager, shall execute such
documents as may be necessary to evidence Group's abandonment of any claim
thereto. The parties recognize that a breach of this Section cannot be
adequately compensated in money damages and therefore agree that injunctive
relief shall be available to the Protected Parties as their respective interests
may appear.
The obligations of Group under this Section 10.1 shall not apply to
information: (i) which is a matter of public knowledge on or becomes a matter
of public knowledge after the Effective Date of this Agreement, other than as a
breach of the confidentiality terms of this Agreement or as a breach of the
confidentiality terms of any other agreement between Group and Manager or its
Affiliates; or (ii) which was lawfully obtained by Group on a nonconfidential
basis other than in the course of performance under this Agreement and from some
entity other than Manager or its Affiliates or from some person other than one
employed or engaged by Manager or its Affiliates, which entity or person has no
obligation of confidentiality to Manager or its Affiliates.
10.2 Covenants Not to Compete During the Term. The parties recognize
----------------------------------------
that the services to be provided by Manager shall be feasible only if Group
operates an active dental practice to which Group and Clinical Staff devote full
time and attention. To that end:
21.
<PAGE>
a. Restrictive Covenants by Group. During the term of this
------------------------------
Agreement, Group shall not (i) establish, operate or provide dental care
services at any dental office, clinic or other facility providing services
substantially similar to those provided by Group pursuant to this Agreement
anywhere other than at the Practice Sites and as may be approved in writing by
Manager; (ii) enter into any management or administrative services agreement or
other similar arrangement with any person or entity other than Manager without
Manager's prior written approval and (iii) operate or, directly or indirectly,
hold or own any type of ownership or other form of equity interest in, or serve
as a consultant to or otherwise perform services for any person or entity
engaged in the business of providing management and administrative services to
dental practices.
b. Restrictive Covenants by Providers. Unless otherwise agreed
----------------------------------
to in writing by Manager, Group shall use its best efforts to obtain and enforce
formal agreements with its Employee Providers and Subcontract Providers who are
dentists not to establish, operate or provide dental care services, during the
term of this Agreement and for a period of two (2) years after any termination
of employment with Group, at any dental office, clinic or facility located
within 20 miles of any Practice Site at which the Employee Provider or
Subcontract Provider has practiced. Any variation of such restrictive covenants
shall be approved in advance in writing by Manager.
10.3 Covenant Not to Solicit. For two (2) years following the
-----------------------
termination of this Agreement, Group shall not:
a. directly or indirectly solicit, recruit or hire, or induce
any party to solicit, recruit or hire any person who is an employee of, or who
has entered into an independent contractor arrangement with, Manager or any
Affiliate of Manager;
b. directly or indirectly, whether for himself or for any other
person or entity, call upon, solicit, divert or take away, or attempt to
solicit, call upon, divert or take away any of Manager's customers, business, or
clients; or
c. directly or indirectly solicit, or induce any party to
solicit, any of Manager's contractors or the contractors of any Affiliate of
Manager, to enter into the same or a similar type of contract with any other
party.
10.4 Enforcement. Manager and Group acknowledge and agree that since
-----------
a remedy at law for any breach or attempted breach of the provisions of this
Article X shall be inadequate, either party shall be entitled to specific
performance and injunctive or other equitable relief in case of any such breach
or attempted breach, in addition to whatever other remedies may exist by law.
All parties hereto also waive any requirement for the securing or posting of any
bond in connection with the obtaining of any such injunctive or other equitable
relief.
22.
<PAGE>
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
11.1 Assignment. Neither party shall assign this Agreement to any
----------
other party or parties without the prior written consent of the other party,
which consent may be withheld arbitrarily or capriciously, for any reason or for
no reason whatsoever and any attempted assignment in violation of this Agreement
shall be null and void. Notwithstanding the preceding, Manager may assign this
Agreement to any direct or indirect wholly-owned subsidiary of either Manager or
Parent or to a financial institution as collateral for the indebtedness of
Manager, Parent or any of their respective Affiliates.
11.2 Headings. The article and section headings used in this
--------
Agreement are for purposes of convenience only. They shall not be construed to
limit or to extend the meaning of any part of this Agreement.
11.3 Waiver. Waiver by either Group or Manager of any breach of any
------
provision of this Agreement shall not be deemed to be a waiver of such provision
or of any subsequent breach of the same or of any other provision of this
Agreement.
11.4 Notices. Any notice, demand, approval, consent or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be shall be deemed to have been given when five (5) business
days have elapsed from the date of deposit in the United States mails, certified
and postage prepaid, addressed to the party to be served at the following
address or such other address as may be given in writing to the parties.
Group: Idaho Dental Group, P.A.
Pine Ridge Mall
4155 Yellowstone Avenue
Pocatello, Idaho 83202
Attn: Dr. David P. Sutton
Manager: GMS Dental Group, Inc.
22800 Savi Ranch Parkway
Suite 206
Yorba Linda, California 92887
Attn: Michael T. Fiore
11.5 Attorneys' Fees. If any legal action or arbitration or other
---------------
proceeding is commenced, whether by Manager or Group concerning this Agreement,
the prevailing party shall recover form the losing party reasonable attorneys'
fees and costs and expenses, including those of appeal and not limited to
taxable costs, incurred by the prevailing party, in addition to all other
remedies to which the prevailing party may be entitled. If a claim or
23.
<PAGE>
claims asserted by a third party against Manager or Group or any of them arise
from an action or omission by the other, the party responsible for the action or
omission shall be the losing party, and the other party shall be the prevailing
party, for purposes of the foregoing sentence.
11.6 Successors. Without limiting or otherwise affecting any
----------
restrictions on assignments of this Agreement or rights or duties under this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
successor and assigns of Group and Manager.
11.7 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between Group and Manager and supersedes all prior negotiation and agreements,
written or oral, concerning or relating to the subject matter of this Agreement
(including, without limitation, that certain Dental Group Management Agreement
by and between the parties dated October 11, 1996), and this Agreement may not
be modified except by a writing executed by all parties and subject to the
provisions thereof.
11.8 Governing Law. This Agreement and the rights and obligations of
-------------
the parties hereto shall be governed by, and construed according to, the laws of
the State of California.
11.9 Severability, Contract Modifications for Prospective Legal
----------------------------------------------------------
Events. Nothing contained in this Agreement shall be construed to require the
- ------
commission of an act contrary to law, and whenever there is any conflict between
any provision of this Agreement and any statute, law, ordinance or regulation,
the latter shall prevail. In such event, and in any case in which any provision
of this Agreement is determined to be in violation of a statute, law, ordinance
or regulation, the affected provision(s) shall be limited only to the extent
necessary to bring it within the requirements of the law and, insofar as
possible under the circumstances, to carry out the purposes of this Agreement.
The other provisions of this Agreement shall remain in full force and effect,
and the invalidity or unenforceability of any provision hereof shall not affect
the validity and enforceability of the other provisions of this Agreement, nor
the availability of all remedies in law or equity to the parties with respect to
such other provisions.
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision, a regulatory agency or legal counsel of both
parties in such a manner as to indicate that the structure of this Agreement may
be in violation of such laws or regulations, Group and Manager shall amend this
Agreement, to the maximum extent possible, to preserve the underlying economic
and financial arrangements between Group and Manager. The parties agree that
such amendment may require reorganization of Group or Manager, or both, and may
require either or both parties to obtain appropriate regulatory licenses and
approvals. If an amendment is not possible, either party shall have the right to
terminate this Agreement upon thirty (30) days notice to the other party.
24.
<PAGE>
11.10 Time Is of the Essence. Time is of the essence in this
----------------------
Agreement.
11.11 Authority. Any Person signing this Agreement on behalf of any
---------
entity hereby represents and warrants in its individual capacity that it has
full authority to do so on behalf of such entity.
11.12 Counterparts. This Agreement may be executed in two (2) or
------------
more counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same instrument.
[Signature Page to Follow]
25.
<PAGE>
IN WITNESS WHEREOF, Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
"Group"
IDAHO DENTAL GROUP, P.A., an Idaho
professional corporation
By: /s/ David Porter Sutton
-------------------------
David Porter Sutton
President
"Manager"
GMS DENTAL GROUP MANAGEMENT, INC., a
Delaware corporation
By: /s/ Michael T. Fiore
_________________________
Michael T. Fiore
President
26.
<PAGE>
ADDENDUM 1.
----------
For purposes of this Agreement, the following terms shall have the
meaning indicated below or defined at the indicated section:
(1) Accounts. See Section 2.5.
--------
(2) Affiliate. "Affiliate" shall mean, with respect to any Person,
---------
(i) any individual or entity directly or indirectly owned or controlled by such
Person, (ii) any individual or entity directly or indirectly owning or
controlling such Person or (iii) any individual or entity directly or indirectly
owned or controlled by the same family member, individual or entity as owns or
controls such Person. For purposes of this Agreement, neither Group nor Manager
shall be deemed an Affiliate of the Other.
(3) Agreement. "Agreement" means this Group Management Agreement.
---------
(4) Annual Budget. See Section 3.6.
-------------
(5) Beneficiaries. See Recital A.
-------------
(6) Books and Records. "Books and Records" means Group's books of
-----------------
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
(7) Capital Costs. "Capital Costs" shall mean any and all investments
-------------
that are or would be capitalized pursuant to GAAP.
(8) Committee Members. See Section 3.5a.
-----------------
(9) Default Notice. See Section 6.2b(1).
--------------
(10) Effective Date. See preamble paragraph.
--------------
(11) Employee Providers. See Recital B.
------------------
(12) Employment Agreements. See Recital B.
---------------------
(13) GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with GAAP, and all financial
computations hereunder shall be computed unless
1.
<PAGE>
otherwise specifically provided herein, in accordance with GAAP as consistently
applied and using the same method of valuation as used in the preparation of
Manager's financial statement.
(14) Group. See first paragraph of this Agreement.
-----
(15) Group Expenses. "Group Expenses" means salaries and wages,
--------------
compensation, payroll taxes, and employee benefits of Employee Providers and
Subcontract Providers, all as set forth in, and subject to and limited by, the
Annual Budget. Notwithstanding the preceding, 34.211% of salaries and wages,
compensation and payroll taxes of Group's shareholder employees, who were both
shareholders and employees of Group as of January 1, 1997, and for so long as
such shareholders remain Employee Providers pursuant to their respective Dental
Employment Agreements as in existence on January 1, 1997, shall be specifically
excluded from Group Expenses and payment of such amounts shall be the sole
obligation of the Group.
(16) Group Members. See Section 3.5a.
-------------
(17) Group Patients. See Recital A.
--------------
(18) Joint Operations Committee. See Section 3.4b.
--------------------------
(19) Management Fee. See Section 7.1.
--------------
(20) Manager. See first paragraph of this Agreement.
-------
(21) Manager Members. See Section 3.5a.
---------------
(22) Marks. See Section 2.3a.
-----
(23) Offer. See Section 5.1.
-----
(24) Parent. "Parent" shall mean GMS Dental Group, Inc. or any
------
successor thereto.
(25) Payment Date. See Section 7.2.
------------
(26) Payor Contracts. See Recital A.
---------------
(27) Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
(28) Plans. See Recital A.
-----
(29) Practice. See Recital C.
--------
2.
<PAGE>
(30) Practice Expenses. "Practice Expenses" means all costs incurred
-----------------
by Manager including amortization associated with costs of acquiring assets of
the Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which are
attributable to Manager's business operations in accordance with Manager's
corporate allocation policies.
(31) Practice Sites. See Section 3.4a.
--------------
(32) Practice Site Facilities. See Section 3.4a.
------------------------
(33) Preliminary Budget. See Section 3.7b.
------------------
(34) Programs. See Section 2.3b.
--------
(35) Proprietary Information. See Section 10.1.
-----------------------
(36) Protected Parties. See Section 10.1.
-----------------
(37) Providers. See Recital B. The term "Providers" shall include
---------
individuals or organizations licensed to practice dentistry (including
specialists) as well as other licensed dental professionals who provide
ancillary reimbursable dental services.
(38) Provider Subcontracts. See Recital A.
---------------------
(39) Revenues. See Section 2.4.
--------
(40) Security Agreement. See Section 7.5.
------------------
(41) Subcontract Providers. See Recital B.
---- ---------------------
(42) Term. See Section 6.1.
----
3.
<PAGE>
EXHIBIT 10.43
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
THIS DENTAL GROUP MANAGEMENT AGREEMENT (this "Agreement") is dated as
of July 24, 1997 ("Effective Date") by and between GMS Dental Group Management,
--------------
Inc., a Delaware corporation ("Manager") and wholly-owned subsidiary of GMS
-------
Dental Group, Inc., a Delaware corporation (the "Company") and Fremont Dental
-------
Group, a California general partnership ("Group").
-----
RECITALS
--------
A. Group engages in the practice of dentistry by providing dental
services to patients of Group ("Group Patients") and to enrollees
--------------
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
------------- ----- ---------------
between Group and Plans or between Beneficiaries and Plans.
B. Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
---------
arrangements may include contracts ("Employment Agreements") with dentist
---------------------
employees (collectively "Employee Providers") and agreements ("Provider
------------------ --------
Subcontracts") with independent contractor dentists and non-dentist providers of
- ------------
various dental care services (collectively "Subcontract Providers").
---------------------
C. All activities of Group subject to this Agreement are referenced
as the "Practice." All references to "dental" care and services include general
--------
and specialist dental services. All references to "dentists" include generalists
and specialists.
D. Manager is a management services company that has been organized
to provide certain support services for the Practice and for other dental
groups. Manager is in the business of providing or arranging for management
services, facilities, equipment and certain personnel necessary for the
operation of the Practice.
E. Group desires to retain Manager on an independent contractor basis
to provide management services that are more particularly described below, and
Manager desires to provide such management services under the terms and
conditions set forth in this Agreement.
<PAGE>
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the covenants and conditions
contained herein, Manager and Group agrees as follows:
ARTICLE I
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
----------
ARTICLE II
SCOPE OF AGREEMENT
------------------
2.1 General Scope of Agreement. This Agreement shall apply to the
--------------------------
Practice being conducted by Group, including, without limitation, all
professional, administrative and technical services, marketing, contracting,
case management, ancillary dental services, outpatient services and dental care
facilities, equipment, supplies and items, except as otherwise specifically
provided in this Agreement. Group's Employment Agreements shall encompass
substantially all such activities of Employee Providers and shall provide that
all revenues derived from such activities (and not excluded below) shall be
included in Revenues as such term is defined in Section 2.4 hereof. Nothing in
-----------
this Agreement shall be construed to alter or in any way affect the legal,
ethical and professional relationship between and among Provider and Provider's
patients, nor shall anything contained in this Agreement abrogate any right or
obligation arising out of or applicable to the dentist-patient relationship.
2.2 License. Except as prohibited by contract or by applicable laws
-------
and requirements governing the practice of dentistry, Group grants Manager an
exclusive license to use any and all of Group's assets, whether tangible or
intangible, in carrying out Manager's duties and responsibilities under the
provisions of this Agreement.
2.3 Intellectual Property. Group hereby grants to manager a non-
---------------------
exclusive, perpetual, royalty-free, worldwide license to use and sublicense the
use of any intellectual property owned by Group. This license shall cover, but
not be limited to, use of the following:
a. Service Mark. Group hereby grants Manager the right to use
------------
all service marks and trademarks of Group (the "Marks") for marketing and
-----
promotional materials in connection with Group's offering of dental services.
Manager agrees to use the Marks solely in the design format used by Group as of
the date of this Agreement or another design format approved in advance in
writing by Group. Group shall have the opportunity to review any marketing or
other materials using the Marks in advance of any public distribution. Manager
agrees that it will include these restrictions on use in any sublicense of the
Marks.
b. Copyrighted Materials. Group hereby grants Manager the right
---------------------
to use any and all copyrighted materials authored or owned by Group including,
specifically, the
2.
<PAGE>
Group dental management system software programs (the "Programs"). This license
--------
includes the right to sublicense the Programs and the right to prepare and own
derivative works based on the Programs, all without a duty of accounting to
Group. Group shall execute all documents required to enable Manager to own, use
and exploit all such rights.
2.4 Revenues. "Revenues" shall mean all of Group's accounts
-------- --------
receivable (net of contractual adjustments and bad debt), and cash collections.
Revenues shall include all funds collected by, or legally due to, Group or any
downstream Affiliate of Group, including, without limitation, the following: (a)
all fee-for-service payments for services to Group Patients or Beneficiaries;
(b) all payments established under Payor Contracts; (c) all coordination of
benefits or deductibles and third-party liability recoveries related to the
Group's services; (d) all payments, dues, fees or other compensation to Group;
(e) any income, profits, dividends, distributions or other payments from Group's
investments; and (f) any interest or other non-operating income of Group;
provided, however, that Revenues shall not include the Purchase Price (as
defined in the Asset Purchase Agreement) or any amounts now or hereafter payable
from Wellpoint Dental Services, Inc. (or any of its affiliates) to Group or its
partners (or any of their affiliates) in connection with certain proposed
acquisition transactions involving such parties which were terminated prior to
the date hereof.
2.5 Deposit Accounts. All cash received by Group from whatever
----------------
source shall be deposited into an account or accounts ("Accounts") in the name
--------
of Group at a banking institution selected by Group and approved by Manager.
Group authorizes Manager to bill and collect, in Group's name, all charges and
reimbursements for Group's dental related activities and to deposit such
collections in the Accounts. Group agrees to assist and cooperate with Manager
in the billing and collection process and to immediately deliver to Manager for
deposit any monies Group may receive. Manager shall manage the cash equivalents
of the Group and Manager shall be entitled (and is hereby authorized) to
transfer such cash to the account of Manager and to use such cash for purposes
as Administrator deems appropriate, subject to and consistent with the terms and
provisions of this Agreement. Nothing in this Section 2.5 shall be construed to
limit or otherwise modify the requirement that Manager disburse funds in
fulfillment of the obligations of the Group and Manager under this Agreement.
ARTICLE III
OPERATION OF PRACTICES
----------------------
3.1 Appointment. Subject to applicable laws and requirements
-----------
governing the practice of dentistry and the provisions of this Agreement, Group
hereby appoints Manager as its sole and exclusive Manager for the operation of
the Practice and covenants not to enter into an agreement with any Person other
than Manager to perform or assume any of Manager's rights, duties or
responsibilities as provided herein. Manager hereby accepts full responsibility
for such management as more fully set forth herein.
3.2 Professional Matters. Pursuant to applicable laws and
--------------------
requirements governing the practice of dentistry, Group shall retain ultimate
responsibility for all activities
3.
<PAGE>
of Group that are within the scope of a dentist's licensure and cannot be
performed by Manager due to Manager's non-licensed status.
3.3 Relationship of Parties. In the performance of its duties and
-----------------------
obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Group. Except as provided in this Agreement or as
required by law, Group shall neither have nor exercise any control or direction
over the methods by which Manager shall perform its obligations hereunder; nor
shall Manager have or exercise any control or direction over the methods by
which Group shall practice dentistry. It is expressly agreed by the parties
that no work, act, commission or omission of manager pursuant to the terms and
conditions of this Agreement shall be construed to make or render Manager or
Manager's employees or agents, the employees of Group. Manager and Group are
not partners or joint venturers with each other and nothing herein shall be
construed so as to make them partners or joint venturers or impose upon either
of them any liability as partners or joint venturers. Group's responsibility is
to assure that the services covered by this Agreement shall be performed and
rendered in a competent, efficient and satisfactory manner.
3.4 Authority and Control. Strategic planning, overall direction and
---------------------
control of the business and affairs of Group, and authority over the day-to-day
activities of Group shall be accomplished as follows:
a. Exclusive Authority. Notwithstanding anything else to the
-------------------
contrary contained herein, Group shall have the sole responsibility and
authority for all aspects of the practice of dentistry and delivery of dental
services by Providers. Providers shall use and occupy at the practice sites
("Practice Sites") the facilities provided by Manager hereunder exclusively for
--------------
the practice of dentistry ("Practice Site Facilities"). Group expressly
------------------------
acknowledges that the Practice or Practices conducted at these Practice Site
Facilities shall be conducted solely by dentists and dental hygienists
associated with Group as Employee Providers or Subcontract Providers. Group
shall consult with Manager or the Joint Operations Committee to the extent
reasonable and not inconsistent with the laws governing the practice of
dentistry.
b. Joint Authority. All other decision-making authority related
---------------
to the business and affairs of Group shall be vested in a joint operations
committee (the "Joint Operations Committee"). Nothing herein shall be construed
--------------------------
as preventing the Joint Operations Committee from appointing representatives and
delegating authority to such representatives so long as the Joint Operations
Committee may revoke such appointment and delegation at any time and so long as
the Joint Operations Committee retains ultimate responsibility for the decisions
of such representatives.
3.5 Joint Operations Committee. Subject to applicable laws and
--------------------------
requirements governing the practice of dentistry, the Joint Operations Committee
shall have authority and responsibility to provide strategic planning, overall
direction and authority over the day-to-day management and administrative
activities of the Group and shall manage the business operations of the Group as
follows:
4.
<PAGE>
a. Joint Operations Committee Membership. The Joint Operations
-------------------------------------
Committee shall consist initially of five (5) individuals (the "Committee
---------
Members"). Manager shall designate three (3) Committee Members (the "Manager
- ------- -------
Members"), Group shall designate one (1) Committee Member (the "Group Member")
- ------- ------------
and the remaining one (1) Committee Member shall be the practice administrator
provided however, if at any time there is not a practice administrator, Group
shall designate the final one (1) Committee Member (together with the Group
Member, the "Group Members"). The number of Committee Members may be increased
-------------
or decreased by agreement of the parties. Each party shall continue to direct
the appointment of the same percentage of Committee Members as described above.
Each Committee Member shall serve at the pleasure of the party designating such
Committee Member and may be replaced, with or without cause, at any time by such
party upon the delivery of written notice thereof to the other Committee
Members. Manager, Group and the Committee Members shall diligently pursue any
preliminary activities that are necessary to allow the Joint Operations
Committee to take an action. Where Committee Members are required to consult
with the organization appointing such Committee Members, the Committee shall
establish and agree on a deadline for accomplishing such consultation.
b. Joint Operations Committee Action.
---------------------------------
(i) Joint Action. Except as otherwise expressly set forth
------------
above, the Joint Operations Committee shall take all other actions that have
been approved by a majority of the Committee Members.
(ii) Consultation Forum. Consultation between Group and
------------------
Manager, if any, shall take place at a meeting of the Joint Operations
Committee, and Group and Manager hereby agree to be bound by the decision of
their Group Member(s) or Manager Members, as the case may be.
c. Joint Operations Committee Meetings. Meetings of the Joint
-----------------------------------
Operations Committee may be held by telephone or similar communications
equipment so long as all Committee Members participating in a meeting can hear
and speak to each other. The Joint Operations Committee shall prepare and
maintain written minutes of all meetings and shall provide a copy of the minutes
to the parties within fifteen (15) business days following each meeting.
(i) Regular Meetings. The Joint Operations Committee
----------------
shall hold not less than four (4) regular meetings each year, at such specific
times and places as the Committee Members may determine.
(ii) Special Meetings. A special meeting of the Joint
----------------
Operations Committee may be called by a majority of the Committee Members.
(iii) Notice Requirement. A Committee Member calling a
------------------
special meeting must provide all other Committee Members with ten (10) days'
advance written or telephonic notice. Notice must be given or sent to the
Committee Member's address or
5.
<PAGE>
telephone number as shown on the records of the Joint Operations Committee.
Notice may be delivered directly to each Committee Member or to a person at the
Committee Member's principal place of business who reasonably would be expected
to communicate that notice promptly to the Committee Member.
(iv) Waiver of Notice Requirement.
----------------------------
(a) Written Waiver, Consent or Approval. Notice of a
-----------------------------------
special meeting need not be given to any Committee Member who, either before or
after the meeting, signs a waiver of notice or a written consent of the holding
of the special meeting, or an approval of the minutes of the special meeting.
Such waiver, consent or approval need not specify the purpose of the special
meeting. All such waivers, consents and approvals shall be filed with the Joint
Operations Committee records or made a part of the minutes of the special
meetings.
(b) Failure to Object. Notice of a special meeting
-----------------
need not be given to any Committee Member who attends the special meeting and
does not protest before or at the commencement of the special meeting such lack
of notice.
(v) Quorum. The smallest number of Committee Members that
------
exceed fifty percent (50%) of all Committee Members shall constitute a quorum of
the Joint Operations Committee, provided, however, that such quorum shall
include at least one Group member and one Manager member.
(vi) Proxies. The Joint Operations Committee shall provide
-------
for the use of proxies, telephonic conference calls, written consents or other
appropriate methods by which the full participation of the Group Member(s),
Manager Members and Administrator Member, if any, can be assured.
d. Limitation of Responsibility. Notwithstanding any other
----------------------------
provisions hereof, Committee Members shall be liable to the parties only for
actions constituting bad faith, gross negligence or breach of an express
provision of this Agreement (so long as such breach remains uncured after ten
(10) days of receiving notice of the nature of such breach). In all other
respects, Committee Members shall not be liable for negligence or mistakes of
judgment.
3.6 Budgets. A capital and operating budget ("Annual Budget") shall
------- -------------
be established regarding all financial aspects of the Practice. The Annual
Budget shall include the following elements and other items, as appropriate:
a. A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
b. An operating budget setting forth an estimate of revenues and
expenses (which the parties contemplate will comprise all reasonable and
necessary expenses to be incurred by the Practice in such year) including,
without limitation, a breakdown of all Group
6.
<PAGE>
Expenses and Practice Expenses for the next succeeding fiscal year, together
with an explanation of anticipated changes or modifications, if any, in the
Practice's utilization, rates, charges to patients or third party payors,
salaries, costs of Provider, non-wage cost increases, and all other similar
factors expected to differ significantly from those prevailing during the
current fiscal year;
c. Other expenses of operation;
d. The amount of a reasonable reserve to satisfy possible
shortfalls from operations. The allocation of such reserve shall be made by the
Joint Operations Committee as and when necessary; and
e. The Management Fee, as defined below, for the next succeeding
fiscal year.
3.7 Budget Process.
--------------
a. Initial Annual Budget. Not later than 45 days after the
---------------------
Effective Date, the Joint Operations Committee will have prepared the initial
Annual Budget for the first fiscal year (which shall initially be the calendar
year) during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains, or, at the option of
the parties, such portion of the then current fiscal year plus the immediately
subsequent fiscal year.
b. Preliminary Budget. Not later than forty-five (45) days
------------------
prior to the end of each fiscal year during the term of this Agreement, the
Manager shall prepare and deliver to the Joint Operations Committee a
preliminary Annual Budget for the next succeeding fiscal year ("Preliminary
-----------
Budget").
- ------
c. Joint Operations Committee Approval. The Joint Operations
-----------------------------------
Committee shall review and suggest modifications to the Preliminary Budget
within ten (10) days of receipt. Manager shall prepare a revised budget based
upon the Joint Operations Committee's recommendations and the Preliminary Budget
as revised shall become the Annual Budget.
d. Adjustments. In the event of a material deviation between
-----------
financial forecasts and financial performance during a fiscal year, Manager or
Group may propose adjustments to the Annual budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
3.8 Personnel.
---------
a. Providers. Except in unusual circumstances approved by the
---------
Joint Operations Committee, and as permitted by law, Manager shall not employ or
contract with any Provider for the provision of dental services. All Providers
who provide dental services to Group Patients or to Beneficiaries shall be
either (1) Employee Providers, (2) Subcontract
7.
<PAGE>
Providers, or (3) employees of Subcontract Providers. Group shall have complete
control of and responsibility for the hiring, engagement, compensation,
training, scheduling, supervision, evaluation, and termination of all Employee
Providers and Subcontract Providers, although at the request of Group, Manager
shall consult with Group respecting such matters and shall coordinate the
advertising of positions available, interviewing of candidates, and scheduling
of clinical staff meetings and training sessions.
b. Non-Providers. With the exception of employees of
-------------
Subcontract Providers, Manager shall employ all non-Provider personnel necessary
for the operation of the Practice.
c. Salary and Benefits. Subject to Manager's responsibilities
-------------------
under Article VII, each party to this Agreement shall remain liable for the
-----------
salary and benefits paid to such party's own employees and shall be ultimately
responsible for compliance with state and federal laws pertaining to employment
taxes, workers' compensation, unemployment compensation and other employment-
related statutes pertaining to the party's own employees.
d. Payments to Subcontract Providers. Subject to Manager's
---------------------------------
responsibilities under Article VII, Group shall be liable for any payments due
-----------
Subcontract Providers under Provider Subcontracts.
ARTICLE IV
MANAGEMENT SERVICES
-------------------
4.1 General Description of Services. Except as prohibited by law and
-------------------------------
within the limitations set out elsewhere in this Agreement, Manager shall
provide or arrange for the provision to Group of all support services reasonably
necessary and appropriate for the efficient operation of the Practice. Such
services include all administrative services necessary to Group's performance of
its obligations under Payor Contracts, contracting, marketing, capital formation
and assistance with long term strategic planning. Manager shall exercise its
best efforts to fulfill the administrative functions of a well managed dental
group.
4.2 Practice Site Facilities. When appropriate, Manager shall secure
------------------------
and maintain Practice Site Facilities, including, without limitation, office
space, improvements, furnishings, equipment, supplies, and personal property, of
a nature and in a condition necessary and appropriate for the efficient and
effective operations of the Practice subject to the general approval of the
Joint Operations Committee. Group hereby accepts and approves of the Practice
Site Facilities initially provided by Manager. However, Manager from time to
time shall make such Practice Site Facilities changes, including but not limited
to dental equipment purchases, as reasonably may be requested by Group and
consistent with the Annual Budget.
4.3 Purchased Items and Services. Manager shall serve as the
----------------------------
purchasing agent for Group and shall arrange for personnel benefits, insurance,
and any other items and services required for the proper operation of the
Practice.
8.
<PAGE>
4.4 Manager Personnel.
-----------------
a. Management Team. Subject to any approval or consulting
---------------
rights of the Joint Operations Committee, Manager may engage or designate one or
more individuals experienced in dental group management and direction,
including, but not limited to, an administrator, who will be responsible for the
overall administration of the Practice including day-to-day operations and
strategic development activities.
b. Other Manager Personnel. Manager shall select, hire, train,
-----------------------
supervise, monitor and terminate all non-Provider personnel necessary for the
operation and management of the Practice; provided, however, with respect to the
selection, hiring and termination of non-Provider personnel, Manager shall
consult with Group.
4.5 Day-to-Day Management and Supervision. Subject to any approval
-------------------------------------
or consulting rights of the Joint Operations Committee, Manager shall provide
general management including, but not limited to, day-to-day supervision of:
a. manager personnel;
b. equipment and supply acquisition;
c. office space and facility maintenance;
d. patient records organization and retention;
e. third party payor contracting;
f. case management;
g. billing, collections and accounting activities as set forth
below;
h. all operating aspects and policies of the Practice including,
but not limited to, hours of operation, work schedules, standard duties and job
descriptions, for all non-Group personnel; and
i. other related and incidental matters.
4.6 Billing and Collection Payment of Expenses. In addition to the
------------------------------------------
responsibilities of Manager under Article VII, Manager shall be responsible for
-----------
all billing and collection activities required by Group. Manager shall also be
responsible for reviewing and paying accounts payable of Group. Group hereby
appoints the Manager its true and lawful attorney-in-fact to take the following
actions for and on behalf of and in the name of Group:
a. bill and collect in Group's name or the name of the
individual practicing dentist, all charges and reimbursements for Group. Group
shall give Manager all
9.
<PAGE>
necessary access to Patient records to accomplish all billing and collection. In
so doing, Manager will use its best efforts but does not guarantee any specific
level of collections, and Manager will comply with Group's reasonable and lawful
policies regarding courtesy discounts;
b. take possession of and endorse in the name of the Group any
and all instruments received as payment of accounts receivable;
c. deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
d. place accounts for collection, settle and compromise claims,
and institute legal action for the recovery of accounts.
4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
a. Financial Reporting. manager shall prepare, analyze and
-------------------
deliver to the Joint Operations Committee financial reports to the extent
necessary or appropriate for the operation of the Practice, including the
following:
(i) financial statements, including balance sheets and
statements of cash flow and income;
(ii) accounts payable and accounts receivable analysis;
(iii) billing status including any medicaid remittances; and
(iv) reconciliation of assets, liabilities and major
expenses.
b. Audits. Group shall have the right to review and, at its
------
sole cost and expense, obtain an audit (separate from any annual audit or review
of Group's financial statements performed at the direction of the Manager) of
Group's financial books and records maintained by the Manager. Upon prior
written notice, Manager shall allow Group access during reasonable business
hours to all information and documents reasonably required for such review or
audit. Upon Group's request and at Group's expense, Manager shall also provide
copies of such documents.
4.8 Marketing and Public Relations Services. Manager shall provide
---------------------------------------
such marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Group after
consultation with Group. Manager shall provide Group with marketing materials
and activities. Nothing in this Agreement shall be construed to affect or limit
in any way the professional discretion of Group to select patients that may be
effectively treated in the Practice in accordance with professional standards of
patient selection.
10.
<PAGE>
4.9 Group Agreements. Subject to Group's consent, which consent
----------------
shall not be unreasonably withheld, on behalf of Group, Manager shall review,
evaluate and negotiate Payor Contracts and Provider Subcontracts and any other
contracts or agreements regarding the provision of dental related items or
services by Group or Providers.
4.10 Utilization Review Quality Improvement and Outcomes Monitoring.
--------------------------------------------------------------
Manager shall be responsible for providing administrative support for Group's
utilization review, quality improvement and outcomes monitoring activities,
including, without limitation, data collection, analysis and reporting for Group
Patients and Beneficiaries. Manager shall also support the development and
implementation of relevant policies, procedures, protocols, practice guidelines
and other interventions based on such activities.
4.11 Patient Referrals. The parties agree that the benefits to Group
-----------------
hereunder do not require, are not payment for, and are not in any way contingent
upon the admission, referral or any other arrangements for the provision of any
item or service offered by Manager or any affiliate of Manager to any of Group's
Patients in any facility owned or controlled, managed or operated by Manager or
any affiliate of Manager.
4.12 Applicable Law. Manager and Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE V
GROUP RESPONSIBILITIES
----------------------
5.1 Diagnosis, Treatment Planning, Specific Patient Education and
-------------------------------------------------------------
Consultation. Group shall have sole responsibility for all professional dental
- ------------
services provided to Patients with regard to the diagnosis of the patient's
condition and the development of treatment plan alternatives, including, without
limitation, the following:
a. Diagnosis. Group shall have sole responsibility for all
---------
medical and dental history evaluation, examination, obtaining clinical records,
and diagnostic procedures appropriate for complete diagnosis.
b. Treatment Planning. Group shall have sole responsibility
------------------
for all determination of treatment alternatives that may be professionally
acceptable for the treatment of the patient's condition.
c. Specific Patient Education. Group shall have sole
--------------------------
responsibility for all discussion, recommendation, demonstration, and other
educational modalities intended to address the patient's specific condition, as
differentiated from general patient education intended to address the common
concerns of all patients presenting with similar conditions.
11.
<PAGE>
d. Consultation. Group shall have sole responsibility for all
------------
discussion of clinical advantages, disadvantages, complications, and risks of
each alternative treatment plan, and including the likely results of no
treatment.
e. Manager to Assist with Record Procurement. Notwithstanding
-----------------------------------------
the above, Manager shall be responsible for exercising reasonable efforts to
procure, at its own expense, medical and dental history information, previous
clinical records, and X-ray records prior to presentation of the patient for
treatment by Group, in accordance with protocols developed by Group in
consultation with Manager.
5.2 Dental Services. Group shall have sole responsibility for all
---------------
professional dental services provided to Patients with regard to the treatment
of the patient's condition, including, without limitation, the following:
a. Preventive Care. Group shall have sole responsibility for
---------------
all preventive care intended to delay, or intercept the development of
pathologic conditions.
b. Therapeutic Care. Group shall have sole responsibility for
----------------
all therapeutic care intended to ameliorate, or improve existing pathologic
conditions.
c. Referral to Specialists. Group shall have sole
-----------------------
responsibility for all referral to appropriate dental specialists and other
allied health care professionals in accordance with professional dental
standards of care.
d. Continuing Care. Group shall have sole responsibility for
---------------
all development and execution of continuing care protocols intended to maintain
the patient's condition over the course of time.
e. Manager to Assist with Patient Compliance Tracking.
--------------------------------------------------
Notwithstanding the above, Manager shall be responsible for exercising
reasonable efforts to facilitate, coordinate, and document the scheduling,
tracking, and confirmation of Group's recommendations for dental diagnostic and
therapeutic services, treatments, referrals, and continuing care in accordance
with protocols developed by Group in consultation with Manager.
5.3 Provision of Dental Services by Group. Group shall operate the
-------------------------------------
Practice during the Term as a dental practice in accordance with the terms of
this Agreement and the Annual Budget. However, nothing in this Agreement shall
be construed to affect or limit in any way the professional discretion or duty
of Group insofar as such constitutes the practice of dentistry.
5.4 Providers.
---------
a. Professional Dental Services. Group shall employ or contract
----------------------------
with the number of Providers Group deems necessary for the efficient and
effective operation of the Practice and in accordance with the Annual Budget and
quality assurance, credentialing and
12.
<PAGE>
utilization management protocols approved by the Joint Operations Committee.
Group shall provide full and prompt dental coverage for the Practice, including
emergency service twenty-four hours per day, seven days per week, including
holidays, according to policies and schedules approved by the Joint Operations
Committee.
b. Provider Subcontracts and Employment Agreements. Group
-----------------------------------------------
shall not negotiate or execute any Provider Subcontract, Employment Agreement,
or any amendment thereto, or terminate any Provider Subcontract or Employment
Agreement without the approval of the Joint Operations Committee. Subject to
Manager's responsibilities under Article VII, Group shall be responsible for the
-----------
payment, in accordance with the Annual Budget, of all Employee and Subcontract
Providers.
5.5 Peer Review. Group, after consultation with the Joint Operations
-----------
Committee, shall implement, regularly review, modify as necessary or appropriate
and obtain the commitment of Providers to actively participate in peer review
procedures for Providers. Group shall assist Manager in the production of
periodic reports describing the results of such procedures. Group shall provide
Manager with prompt notice of any information that raises a reasonable risk to
the health and safety of Group Patients or Beneficiaries. In any event, after
consultation with the Joint Operations Committee, Group shall take such action
as may be reasonably warranted under the facts and circumstances.
5.6 Fees, Charges and Payor Agreements. Group shall, after
----------------------------------
consultation with Manager, determine the fees, charges, premiums, or other
amounts due in connection with delivery of dental services to Patients. Such
fees, charges, premiums, or other amounts (regardless of whether determined on a
fee-for-service, capitated, prepaid, or other basis) shall be reasonable and
consistent with the fees, charges, premiums, and other amounts due to dental
care providers for similar services within the community under similar types of
reimbursement programs involved if such programs are currently offered within
the community.
5.7 Hours of Clinical Operation. After consultation with the Joint
---------------------------
Operations Committee, Group shall establish hours of operation that are
consistent with good dental practice, and are appropriate to the need to timely
deliver professional dental care services to Group Patients.
5.8 Billing Information and Assignments. Group shall promptly
-----------------------------------
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Group's
services. Group shall use reasonable efforts to procure consents to assignments
and other approvals and documents necessary to enable Manager to obtain payment
or reimbursement from third party payors and patients. With the assistance of
Manager, Group shall obtain all provider numbers necessary to obtain payment or
reimbursement for its services.
5.9 Third Party Contracts. Group shall be in compliance with all
---------------------
contracts, agreements and arrangements, including any contracts that exist on
the Effective Date, between Group and third parties.
13.
<PAGE>
5.10 Use of Manager's Goods and Services. Group shall not use any
-----------------------------------
goods or services provided by Manager pursuant to this Agreement for any purpose
other than the provision of and management of dental services as contemplated by
this Agreement and purposes incidental thereto.
5.11 Negative Covenants. During the Term, Group shall not, without
------------------
the prior approval of the Joint Operations Committee, (a) pledge, mortgage or
otherwise encumber any of its property, (b) assign, transfer or convey all or
substantially all of its assets, including its goodwill, (c) merge or
consolidate with any other entity, (d) except as contemplated by Section 11.1
hereof, allow the transfer or issuance of any partnership interest in Group
(other than in accordance with the terms and provisions of those certain Shares
Acquisition Agreement, substantially in the form attached hereto as Exhibit 5.1,
-----------
dated as of the Effective Date between Manager and each of the persons set forth
on Schedule A hereto), or (e) take or allow any act that would materially impair
-----------------
the ability of Group to carry on the business of the Practice or to fulfill its
obligations under this Agreement. Notwithstanding the preceding, prior to
consummating with any third party (i) any transfer, assignment or conveyance as
contemplated in subparagraph (b) above or (ii) any merger or consolidation
contemplated in subparagraph (c) above, Group shall first offer (the "Offer") to
-----
Manager or its designee the right to acquire the assets of Manager or to effect
a merger or consolidation with Manager upon the same business and economic terms
as proposed to Manager by such third party. Manager or its designee shall have
60 days to elect to accept or reject such Offer, which election shall be binding
on the parties.
5.12 Group Maintains Full Professional Authority. Notwithstanding
-------------------------------------------
Manager's general and specific rights and responsibilities set forth in this
Agreement, Group shall have full authority and control with respect to all
dental, professional and ethical determinations over Group's Practice to the
extent required by federal, state and local laws, rules and regulation. Manager
shall not engage in activities which constitute the practice of dentistry under
applicable law. Manager shall neither exercise control over nor interfere with
the dentist-patient relationship, which shall be maintained strictly between
Group's Providers and their Patients.
ARTICLE VI
TERM
----
6.1 Term. This Agreement shall be effective the Effective Date, and
----
shall remain in effect for an initial term of forty (40) years from the
Effective Date, expiring on the fortieth (40th) anniversary of the Effective
Date, unless earlier terminated pursuant to the terms of this Agreement. The
word "Term" shall include such initial term and, where applicable, any extension
----
of such initial term (whether extended pursuant to Section 6.2a or otherwise),
subject to earlier termination pursuant to the provisions of this Agreement.
6.2 Termination and Extension.
-------------------------
a. Automatic Extension. At the end of the initial term and any
-------------------
subsequent term, this Agreement shall automatically renew for a five (5) year
term unless one
14.
<PAGE>
of the parties provides the other party with written notice of intent not to
renew, not less than one hundred eighty (180) days prior to the expiration of
the then current term.
b. Early Termination. This Agreement may be terminated
-----------------
according to the provisions of this Section.
(i) Material Breach. In the event either party materially
---------------
breaches this Agreement and such breach is not cured to the reasonable
satisfaction of the non-breaching party within sixty (60) days after the non-
breaching party serves written notice of the default upon the defaulting party
(the "Default Notice"), the Agreement shall automatically terminate at the
--------------
election of the non-breaching party upon the giving of a written notice of
termination to the defaulting party not later than fifteen (15) days after
termination of the 60-day cure period; provided that if such uncured breach is
only capable of being cured within a reasonable period of time in excess of
sixty (60) days, the non-breaching party shall not be entitled to terminate this
Agreement so long as the defaulting party has commenced such cure and thereafter
diligently pursues such cure to completion.
(ii) Refusal to Comply. In the event that Group or Manager
-----------------
refuses or fails to comply with a decision of the Joint Operations Committee,
the aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if such dispute between Group and Manager continues for thirty
(30) days after the date the aggrieved party exercises its option regarding
mediation, the non-complying party shall have thirty (30) days in which to
comply with the decision of the Joint Operations Committee. If the non-complying
party has not complied by the end of such thirty (30) day period, the aggrieved
party shall have the option to terminate this Agreement upon fifteen (15) days'
prior written notice. During such mediation, Manager and Group shall continue to
operate and manage the practice in good faith.
(iii) Bankruptcy. A party may, upon three (3) days' prior
----------
written notice, terminate this Agreement if the other party:
(a) Applies for or consents to the appointment of a
receiver, trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary petition,
makes a general assignment for the benefit of its creditors, files a petition or
answer seeking reorganization or arrangement with its creditors, or admits in
writing its inability to pay its debts when due, or
(b) Suffers any order, judgment or decree to be
entered by any court of competent jurisdiction, adjudicating such party bankrupt
or approving a petition seeking its reorganization or the appointment of a
receiver, trustee or liquidator of such party or of all or a substantial part of
its assets, and such order, judgment or decree continues unstayed and in effect
for ninety (90) days after its entry.
(iv) Nonperformance. Manager may terminate this Agreement
--------------
in the event that in any two consecutive fiscal quarters the Manager has not
been paid all of the
15.
<PAGE>
Reimbursable Expense Portion and at least one-third (1/3) of the Percentage Fee
Portion (i.e. 10%) of the Management Fee and, in the sole discretion of the
Manager, it is not reasonably likely that such amounts of the Management Fee
will be paid in the next fiscal quarter. Any such termination shall be
effective as of the last day of such third fiscal quarter provided at least 60
days notice shall have been given; otherwise, such termination shall be
effective on the sixtieth day after notice is given.
(v) Change in Law. In the event of any material change in
-------------
federal or state law that has a significant adverse impact on either party
hereto in connection with their performance under this Agreement, or if
performance by a party of any duties under this Agreement be deemed illegal by
any administrative agency or in a formal opinion rendered to manager by legal
counsel knowledgeable in health law matter retained by the Manager, the affected
party shall have the right to require that the other party renegotiate the terms
of this Agreement. Unless the parties otherwise mutually agree in writing, such
renegotiated terms shall be effective not later than twenty (20) days after
receipt of written notice of such request for renegotiation. Solely in the event
of illegality, if the parties fail to reach an agreement within thirty (30) days
of the request for renegotiation, either party may (subject to the severability
provision of this Agreement) terminate this Agreement upon thirty (30) days'
prior written notice to the other party.
c. Effect of Termination. Upon termination of this Agreement:
---------------------
(i) Group shall surrender to Manager all of Manager's
property used primarily in the operation of the Practice in the same condition
as received, reasonable wear and tear excepted;
(ii) Manager shall deliver to Group all records related to
the business of and provision of dental care through the Practice including,
without limitation, patient records and any corporate, personnel and financial
records maintained for the Practice and Providers, provided, that except as
limited by law, including, but not limited to laws governing the confidentiality
of patient records, Manager shall have the option to copy (or otherwise
duplicate) at its sole cost and expense such records of Group and to retain and
utilize such records for its own use;
(iii) Manager shall deliver to Group any other property of
Group in Manager's possession;
(iv) Both parties shall cooperate to ensure the provision
of appropriate dental care to Group Patients and Beneficiaries;
(v) Group shall promptly deliver to Manager any Management
Fees due and payable to Manager (such fees prorated for the month of
termination) and any amounts owed to Manager for advances made pursuant to
Section 7.3; and
16.
<PAGE>
(vi) Both parties shall cooperate to ensure the appropriate
billing and collections for dental services rendered by Group prior to the
effective date of termination, and any such cash collected shall be retained by
Group and/or paid to Manager pursuant to Article VII.
ARTICLE VII
FINANCIAL AND SECURITY ARRANGEMENTS
-----------------------------------
7.1 Management Fee. Group and Manager agree that the compensation
--------------
set forth in this Article VII is being paid to Manager in consideration of the
-----------
services provided and the substantial commitment and effort made by Manager
hereunder and that such fees have been negotiated at arms' length and are fair,
reasonable and consistent with fair market value. Manager shall be paid the
management fee (the "Management Fee") as set forth on Exhibit 7.1 hereto.
-------------- -----------
Payment of the Management Fee is not intended to and shall not be interpreted or
implied as permitting Manager to share in Group's fees for medical services but
is acknowledged as the negotiated fair market value compensation to Manager
considering the scope of services and the business risks assumed by Manager.
7.2 Payments. Except as otherwise set forth on Exhibit 7.1 hereto,
-------- -----------
the amounts to be paid to Manager under this Article VII shall be calculated by
-----------
Manager on the accrual basis of accounting and shall be payable monthly.
Payments due for any Management Fee shall be made by Group each calendar month
as provided herein and shall be paid on the 15th day following the end of such
month (or the first preceding day that is a business day if the 15th day is not
a business day) (a "Payment Date"). Such amounts paid shall be estimates based
------------
upon available information for such month, and adjustments to the estimated
payments shall be made to reconcile final amounts due under Section 7.1 on the
-----------
next Payment Date.
7.3 Advances.
--------
a. Group shall be entitled to an advance from Manager of such
additional sums, over and above Group's right to the amounts otherwise set forth
in this Article VII, as shall be required by Group to pay Practice Expenses
-----------
consistent with the Annual Budget of the Practice (prepared as provided in
Section 3.6 hereof), the Management Fee as provided in Exhibit 7.1 hereto and
-----------
Group Expenses at the discretion of Manager. Any amounts advanced to Group
pursuant to this Section 7.3 shall be repaid by Group in such priority as set
-----------
forth in Section 7.5 below and shall bear interest at a rate equal to one
-----------
percent (1%) above the prime rate reported by the Wall Street Journal as
adjusted on a quarterly basis, compounded monthly until all such amounts of
principal and interest are repaid to Manager as provided herein.
7.4 Security Agreement. In order to enforce its rights granted
------------------
hereunder and subject to applicable law, Group shall execute a Security
Agreement in substantially the form attached hereto as Exhibit 7.4 (the
-----------
"Security Agreement"), which Security Agreement grants a security interest in
- -------------------
all of Group's accounts receivable and other assets (as more fully described in
the Security Agreement) to Manager. In addition, Group shall cooperate with
Manager and execute all necessary documents in connection with the pledge of
such accounts receivable and
17.
<PAGE>
perfection of a security interest in any such other assets to Manager or at
Manager's option, its lenders.
7.5 Priority of Payments. Manager shall administer and make
--------------------
disbursements from amounts deposited into the Accounts or transferred from the
Accounts to pay (including, without limitation the making of advances as
provided in Section 7.3) the Practice Expenses and Group Expenses as the same
become due and payable, and for which Group shall remain responsible. In
performing its obligations pursuant to Article IV, Manager shall apply funds of
Group in the following order of priority:
a. payment of all Group Expenses;
b. payment of all Practice Expenses and the Reimbursable
Expense Portion of the Management Fee;
c. payment of the Percentage Portion of the Management Fee; and
d. payment of amounts advanced to Group, and applicable
interest thereon (as contemplated in Section 7.3).
-----------
If there are not sufficient funds to pay all amounts provided for
above in items (a), (b) and (d) and at least one-third (1/3) of item (c), all
such unpaid amounts shall accumulate and carry over until paid or until the
termination of this Agreement, in which case such unpaid amounts shall be
immediately due and payable as of the date of termination. Any amounts which
remain following the payment of the expenses and fees set forth in subparagraphs
(a) through (d) above shall be retained in the Accounts.
7.6 Accounts Receivable. At the option of Manager, on the first
-------------------
business day of each month, Manager may purchase all or any portion of the
accounts receivable of Group relating to Revenues arising during the previous
month, by payment of cash or other readily available funds into an account for
Group or by offset of amounts owed by Group to Manager. The consideration for
the purchase shall be an amount equal to all fees recorded each month (net of
adjustments for uncollectible accounts, professional courtesies and other such
activities that do not generate a collectible fee) less Management Fees due to
Manager under this Article VII. Manager's purchase shall be effective upon full
-----------
payment of the purchase price. In the event that such purchase shall be
ineffective for any reason, Group is concurrently herewith entering into the
Security Agreement to grant a security interest in the accounts receivable to
Manager. In addition, Group shall cooperate with Manager and execute all
necessary documents in connection with the pledge of such accounts receivable to
Manager or at Manager's option, its lenders. All collections in respect of such
accounts receivable shall be deposited in a bank account at a bank selected by
mutual agreement of Group and Manager. To the extent Group comes into
possession of any payments in respect of such accounts receivable, Group shall
direct such payments to Manager for deposit.
18.
<PAGE>
ARTICLE VIII
INDEMNITY AND INSURANCE
-----------------------
8.1 Indemnity.
---------
a. Indemnification. Each party shall indemnify, defend and hold
---------------
harmless the other party from any and all liability, loss, claim, lawsuit,
injury, cost, damage or expense whatsoever (including reasonable attorneys' fees
and court costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Group agrees
to indemnify, defend and hold harmless Manager for all liability, loss, claim,
lawsuit, injury, cost, damage or expense whatsoever (including reasonably
attorneys' fees and court costs) arising out of the professional negligence of
Group, its employees, agents, contractors or subcontractors, including any
amounts in excess of the professional liability insurance coverage of Group or
its employees, agents, contractors or subcontractors.
b. Mutual Indemnity. Subject to Manager's responsibilities
----------------
under Article VII, each party to this Agreement shall be indemnified by the
-----------
other party for any claim under this Agreement or otherwise against the
indemnified party for vacation pay, sick leave, retirement benefits, Social
Security benefits, workers' compensation benefits, disability or unemployment,
insurance benefits, or other employee benefits of any kind accrued during the
term of this Agreement by an employee of the indemnifying party.
8.2 Manager's Insurance. Manager shall, on its own behalf and at its
-------------------
sole cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
a. Comprehensive general liability insurance covering the risks
of Manager, in an amount determined by the Joint Operations Committee;
b. Workers' Compensation insurance covering the employees of
Manager, in such amounts as is usual and customary under the circumstances;
c. Property insurance covering the facilities, equipment and
supplies owned or leased by Manager or Group for use in the operation of the
Practice.
8.3 Group's Insurance. At Group's sole cost and expense, Manager
-----------------
shall obtain, and maintain on behalf of Group in full force and effect during
the Term, policies in the following categories in the amount indicated:
19.
<PAGE>
a. Comprehensive professional liability insurance coverage for
Group and Group's Employee Providers, in such amounts as Group shall reasonably
deem necessary; provided, however, such coverage shall be no greater than that
set forth on Schedule B hereto without the prior consent of the Joint Operations
Committee, which consent shall not be unreasonably withheld;
b. Workers' Compensation insurance covering the employees of
Group, in such amounts as is usual and customary under the circumstances;
c. Comprehensive general liability insurance covering the risks
of Group, in an amount determined by the Joint Operations Committee.
ARTICLE IX
BOOKS AND RECORDS
-----------------
9.1 Ownership of Records. All business records and information
--------------------
relating exclusively to the business and activities of either party shall be the
property of that party, irrespective of identity of the party responsible for
producing or maintaining such records and information. Without limiting the
foregoing, all patient charts and records maintained by Manager relating to the
dental services of Group shall be the property of Group. Group also shall be
entitled to a copy at Group's sole cost of all business records pertaining to
Group. Except as limited by law, including, but not limited to laws governing
the confidentiality of patient records, Manager shall be entitled to a copy at
Manager's sole cost of all records of Group.
ARTICLE X
RESTRICTIVE COVENANTS
---------------------
10.1 Covenant Regarding Proprietary Information. In the course of
------------------------------------------
the relationship created pursuant to this Agreement, Group will have access to
certain methods, trade secrets, processes, ideas, systems, procedures,
inventions, discoveries, concepts, software in various stages of development,
designs, drawings, specifications, models, data, documents, diagrams, flow
charts, research, economic and financial analysis, developments, procedures,
know-how, policy manuals, form contracts, marketing and other techniques, plans,
materials, forms, copyrightable materials and trade information (all of which is
referred to in this Agreement as "Proprietary Information") regarding the
-----------------------
operations of Manager and/or of its Affiliates (collectively, the "Protected
---------
Parties"). Group shall maintain all such Proprietary Information in strict
- -------
secrecy and shall not divulge such information to any third parties, except as
may be necessary for the discharge of their obligations under this Agreement.
Group shall take all necessary and proper precautions against disclosure of any
Proprietary Information to unauthorized persons by any of its employees or
agents. Group and all employees, and agents of Group who will have access to
all or any part of the Proprietary Information may be required to execute an
agreement, at the request of Manager, valid under the law of the jurisdiction in
which such agreement is executed, and in a form acceptable to Manager and its
counsel, committing themselves to maintain the Proprietary Information in strict
confidence and not to
20.
<PAGE>
disclose it to any unauthorized person or entity. The Protected Parties not
party to this Agreement are hereby specifically made third party beneficiaries
of this Section, with the power to enforce the provisions hereof. Upon
termination of this Agreement for any reason, Group and each of its Employee
Providers and Subcontract Providers shall cease all use of any of the
Proprietary Information and, at the request of Manager, shall execute such
documents as may be necessary to evidence Group's abandonment of any claim
thereto. The parties recognize that a breach of this Section cannot be
adequately compensated in money damages and therefore agree that injunctive
relief shall be available to the Protected Parties as their respective interests
may appear.
The obligations of Group under this Section 10.1 shall not apply to
------------
information: (i) which is a matter of public knowledge on or becomes a matter
of public knowledge after the Effective Date of this Agreement, other than as a
breach of the confidentiality terms of this Agreement or as a breach of the
confidentiality terms of any other agreement between Group and Manager or its
Affiliates; or (ii) which was lawfully obtained by Group on a nonconfidential
basis other than in the course of performance under this Agreement and from some
entity other than Manager or its Affiliates or from some person other than one
employed or engaged by Manager or its Affiliates, which entity or person has no
obligation of confidentiality to Manager or its Affiliates.
10.2 Covenants Not to Compete During the Term. The parties recognize
----------------------------------------
that the services to be provided by Manager shall be feasible only if Group
operates an active dental practice to which Group and its Providers devote full
time and attention. To that end:
a. Restrictive Covenants by Group. During the term of this
------------------------------
Agreement, Group shall not (i) establish, operate or provide dental care
services at any dental office, clinic or other facility providing services
substantially similar to those provided by Group pursuant to this Agreement
anywhere other than at the Practice Sites and as may be approved in writing by
Manager; (ii) enter into any management or administrative services agreement or
other similar arrangement with any person or entity other than Manager without
Manager's prior written approval and (iii) operate or, directly or indirectly,
hold or own any type of ownership or other form of equity interest in, or serve
as a consultant to or otherwise perform services for any person or entity
engaged in the business of providing management and administrative services to
dental practices.
b. Restrictive Covenants by Providers. Group shall use its
----------------------------------
reasonable best efforts to obtain and enforce formal agreements with its
partners, Employee Providers and Subcontract Providers who are dentists not to
establish, operate or provide dental care services, during the term of this
Agreement and for a period of at least two (2) years after any termination of
employment with Group, at any dental office, clinic or facility located within a
minimum of ten (10) miles of any Practice Site at which the partner, Employee
Provider or Subcontract Provider has practiced. Any variation of such
restrictive covenants shall be approved in advance in writing by Manager.
21.
<PAGE>
10.3 Covenant Not to Solicit. For three (3) years following the
-----------------------
termination of this Agreement, Group shall not:
a. directly or indirectly solicit, recruit or hire, or induce
any party to solicit, recruit or hire any person who is an employee of, or who
has entered into an independent contractor arrangement with, Manager or any
Affiliate of Manager ;
b. directly or indirectly, whether for itself or for any other
entity or person, call upon, solicit, divert or take away, or attempt to
solicit, call upon, divert or take away any of Manager's customers, business, or
clients; or
c. directly or indirectly solicit, or induce any party to
solicit, any of Manager's contractors or the contractors of any Affiliate of
Manager, to enter into the same or a similar type of contract with any other
party.
10.4 Enforcement. Manager and Group acknowledge and agree that since
-----------
a remedy at law for any breach or attempted breach of the provisions of this
Article X shall be inadequate, either party shall be entitled to specific
- ---------
performance and injunctive or other equitable relief in case of any such breach
or attempted breach, in addition to whatever other remedies may exist by law.
All parties hereto also waive any requirement for the securing or posting of any
bond in connection with the obtaining of any such injunctive or other equitable
relief.
10.5 Group Partner Limitation. Notwithstanding the foregoing
------------------------
provisions of this Article 10, Sections 10.2 and 10.3 hereof, except for such
------
provisions which restrict the direct solicitation of patients of Group or the
direct or indirect solicitation of employees of Group, shall cease to be binding
with respect to any partner of Group if under Section 3.2(b) of such partner's
Profit Distribution Agreement the provisions of Section 7.2 thereof have ceased
to be binding on such partner.
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
11.1 Incorporation of Partners and Non-Recourse Obligations.
------------------------------------------------------
a. The parties acknowledge and agree that as soon as possible
after the date of execution hereof, each of the individual partners of Group
intends to transfer its partnership interest in Group to a professional
corporation (a "PC") of which such individual partner is the sole shareholder.
Upon written notice to the Manager of the consummation of such transfers
involving the individual partners' partnership interests, the parties agree that
(i) all references herein to the partners (or owners) of Group shall for all
purposes automatically, and without further action, be deemed references to the
PCs, (ii) such PCs shall automatically, and without further action, succeed to
and be deemed to have assumed all of the obligations and liabilities (if any) of
such individual hereunder and (iii) such individual shall thereafter
automatically, and without further action, be deemed released from any and all
continuing liabilities and obligations hereunder.
22.
<PAGE>
b. Pending the date on which the partners of the Group transfer
their partnership interests to PCs as contemplated by preceding paragraph (a),
the obligations and agreements of Group contained herein and relating hereto
shall be deemed the obligations and agreements of Group, but not of any partner
of Group, and the partners of Group shall not be liable personally thereon or be
subject to any personal liability or accountability based upon or in respect
thereof or of any transaction contemplated thereby; except for the obligations
of any Group partner set forth in the Purchase and Sale of Interests Agreement
between a partner and Manager dated as of the Effective Date.
11.2 Assignment. Neither party shall assign this Agreement to any
----------
other party or parties without the prior written consent of the other party,
which consent may be withheld arbitrarily or capriciously, for any reason or for
no reason whatsoever and any attempted assignment in violation of this Agreement
shall be null and void. Notwithstanding the preceding, Manager may assign this
Agreement to any direct or indirect wholly-owned subsidiary of either Manager or
Parent or to a financial institution as collateral security for the indebtedness
of Manager, Parent or any of their respective Affiliates.
11.3 Headings. The article and section headings used in this
--------
Agreement are for purposes of convenience only. They shall not be construed to
limit or to extend the meaning of any part of this Agreement.
11.4 Waiver. Waiver by either Group or Manager of any breach of any
------
provision of this Agreement shall not be deemed to be a waiver of such provision
or of any subsequent breach of the same or of any other provision of this
Agreement.
11.5 Notices. Any notice, demand, approval, consent or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be shall be deemed to have been given when five (5) business
days have elapsed from the date of deposit in the United States mails, certified
and postage prepaid, addressed to the party to be served at the following
address or such other address as may be given in writing to the parties.
Group: Fremont Dental Group
40803 Fremont Blvd.
Fremont, CA 94538
Attn: John Maguire, D.D.S.
Manager: GMS Dental Group, Inc.
22800 Savi Ranch Parkway
Suite 206
Yorba Linda, California 92887
Attn: Michael T. Fiore, President and Chief Executive
Officer
11.6 Attorneys' Fees. If any legal action or arbitration or other
---------------
proceeding is commenced, whether by Manager or Group concerning this Agreement,
the prevailing party
23.
<PAGE>
shall recover form the losing party reasonable attorneys' fees and costs and
expenses, including those of appeal and not limited to taxable costs, incurred
by the prevailing party, in addition to all other remedies to which the
prevailing party may be entitled. If a claim or claims asserted by a third party
against Manager or Group or any of them arise from an action or omission by the
other, the party responsible for the action or omission shall be the losing
party, and the other party shall be the prevailing party, for purposes of the
foregoing sentence.
11.7 Successors. Without limiting or otherwise affecting any
----------
restrictions on assignments of this Agreement or rights or duties under this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
successor and assigns of Group and Manager.
11.8 Entire Agreement. This Agreement sets forth the entire
----------------
agreement between Group and Manager and supersedes all prior negotiation and
agreements, written or oral, concerning or relating to the subject matter of
this Agreement, and this Agreement may not be modified except by a writing
executed by all parties and subject to the provisions thereof.
11.9 Governing Law. This Agreement and the rights and obligations
-------------
of the parties hereto shall be governed by, and construed according to, the laws
of the State of California.
11.10 Severability, Contract Modifications for Prospective Legal
----------------------------------------------------------
Events. Nothing contained in this Agreement shall be construed to require the
- ------
commission of an act contrary to law, and whenever there is any conflict between
any provision of this Agreement and any statute, law, ordinance or regulation,
the latter shall prevail. In such event, and in any case in which any provision
of this Agreement is determined to be in violation of a statute, law, ordinance
or regulation, the affected provision(s) shall be limited only to the extent
necessary to bring it within the requirements of the law and, insofar as
possible under the circumstances, to carry out the purposes of this Agreement.
The other provisions of this Agreement shall remain in full force and effect,
and the invalidity or unenforceability of any provision hereof shall not affect
the validity and enforceability of the other provisions of this Agreement, nor
the availability of all remedies in law or equity to the parties with respect to
such other provisions.
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision, a regulatory agency or legal counsel of both
parties in such a manner as to indicate that the structure of this Agreement may
be in violation of such laws or regulations, Group and Manager shall amend this
Agreement, to the maximum extent possible, to preserve the underlying economic
and financial arrangements between Group and Manager. The parties agree that
such amendment may require reorganization of Group or Manager, or both, and may
require either or both parties to obtain appropriate regulatory licenses and
approvals. If an amendment is not possible, either party shall have the right
to terminate this Agreement upon thirty (30) days notice to the other party.
11.11 Time Is of the Essence. Time is of the essence in this
----------------------
Agreement.
24.
<PAGE>
11.12 Authority. Any Person signing this Agreement on behalf of any
---------
entity hereby represents and warrants in its individual capacity that it has
full authority to do so on behalf of such entity.
11.13 Counterparts. This Agreement may be executed in two (2) or
------------
more counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same instrument.
[Signature Page to Follow]
25.
<PAGE>
IN WITNESS WHEREOF, Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
"Group"
Fremont Dental Group,
a California general partnership
/s/ Joseph Checchio
-------------------------------------
Joseph Checchio, Jr., D.D.S., partner
/s/ Alexander Gonzales
-------------------------------------
Alexander Gonzales, D.D.S., partner
/s/ Frederick Johnston
-------------------------------------
Frederick Johnston, D.D.S., partner
/s/ John Maguire
-------------------------------------
John Maguire, D.D.S., partner
"Manager"
GMS Dental Group Management, Inc.,
a Delaware corporation
Michael T Fiore
By: --------------------------------
Michael T. Fiore, President
and Chief Executive Officer
<PAGE>
ADDENDUM 1.
----------
For purposes of this Agreement, the following terms shall have the
meaning indicated below or defined at the indicated section:
(1) Accounts. See Section 2.5.
--------
(2) Affiliate. "Affiliate" shall mean, with respect to any Person,
---------
(i) any individual or entity directly or indirectly owned or controlled by such
Person, (ii) any individual or entity directly or indirectly owning or
controlling such Person or (iii) any individual or entity directly or indirectly
owned or controlled by the same family member, individual or entity as owns or
controls such Person. For purposes of this Agreement, neither Group nor Manager
shall be deemed an Affiliate of the Other.
(3) Agreement. "Agreement" means this Group Management Agreement.
---------
(4) Annual Budget. See Section 3.6.
-------------
(5) Asset Purchase Agreement. That certain Asset Purchase Agreement,
------------------------
dated as of the Effective Date by and among the Company, Manager and Group.
(6) Beneficiaries. See Recital A.
-------------
(7) Books and Records. "Books and Records" means Group's books of
-----------------
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
(8) Capital Costs. "Capital Costs" shall mean any and all
-------------
investments that are or would be capitalized pursuant to GAAP.
(9) Committee Members. See Section 3.5a.
-----------------
(10) Default Notice. See Section 6.2b(1).
--------------
(11) Effective Date. See preamble paragraph.
--------------
(12) Employee Providers. See Recital B.
------------------
(13) Employment Agreements. See Recital B.
---------------------
1.
<PAGE>
(14) GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with 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 Manager's financial statement.
(15) Group. See first paragraph of this Agreement.
-----
(16) Group Expenses. "Group Expenses" means (i) amounts payable to
--------------
Partners under Profit Distribution Agreements and (ii) salaries and wages,
compensation, payroll taxes, and employee benefits of Employee Providers and
Subcontract Providers, all as set forth in, and subject to and limited by, the
Annual Budget.
(17) Group Member. See Section 3.5a.
------------
(18) Group Patients. See Recital A.
--------------
(19) Joint Operations Committee. See Section 3.4b.
--------------------------
(20) Management Fee. See Section 7.1.
--------------
(21) Manager. See first paragraph of this Agreement.
-------
(22) Manager Members. See Section 3.5a.
---------------
(23) Marks. See Section 2.3a.
-----
(24) Offer. See Section 5.1.
-----
(25) Parent. "Parent" shall mean GMS Dental Group, Inc. or any
------
successor thereto.
(26) Partners. "Partners" shall mean (subject to section 11.1(a))
--------
Joseph Checchio, Jr., D.D.S., Alexander Gonzales, D.D.S., Frederick Johnston,
D.D.S., and John Maguire, D.D.S., and each individually shall be referred to as
a "Partner".
-------
(27) Payment Date. See Section 7.2.
------------
(28) Payor Contracts. See Recital A.
---------------
(29) Percentage Fee Portion. See Exhibit 7.1.
---------------------- -----------
(30) Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
2.
<PAGE>
(31) Plans. See Recital A.
-----
(32) Practice. See Recital C.
--------
(33) Practice Expenses. "Practice Expenses" means all costs incurred
-----------------
by Manager including amortization associated with costs of acquiring assets of
the Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which are
attributable to Manager's business operations in accordance with Manager's
corporate allocation policies, all as consistent with and/or contemplated in the
Annual Budget.
(34) Practice Sites. See Section 3.4a.
--------------
(35) Practice Site Facilities. See Section 3.4a.
------------------------
(36) Preliminary Budget. See Section 3.7b.
------------------
(37) Programs. See Section 2.3b.
--------
(38) Proprietary Information. See Section 10.1.
-----------------------
(39) Protected Parties. See Section 10.1.
-----------------
(40) Providers. See Recital B. The term "Providers" shall include
---------
individuals or organizations licensed to practice dentistry (including
specialists) as well as other licensed dental professionals who provide
ancillary reimbursable dental services.
(41) Provider Subcontracts. See Recital A.
---------------------
(42) Reimbursable Expense Portion. See Exhibit 7.1.
---------------------------- -----------
(43) Revenues. See Section 2.4.
--------
(44) Security Agreement. See Section 7.4.
------------------
(45) Subcontract Providers. See Recital B.
---------------------
(46) Term. See Section 6.1.
----
3.
<PAGE>
EXHIBIT 10.44
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
THIS DENTAL GROUP MANAGEMENT AGREEMENT (this "Agreement") is dated as
---------
of July 24, 1997 ("Effective Date") by and between GMS Dental Group Management,
--------------
Inc., a Delaware corporation ("Manager") and wholly-owned subsidiary of GMS
-------
Dental Group, Inc., a Delaware corporation (the "Company") and Mark Armstrong,
-------
D.D.S., doing business as a sole proprietor under the d/b/a Concord Dental Care
("Group").
-----
RECITALS
--------
A. Group engages in the practice of dentistry by providing dental
services to patients of Group ("Group Patients") and to enrollees
--------------
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
------------- ----- ---------------
between Group and Plans or between Beneficiaries and Plans.
B. Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
---------
arrangements may include contracts ("Employment Agreements") with dentist
---------------------
employees (collectively "Employee Providers") and agreements ("Provider
------------------ --------
Subcontracts") with independent contractor dentists and non-dentist providers of
- ------------
various dental care services (collectively "Subcontract Providers").
---------------------
C. All activities of Group subject to this Agreement are referenced
as the "Practice." All references to "dental" care and services include general
--------
and specialist dental services. All references to "dentists" include generalists
and specialists.
D. Manager is a management services company that has been organized
to provide certain support services for the Practice and for other dental
groups. Manager is in the business of providing or arranging for management
services, facilities, equipment and certain personnel necessary for the
operation of the Practice.
E. Immediately prior to the Effective Date, Group was managed by
Premier Dental, a California general partnership, pursuant to a management and
option agreement (the "Original Agreement"). Manager acquired the Original
------------------
Agreement on the date hereof, and this Agreement amends and restates the
Original Agreement.
F. Group desires to retain Manager on an independent contractor
basis to provide management services that are more particularly described below,
and Manager desires to provide such management services under the terms and
conditions set forth in this amendment and restatement of the Original
Agreement.
<PAGE>
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the covenants and conditions
contained herein, Manager and Group agrees as follows:
ARTICLE I
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
----------
ARTICLE II
SCOPE OF AGREEMENT
------------------
2.1 General Scope of Agreement. This Agreement shall apply to the
--------------------------
Practice being conducted by Group, including, without limitation, all
professional, administrative and technical services, marketing, contracting,
case management, ancillary dental services, outpatient services and dental care
facilities, equipment, supplies and items, except as otherwise specifically
provided in this Agreement. Group's Employment Agreements shall encompass
substantially all such activities of Employee Providers and shall provide that
all revenues derived from such activities (and not excluded below) shall be
included in Revenues as such term is defined in Section 2.4 hereof. Nothing in
-----------
this Agreement shall be construed to alter or in any way affect the legal,
ethical and professional relationship between and among Provider and Provider's
patients, nor shall anything contained in this Agreement abrogate any right or
obligation arising out of or applicable to the dentist-patient relationship.
2.2 License. Except as prohibited by contract or by applicable laws
-------
and requirements governing the practice of dentistry, Group grants Manager an
exclusive license to use any and all of Group's assets, whether tangible or
intangible, in carrying out Manager's duties and responsibilities under the
provisions of this Agreement.
2.3 Intellectual Property. Group hereby grants to manager a non-
---------------------
exclusive, perpetual, royalty-free, worldwide license to use and sublicense the
use of any intellectual property owned by Group. This license shall cover, but
not be limited to, use of the following:
a. Service Mark. Group hereby grants Manager the right to use
------------
all service marks and trademarks of Group (the "Marks") for marketing and
-----
promotional materials in connection with Group's offering of dental services.
Manager agrees to use the Marks solely in the design format used by Group as of
the date of this Agreement or another design format approved in advance in
writing by Group. Group shall have the opportunity to review any marketing or
other materials using the Marks in advance of any public distribution. Manager
agrees that it will include these restrictions on use in any sublicense of the
Marks.
b. Copyrighted Materials. Group hereby grants Manager the
---------------------
right to use any and all copyrighted materials authored or owned by Group
including, specifically, the
2.
<PAGE>
Group dental management system software programs (the "Programs"). This license
--------
includes the right to sublicense the Programs and the right to prepare and own
derivative works based on the Programs, all without a duty of accounting to
Group. Group shall execute all documents required to enable Manager to own, use
and exploit all such rights.
2.4 Revenues. "Revenues" shall mean all of Group's accounts
-------- --------
receivable (net of contractual adjustments and bad debt), and cash collections.
Revenues shall include all funds collected by, or legally due to, Group or any
downstream Affiliate of Group, including, without limitation, the following: (a)
all fee-for-service payments for services to Group Patients or Beneficiaries;
(b) all payments established under Payor Contracts; (c) all coordination of
benefits or deductibles and third-party liability recoveries related to the
Group's services; (d) all payments, dues, fees or other compensation to Group;
(e) any income, profits, dividends, distributions or other payments from Group's
investments; and (f) any interest or other non-operating income of Group;
provided, however, that Revenues shall not include the Purchase Price (as
defined in the Asset Purchase Agreement).
2.5 Deposit Accounts. All cash received by Group from whatever
----------------
source shall be deposited into an account or accounts ("Accounts") in the name
--------
of Group at a banking institution selected by Group and approved by Manager.
Group authorizes Manager to bill and collect, in Group's name, all charges and
reimbursements for Group's dental related activities and to deposit such
collections in the Accounts. Group agrees to assist and cooperate with Manager
in the billing and collection process and to immediately deliver to Manager for
deposit any monies Group may receive. Manager shall manage the cash equivalents
of the Group and Manager shall be entitled (and is hereby authorized) to
transfer such cash to the account of Manager and to use such cash for purposes
as Administrator deems appropriate, subject to and consistent with the terms and
provisions of this Agreement. Nothing in this Section 2.5 shall be construed to
limit or otherwise modify the requirement that Manager disburse funds in
fulfillment of the obligations of the Group and Manager under this Agreement.
ARTICLE III
OPERATION OF PRACTICES
----------------------
3.1 Appointment. Subject to applicable laws and requirements
-----------
governing the practice of dentistry and the provisions of this Agreement, Group
hereby appoints Manager as its sole and exclusive Manager for the operation of
the Practice and covenants not to enter into an agreement with any Person other
than Manager to perform or assume any of Manager's rights, duties or
responsibilities as provided herein. Manager hereby accepts full responsibility
for such management as more fully set forth herein.
3.2 Professional Matters. Pursuant to applicable laws and
--------------------
requirements governing the practice of dentistry, Group shall retain ultimate
responsibility for all activities of Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's non-
licensed status.
3.
<PAGE>
3.3 Relationship of Parties. In the performance of its duties and
-----------------------
obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Group. Except as provided in this Agreement or as required
by law, Group shall neither have nor exercise any control or direction over the
methods by which Manager shall perform its obligations hereunder; nor shall
Manager have or exercise any control or direction over the methods by which
Group shall practice dentistry. It is expressly agreed by the parties that no
work, act, commission or omission of manager pursuant to the terms and
conditions of this Agreement shall be construed to make or render Manager or
Manager's employees or agents, the employees of Group. Manager and Group are not
partners or joint venturers with each other and nothing herein shall be
construed so as to make them partners or joint venturers or impose upon either
of them any liability as partners or joint venturers. Group's responsibility is
to assure that the services covered by this Agreement shall be performed and
rendered in a competent, efficient and satisfactory manner.
3.4 Authority and Control. Strategic planning, overall direction and
---------------------
control of the business and affairs of Group, and authority over the day-to-day
activities of Group shall be accomplished as follows:
a. Exclusive Authority. Notwithstanding anything else to the
-------------------
contrary contained herein, Group shall have the sole responsibility and
authority for all aspects of the practice of dentistry and delivery of dental
services by Providers. Providers shall use and occupy at the practice sites
("Practice Sites") the facilities provided by Manager hereunder exclusively for
--------------
the practice of dentistry ("Practice Site Facilities"). Group expressly
------------------------
acknowledges that the Practice or Practices conducted at these Practice Site
Facilities shall be conducted solely by dentists and dental hygienists
associated with Group as Employee Providers or Subcontract Providers. Group
shall consult with Manager or the Joint Operations Committee to the extent
reasonable and not inconsistent with the laws governing the practice of
dentistry.
b. Joint Authority. All other decision-making authority
---------------
related to the business and affairs of Group shall be vested in a joint
operations committee (the "Joint Operations Committee"). Nothing herein shall be
--------------------------
construed as preventing the Joint Operations Committee from appointing
representatives and delegating authority to such representatives so long as the
Joint Operations Committee may revoke such appointment and delegation at any
time and so long as the Joint Operations Committee retains ultimate
responsibility for the decisions of such representatives.
3.5 Joint Operations Committee. Subject to applicable laws and
--------------------------
requirements governing the practice of dentistry, the Joint Operations Committee
shall have authority and responsibility to provide strategic planning, overall
direction and authority over the day-to-day management and administrative
activities of the Group and shall manage the business operations of the Group as
follows:
a. Joint Operations Committee Membership. The Joint Operations
-------------------------------------
Committee shall consist initially of five (5) individuals (the "Committee
---------
Members"). Manager shall designate three (3) Committee Members (the "Manager
- ------- -------
Members"), Group shall designate
- -------
4.
<PAGE>
one (1) Committee Member (the "Group Member") and the remaining one (1)
------------
Committee Member shall be the practice administrator provided however, if at any
time there is not a practice administrator, Group shall designate the final one
(1) Committee Member (together with the Group Member, the "Group Members"). The
-------------
number of Committee Members may be increased or decreased by agreement of the
parties. Each party shall continue to direct the appointment of the same
percentage of Committee Members as described above. Each Committee Member shall
serve at the pleasure of the party designating such Committee Member and may be
replaced, with or without cause, at any time by such party upon the delivery of
written notice thereof to the other Committee Members. Manager, Group and the
Committee Members shall diligently pursue any preliminary activities that are
necessary to allow the Joint Operations Committee to take an action. Where
Committee Members are required to consult with the organization appointing such
Committee Members, the Committee shall establish and agree on a deadline for
accomplishing such consultation.
b. Joint Operations Committee Action.
---------------------------------
(i) Joint Action. Except as otherwise expressly set forth
------------
above, the Joint Operations Committee shall take all other actions that have
been approved by a majority of the Committee Members.
(ii) Consultation Forum. Consultation between Group and
------------------
Manager, if any, shall take place at a meeting of the Joint Operations
Committee, and Group and Manager hereby agree to be bound by the decision of
their Group Member(s) or Manager Members, as the case may be.
c. Joint Operations Committee Meetings. Meetings of the Joint
-----------------------------------
Operations Committee may be held by telephone or similar communications
equipment so long as all Committee Members participating in a meeting can hear
and speak to each other. The Joint Operations Committee shall prepare and
maintain written minutes of all meetings and shall provide a copy of the minutes
to the parties within fifteen (15) business days following each meeting.
(i) Regular Meetings. The Joint Operations Committee
----------------
shall hold not less than four (4) regular meetings each year, at such specific
times and places as the Committee Members may determine.
(ii) Special Meetings. A special meeting of the Joint
----------------
Operations Committee may be called by a majority of the Committee Members.
(iii) Notice Requirement. A Committee Member calling a
------------------
special meeting must provide all other Committee Members with ten (10) days'
advance written or telephonic notice. Notice must be given or sent to the
Committee Member's address or telephone number as shown on the records of the
Joint Operations Committee. Notice may be delivered directly to each Committee
Member or to a person at the Committee Member's principal place
5.
<PAGE>
of business who reasonably would be expected to communicate that notice promptly
to the Committee Member.
(iv) Waiver of Notice Requirement.
----------------------------
(a) Written Waiver, Consent or Approval. Notice of a
-----------------------------------
special meeting need not be given to any Committee Member who, either before or
after the meeting, signs a waiver of notice or a written consent of the holding
of the special meeting, or an approval of the minutes of the special meeting.
Such waiver, consent or approval need not specify the purpose of the special
meeting. All such waivers, consents and approvals shall be filed with the Joint
Operations Committee records or made a part of the minutes of the special
meetings.
(b) Failure to Object. Notice of a special meeting
-----------------
need not be given to any Committee Member who attends the special meeting and
does not protest before or at the commencement of the special meeting such lack
of notice.
(v) Quorum. The smallest number of Committee Members that
------
exceed fifty percent (50%) of all Committee Members shall constitute a quorum of
the Joint Operations Committee, provided, however, that such quorum shall
include at least one Group member and one Manager member.
(vi) Proxies. The Joint Operations Committee shall provide
-------
for the use of proxies, telephonic conference calls, written consents or other
appropriate methods by which the full participation of the Group Member(s),
Manager Members and Administrator Member, if any, can be assured.
d. Limitation of Responsibility. Notwithstanding any other
----------------------------
provisions hereof, Committee Members shall be liable to the parties only for
actions constituting bad faith, gross negligence or breach of an express
provision of this Agreement (so long as such breach remains uncured after ten
(10) days of receiving notice of the nature of such breach). In all other
respects, Committee Members shall not be liable for negligence or mistakes of
judgment.
3.6 Budgets. A capital and operating budget ("Annual Budget") shall
------- -------------
be established regarding all financial aspects of the Practice. The Annual
Budget shall include the following elements and other items, as appropriate:
a. A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
b. An operating budget setting forth an estimate of revenues
and expenses (which the parties contemplate will comprise all reasonable and
necessary expenses to be incurred by the Practice in such year) including,
without limitation, a breakdown of all Group Expenses and Practice Expenses for
the next succeeding fiscal year, together with an explanation of anticipated
changes or modifications, if any, in the Practice's utilization, rates, charges
to
6.
<PAGE>
patients or third party payors, salaries, costs of Provider, non-wage cost
increases, and all other similar factors expected to differ significantly from
those prevailing during the current fiscal year;
c. Other expenses of operation;
d. The amount of a reasonable reserve to satisfy possible
shortfalls from operations. The allocation of such reserve shall be made by the
Joint Operations Committee as and when necessary; and
e. The Management Fee, as defined below, for the next succeeding
fiscal year.
3.7 Budget Process.
--------------
a. Initial Annual Budget. Not later than 45 days after the
---------------------
Effective Date, the Joint Operations Committee will have prepared the initial
Annual Budget for the first fiscal year (which shall initially be the calendar
year) during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains, or, at the option of
the parties, such portion of the then current fiscal year plus the immediately
subsequent fiscal year.
b. Preliminary Budget. Not later than forty-five (45) days
------------------
prior to the end of each fiscal year during the term of this Agreement, the
Manager shall prepare and deliver to the Joint Operations Committee a
preliminary Annual Budget for the next succeeding fiscal year ("Preliminary
-----------
Budget").
- ------
c. Joint Operations Committee Approval. The Joint Operations
-----------------------------------
Committee shall review and suggest modifications to the Preliminary Budget
within ten (10) days of receipt. Manager shall prepare a revised budget based
upon the Joint Operations Committee's recommendations and the Preliminary Budget
as revised shall become the Annual Budget.
d. Adjustments. In the event of a material deviation between
-----------
financial forecasts and financial performance during a fiscal year, Manager or
Group may propose adjustments to the Annual budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
3.8 Personnel.
---------
a. Providers. Except in unusual circumstances approved by the
---------
Joint Operations Committee, and as permitted by law, Manager shall not employ or
contract with any Provider for the provision of dental services. All Providers
who provide dental services to Group Patients or to Beneficiaries shall be
either (1) Employee Providers, (2) Subcontract Providers, or (3) employees of
Subcontract Providers. Group shall have complete control of and responsibility
for the hiring, engagement, compensation, training, scheduling, supervision,
evaluation, and termination of all Employee Providers and Subcontract Providers,
although at the request of
7.
<PAGE>
Group, Manager shall consult with Group respecting such matters and shall
coordinate the advertising of positions available, interviewing of candidates,
and scheduling of clinical staff meetings and training sessions.
b. Non-Providers. With the exception of employees of
-------------
Subcontract Providers, Manager shall employ all non-Provider personnel necessary
for the operation of the Practice.
c. Salary and Benefits. Subject to Manager's responsibilities
-------------------
under Article VII, each party to this Agreement shall remain liable for the
-----------
salary and benefits paid to such party's own employees and shall be ultimately
responsible for compliance with state and federal laws pertaining to employment
taxes, workers' compensation, unemployment compensation and other employment-
related statutes pertaining to the party's own employees.
d. Payments to Subcontract Providers. Subject to Manager's
---------------------------------
responsibilities under Article VII, Group shall be liable for any payments due
-----------
Subcontract Providers under Provider Subcontracts.
ARTICLE IV
MANAGEMENT SERVICES
-------------------
4.1 General Description of Services. Except as prohibited by law and
-------------------------------
within the limitations set out elsewhere in this Agreement, Manager shall
provide or arrange for the provision to Group of all support services reasonably
necessary and appropriate for the efficient operation of the Practice. Such
services include all administrative services necessary to Group's performance of
its obligations under Payor Contracts, contracting, marketing, capital formation
and assistance with long term strategic planning. Manager shall exercise its
best efforts to fulfill the administrative functions of a well managed dental
group.
4.2 Practice Site Facilities. When appropriate, Manager shall secure
------------------------
and maintain Practice Site Facilities, including, without limitation, office
space, improvements, furnishings, equipment, supplies, and personal property, of
a nature and in a condition necessary and appropriate for the efficient and
effective operations of the Practice subject to the general approval of the
Joint Operations Committee. Group hereby accepts and approves of the Practice
Site Facilities initially provided by Manager. However, Manager from time to
time shall make such Practice Site Facilities changes, including but not limited
to dental equipment purchases, as reasonably may be requested by Group and
consistent with the Annual Budget.
4.3 Purchased Items and Services. Manager shall serve as the
----------------------------
purchasing agent for Group and shall arrange for personnel benefits, insurance,
and any other items and services required for the proper operation of the
Practice.
8.
<PAGE>
4.4 Manager Personnel.
-----------------
a. Management Team. Subject to any approval or consulting
---------------
rights of the Joint Operations Committee, Manager may engage or designate one or
more individuals experienced in dental group management and direction,
including, but not limited to, an administrator, who will be responsible for the
overall administration of the Practice including day-to-day operations and
strategic development activities.
b. Other Manager Personnel. Manager shall select, hire, train,
-----------------------
supervise, monitor and terminate all non-Provider personnel necessary for the
operation and management of the Practice; provided, however, with respect to the
selection, hiring and termination of non-Provider personnel, Manager shall
consult with Group.
4.5 Day-to-Day Management and Supervision. Subject to any approval
-------------------------------------
or consulting rights of the Joint Operations Committee, Manager shall provide
general management including, but not limited to, day-to-day supervision of:
a. manager personnel;
b. equipment and supply acquisition;
c. office space and facility maintenance;
d. patient records organization and retention;
e. third party payor contracting;
f. case management;
g. billing, collections and accounting activities as set forth
below;
h. all operating aspects and policies of the Practice
including, but not limited to, hours of operation, work schedules, standard
duties and job descriptions, for all non-Group personnel; and
i. other related and incidental matters.
4.6 Billing and Collection Payment of Expenses. In addition to
------------------------------------------
the responsibilities of Manager under Article VII, Manager shall be responsible
-----------
for all billing and collection activities required by Group. Manager shall also
be responsible for reviewing and paying accounts payable of Group. Group hereby
appoints the Manager its true and lawful attorney-in-fact to take the following
actions for and on behalf of and in the name of Group:
a. bill and collect in Group's name or the name of the
individual practicing dentist, all charges and reimbursements for Group. Group
shall give Manager all
9.
<PAGE>
necessary access to Patient records to accomplish all billing and collection.
In so doing, Manager will use its best efforts but does not guarantee any
specific level of collections, and Manager will comply with Group's reasonable
and lawful policies regarding courtesy discounts;
b. take possession of and endorse in the name of the Group any
and all instruments received as payment of accounts receivable;
c. deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
d. place accounts for collection, settle and compromise claims,
and institute legal action for the recovery of accounts.
4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
a. Financial Reporting. manager shall prepare, analyze and
-------------------
deliver to the Joint Operations Committee financial reports to the extent
necessary or appropriate for the operation of the Practice, including the
following:
(i) financial statements, including balance sheets and
statements of cash flow and income;
(ii) accounts payable and accounts receivable analysis;
(iii) billing status including any medicaid remittances; and
(iv) reconciliation of assets, liabilities and major
expenses.
b. Audits. Group shall have the right to review and, at its
------
sole cost and expense, obtain an audit (separate from any annual audit or review
of Group's financial statements performed at the direction of the Manager) of
Group's financial books and records maintained by the Manager. Upon prior
written notice, Manager shall allow Group access during reasonable business
hours to all information and documents reasonably required for such review or
audit. Upon Group's request and at Group's expense, Manager shall also provide
copies of such documents.
4.8 Marketing and Public Relations Services. Manager shall provide
---------------------------------------
such marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Group after
consultation with Group. Manager shall provide Group with marketing materials
and activities. Nothing in this Agreement shall be construed to affect or limit
in any way the professional discretion of Group to select patients that may be
effectively treated in the Practice in accordance with professional standards of
patient selection.
10.
<PAGE>
4.9 Group Agreements. Subject to Group's consent, which consent
----------------
shall not be unreasonably withheld, on behalf of Group, Manager shall review,
evaluate and negotiate Payor Contracts and Provider Subcontracts and any other
contracts or agreements regarding the provision of dental related items or
services by Group or Providers.
4.10 Utilization Review Quality Improvement and Outcomes Monitoring.
--------------------------------------------------------------
Manager shall be responsible for providing administrative support for Group's
utilization review, quality improvement and outcomes monitoring activities,
including, without limitation, data collection, analysis and reporting for Group
Patients and Beneficiaries. Manager shall also support the development and
implementation of relevant policies, procedures, protocols, practice guidelines
and other interventions based on such activities.
4.11 Patient Referrals. The parties agree that the benefits to Group
-----------------
hereunder do not require, are not payment for, and are not in any way contingent
upon the admission, referral or any other arrangements for the provision of any
item or service offered by Manager or any affiliate of Manager to any of Group's
Patients in any facility owned or controlled, managed or operated by Manager or
any affiliate of Manager.
4.12 Applicable Law. Manager and Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE V
GROUP RESPONSIBILITIES
----------------------
5.1 Diagnosis, Treatment Planning, Specific Patient Education and
-------------------------------------------------------------
Consultation. Group shall have sole responsibility for all professional dental
- ------------
services provided to Patients with regard to the diagnosis of the patient's
condition and the development of treatment plan alternatives, including, without
limitation, the following:
a. Diagnosis. Group shall have sole responsibility for all
---------
medical and dental history evaluation, examination, obtaining clinical records,
and diagnostic procedures appropriate for complete diagnosis.
b. Treatment Planning. Group shall have sole responsibility
------------------
for all determination of treatment alternatives that may be professionally
acceptable for the treatment of the patient's condition.
c. Specific Patient Education. Group shall have sole
--------------------------
responsibility for all discussion, recommendation, demonstration, and other
educational modalities intended to address the patient's specific condition, as
differentiated from general patient education intended to address the common
concerns of all patients presenting with similar conditions.
11.
<PAGE>
d. Consultation. Group shall have sole responsibility for all
------------
discussion of clinical advantages, disadvantages, complications, and risks of
each alternative treatment plan, and including the likely results of no
treatment.
e. Manager to Assist with Record Procurement. Notwithstanding
-----------------------------------------
the above, Manager shall be responsible for exercising reasonable efforts to
procure, at its own expense, medical and dental history information, previous
clinical records, and X-ray records prior to presentation of the patient for
treatment by Group, in accordance with protocols developed by Group in
consultation with Manager.
5.2 Dental Services. Group shall have sole responsibility for all
---------------
professional dental services provided to Patients with regard to the treatment
of the patient's condition, including, without limitation, the following:
a. Preventive Care. Group shall have sole responsibility for
---------------
all preventive care intended to delay, or intercept the development of
pathologic conditions.
b. Therapeutic Care. Group shall have sole responsibility for
----------------
all therapeutic care intended to ameliorate, or improve existing pathologic
conditions.
c. Referral to Specialists. Group shall have sole
-----------------------
responsibility for all referral to appropriate dental specialists and other
allied health care professionals in accordance with professional dental
standards of care.
d. Continuing Care. Group shall have sole responsibility for
---------------
all development and execution of continuing care protocols intended to maintain
the patient's condition over the course of time.
e. Manager to Assist with Patient Compliance Tracking.
--------------------------------------------------
Notwithstanding the above, Manager shall be responsible for exercising
reasonable efforts to facilitate, coordinate, and document the scheduling,
tracking, and confirmation of Group's recommendations for dental diagnostic and
therapeutic services, treatments, referrals, and continuing care in accordance
with protocols developed by Group in consultation with Manager.
5.3 Provision of Dental Services by Group. Group shall operate the
-------------------------------------
Practice during the Term as a dental practice in accordance with the terms of
this Agreement and the Annual Budget. However, nothing in this Agreement shall
be construed to affect or limit in any way the professional discretion or duty
of Group insofar as such constitutes the practice of dentistry.
5.4 Providers.
---------
a. Professional Dental Services. Group shall employ or
----------------------------
contract with the number of Providers Group deems necessary for the efficient
and effective operation of the Practice and in accordance with the Annual Budget
and quality assurance, credentialing and
12.
<PAGE>
utilization management protocols approved by the Joint Operations Committee.
Group shall provide full and prompt dental coverage for the Practice, including
emergency service twenty-four hours per day, seven days per week, including
holidays, according to policies and schedules approved by the Joint Operations
Committee.
b. Provider Subcontracts and Employment Agreements. Group
-----------------------------------------------
shall not negotiate or execute any Provider Subcontract, Employment Agreement,
or any amendment thereto, or terminate any Provider Subcontract or Employment
Agreement without the approval of the Joint Operations Committee. Subject to
Manager's responsibilities under Article VII, Group shall be responsible for the
-----------
payment, in accordance with the Annual Budget, of all Employee and Subcontract
Providers.
5.5 Peer Review. Group, after consultation with the Joint Operations
-----------
Committee, shall implement, regularly review, modify as necessary or appropriate
and obtain the commitment of Providers to actively participate in peer review
procedures for Providers. Group shall assist Manager in the production of
periodic reports describing the results of such procedures. Group shall provide
Manager with prompt notice of any information that raises a reasonable risk to
the health and safety of Group Patients or Beneficiaries. In any event, after
consultation with the Joint Operations Committee, Group shall take such action
as may be reasonably warranted under the facts and circumstances.
5.6 Fees, Charges and Payor Agreements. Group shall, after
----------------------------------
consultation with Manager, determine the fees, charges, premiums, or other
amounts due in connection with delivery of dental services to Patients. Such
fees, charges, premiums, or other amounts (regardless of whether determined on a
fee-for-service, capitated, prepaid, or other basis) shall be reasonable and
consistent with the fees, charges, premiums, and other amounts due to dental
care providers for similar services within the community under similar types of
reimbursement programs involved if such programs are currently offered within
the community.
5.7 Hours of Clinical Operation. After consultation with the Joint
---------------------------
Operations Committee, Group shall establish hours of operation that are
consistent with good dental practice, and are appropriate to the need to timely
deliver professional dental care services to Group Patients.
5.8 Billing Information and Assignments. Group shall promptly
-----------------------------------
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Group's
services. Group shall use reasonable efforts to procure consents to assignments
and other approvals and documents necessary to enable Manager to obtain payment
or reimbursement from third party payors and patients. With the assistance of
Manager, Group shall obtain all provider numbers necessary to obtain payment or
reimbursement for its services.
5.9 Third Party Contracts. Group shall be in compliance with all
---------------------
contracts, agreements and arrangements, including any contracts that exist on
the Effective Date, between Group and third parties.
13.
<PAGE>
5.10 Use of Manager's Goods and Services. Group shall not use any
-----------------------------------
goods or services provided by Manager pursuant to this Agreement for any purpose
other than the provision of and management of dental services as contemplated by
this Agreement and purposes incidental thereto.
5.11 Negative Covenants. During the Term, Group shall not, without
------------------
the prior approval of the Joint Operations Committee, (a) pledge, mortgage or
otherwise encumber any of its property, (b) merge or consolidate with any other
entity, (c) allow the transfer of any assets (other than in accordance with the
terms and provisions hereof), or (d) take or allow any act that would materially
impair the ability of Group to carry on the business of the Practice or to
fulfill its obligations under this Agreement. Notwithstanding the preceding,
prior to consummating with any third party any transfer, assignment or
conveyance, or any merger or consolidation, in any case as contemplated in
subparagraphs (a), (b) or (c) above, Group shall first offer (the "Offer") to
-----
Manager or its designee the right to acquire the assets of Manager or to effect
a merger or consolidation with Manager upon the same business and economic terms
as proposed to Manager by such third party. Manager or its designee shall have
60 days to elect to accept or reject such Offer, which election shall be binding
on the parties. In addition to the foregoing, at any time upon ten (10) days'
written notice from Manager to Group, Manager (or its designee) shall have the
right to purchase all of the assets of the Group relating to the Practice for a
purchase price of One Thousand Dollars ($1,000.00). This Section 5.11 is
intended to ratify, amend and restate the option contained in the Original
Agreement on the terms set forth herein.
5.12 Group Maintains Full Professional Authority. Notwithstanding
-------------------------------------------
Manager's general and specific rights and responsibilities set forth in this
Agreement, Group shall have full authority and control with respect to all
dental, professional and ethical determinations over Group's Practice to the
extent required by federal, state and local laws, rules and regulation. Manager
shall not engage in activities which constitute the practice of dentistry under
applicable law. Manager shall neither exercise control over nor interfere with
the dentist-patient relationship, which shall be maintained strictly between
Group's Providers and their Patients.
ARTICLE VI
TERM
----
6.1 Term. This Agreement shall be effective the Effective Date, and
----
shall remain in effect for an initial term of forty (40) years from the
Effective Date, expiring on the fortieth (40th) anniversary of the Effective
Date, unless earlier terminated pursuant to the terms of this Agreement. The
word "Term" shall include such initial term and, where applicable, any extension
----
of such initial term (whether extended pursuant to Section 6.2a or otherwise),
subject to earlier termination pursuant to the provisions of this Agreement.
6.2 Termination and Extension.
-------------------------
a. Automatic Extension. At the end of the initial term and any
-------------------
subsequent term, this Agreement shall automatically renew for a five (5) year
term unless one
14.
<PAGE>
of the parties provides the other party with written notice of intent not to
renew, not less than one hundred eighty (180) days prior to the expiration of
the then current term.
b. Early Termination. This Agreement may be terminated
-----------------
according to the provisions of this Section.
(i) Material Breach. In the event either party materially
---------------
breaches this Agreement and such breach is not cured to the reasonable
satisfaction of the non-breaching party within sixty (60) days after the non-
breaching party serves written notice of the default upon the defaulting party
(the "Default Notice"), the Agreement shall automatically terminate at the
--------------
election of the non-breaching party upon the giving of a written notice of
termination to the defaulting party not later than fifteen (15) days after
termination of the 60-day cure period; provided that if such uncured breach is
only capable of being cured within a reasonable period of time in excess of
sixty (60) days, the non-breaching party shall not be entitled to terminate this
Agreement so long as the defaulting party has commenced such cure and thereafter
diligently pursues such cure to completion.
(ii) Refusal to Comply. In the event that Group or Manager
-----------------
refuses or fails to comply with a decision of the Joint Operations Committee,
the aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if such dispute between Group and Manager continues for thirty
(30) days after the date the aggrieved party exercises its option regarding
mediation, the non-complying party shall have thirty (30) days in which to
comply with the decision of the Joint Operations Committee. If the non-complying
party has not complied by the end of such thirty (30) day period, the aggrieved
party shall have the option to terminate this Agreement upon fifteen (15) days'
prior written notice. During such mediation, Manager and Group shall continue to
operate and manage the practice in good faith.
(iii) Bankruptcy. A party may, upon three (3) days' prior
----------
written notice, terminate this Agreement if the other party:
(a) Applies for or consents to the appointment of a
receiver, trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary petition,
makes a general assignment for the benefit of its creditors, files a petition or
answer seeking reorganization or arrangement with its creditors, or admits in
writing its inability to pay its debts when due, or
(b) Suffers any order, judgment or decree to be
entered by any court of competent jurisdiction, adjudicating such party bankrupt
or approving a petition seeking its reorganization or the appointment of a
receiver, trustee or liquidator of such party or of all or a substantial part of
its assets, and such order, judgment or decree continues unstayed and in effect
for ninety (90) days after its entry.
(iv) Nonperformance. Manager may terminate this Agreement
--------------
in the event that in any two consecutive fiscal quarters the Manager has not
been paid all of the
15.
<PAGE>
Reimbursable Expense Portion and at least one-third (1/3) of the Percentage Fee
Portion (i.e. 10%) of the Management Fee and, in the sole discretion of the
Manager, it is not reasonably likely that such amounts of the Management Fee
will be paid in the next fiscal quarter. Any such termination shall be
effective as of the last day of such third fiscal quarter provided at least 60
days notice shall have been given; otherwise, such termination shall be
effective on the sixtieth day after notice is given.
(v) Change in Law. In the event of any material change in
-------------
federal or state law that has a significant adverse impact on either party
hereto in connection with their performance under this Agreement, or if
performance by a party of any duties under this Agreement be deemed illegal by
any administrative agency or in a formal opinion rendered to manager by legal
counsel knowledgeable in health law matter retained by the Manager, the affected
party shall have the right to require that the other party renegotiate the terms
of this Agreement. Unless the parties otherwise mutually agree in writing, such
renegotiated terms shall be effective not later than twenty (20) days after
receipt of written notice of such request for renegotiation. Solely in the event
of illegality, if the parties fail to reach an agreement within thirty (30) days
of the request for renegotiation, either party may (subject to the severability
provision of this Agreement) terminate this Agreement upon thirty (30) days'
prior written notice to the other party.
c. Effect of Termination. Upon termination of this Agreement:
---------------------
(i) Group shall surrender to Manager all of Manager's
property used primarily in the operation of the Practice in the same condition
as received, reasonable wear and tear excepted;
(ii) Manager shall deliver to Group all records related to
the business of and provision of dental care through the Practice including,
without limitation, patient records and any corporate, personnel and financial
records maintained for the Practice and Providers, provided, that except as
limited by law, including, but not limited to laws governing the confidentiality
of patient records, Manager shall have the option to copy (or otherwise
duplicate) at its sole cost and expense such records of Group and to retain and
utilize such records for its own use;
(iii) Manager shall deliver to Group any other property of
Group in Manager's possession;
(iv) Both parties shall cooperate to ensure the provision
of appropriate dental care to Group Patients and Beneficiaries;
(v) Group shall promptly deliver to Manager any Management
Fees due and payable to Manager (such fees prorated for the month of
termination) and any amounts owed to Manager for advances made pursuant to
Section 7.3; and
16.
<PAGE>
(vi) Both parties shall cooperate to ensure the appropriate
billing and collections for dental services rendered by Group prior to the
effective date of termination, and any such cash collected shall be retained by
Group and/or paid to Manager pursuant to Article VII.
ARTICLE VII
FINANCIAL AND SECURITY ARRANGEMENTS
-----------------------------------
7.1 Management Fee. Group and Manager agree that the compensation
--------------
set forth in this Article VII is being paid to Manager in consideration of the
-----------
services provided and the substantial commitment and effort made by Manager
hereunder and that such fees have been negotiated at arms' length and are fair,
reasonable and consistent with fair market value. Manager shall be paid the
management fee (the "Management Fee") as set forth on Exhibit 7.1 hereto.
-------------- -----------
Payment of the Management Fee is not intended to and shall not be interpreted or
implied as permitting Manager to share in Group's fees for medical services but
is acknowledged as the negotiated fair market value compensation to Manager
considering the scope of services and the business risks assumed by Manager.
7.2 Payments. Except as otherwise set forth on Exhibit 7.1 hereto,
-------- -----------
the amounts to be paid to Manager under this Article VII shall be calculated by
-----------
Manager on the accrual basis of accounting and shall be payable monthly.
Payments due for any Management Fee shall be made by Group each calendar month
as provided herein and shall be paid on the 15th day following the end of such
month (or the first preceding day that is a business day if the 15th day is not
a business day) (a "Payment Date"). Such amounts paid shall be estimates based
------------
upon available information for such month, and adjustments to the estimated
payments shall be made to reconcile final amounts due under Section 7.1 on the
-----------
next Payment Date.
7.3 Advances.
--------
a. Group shall be entitled to an advance from Manager of such
additional sums, over and above Group's right to the amounts otherwise set forth
in this Article VII, as shall be required by Group to pay Practice Expenses
-----------
consistent with the Annual Budget of the Practice (prepared as provided in
Section 3.6 hereof), the Management Fee as provided in Exhibit 7.1 hereto and
-----------
Group Expenses at the discretion of Manager. Any amounts advanced to Group
pursuant to this Section 7.3 shall be repaid by Group in such priority as set
-----------
forth in Section 7.5 below and shall bear interest at a rate equal to one
-----------
percent (1%) above the prime rate reported by the Wall Street Journal as
adjusted on a quarterly basis, compounded monthly until all such amounts of
principal and interest are repaid to Manager as provided herein.
7.4 Security Agreement. In order to enforce its rights granted
------------------
hereunder and subject to applicable law, Group shall execute a Security
Agreement in substantially the form attached hereto as Exhibit 7.4 (the
-----------
"Security Agreement"), which Security Agreement grants a security interest in
- -------------------
all of Group's accounts receivable (as more fully described in the Security
Agreement) to Manager. In addition, Group shall cooperate with Manager and
execute all
17.
<PAGE>
necessary documents in connection with the pledge of such accounts receivable to
Manager or at Manager's option, its lenders.
7.5 Priority of Payments. Manager shall administer and make
--------------------
disbursements from amounts deposited into the Accounts or transferred from the
Accounts to pay (including, without limitation the making of advances as
provided in Section 7.3) the Practice Expenses and Group Expenses as the same
become due and payable, and for which Group shall remain responsible. In
performing its obligations pursuant to Article IV, Manager shall apply funds of
Group in the following order of priority:
a. payment of all Group Expenses;
b. payment of all Practice Expenses and the Reimbursable
Expense Portion of the Management Fee;
c. payment of the Percentage Portion of the Management Fee; and
d. payment of amounts advanced to Group, and applicable
interest thereon (as contemplated in Section 7.3).
-----------
If there are not sufficient funds to pay all amounts provided for
above in items (a), (b) and (d) and at least one-third (1/3) of item (c), all
such unpaid amounts shall accumulate and carry over until paid or until the
termination of this Agreement, in which case such unpaid amounts shall be
immediately due and payable as of the date of termination. Any amounts which
remain following the payment of the expenses and fees set forth in subparagraphs
(a) through (d) above shall be retained in the Accounts.
7.6 Accounts Receivable. At the option of Manager, on the first
-------------------
business day of each month, Manager may purchase all or any portion of the
accounts receivable of Group relating to Revenues arising during the previous
month, by payment of cash or other readily available funds into an account for
Group or by offset of amounts owed by Group to Manager. The consideration for
the purchase shall be an amount equal to all fees recorded each month (net of
adjustments for uncollectible accounts, professional courtesies and other such
activities that do not generate a collectible fee) less Management Fees due to
Manager under this Article VII. Manager's purchase shall be effective upon full
-----------
payment of the purchase price. In the event that such purchase shall be
ineffective for any reason, Group is concurrently herewith entering into the
Security Agreement to grant a security interest in the accounts receivable to
Manager. In addition, Group shall cooperate with Manager and execute all
necessary documents in connection with the pledge of such accounts receivable to
Manager or at Manager's option, its lenders. All collections in respect of such
accounts receivable shall be deposited in a bank account at a bank selected by
mutual agreement of Group and Manager. To the extent Group comes into
possession of any payments in respect of such accounts receivable, Group shall
direct such payments to Manager for deposit.
18.
<PAGE>
ARTICLE VIII
INDEMNITY AND INSURANCE
-----------------------
8.1 Indemnity.
---------
a. Indemnification. Each party shall indemnify, defend and hold
---------------
harmless the other party from any and all liability, loss, claim, lawsuit,
injury, cost, damage or expense whatsoever (including reasonable attorneys' fees
and court costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Group agrees
to indemnify, defend and hold harmless Manager for all liability, loss, claim,
lawsuit, injury, cost, damage or expense whatsoever (including reasonably
attorneys' fees and court costs) arising out of the professional negligence of
Group, its employees, agents, contractors or subcontractors, including any
amounts in excess of the professional liability insurance coverage of Group or
its employees, agents, contractors or subcontractors.
b. Mutual Indemnity. Subject to Manager's responsibilities
----------------
under Article VII, each party to this Agreement shall be indemnified by the
-----------
other party for any claim under this Agreement or otherwise against the
indemnified party for vacation pay, sick leave, retirement benefits, Social
Security benefits, workers' compensation benefits, disability or unemployment,
insurance benefits, or other employee benefits of any kind accrued during the
term of this Agreement by an employee of the indemnifying party.
8.2 Manager's Insurance. Manager shall, on its own behalf and at its
-------------------
sole cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
a. Comprehensive general liability insurance covering the risks
of Manager, in an amount determined by the Joint Operations Committee;
b. Workers' Compensation insurance covering the employees of
Manager, in such amounts as is usual and customary under the circumstances;
c. Property insurance covering the facilities, equipment and
supplies owned or leased by Manager or Group for use in the operation of the
Practice.
8.3 Group's Insurance. At Group's sole cost and expense, Manager
-----------------
shall obtain, and maintain on behalf of Group in full force and effect during
the Term, policies in the following categories in the amount indicated:
19.
<PAGE>
a. Comprehensive professional liability insurance coverage for
Group and Group's Employee Providers, in such amounts as Group shall reasonably
deem necessary; provided, however, such coverage shall be no greater than that
set forth on Schedule B hereto without the prior consent of the Joint Operations
----------
Committee, which consent shall not be unreasonably withheld;
b. Workers' Compensation insurance covering the employees of
Group, in such amounts as is usual and customary under the circumstances;
c. Comprehensive general liability insurance covering the risks
of Group, in an amount determined by the Joint Operations Committee.
ARTICLE IX
BOOKS AND RECORDS
-----------------
9.1 Ownership of Records. All business records and information
--------------------
relating exclusively to the business and activities of either party shall be the
property of that party, irrespective of identity of the party responsible for
producing or maintaining such records and information. Without limiting the
foregoing, all patient charts and records maintained by Manager relating to the
dental services of Group shall be the property of Group. Group also shall be
entitled to a copy at Group's sole cost of all business records pertaining to
Group. Except as limited by law, including, but not limited to laws governing
the confidentiality of patient records, Manager shall be entitled to a copy at
Manager's sole cost of all records of Group.
ARTICLE X
RESTRICTIVE COVENANTS
---------------------
10.1 Covenant Regarding Proprietary Information. In the course of
------------------------------------------
the relationship created pursuant to this Agreement, Group will have access to
certain methods, trade secrets, processes, ideas, systems, procedures,
inventions, discoveries, concepts, software in various stages of development,
designs, drawings, specifications, models, data, documents, diagrams, flow
charts, research, economic and financial analysis, developments, procedures,
know-how, policy manuals, form contracts, marketing and other techniques, plans,
materials, forms, copyrightable materials and trade information (all of which is
referred to in this Agreement as "Proprietary Information") regarding the
-----------------------
operations of Manager and/or of its Affiliates (collectively, the "Protected
---------
Parties"). Group shall maintain all such Proprietary Information in strict
- -------
secrecy and shall not divulge such information to any third parties, except as
may be necessary for the discharge of their obligations under this Agreement.
Group shall take all necessary and proper precautions against disclosure of any
Proprietary Information to unauthorized persons by any of its employees or
agents. Group and all employees, and agents of Group who will have access to
all or any part of the Proprietary Information may be required to execute an
agreement, at the request of Manager, valid under the law of the jurisdiction in
which such agreement is executed, and in a form acceptable to Manager and its
counsel, committing themselves to maintain the Proprietary Information in strict
confidence and not to disclose it to any unauthorized person or entity. The
Protected Parties not party to this
20.
<PAGE>
Agreement are hereby specifically made third party beneficiaries of this
Section, with the power to enforce the provisions hereof. Upon termination of
this Agreement for any reason, Group and each of its Employee Providers and
Subcontract Providers shall cease all use of any of the Proprietary Information
and, at the request of Manager, shall execute such documents as may be necessary
to evidence Group's abandonment of any claim thereto. The parties recognize
that a breach of this Section cannot be adequately compensated in money damages
and therefore agree that injunctive relief shall be available to the Protected
Parties as their respective interests may appear.
The obligations of Group under this Section 10.1 shall not apply to
------------
information: (i) which is a matter of public knowledge on or becomes a matter
of public knowledge after the Effective Date of this Agreement, other than as a
breach of the confidentiality terms of this Agreement or as a breach of the
confidentiality terms of any other agreement between Group and Manager or its
Affiliates; or (ii) which was lawfully obtained by Group on a nonconfidential
basis other than in the course of performance under this Agreement and from some
entity other than Manager or its Affiliates or from some person other than one
employed or engaged by Manager or its Affiliates, which entity or person has no
obligation of confidentiality to Manager or its Affiliates.
10.2 Covenants Not to Compete During the Term. The parties recognize
----------------------------------------
that the services to be provided by Manager shall be feasible only if Group
operates an active dental practice to which Group and its Providers devote full
time and attention. To that end:
a. Restrictive Covenants by Group. During the term of this
------------------------------
Agreement, Group shall not (i) establish, operate or provide dental care
services at any dental office, clinic or other facility providing services
substantially similar to those provided by Group pursuant to this Agreement
anywhere other than at the Practice Sites and as may be approved in writing by
Manager; (ii) enter into any management or administrative services agreement or
other similar arrangement with any person or entity other than Manager without
Manager's prior written approval and (iii) operate or, directly or indirectly,
hold or own any type of ownership or other form of equity interest in, or serve
as a consultant to or otherwise perform services for any person or entity
engaged in the business of providing management and administrative services to
dental practices.
b. Restrictive Covenants by Providers. Group shall use its
----------------------------------
reasonable best efforts to obtain and enforce formal agreements with its owners,
Employee Providers and Subcontract Providers who are dentists not to establish,
operate or provide dental care services, during the term of this Agreement and
for a period of at least two (2) years after any termination of employment with
Group, at any dental office, clinic or facility located within a minimum of ten
(10) miles of any Practice Site at which the owner, Employee Provider or
Subcontract Provider has practiced. Any variation of such restrictive covenants
shall be approved in advance in writing by Manager.
10.3 Covenant Not to Solicit. For three (3) years following the
-----------------------
termination of this Agreement, Group shall not:
21.
<PAGE>
a. directly or indirectly solicit, recruit or hire, or induce
any party to solicit, recruit or hire any person who is an employee of, or who
has entered into an independent contractor arrangement with, Manager or any
Affiliate of Manager ;
b. directly or indirectly, whether for itself or for any other
entity or person, call upon, solicit, divert or take away, or attempt to
solicit, call upon, divert or take away any of Manager's customers, business, or
clients; or
c. directly or indirectly solicit, or induce any party to
solicit, any of Manager's contractors or the contractors of any Affiliate of
Manager, to enter into the same or a similar type of contract with any other
party.
10.4 Enforcement. Manager and Group acknowledge and agree that since
-----------
a remedy at law for any breach or attempted breach of the provisions of this
Article X shall be inadequate, either party shall be entitled to specific
- ---------
performance and injunctive or other equitable relief in case of any such breach
or attempted breach, in addition to whatever other remedies may exist by law.
All parties hereto also waive any requirement for the securing or posting of any
bond in connection with the obtaining of any such injunctive or other equitable
relief.
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
11.1 Future Incorporation; Nonrecourse Obligations. Future
--------------------------------------------- ------
Incorporation; Nonrecourse Obligations. The parties acknowledge that Mark
- --------------------------------------
Armstrong, D.D.S. intends to form a California professional corporation (the
"New PC") to conduct the Practice, and that the Practice and this Agreement will
be conveyed, transferred and assigned to the New PC at such time. For so long
as Group conducts the Practice in the form of a sole proprietorship, the parties
acknowledge and agree that there shall be no recourse whatsoever by Manager or
the Company against Mark Armstrong, D.D.S. for the failure of Group to perform
its obligations under this Agreement, except for those obligations contemplated
in Section 5.11 hereto. As soon as possible after the transfer of the Practice
to the New PC, Mark Armstrong covenants to execute and deliver to Manager a
Purchase and Sale of Interests Agreement relating to his interest in the New PC,
substantially in the form of the Purchase and Sale of Interests Agreements
executed between Fremont Dental Group partners and Manager on or about the date
of this Agreement.
11.2 Assignment. Neither party shall assign this Agreement to any
----------
other party or parties without the prior written consent of the other party,
which consent may be withheld arbitrarily or capriciously, for any reason or for
no reason whatsoever and any attempted assignment in violation of this Agreement
shall be null and void. Notwithstanding the preceding, Manager may assign this
Agreement to any direct or indirect wholly-owned subsidiary of either Manager or
Parent or to a financial institution as collateral security for the indebtedness
of Manager, Parent or any of their respective Affiliates.
22.
<PAGE>
11.3 Headings. The article and section headings used in this
--------
Agreement are for purposes of convenience only. They shall not be construed to
limit or to extend the meaning of any part of this Agreement.
11.4 Waiver. Waiver by either Group or Manager of any breach of any
------
provision of this Agreement shall not be deemed to be a waiver of such provision
or of any subsequent breach of the same or of any other provision of this
Agreement.
11.5 Notices. Any notice, demand, approval, consent or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be shall be deemed to have been given when five (5) business
days have elapsed from the date of deposit in the United States mails, certified
and postage prepaid, addressed to the party to be served at the following
address or such other address as may be given in writing to the parties.
Group: Mark D. Armstrong, D.D.S.,
d/b/a Concord Dental Care,
a sole proprietorship
1776 Arnold Industrial Way, Suite A
Concord, CA 94520
Attn: Mark Armstrong, D.D.S.
Manager: GMS Dental Group, Inc.
22800 Savi Ranch Parkway
Suite 206
Yorba Linda, California 92887
Attn: Michael T. Fiore, President
and Chief Executive Officer
11.6 Attorneys' Fees. If any legal action or arbitration or other
---------------
proceeding is commenced, whether by Manager or Group concerning this Agreement,
the prevailing party shall recover form the losing party reasonable attorneys'
fees and costs and expenses, including those of appeal and not limited to
taxable costs, incurred by the prevailing party, in addition to all other
remedies to which the prevailing party may be entitled. If a claim or claims
asserted by a third party against Manager or Group or any of them arise from an
action or omission by the other, the party responsible for the action or
omission shall be the losing party, and the other party shall be the prevailing
party, for purposes of the foregoing sentence.
11.7 Successors. Without limiting or otherwise affecting any
----------
restrictions on assignments of this Agreement or rights or duties under this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
successor and assigns of Group and Manager.
23.
<PAGE>
11.8 Entire Agreement. This Agreement sets forth the entire
----------------
agreement between Group and Manager and supersedes all prior negotiation and
agreements, written or oral, concerning or relating to the subject matter of
this Agreement, and this Agreement may not be modified except by a writing
executed by all parties and subject to the provisions thereof.
11.9 Governing Law. This Agreement and the rights and obligations of
-------------
the parties hereto shall be governed by, and construed according to, the laws of
the State of California.
11.10 Severability, Contract Modifications for Prospective Legal
----------------------------------------------------------
Events. Nothing contained in this Agreement shall be construed to require the
- ------
commission of an act contrary to law, and whenever there is any conflict between
any provision of this Agreement and any statute, law, ordinance or regulation,
the latter shall prevail. In such event, and in any case in which any provision
of this Agreement is determined to be in violation of a statute, law, ordinance
or regulation, the affected provision(s) shall be limited only to the extent
necessary to bring it within the requirements of the law and, insofar as
possible under the circumstances, to carry out the purposes of this Agreement.
The other provisions of this Agreement shall remain in full force and effect,
and the invalidity or unenforceability of any provision hereof shall not affect
the validity and enforceability of the other provisions of this Agreement, nor
the availability of all remedies in law or equity to the parties with respect to
such other provisions.
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision, a regulatory agency or legal counsel of both
parties in such a manner as to indicate that the structure of this Agreement may
be in violation of such laws or regulations, Group and Manager shall amend this
Agreement, to the maximum extent possible, to preserve the underlying economic
and financial arrangements between Group and Manager. The parties agree that
such amendment may require reorganization of Group or Manager, or both, and may
require either or both parties to obtain appropriate regulatory licenses and
approvals. If an amendment is not possible, either party shall have the right
to terminate this Agreement upon thirty (30) days notice to the other party.
11.11 Time Is of the Essence. Time is of the essence in this
----------------------
Agreement.
11.12 Authority. Any Person signing this Agreement on behalf of any
---------
entity hereby represents and warrants in its individual capacity that it has
full authority to do so on behalf of such entity.
11.13 Counterparts. This Agreement may be executed in two (2) or
------------
more counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same instrument.
[Signature Page to Follow]
24.
<PAGE>
IN WITNESS WHEREOF, Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
"Group"
Mark Armstrong, D.D.S.
dba Concord Dental Care
By: /s/ Mark Armstrong
---------------------------
Mark Armstrong, D.D.S.
"Manager"
GMS Dental Group Management, Inc.
a Delaware corporation
By:
---------------------------
Michael T. Fiore
President and Chief Executive
Officer
25.
<PAGE>
IN WITNESS WHEREOF, Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
"Group"
Mark Armstrong, D.D.S.
dba Concord Dental Care
By:
---------------------------
Mark Armstrong, D.D.S.
"Manager"
GMS Dental Group Management, Inc.
a Delaware corporation
By: /s/ Michael T. Fiore
---------------------------
Michael T. Fiore
President and Chief Executive
Officer
25.
<PAGE>
ADDENDUM 1.
----------
For purposes of this Agreement, the following terms shall have the
meaning indicated below or defined at the indicated section:
(1) Accounts. See Section 2.5.
--------
(2) Affiliate. "Affiliate" shall mean, with respect to any Person,
---------
(i) any individual or entity directly or indirectly owned or controlled by such
Person, (ii) any individual or entity directly or indirectly owning or
controlling such Person or (iii) any individual or entity directly or indirectly
owned or controlled by the same family member, individual or entity as owns or
controls such Person. For purposes of this Agreement, neither Group nor Manager
shall be deemed an Affiliate of the Other.
(3) Agreement. "Agreement" means this Group Management Agreement.
---------
(4) Annual Budget. See Section 3.6.
-------------
(5) Asset Purchase Agreement. That certain Asset Purchase
------------------------
Agreement, dated as of the Effective Date by and among the Company, Manager and
Group.
(6) Beneficiaries. See Recital A.
-------------
(7) Books and Records. "Books and Records" means Group's books of
-----------------
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
(8) Capital Costs. "Capital Costs" shall mean any and all
-------------
investments that are or would be capitalized pursuant to GAAP.
(9) Committee Members. See Section 3.5a.
-----------------
(10) Default Notice. See Section 6.2b(1).
--------------
(11) Effective Date. See preamble paragraph.
--------------
(12) Employee Providers. See Recital B.
------------------
(13) Employment Agreements. See Recital B.
---------------------
1.
<PAGE>
(14) GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with 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 Manager's financial statement.
(15) Group. See first paragraph of this Agreement.
-----
(16) Group Expenses. "Group Expenses" means salaries and wages,
--------------
compensation, payroll taxes, and employee benefits of Mark Armstrong, Employee
Providers and Subcontract Providers, all as set forth in, and subject to and
limited by, the Annual Budget.
(17) Group Member. See Section 3.5a.
------------
(18) Group Patients. See Recital A.
--------------
(19) Joint Operations Committee. See Section 3.4b.
--------------------------
(20) Management Fee. See Section 7.1.
--------------
(21) Manager. See first paragraph of this Agreement.
-------
(22) Manager Members. See Section 3.5a.
---------------
(23) Marks. See Section 2.3a.
-----
(24) Offer. See Section 5.1.
-----
(25) Parent. "Parent" shall mean GMS Dental Group, Inc. or any
------
successor thereto.
(26) Payment Date. See Section 7.2.
------------
(27) Payor Contracts. See Recital A.
---------------
(28) Percentage Fee Portion. See Exhibit 7.1.
---------------------- -----------
(29) Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
(30) Plans. See Recital A.
-----
(31) Practice. See Recital C.
--------
2.
<PAGE>
(32) Practice Expenses. "Practice Expenses" means all costs incurred
-----------------
by Manager including amortization associated with costs of acquiring assets of
the Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which are
attributable to Manager's business operations in accordance with Manager's
corporate allocation policies, all as consistent with and/or contemplated in the
Annual Budget.
(33) Practice Sites. See Section 3.4a.
--------------
(34) Practice Site Facilities. See Section 3.4a.
------------------------
(35) Preliminary Budget. See Section 3.7b.
------------------
(36) Programs. See Section 2.3b.
--------
(37) Proprietary Information. See Section 10.1.
-----------------------
(38) Protected Parties. See Section 10.1.
-----------------
(39) Providers. See Recital B. The term "Providers" shall include
---------
individuals or organizations licensed to practice dentistry (including
specialists) as well as other licensed dental professionals who provide
ancillary reimbursable dental services.
(40) Provider Subcontracts. See Recital A.
---------------------
(41) Reimbursable Expense Portion. See Exhibit 7.1.
---------------------------- -----------
(42) Revenues. See Section 2.4.
--------
(43) Security Agreement. See Section 7.4.
------------------
(44) Subcontract Providers. See Recital B.
---------------------
(45) Term. See Section 6.1.
----
3.
<PAGE>
EXHIBIT 10.45
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
THIS DENTAL GROUP MANAGEMENT AGREEMENT (this "Agreement") is dated as
---------
of October 31, 1997 ("Effective Date") by and between GMS Dental Group
--------------
Management, Inc., a Delaware corporation ("Manager") and wholly-owned subsidiary
-------
of GMS Dental Group, Inc., a Delaware corporation (the "Company"), and Charles
-------
Murillo, D.D.S., d/b/a Community Dental Group, a California sole proprietorship
("Group").
-----
RECITALS
--------
A. Group engages in the practice of dentistry by providing dental
services to patients of Group ("Group Patients") and to enrollees
--------------
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
- --------------- ----- ---------------
between Group and Plans or between Beneficiaries and Plans.
B. Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
---------
arrangements may include contracts ("Employment Agreements") with dentist
---------------------
employees (collectively "Employee Providers") and agreements ("Provider
------------------ --------
Subcontracts") with independent contractor dentists and non-dentist providers of
- ------------
various dental care services (collectively "Subcontract Providers").
---------------------
C. All activities of Group subject to this Agreement are referenced
as the "Practice." All references to "dental" care and services include general
--------
and specialist dental services. All references to "dentists" include
generalists and specialists.
D. Manager is a management services company that has been organized
to provide all nonprofessional dental support services for the Practice and for
other dental groups. Manager is in the business of providing or arranging for
management services, facilities, equipment and all nonprofessional dental
personnel necessary for the operation of the Practice.
E. Group desires to retain Manager on an independent contractor
basis to provide management services that are more particularly described below,
and Manager desires to provide such management services under the terms and
conditions set forth in this Agreement.
1
<PAGE>
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the covenants and conditions
contained herein, Manager and Group agrees as follows:
ARTICLE I
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
----------
ARTICLE II
SCOPE OF AGREEMENT
------------------
2.1 General Scope of Agreement. This Agreement shall apply to the
--------------------------
Practice being conducted by Group, including, without limitation, all
professional, administrative and technical services, marketing, contracting,
case management, ancillary dental services, outpatient services and dental care
facilities, equipment, supplies and items, except as otherwise specifically
provided in this Agreement. Group's Employment Agreements and Provider
Contracts shall encompass substantially all such activities of Employee
Providers and shall provide that all revenues derived from such activities (and
not excluded below) shall be included in Revenues as such term is defined in
Section 2.4 hereof. Nothing in this Agreement shall be construed to alter or in
- -----------
any way affect the legal, ethical and professional relationship between and
among Provider and Provider's patients and Group and Group patients, nor shall
anything contained in this Agreement abrogate any right or obligation arising
out of or applicable to the dentist-patient relationship.
2.2 License. Except as prohibited by contract or by applicable laws
-------
and requirements governing the practice of dentistry, Group grants Manager an
exclusive license to use any and all of Group's assets, whether tangible or
intangible, in carrying out Manager's duties and responsibilities under the
provisions of this Agreement.
2.3 Intellectual Property. Group hereby grants to manager a non-
---------------------
exclusive, perpetual, royalty-free, worldwide license to use and sublicense the
use of any intellectual property owned by Group. This license shall cover, but
not be limited to, use of the following:
a. Service Mark. Group hereby grants Manager the right to use
------------
all service marks and trademarks of Group (the "Marks") for marketing and
-----
promotional materials in connection with Group's offering of dental services.
Manager agrees to use the Marks solely in the design format used by Group as of
the date of this Agreement or another design format approved in advance in
writing by Group. Group shall have the opportunity to review any marketing or
other materials using the Marks in advance of any public distribution. Manager
agrees that it will include these restrictions on use in any sublicense of the
Marks.
b. Copyrighted Materials. Group hereby grants Manager the right
---------------------
to use any and all copyrighted materials authored or owned by Group including,
specifically, the Group dental management system software programs (the
"Programs"). This license includes the right to sublicense the Programs and the
--------
right to prepare and own derivative works based on the Programs, all without a
duty of accounting to Group. Group shall execute all documents required to
enable Manager to own, use and exploit all such rights.
2
<PAGE>
2.4 Revenues. "Revenues" shall mean all of Group's accounts
-------- --------
receivable (net of contractual adjustments and bad debt), and cash collections.
Revenues shall include all funds collected by, or legally due to, Group or any
downstream Affiliate of Group, including, without limitation, the following: (a)
all fee-for-service payments for services to Group Patients or Beneficiaries;
(b) all payments established under Payor Contracts; (c) all coordination of
benefits or deductibles and third-party liability recoveries related to the
Group's services; (d) all payments, dues, fees or other compensation to Group;
(e) any income, profits, dividends, distributions or other payments from Group's
investments; and (f) any interest or other non-operating income of Group;
provided, however, that Revenues shall not include the Purchase Price (as
defined in the Asset Purchase Agreement) or any other amounts payable to Group
or its owners pursuant to the Asset Purchase Agreement.
2.5 Deposit Accounts. All cash received by Group from whatever
----------------
source shall be deposited into an account or accounts ("Accounts") in the name
--------
of Group at a banking institution selected by Group and approved by Manager.
Group authorizes Manager to bill and collect, in Group's name, all charges and
reimbursements for Group's dental related activities and to deposit such
collections in the Accounts. Group agrees to assist and cooperate with Manager
in the billing and collection process and to immediately deliver to Manager for
deposit any monies Group may receive. Subject to and consistent with the terms
and provisions of this Agreement, including Section 7.5 hereof, Manager shall
-----------
manage the cash equivalents of the Group and shall be entitled (and is hereby
authorized) to transfer such cash to the account of Manager and to use such cash
for purposes as Administrator deems appropriate, subject to and consistent with
the terms and provisions of this Agreement. Nothing in this Section 2.5 shall
-----------
be construed to limit or otherwise modify the requirement that Manager disburse
funds in accordance with the priorities established herein and in fulfillment of
the obligations of the Group and Manager under this Agreement.
ARTICLE III
OPERATION OF PRACTICES
----------------------
3.1 Appointment. Subject to applicable laws and requirements
-----------
governing the practice of dentistry and the provisions of this Agreement, Group
hereby appoints Manager as its sole and exclusive Manager for the operation of
the Practice and covenants not to enter into an agreement with any Person other
than Manager to perform or assume any of Manager's rights, duties or
responsibilities as provided herein. Manager hereby accepts full responsibility
for such management as more fully set forth herein.
3.2 Professional Matters. Pursuant to applicable laws and
--------------------
requirements governing the practice of dentistry, Group shall retain ultimate
responsibility for all activities of Group that are of a professional nature and
that are within the scope of a dentist's licensure and cannot be performed by
Manager due to Manager's non-licensed status.
3.3 Relationship of Parties. In the performance of its duties and
-----------------------
obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Group or as a joint venturer or partner. Except as
provided in this Agreement or as required by law, Group shall neither have nor
exercise any control or direction over the methods by which Manager shall
perform its obligations hereunder; nor shall Manager have or exercise any
control or direction over the methods by which Group shall practice dentistry.
It is expressly agreed by the parties that no work, act, commission or omission
of Manager pursuant to the terms and conditions of this Agreement shall be
construed to make or render Manager or Manager's employees or agents, the
employees of Group. Manager and Group are not partners or joint venturers with
each other and nothing herein shall be construed so as to make them partners or
joint venturers or impose
3
<PAGE>
upon either of them any liability as partners or joint venturers. Group's
responsibility is to assure that the services covered by this Agreement shall be
performed and rendered in a competent, efficient and satisfactory manner.
3.4 Authority and Control. Strategic planning, overall direction and
---------------------
control of the business and affairs of Group, and authority over the day-to-day
activities of Group shall be accomplished as follows:
a. Exclusive Authority. Notwithstanding anything else to the
-------------------
contrary contained herein, Group shall have the sole responsibility and
authority for all aspects of the practice of dentistry and delivery of dental
services by Providers. Providers shall use and occupy at the practice sites set
forth on Exhibit 3.4 hereto ("Practice Sites") the facilities provided by
----------- --------------
Manager hereunder exclusively for the practice of dentistry ("Practice Site
-------------
Facilities"). Group expressly acknowledges that the Practice or Practices
- ----------
conducted at these Practice Site Facilities shall be conducted solely by
dentists and dental hygienists associated with Group as Employee Providers or
Subcontract Providers. Group shall consult with Manager or the Joint Operations
Committee on all matters to the extent reasonable and not inconsistent with the
laws governing the practice of dentistry.
b. Joint Authority. All other decision-making authority related
---------------
to the business and affairs of Group shall be vested in a joint operations
committee (the "Joint Operations Committee"). Nothing herein shall be construed
as preventing the Joint Operations Committee from appointing representatives and
delegating authority to such representatives so long as the Joint Operations
Committee may revoke such appointment and delegation at any time and so long as
the Joint Operations Committee retains ultimate responsibility for the decisions
of such representatives.
3.5 Joint Operations Committee. Subject to applicable laws and
--------------------------
requirements governing the practice of dentistry, the Joint Operations Committee
shall have authority and responsibility to provide strategic planning, overall
direction and authority over the day-to-day management and administrative
activities of the Group and shall manage the business operations of the Group as
follows:
a. Joint Operations Committee Membership. The Joint Operations
-------------------------------------
Committee shall consist initially of five (5) individuals (the "Committee
---------
Members"). Manager shall designate three (3) Committee Members (the "Manager
- ------- -------
Members"), Group shall designate one (1) Committee Member (the "Group Member")
- ------- ------------
and the remaining one (1) Committee Member shall be the practice administrator
provided however, if at any time there is not a practice administrator, Group
shall designate the final one (1) Committee Member (together with the Group
Member, the "Group Members"). The number of Committee Members may be increased
-------------
or decreased by agreement of the parties. Each party shall continue to direct
the appointment of the same percentage of Committee Members as described above.
Each Committee Member shall serve at the pleasure of the party designating such
Committee Member and may be replaced, with or without cause, at any time by such
party upon the delivery of written notice thereof to the other Committee
Members. Manager, Group and the Committee Members shall diligently pursue any
preliminary activities that are necessary to allow the Joint Operations
Committee to take an action. Where Committee Members are required to consult
with the organization appointing such Committee Members, the Committee shall
establish and agree on a deadline for accomplishing such consultation.
4
<PAGE>
b. Joint Operations Committee Action.
---------------------------------
(i) Joint Action. Except as otherwise expressly set forth
------------
above, the Joint Operations Committee shall take all other actions that have
been approved by a majority of the Committee Members.
(ii) Consultation Forum. Consultation between Group and
------------------
Manager, if any, shall take place at a meeting of the Joint Operations
Committee, and Group and Manager hereby agree to be bound by the decision of
their Group Member(s) or Manager Members, as the case may be.
c. Joint Operations Committee Meetings. Meetings of the Joint
-----------------------------------
Operations Committee may be held by telephone or similar communications
equipment so long as all Committee Members participating in a meeting can hear
and speak to each other. The Joint Operations Committee shall prepare and
maintain written minutes of all meetings and shall provide a copy of the minutes
to the parties within fifteen (15) business days following each meeting.
(i) Regular Meetings. The Joint Operations Committee
----------------
shall hold not less than four (4) regular meetings each year, at such specific
times and places as the Committee Members may determine.
(ii) Special Meetings. A special meeting of the Joint
----------------
Operations Committee may be called by a majority of the Committee Members.
(iii) Notice Requirement. A Committee Member calling a
------------------
special meeting must provide all other Committee Members with ten (10) days'
advance written or telephonic notice. Notice must be given or sent to the
Committee Member's address or telephone number as shown on the records of the
Joint Operations Committee. Notice may be delivered directly to each Committee
Member or to a person at the Committee Member's principal place of business who
reasonably would be expected to communicate that notice promptly to the
Committee Member.
(iv) Waiver of Notice Requirement.
----------------------------
(a) Written Waiver, Consent or Approval. Notice of
-----------------------------------
a special meeting need not be given to any Committee Member who, either before
or after the meeting, signs a waiver of notice or a written consent of the
holding of the special meeting, or an approval of the minutes of the special
meeting. Such waiver, consent or approval need not specify the purpose of the
special meeting. All such waivers, consents and approvals shall be filed with
the Joint Operations Committee records or made a part of the minutes of the
special meetings.
(b) Failure to Object. Notice of a special meeting
-----------------
need not be given to any Committee Member who attends the special meeting and
does not protest before or at the commencement of the special meeting such lack
of notice.
(v) Quorum. The smallest number of Committee Members that
------
exceed fifty percent (50%) of all Committee Members shall constitute a quorum of
the Joint Operations Committee, provided, however, that such quorum shall
include at least one Group member and one Manager member.
5
<PAGE>
(vi) Proxies. The Joint Operations Committee shall provide
-------
for the use of proxies, telephonic conference calls, written consents or other
appropriate methods by which the full participation of the Group Member(s),
Manager Members and Administrator Member, if any, can be assured.
d. Limitation of Responsibility. Notwithstanding any other
----------------------------
provisions hereof, Committee Members shall be liable to the parties only for
actions constituting bad faith, gross negligence or breach of an express
provision of this Agreement (so long as such breach remains uncured after ten
(10) days of receiving notice of the nature of such breach). In all other
respects, Committee Members shall not be liable for negligence or mistakes of
judgment.
3.6 Budgets. A capital and operating budget ("Annual Budget") shall
------- -------------
be established regarding all financial aspects of the Practice. The Annual
Budget shall include the following elements and other items, as appropriate:
a. A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
b. An operating budget setting forth an estimate of revenues
and expenses (which the parties contemplate will comprise all reasonable and
necessary expenses to be incurred by the Practice in such year) including,
without limitation, a breakdown of all Group Expenses and Practice Expenses for
the next succeeding fiscal year, together with an explanation of anticipated
changes or modifications, if any, in the Practice's utilization, rates, charges
to patients or third party payors, salaries, costs of Provider, non-wage cost
increases, and all other similar factors expected to differ significantly from
those prevailing during the current fiscal year;
c. Other expenses of operation;
d. The amount of a reasonable reserve to satisfy possible
shortfalls from operations. The allocation of such reserve shall be made by the
Joint Operations Committee as and when necessary; and
e. The Management Fee, as defined below, for the next
succeeding fiscal year.
3.7 Budget Process.
--------------
a. Initial Annual Budget. Not later than 45 days after the
---------------------
Effective Date, the Joint Operations Committee will have prepared the initial
Annual Budget for the first fiscal year (which shall initially be the calendar
year) during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains, or, at the option of
the parties, such portion of the then current fiscal year plus the immediately
subsequent fiscal year.
b. Preliminary Budget. Not later than forty-five (45) days
------------------
prior to the end of each fiscal year during the term of this Agreement, the
Manager shall prepare and deliver to the Joint Operations Committee a
preliminary Annual Budget for the next succeeding fiscal year ("Preliminary
-----------
Budget").
- ------
6
<PAGE>
c. Joint Operations Committee Approval. The Joint Operations
-----------------------------------
Committee shall review and suggest modifications to the Preliminary Budget
within ten (10) days of receipt. Manager shall prepare a revised budget based
upon the Joint Operations Committee's recommendations and the Preliminary Budget
as revised shall become the Annual Budget.
d. Adjustments. In the event of a material deviation between
-----------
financial forecasts and financial performance during a fiscal year, Manager or
Group may propose adjustments to the Annual budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
3.8 Personnel.
---------
a. Providers. Except in unusual circumstances approved by the
---------
Joint Operations Committee, and as permitted by law, Manager shall not employ or
contract with any Provider for the provision of dental services. All Providers
who provide dental services to Group Patients or to Beneficiaries shall be
either (1) Employee Providers, (2) Subcontract Providers, or (3) employees of
Subcontract Providers. Group shall have complete control of and responsibility
for the hiring, engagement, compensation, training, scheduling, supervision,
evaluation, and termination of all Employee Providers and Subcontract Providers,
although at the request of Group, Manager shall consult with Group respecting
such matters and shall coordinate the advertising of positions available,
interviewing of candidates, and scheduling of clinical staff meetings and
training sessions.
b. Non-Providers. With the exception of employees of
-------------
Subcontract Providers, Manager shall employ all non-Provider personnel necessary
for the operation of the Practice.
c. Salary and Benefits. Subject to Manager's responsibilities
-------------------
under Article VII, each party to this Agreement shall remain liable for the
-----------
salary and benefits paid to such party's own employees and shall be ultimately
responsible for compliance with state and federal laws pertaining to employment
taxes, workers' compensation, unemployment compensation and other employment-
related statutes pertaining to the party's own employees.
d. Payments to Subcontract Providers. Subject to Manager's
---------------------------------
responsibilities under Article VII, Group shall be liable for any payments due
-----------
Subcontract Providers under Provider Subcontracts.
ARTICLE IV
MANAGEMENT SERVICES
-------------------
4.1 General Description of Services. Except as prohibited by law and
-------------------------------
within the limitations set out elsewhere in this Agreement, Manager shall
provide or arrange for the provision to Group of all support services reasonably
necessary and appropriate for the efficient operation of the Practice. Such
services include all administrative services necessary to Group's performance of
its obligations under Payor Contracts, contracting, marketing, capital formation
and assistance with long term strategic planning. Manager shall exercise its
best efforts to fulfill the administrative functions of a well managed dental
group.
4.2 Practice Site Facilities. When appropriate, Manager shall secure
------------------------
and maintain Practice Site Facilities, including, without limitation, office
space, improvements, furnishings, equipment, supplies, and personal property, of
a nature and in a condition necessary and appropriate for the efficient
7
<PAGE>
and effective operations of the Practice subject to the general approval of the
Joint Operations Committee. Group hereby accepts and approves of the Practice
Site Facilities initially provided by Manager. However, Manager from time to
time shall make such Practice Site Facilities changes, including but not limited
to dental equipment purchases, as reasonably may be requested by Group and
consistent with the Annual Budget.
4.3 Purchased Items and Services. Manager shall serve as the
----------------------------
purchasing agent for Group and shall arrange for personnel benefits, insurance,
and any other items and services required for the proper operation of the
Practice.
4.4 Manager Personnel.
-----------------
a. Management Team. Subject to any approval or consulting
---------------
rights of the Joint Operations Committee, Manager may engage or designate one or
more individuals experienced in dental group management and direction,
including, but not limited to, an administrator, who will be responsible for the
overall administration of the Practice including day-to-day operations and
strategic development activities.
b. Other Manager Personnel. Manager shall select, hire, train,
-----------------------
supervise, monitor and terminate all non-Provider personnel necessary for the
operation and management of the Practice; provided, however, with respect to the
selection, hiring and termination of non-Provider personnel, Manager shall
consult with Group.
4.5 Day-to-Day Management and Supervision. Subject to any approval
-------------------------------------
or consulting rights of the Joint Operations Committee, Manager shall provide
general management including, but not limited to, day-to-day supervision of:
a. manager personnel;
b. equipment and supply acquisition;
c. office space and facility maintenance;
d. patient records organization and retention;
e. third party payor contracting;
f. case management;
g. billing, collections and accounting activities as set forth
below;
h. all operating aspects and policies of the Practice
including, but not limited to, hours of operation, work schedules, standard
duties and job descriptions, for all non-Group personnel; and
i. other related and incidental matters.
4.6 Billing and Collection Payment of Expenses. In addition to the
------------------------------------------
responsibilities of Manager under Article VII, Manager shall be responsible for
-----------
all billing and collection activities required
8
<PAGE>
by Group. Manager shall also be responsible for reviewing and paying accounts
payable of Group. Group hereby appoints the Manager its true and lawful
attorney-in-fact to take the following actions for and on behalf of and in the
name of Group:
a. bill and collect in Group's name or the name of the
individual practicing dentist, all charges and reimbursements for Group. Group
shall give Manager all necessary access to Patient records to accomplish all
billing and collection. In so doing, Manager will use its best efforts but does
not guarantee any specific level of collections, and Manager will comply with
Group's reasonable and lawful policies regarding courtesy discounts;
b. take possession of and endorse in the name of the Group any
and all instruments received as payment of accounts receivable;
c. deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
d. place accounts for collection, settle and compromise claims,
and institute legal action for the recovery of accounts.
4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
a. Financial Reporting. Manager shall prepare, analyze and
-------------------
deliver to each member of the Joint Operations Committee financial reports to
the extent necessary or appropriate for the operation of the Practice, including
the following:
(i) financial statements, including balance sheets and
statements of cash flow and income;
(ii) accounts payable and accounts receivable analysis;
(iii) billing status including any medicaid remittances;
and
(iv) reconciliation of assets, liabilities and major
expenses.
b. Audits. Group, at its sole cost and expense (which cost and
------
expense shall be an Excluded Expense), during reasonable business hours after
reasonable prior written notice to Manager, shall have the right to inspect,
review and/or copy any of the financial Books and Records of or pertaining to
Group maintained by the Manager. Group, at its sole cost and expense, may
obtain an audit (separate from any annual audit or review of Group's financial
statements performed at the direction of the Manager) of Group's financial Books
and Records maintained by the Manager, the cost of which shall be an Excluded
Expense. Upon prior written notice, Manager shall allow Group access during
reasonable business hours to all information and documents reasonably required
for such review or audit. Upon Group's request and at Group's expense, Manager
shall also provide copies of such documents.
4.8 Marketing and Public Relations Services. Manager shall provide
---------------------------------------
such marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Group after
consultation with Group. Manager shall provide Group with marketing
9
<PAGE>
materials and activities. Nothing in this Agreement shall be construed to
affect or limit in any way the professional discretion of Group to select
patients that may be effectively treated in the Practice in accordance with all
professional standards of patient selection.
4.9 Group Agreements. Subject to Group's consent, which consent
----------------
shall not be unreasonably withheld, on behalf of Group, Manager shall review,
evaluate and negotiate Payor Contracts and Provider Subcontracts and any other
contracts or agreements regarding the provision of dental related items or
services by Group or Providers.
4.10 Utilization Review Quality Improvement and Outcomes Monitoring.
--------------------------------------------------------------
Manager shall be responsible for providing administrative support for Group's
utilization review, quality improvement and outcomes monitoring activities,
including, without limitation, data collection, analysis and reporting for Group
Patients and Beneficiaries. Manager shall also support the development and
implementation of relevant policies, procedures, protocols, practice guidelines
and other interventions based on such activities.
4.11 Patient Referrals. The parties agree that the benefits to Group
-----------------
hereunder do not require, are not payment for, and are not in any way contingent
upon the admission, referral or any other arrangements for the provision of any
item or service offered by Manager or any affiliate of Manager to any of Group's
Patients in any facility owned or controlled, managed or operated by Manager or
any affiliate of Manager.
4.12 Applicable Law. Manager and Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE V
GROUP RESPONSIBILITIES
----------------------
5.1 Diagnosis, Treatment Planning, Specific Patient Education and
-------------------------------------------------------------
Consultation. Group shall have sole responsibility for all professional dental
- ------------
services provided to Patients with regard to the diagnosis of the patient's
condition and the development of treatment plan alternatives, including, without
limitation, the following:
a. Diagnosis. Group shall have sole responsibility for all
---------
medical and dental history evaluation, examination, obtaining clinical records,
and diagnostic procedures appropriate for complete diagnosis.
b. Treatment Planning. Group shall have sole responsibility
------------------
for all determination of treatment alternatives that may be professionally
acceptable for the treatment of the patient's condition.
c. Specific Patient Education. Group shall have sole
--------------------------
responsibility for all discussion, recommendation, demonstration, and other
educational modalities intended to address the patient's specific condition, as
differentiated from general patient education intended to address the common
concerns of all patients presenting with similar conditions.
10
<PAGE>
d. Consultation. Group shall have sole responsibility for all
------------
discussion of clinical advantages, disadvantages, complications, and risks of
each alternative treatment plan, and including the likely results of no
treatment.
e. Manager to Assist with Record Procurement. Notwithstanding
-----------------------------------------
the above, Manager shall be responsible for exercising reasonable efforts to
procure, at its own expense, medical and dental history information, previous
clinical records, and X-ray records prior to presentation of the patient for
treatment by Group, in accordance with protocols developed by Group in
consultation with Manager.
5.2 Dental Services. Group shall have sole responsibility for all
---------------
professional dental services provided to Patients with regard to the treatment
of the patient's condition, including, without limitation, the following:
a. Preventive Care. Group shall have sole responsibility for
---------------
all preventive care intended to delay, or intercept the development of
pathologic conditions.
b. Therapeutic Care. Group shall have sole responsibility for
----------------
all therapeutic care intended to ameliorate, or improve existing pathologic
conditions.
c. Referral to Specialists. Group shall have sole
-----------------------
responsibility for all referral to appropriate dental specialists and other
allied health care professionals in accordance with professional dental
standards of care.
d. Continuing Care. Group shall have sole responsibility for
---------------
all development and execution of continuing care protocols intended to maintain
the patient's condition over the course of time.
e. Manager to Assist with Patient Compliance Tracking.
--------------------------------------------------
Notwithstanding the above, Manager shall be responsible for exercising
reasonable efforts to facilitate, coordinate, and document the scheduling,
tracking, and confirmation of Group's recommendations for dental diagnostic and
therapeutic services, treatments, referrals, and continuing care in accordance
with protocols developed by Group in consultation with Manager.
5.3 Provision of Dental Services by Group. Group shall operate the
-------------------------------------
Practice during the Term as a dental practice in accordance with the terms of
this Agreement and the Annual Budget. However, nothing in this Agreement shall
be construed to affect or limit in any way the professional discretion or duty
of Group insofar as such constitutes the practice of dentistry.
5.4 Providers.
---------
a. Professional Dental Services. Group shall employ or
----------------------------
contract with the number of Providers which Group deems necessary for the
efficient and effective operation of the Practice and in accordance with the
Annual Budget and quality assurance, credentialing and utilization management
protocols approved by the Joint Operations Committee. Group shall provide full
and prompt dental coverage for the Practice, including emergency service twenty-
four hours per day, seven days per week, including holidays, according to
policies and schedules approved by the Joint Operations Committee.
b. Provider Subcontracts and Employment Agreements. Group
-----------------------------------------------
shall not negotiate or execute any Provider Subcontract, Employment Agreement,
or any amendment thereto, or
11
<PAGE>
terminate any Provider Subcontract or Employment Agreement without the approval
of the Joint Operations Committee. Subject to Manager's responsibilities under
Article VII, Group shall be responsible for the payment, in accordance with the
- -----------
Annual Budget, of all Employee and Subcontract Providers.
5.5 Peer Review. Group, after consultation with the Joint Operations
-----------
Committee, shall implement, regularly review, modify as necessary or appropriate
and obtain the commitment of Providers to actively participate in peer review
procedures for Providers. Group shall assist Manager in the production of
periodic reports describing the results of such procedures. Group shall provide
Manager with prompt notice of any information that raises a reasonable risk to
the health and safety of Group Patients or Beneficiaries. In any event, after
consultation with the Joint Operations Committee, Group shall take such action
as may be reasonably warranted under the facts and circumstances.
5.6 Fees, Charges and Payor Agreements. Group shall, after
----------------------------------
consultation with Manager, determine the fees, charges, premiums, or other
amounts due in connection with delivery of dental services to Patients. Such
fees, charges, premiums, or other amounts (regardless of whether determined on a
fee-for-service, capitated, prepaid, or other basis) shall be reasonable and
consistent with the fees, charges, premiums, and other amounts due to dental
care providers for similar services within the community under similar types of
reimbursement programs involved if such programs are then currently offered
within the community.
5.7 Hours of Clinical Operation. After consultation with the Joint
---------------------------
Operations Committee, Group shall establish hours of operation that are
consistent with good dental practice, and are appropriate to the need to timely
deliver professional dental care services to Group Patients.
5.8 Billing Information and Assignments. Group shall promptly
-----------------------------------
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Group's
services. Group shall use reasonable efforts to procure consents to assignments
and other approvals and documents necessary to enable Manager to obtain payment
or reimbursement from third party payors and patients. With the assistance of
Manager, Group shall obtain all provider numbers necessary to obtain payment or
reimbursement for its services.
5.9 Third Party Contracts. Group shall be in compliance with all
---------------------
contracts, agreements and arrangements, including any contracts that exist on
the Effective Date, between Group and third parties.
5.10 Use of Manager's Goods and Services. Group shall not use any
-----------------------------------
goods or services provided by Manager pursuant to this Agreement for any purpose
other than the provision of and management of dental services as contemplated by
this Agreement and purposes incidental thereto.
5.11 Negative Covenants. During the Term, Group shall not, without
------------------
the prior approval of the Joint Operations Committee, (a) pledge, mortgage or
otherwise encumber any of its property, (b) merge or consolidate with any other
entity, (c) allow the transfer of any assets (other than in accordance with the
terms and provisions hereof), or (d) take or allow any act that would materially
impair the ability of Group to carry on the business of the Practice or to
fulfill its obligations under this Agreement. Notwithstanding the preceding,
prior to consummating with any third party any transfer, assignment or
conveyance, or any merger or consolidation, in any case as contemplated in
subparagraphs (a), (b) or (c) above, Group shall first offer (the "Offer") to
-----
Manager or its designee the right to acquire the assets of Group or to effect a
merger or consolidation with Group upon the same business and economic terms as
proposed to Group by such third party. Manager or its designee shall
12
<PAGE>
have 60 days to elect to accept or reject such Offer, which election shall be
binding on the parties. In addition to the foregoing, at any time upon ten (10)
days' written notice from Manager to Group, Manager (or its designee) shall have
the right to purchase all of the assets of the Group relating to the Practice
for a purchase price of One Thousand Dollars ($1,000.00).
5.12 Group Maintains Full Professional Authority. Notwithstanding
-------------------------------------------
Manager's general and specific rights and responsibilities set forth in this
Agreement, Group shall have full authority and control with respect to all
dental, professional and ethical determinations over Group's Practice to the
extent required by federal, state and local laws, rules and regulation. Manager
shall not engage in activities which constitute the practice of dentistry under
applicable law. Manager shall neither exercise control over nor interfere with
the dentist-patient relationship, which shall be maintained strictly between
Group's Providers and their Patients.
ARTICLE VI
TERM
----
6.1 Term. This Agreement shall be effective the Effective Date, and
----
shall remain in effect for an initial term of forty (40) years from the
Effective Date, expiring on the fortieth (40th) anniversary of the Effective
Date, unless earlier terminated pursuant to the terms of this Agreement. The
word "Term" shall include such initial term and, where applicable, any extension
----
of such initial term (whether extended pursuant to Section 6.2a or otherwise),
subject to earlier termination pursuant to the provisions of this Agreement.
6.2 Termination and Extension.
-------------------------
a. Automatic Extension. At the end of the initial term and any
-------------------
subsequent term, this Agreement shall automatically renew for a five (5) year
term unless one of the parties provides the other party with written notice of
intent not to renew, not less than one hundred eighty (180) days prior to the
expiration of the then current term.
b. Early Termination. This Agreement may be terminated
-----------------
according to the provisions of this Section.
(i) Material Breach. In the event either party materially
---------------
breaches this Agreement and such breach is not cured to the reasonable
satisfaction of the non-breaching party within sixty (60) days after the non-
breaching party serves written notice of the default upon the defaulting party
(the "Default Notice"), the Agreement shall automatically terminate at the
--------------
election of the non-breaching party upon the giving of a written notice of
termination to the defaulting party not later than fifteen (15) days after
termination of the 60-day cure period; provided that if such uncured breach is
only capable of being cured within a reasonable period of time in excess of
sixty (60) days, the non-breaching party shall not be entitled to terminate this
Agreement so long as the defaulting party has commenced such cure and thereafter
diligently pursues such cure to completion.
(ii) Refusal to Comply. In the event that Group or Manager
-----------------
refuses or fails to comply with a decision of the Joint Operations Committee,
the aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if such dispute between Group and Manager continues for thirty
(30) days after the date the aggrieved party exercises its option regarding
mediation, the non-complying party shall have thirty (30) days in which to
comply with the decision of the Joint Operations Committee. If
13
<PAGE>
the non-complying party has not complied by the end of such thirty (30) day
period, the aggrieved party shall have the option to terminate this Agreement
upon fifteen (15) days' prior written notice. During such mediation, Manager
and Group shall continue to operate and manage the practice in good faith.
(iii) Bankruptcy. A party may, upon three (3) days' prior
----------
written notice, terminate this Agreement if the other party:
(a) Applies for or consents to the appointment of
a receiver, trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary petition,
makes a general assignment for the benefit of its creditors, files a petition or
answer seeking reorganization or arrangement with its creditors, or admits in
writing its inability to pay its debts when due, or
(b) Suffers any order, judgment or decree to be
entered by any court of competent jurisdiction, adjudicating such party bankrupt
or approving a petition seeking its reorganization or the appointment of a
receiver, trustee or liquidator of such party or of all or a substantial part of
its assets, and such order, judgment or decree continues unstayed and in effect
for ninety (90) days after its entry.
(iv) Nonperformance. Manager may terminate this Agreement
--------------
in the event that in any two consecutive fiscal quarters the Manager has not
been paid all of the Reimbursable Expense Portion and at lease one-half (1/2) of
the Percentage Fee Portion (i.e. 10%) of the Management Fee and, in the sole
discretion of the Manager, it is not reasonably likely that such amounts of the
Management Fee will be paid in the next fiscal quarter. Any such termination
shall be effective as of the last day of such third fiscal quarter provided at
least 60 days notice shall have been given; otherwise, such termination shall be
effective on the sixtieth day after notice is given.
(v) Change in Law. In the event of any material change in
-------------
federal or state law that has a significant adverse impact on either party
hereto in connection with their performance under this Agreement, or if
performance by a party of any duties under this Agreement be deemed illegal by
any administrative agency or in a formal opinion rendered to manager by legal
counsel knowledgeable in health law matter retained by the Manager, the affected
party shall have the right to require that the other party renegotiate the terms
of this Agreement. Unless the parties otherwise mutually agree in writing, such
renegotiated terms shall be effective not later than twenty (20) days after
receipt of written notice of such request for renegotiation. Solely in the event
of illegality, if the parties fail to reach an agreement within thirty (30) days
of the request for renegotiation, either party may (subject to the severability
provision of this Agreement) terminate this Agreement upon thirty (30) days'
prior written notice to the other party.
c. Effect of Termination. Upon termination of this Agreement:
---------------------
(i) Group shall surrender to Manager all of Manager's
property used primarily in the operation of the Practice in the same condition
as received, reasonable wear and tear excepted;
(ii) Manager shall deliver to Group all records related to
the business of and provision of dental care through the Practice including,
without limitation, patient records and any corporate, personnel and financial
records maintained for the Practice and Providers, provided, that except as
limited by law, including, but not limited to laws governing the confidentiality
of patient records,
14
<PAGE>
Manager shall have the option to copy (or otherwise duplicate) at its sole cost
and expense such records of Group and to retain and utilize such records for its
own use;
(iii) Manager shall deliver to Group any other property of
Group in Manager's possession;
(iv) Both parties shall cooperate to ensure the provision
of appropriate dental care to Group Patients and Beneficiaries;
(v) Group shall promptly deliver to Manager any
Management Fees due and payable to Manager (such fees prorated for the month of
termination) and any amounts owed to Manager for advances made pursuant to
Section 7.3; and
(vi) Both parties shall cooperate to ensure the
appropriate billing and collections for dental services rendered by Group prior
to the effective date of termination, and any such cash collected shall be
retained by Group and/or paid to Manager pursuant to Article VII.
ARTICLE VII
FINANCIAL AND SECURITY ARRANGEMENTS
-----------------------------------
7.1 Management Fee. Group and Manager agree that the compensation
--------------
set forth in this Article VII is being paid to Manager in consideration of the
-----------
services provided and the substantial commitment and effort made by Manager
hereunder and that such fees have been negotiated at arms' length and are fair,
reasonable and consistent with fair market value. Manager shall be paid the
management fee (the "Management Fee") as set forth on Exhibit 7.1 hereto.
-------------- -----------
Payment of the Management Fee is not intended to and shall not be interpreted or
implied as permitting Manager to share in Group's fees for medical services but
is acknowledged as the negotiated fair market value compensation to Manager
considering the scope of services and the business risks assumed by Manager.
7.2 Payments. Except as otherwise set forth on Exhibit 7.1 hereto,
-------- -----------
the amounts to be paid to Manager under this Article VII shall be calculated by
-----------
Manager on the accrual basis of accounting and shall be payable monthly.
Payments due for any Management Fee shall be made by Group each calendar month
as provided herein and shall be paid on the 15th day following the end of such
month (or the first preceding day that is a business day if the 15th day is not
a business day) (a "Payment Date"). Such amounts paid shall be estimates based
------------
upon available information for such month, and adjustments to the estimated
payments shall be made to reconcile final amounts due under Section 7.1 on the
-----------
next Payment Date.
7.3 Advances.
--------
a. Group shall be entitled to an advance from Manager of such
additional sums, over and above Group's right to the amounts otherwise set forth
in this Article VII, as shall be required by Group to pay Practice Expenses
-----------
consistent with the Annual Budget of the Practice (prepared as provided in
Section 3.6 hereof), the Management Fee as provided in Exhibit 7.1 hereto and
-----------
Group Expenses at the discretion of Manager. Any amounts advanced to Group
pursuant to this Section 7.3 shall be repaid by Group in such priority as set
-----------
forth in Section 7.5 below and shall bear interest at a rate equal to one
-----------
percent (1%) above the prime rate reported by the Wall Street Journal as
adjusted on a quarterly
15
<PAGE>
basis, compounded monthly until all such amounts of principal and interest are
repaid to Manager as provided herein.
7.4 Security Agreement. In order to enforce its rights granted
------------------
hereunder and subject to applicable law, Group shall execute a Security
Agreement in substantially the form attached hereto as Exhibit 7.4 (the
-----------
"Security Agreement"), which Security Agreement grants a security interest in
- -------------------
all of Group's accounts receivable (as more fully described in the Security
Agreement) to Manager. In addition, Group shall cooperate with Manager and
execute all necessary documents in connection with the pledge of such accounts
receivable to Manager or at Manager's option, its lenders.
7.5 Priority of Payments. Manager shall administer and make
--------------------
disbursements from amounts deposited into the Accounts or transferred from the
Accounts to pay (including, without limitation the making of advances as
provided in Section 7.3) the Practice Expenses and Group Expenses as the same
become due and payable, and for which Group shall remain responsible. In
performing its obligations pursuant to Article IV, Manager shall apply funds of
Group in the following order of priority:
a. payment of all Group Expenses;
b. payment of all Practice Expenses and the Reimbursable
Expense Portion of the Management Fee;
c. payment of the Percentage Portion of the Management Fee;
d. payment of amounts advanced to Group, and applicable
interest thereon (as contemplated in Section 7.3); and
-----------
e. payment of Excluded Expenses.
If there are not sufficient funds to pay all amounts provided for
above, all unpaid amounts shall accumulate and carry over until paid or until
the termination of this Agreement, in which case such unpaid amounts shall be
immediately due and payable as of the date of termination. Any amounts which
remain due following the payment of the expenses and fees set forth in
subparagraphs (a) through (e) above shall be retained in the Accounts.
7.6 Accounts Receivable. At the option of Manager, on the first
-------------------
business day of each month, Manager may purchase all or any portion of the
accounts receivable of Group relating to Revenues arising during the previous
month, by payment of cash or other readily available funds into an account for
Group or by offset of amounts owed by Group to Manager. The consideration for
the purchase shall be an amount equal to all fees recorded each month (net of
adjustments for uncollectible accounts, professional courtesies and other such
activities that do not generate a collectible fee) less Management Fees due to
Manager under this Article VII. Manager's purchase shall be effective upon full
-----------
payment of the purchase price. In the event that such purchase shall be
ineffective for any reason, Group is concurrently herewith entering into the
Security Agreement to grant a security interest in the accounts receivable to
Manager. In addition, Group shall cooperate with Manager and execute all
necessary documents in connection with the pledge of such accounts receivable to
Manager or at Manager's option, its lenders. All collections in respect of such
accounts receivable shall be deposited in a bank account at a bank selected by
mutual agreement of Group and Manager. To the extent Group comes into
possession of any payments in respect of such accounts receivable, Group shall
direct such payments to Manager for deposit.
16
<PAGE>
ARTICLE VIII
INDEMNITY AND INSURANCE
-----------------------
8.1 Indemnity.
---------
a. Indemnification. Each party shall indemnify, defend and
---------------
hold harmless the other party from any and all liability, loss, claim, lawsuit,
injury, cost, damage or expense whatsoever (including reasonable attorneys' fees
and court costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Group agrees
to indemnify, defend and hold harmless Manager for all liability, loss, claim,
lawsuit, injury, cost, damage or expense whatsoever (including reasonably
attorneys' fees and court costs) arising out of the professional negligence of
Group, its employees, agents, contractors or subcontractors, including any
amounts in excess of the professional liability insurance coverage of Group or
its employees, agents, contractors or subcontractors.
b. Mutual Indemnity. Subject to Manager's responsibilities
----------------
under Article VII, each party to this Agreement shall be indemnified by the
-----------
other party for any claim under this Agreement or otherwise against the
indemnified party for vacation pay, sick leave, retirement benefits, Social
Security benefits, workers' compensation benefits, disability or unemployment,
insurance benefits, or other employee benefits of any kind accrued during the
term of this Agreement by an employee of the indemnifying party.
8.2 Manager's Insurance. Manager shall, on its own behalf and at its
-------------------
sole cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
a. Comprehensive general liability insurance covering the risks
of Manager, in an amount determined by the Joint Operations Committee;
b. Workers' Compensation insurance covering the employees of
Manager, in such amounts as is usual and customary under the circumstances;
c. Property insurance covering the facilities, equipment and
supplies owned or leased by Manager or Group for use in the operation of the
Practice.
8.3 Group's Insurance. At Group's sole cost and expense, Manager
-----------------
shall obtain, and maintain on behalf of Group in full force and effect during
the Term, policies in the following categories in the amount indicated:
a. Comprehensive professional liability insurance coverage for
Group and Group's Employee Providers, in such amounts as Group shall reasonably
deem necessary; provided, however, such coverage shall be no greater than that
set forth on Schedule A hereto without the prior consent of the Joint Operations
----------
Committee, which consent shall not be unreasonably withheld;
b. Workers' Compensation insurance covering the employees of
Group, in such amounts as is usual and customary under the circumstances;
17
<PAGE>
c. Comprehensive general liability insurance covering the risks
of Group, in an amount determined by the Joint Operations Committee.
ARTICLE IX
BOOKS AND RECORDS
-----------------
9.1 Ownership of Records. All business records and information
--------------------
relating exclusively to the business and activities of either party shall be the
property of that party, irrespective of identity of the party responsible for
producing or maintaining such records and information. Without limiting the
foregoing, all patient charts and records maintained by Manager relating to the
dental services of Group shall be the property of Group. Group also shall be
entitled to a copy at Group's sole cost of all business records pertaining to
Group. Except as limited by law, including, but not limited to laws governing
the confidentiality of patient records, Manager shall be entitled to a copy at
Manager's sole cost of all records of Group.
ARTICLE X
RESTRICTIVE COVENANTS
---------------------
10.1 Covenant Regarding Proprietary Information. In the course of the
------------------------------------------
relationship created pursuant to this Agreement, Group will have access to
certain methods, trade secrets, processes, ideas, systems, procedures,
inventions, discoveries, concepts, software in various stages of development,
designs, drawings, specifications, models, data, documents, diagrams, flow
charts, research, economic and financial analysis, developments, procedures,
know-how, policy manuals, form contracts, marketing and other techniques, plans,
materials, forms, copyrightable materials and trade information (all of which is
referred to in this Agreement as "Proprietary Information") regarding the
-----------------------
operations of Manager and/or of its Affiliates (collectively, the "Protected
---------
Parties"). Group shall maintain all such Proprietary Information in strict
- -------
secrecy and shall not divulge such information to any third parties, except as
may be necessary for the discharge of their obligations under this Agreement.
Group shall take all necessary and proper precautions against disclosure of any
Proprietary Information to unauthorized persons by any of its employees or
agents. Group and all employees, and agents of Group who will have access to
all or any part of the Proprietary Information may be required to execute an
agreement, at the request of Manager, valid under the law of the jurisdiction in
which such agreement is executed, and in a form acceptable to Manager and its
counsel, committing themselves to maintain the Proprietary Information in strict
confidence and not to disclose it to any unauthorized person or entity. The
Protected Parties not party to this Agreement are hereby specifically made third
party beneficiaries of this Section, with the power to enforce the provisions
hereof. Upon termination of this Agreement for any reason, Group and each of
its Employee Providers and Subcontract Providers shall cease all use of any of
the Proprietary Information and, at the request of Manager, shall execute such
documents as may be necessary to evidence Group's abandonment of any claim
thereto. The parties recognize that a breach of this Section cannot be
adequately compensated in money damages and therefore agree that injunctive
relief shall be available to the Protected Parties as their respective interests
may appear.
The obligations of Group under this Section 10.1 shall not apply to
------------
information: (i) which is a matter of public knowledge on or becomes a matter
of public knowledge after the Effective Date of this Agreement, other than as a
breach of the confidentiality terms of this Agreement or as a breach of the
confidentiality terms of any other agreement between Group and Manager or its
Affiliates; or (ii) which was lawfully obtained by Group on a nonconfidential
basis other than in the course of performance under this Agreement and from some
entity other than Manager or its Affiliates or from some person other
18
<PAGE>
than one employed or engaged by Manager or its Affiliates, which entity or
person has no obligation of confidentiality to Manager or its Affiliates.
10.2 Covenants Not to Compete During the Term. The parties recognize
----------------------------------------
that the services to be provided by Manager shall be feasible only if Group
operates an active dental practice to which Group and its Providers devote full
time and attention. To that end:
a. Restrictive Covenants by Group. During the term of this
------------------------------
Agreement, Group shall not (i) establish, operate or provide dental care
services at any dental office, clinic or other facility providing services
substantially similar to those provided by Group pursuant to this Agreement
anywhere other than at the Practice Sites and as may be approved in writing by
Manager; (ii) enter into any management or administrative services agreement or
other similar arrangement with any person or entity other than Manager without
Manager's prior written approval and (iii) operate or, directly or indirectly,
hold or own any type of ownership or other form of equity interest in, or serve
as a consultant to or otherwise perform services for any person or entity
engaged in the business of providing management and administrative services to
dental practices.
b. Restrictive Covenants by Providers. Group shall use its
----------------------------------
reasonable best efforts to obtain and enforce formal agreements with its owners,
Employee Providers and Subcontract Providers who are dentists not to establish,
operate or provide dental care services, during the term of this Agreement and
for a period of at least two (2) years after any termination of employment with
Group, at any dental office, clinic or facility located within a minimum of ten
(10) miles of any Practice Site at which the owner, Employee Provider or
Subcontract Provider has practiced. Any variation of such restrictive covenants
shall be approved in advance in writing by Manager.
10.3 Covenant Not to Solicit. For three (3) years following the
-----------------------
termination of this Agreement, Group shall not:
a. directly or indirectly solicit, recruit or hire, or induce
any party to solicit, recruit or hire any person who is an employee of, or who
has entered into an independent contractor arrangement with, Manager or any
Affiliate of Manager;
b. directly or indirectly, whether for itself or for any other
entity or person, call upon, solicit, divert or take away, or attempt to
solicit, call upon, divert or take away any of Manager's customers, business, or
clients; or
c. directly or indirectly solicit, or induce any party to
solicit, any of Manager's contractors or the contractors of any Affiliate of
Manager, to enter into the same or a similar type of contract with any other
party.
Notwithstanding the foregoing, if this Agreement is terminated by Group pursuant
to Section 6.2b, Group may solicit for hire and employ those employees of
Manager who are performing services exclusively for the Practice at the Practice
Sites.
10.4 Enforcement. Manager and Group acknowledge and agree that since
-----------
a remedy at law for any breach or attempted breach of the provisions of this
Article X shall be inadequate, either party shall be entitled to specific
- ---------
performance and injunctive or other equitable relief in case of any such breach
or attempted breach, in addition to whatever other remedies may exist by law.
All parties hereto
19
<PAGE>
also waive any requirement for the securing or posting of any bond in connection
with the obtaining of any such injunctive or other equitable relief.
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
11.1 Assignment. Neither party shall assign this Agreement to any
----------
other party or parties without the prior written consent of the other party,
which consent may be withheld arbitrarily or capriciously, for any reason or for
no reason whatsoever and any attempted assignment in violation of this Agreement
shall be null and void. Notwithstanding the preceding, Manager may assign this
Agreement to any direct or indirect wholly-owned subsidiary of either Manager or
Parent or to a financial institution as collateral security for the indebtedness
of Manager, Parent or any of their respective Affiliates.
11.2 Headings. The article and section headings used in this
--------
Agreement are for purposes of convenience only. They shall not be construed to
limit or to extend the meaning of any part of this Agreement.
11.3 Waiver. Waiver by either Group or Manager of any breach of any
------
provision of this Agreement shall not be deemed to be a waiver of such provision
or of any subsequent breach of the same or of any other provision of this
Agreement.
11.4 Notices. Any notice, demand, approval, consent or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be shall be deemed to have been given when five (5) business
days have elapsed from the date of deposit in the United States mails, certified
and postage prepaid, addressed to the party to be served at the following
address or such other address as may be given in writing to the parties.
Group: Community Dental Group
2494 Mission Street
San Francisco, CA 94110
Attn: Charles Murillo, D.D.S.
Copy to: MacInnis, Donner & Koplowitz
465 California Street, Suite 222
San Francisco, CA 94104
Attn: Conrad Donner, Esq.
Manager: GMS Dental Group, Inc.
22800 Savi Ranch Parkway
Suite 206
Yorba Linda, California 92887
Attn: Michael T. Fiore, President
and Chief Executive Officer
11.5 Attorneys' Fees. If any legal action or arbitration or other
---------------
proceeding is commenced, whether by Manager or Group concerning this Agreement,
the prevailing party shall recover form the losing party reasonable attorneys'
fees and costs and expenses, including those of appeal and not limited to
taxable costs, incurred by the prevailing party, in addition to all other
remedies to which the
20
<PAGE>
prevailing party may be entitled. If a claim or claims asserted by a third
party against Manager or Group or any of them arise from an action or omission
by the other, the party responsible for the action or omission shall be the
losing party, and the other party shall be the prevailing party, for purposes of
the foregoing sentence.
11.6 Successors. Without limiting or otherwise affecting any
----------
restrictions on assignments of this Agreement or rights or duties under this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
successor and assigns of Group and Manager.
11.7 Entire Agreement. This Agreement sets forth the entire
----------------
agreement between Group and Manager and supersedes all prior negotiation and
agreements, written or oral, concerning or relating to the subject matter of
this Agreement, and this Agreement may not be modified except by a writing
executed by all parties and subject to the provisions thereof.
11.8 Governing Law. This Agreement and the rights and obligations of
-------------
the parties hereto shall be governed by, and construed according to, the laws of
the State of California.
11.9 Severability, Contract Modifications for Prospective Legal
----------------------------------------------------------
Events. Nothing contained in this Agreement shall be construed to require the
- ------
commission of an act contrary to law, and whenever there is any conflict between
any provision of this Agreement and any statute, law, ordinance or regulation,
the latter shall prevail. In such event, and in any case in which any provision
of this Agreement is determined to be in violation of a statute, law, ordinance
or regulation, the affected provision(s) shall be limited only to the extent
necessary to bring it within the requirements of the law and, insofar as
possible under the circumstances, to carry out the purposes of this Agreement.
The other provisions of this Agreement shall remain in full force and effect,
and the invalidity or unenforceability of any provision hereof shall not affect
the validity and enforceability of the other provisions of this Agreement, nor
the availability of all remedies in law or equity to the parties with respect to
such other provisions.
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision, a regulatory agency or legal counsel of both
parties in such a manner as to indicate that the structure of this Agreement may
be in violation of such laws or regulations, Group and Manager shall amend this
Agreement, to the maximum extent possible, to preserve the underlying economic
and financial arrangements between Group and Manager. The parties agree that
such amendment may require reorganization of Group or Manager, or both, and may
require either or both parties to obtain appropriate regulatory licenses and
approvals. If an amendment is not possible, either party shall have the right
to terminate this Agreement upon thirty (30) days notice to the other party.
11.10 Time Is of the Essence. Time is of the essence in this
----------------------
Agreement.
11.11 Authority. Any Person signing this Agreement on behalf of any
---------
entity hereby represents and warrants in its individual capacity that it has
full authority to do so on behalf of such entity.
11.12 Counterparts. This Agreement may be executed in two (2) or
------------
more counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same instrument.
21
<PAGE>
IN WITNESS WHEREOF, Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
"Group"
CHARLES MURILLO, D.D.S., d/b/a
Community Dental Group, a California sole
proprietorship
By: /s/ Charles Murillo
----------------------------------
Charles Murillo, D.D.S.
"Manager"
GMS DENTAL GROUP MANAGEMENT, Inc.
a Delaware corporation
By: /s/ Michael T. Fiore
----------------------------------
Michael T. Fiore
President and Chief Executive Officer
22
<PAGE>
ADDENDUM 1.
----------
For purposes of this Agreement, the following terms shall have the meaning
indicated below or defined at the indicated section:
XII Accounts. See Section 2.5.
--------
XIII Affiliate. "Affiliate" shall mean, with respect to any Person
---------
(including without limitation any corporation), (i) any individual or entity
directly or indirectly owned or controlled by such Person, (ii) any individual
or entity directly or indirectly owning or controlling such Person or (iii) any
individual or entity directly or indirectly owned or controlled by the same
family member, individual or entity as owns or controls such Person. For
purposes of this Agreement, neither Group nor Manager shall be deemed an
Affiliate of the Other.
XIV Agreement. "Agreement" means this Group Management Agreement.
---------
XV Annual Budget. See Section 3.6.
-------------
XVI Asset Purchase Agreement. That certain Asset Purchase Agreement,
------------------------
dated as of the Effective Date by and among the Company, Manager and Group.
XVII Beneficiaries. See Recital A.
-------------
XVIII Books and Records. "Books and Records" means Group's books of
-----------------
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
XIX Capital Costs. "Capital Costs" shall mean any and all investments
-------------
that are or would be capitalized pursuant to GAAP.
XX Committee Members. See Section 3.5a.
-----------------
XXI Default Notice. See Section 6.2b(1).
--------------
XXII Effective Date. See preamble paragraph.
--------------
XXIII Employee Providers. See Recital B.
------------------
XXIV Employment Agreements. See Recital B.
---------------------
XXV Excluded Expenses. "Excluded Expenses" shall mean those expenses
-----------------
incurred by or on behalf of Group, which are not Practice Expenses or Group
Expenses, and for which Group is solely responsible.
XXVI GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise
1
<PAGE>
specifically provided herein, the meaning customarily given in accordance with
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
Manager's financial statement.
XXVII Group. See first paragraph of this Agreement.
-----
XXVIII Group Expenses. "Group Expenses" means amounts payable to
--------------
Charles Murillo, D.D.S. under any applicable Profit Distribution Agreement and
any applicable, salaries, wages, compensation, payroll taxes, and employee
benefits of Charles Murillo, D.D.S., Employee Providers and Subcontract
Providers, all as set forth in, and subject to and limited by, the Annual
Budget.
XXIX Group Member. See Section 3.5a.
------------
XXX Group Patients. See Recital A.
--------------
XXXI Joint Operations Committee. See Section 3.4b.
--------------------------
XXXII Management Fee. See Section 7.1.
--------------
XXXIII Manager. See first paragraph of this Agreement.
-------
XXXIV Manager Members. See Section 3.5a.
---------------
XXXV Marks. See Section 2.3a.
-----
XXXVI Offer. See Section 5.1.
-----
XXXVII Parent. "Parent" shall mean GMS Dental Group, Inc. or any
------
successor thereto.
XXXVIII Payment Date. See Section 7.2.
------------
XXXIX Payor Contracts. See Recital A.
---------------
XL Percentage Fee Portion. See Exhibit 7.1.
---------------------- -----------
XLI Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
XLII Plans. See Recital A.
-----
XLIII Practice. See Recital C.
--------
XLIV Practice Expenses. "Practice Expenses" means all costs incurred
-----------------
by Manager including amortization associated with costs of acquiring assets of
the Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which are
attributable to Manager's business operations in
2
<PAGE>
accordance with Manager's corporate allocation policies, all as consistent with
and/or contemplated in the Annual Budget.
XLV Practice Sites. See Section 3.4a.
--------------
XLVI Practice Site Facilities. See Section 3.4a.
------------------------
XLVII Preliminary Budget. See Section 3.7b.
------------------
XLVIII Programs. See Section 2.3b.
--------
XLIX Proprietary Information. See Section 10.1.
-----------------------
L Protected Parties. See Section 10.1.
-----------------
LI Providers. See Recital B. The term "Providers" shall include
---------
individuals or organizations licensed to practice dentistry (including
specialists) as well as other licensed dental professionals who provide
ancillary reimbursable dental services.
LII Provider Subcontracts. See Recital A.
---------------------
LIII Reimbursable Expense Portion. See Exhibit 7.1.
---------------------------- -----------
LIV Revenues. See Section 2.4.
--------
LV Security Agreement. See Section 7.4.
------------------
LVI Subcontract Providers. See Recital B.
---------------------
LVII Term. See Section 6.1.
----
3
<PAGE>
EXHIBIT 10.46
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
THIS DENTAL GROUP MANAGEMENT AGREEMENT (this "Agreement") is dated as
---------
of July 24, 1997 ("Effective Date") by and between GMS Dental Group Management,
--------------
Inc., a Delaware corporation ("Manager") and wholly-owned subsidiary of GMS
-------
Dental Group, Inc., a Delaware corporation (the "Company") and Sam Samudio,
-------
D.D.S., doing business as a sole proprietor under the d/b/a Pleasanton Dental
Care ("Group").
-----
RECITALS
--------
A. Group engages in the practice of dentistry by providing dental
services to patients of Group ("Group Patients") and to enrollees
--------------
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
------------- ----- ---------------
between Group and Plans or between Beneficiaries and Plans.
B. Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
---------
arrangements may include contracts ("Employment Agreements") with dentist
---------------------
employees (collectively "Employee Providers") and agreements ("Provider
------------------ --------
Subcontracts") with independent contractor dentists and non-dentist providers of
- ------------
various dental care services (collectively "Subcontract Providers").
---------------------
C. All activities of Group subject to this Agreement are referenced
as the "Practice." All references to "dental" care and services include general
--------
and specialist dental services. All references to "dentists" include generalists
and specialists.
D. Manager is a management services company that has been organized
to provide certain support services for the Practice and for other dental
groups. Manager is in the business of providing or arranging for management
services, facilities, equipment and certain personnel necessary for the
operation of the Practice.
E. Immediately prior to the Effective Date, Group was managed by
Premier 2 Dental, a California general partnership, pursuant to a management and
option agreement (the "Original Agreement"). Manager acquired the Original
------------------
Agreement on the date hereof, and this Agreement amends and restates the
Original Agreement.
F. Group desires to retain Manager on an independent contractor basis
to provide management services that are more particularly described below, and
Manager desires to provide such management services under the terms and
conditions set forth in this amendment and restatement of the Original
Agreement.
<PAGE>
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the covenants and conditions
contained herein, Manager and Group agrees as follows:
ARTICLE I
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
----------
ARTICLE II
SCOPE OF AGREEMENT
------------------
2.1 General Scope of Agreement. This Agreement shall apply to the
--------------------------
Practice being conducted by Group, including, without limitation, all
professional, administrative and technical services, marketing, contracting,
case management, ancillary dental services, outpatient services and dental care
facilities, equipment, supplies and items, except as otherwise specifically
provided in this Agreement. Group's Employment Agreements shall encompass
substantially all such activities of Employee Providers and shall provide that
all revenues derived from such activities (and not excluded below) shall be
included in Revenues as such term is defined in Section 2.4 hereof. Nothing in
-----------
this Agreement shall be construed to alter or in any way affect the legal,
ethical and professional relationship between and among Provider and Provider's
patients, nor shall anything contained in this Agreement abrogate any right or
obligation arising out of or applicable to the dentist-patient relationship.
2.2 License. Except as prohibited by contract or by applicable laws
-------
and requirements governing the practice of dentistry, Group grants Manager an
exclusive license to use any and all of Group's assets, whether tangible or
intangible, in carrying out Manager's duties and responsibilities under the
provisions of this Agreement.
2.3 Intellectual Property. Group hereby grants to manager a non-
---------------------
exclusive, perpetual, royalty-free, worldwide license to use and sublicense the
use of any intellectual property owned by Group. This license shall cover, but
not be limited to, use of the following:
a. Service Mark. Group hereby grants Manager the right to use
------------
all service marks and trademarks of Group (the "Marks") for marketing and
-----
promotional materials in connection with Group's offering of dental services.
Manager agrees to use the Marks solely in the design format used by Group as of
the date of this Agreement or another design format approved in advance in
writing by Group. Group shall have the opportunity to review any marketing or
other materials using the Marks in advance of any public distribution. Manager
agrees that it will include these restrictions on use in any sublicense of the
Marks.
b. Copyrighted Materials. Group hereby grants Manager the right
---------------------
to use any and all copyrighted materials authored or owned by Group including,
specifically, the
2.
<PAGE>
Group dental management system software programs (the "Programs"). This license
--------
includes the right to sublicense the Programs and the right to prepare and own
derivative works based on the Programs, all without a duty of accounting to
Group. Group shall execute all documents required to enable Manager to own, use
and exploit all such rights.
2.4 Revenues. "Revenues" shall mean all of Group's accounts
-------- --------
receivable (net of contractual adjustments and bad debt), and cash collections.
Revenues shall include all funds collected by, or legally due to, Group or any
downstream Affiliate of Group, including, without limitation, the following: (a)
all fee-for-service payments for services to Group Patients or Beneficiaries;
(b) all payments established under Payor Contracts; (c) all coordination of
benefits or deductibles and third-party liability recoveries related to the
Group's services; (d) all payments, dues, fees or other compensation to Group;
(e) any income, profits, dividends, distributions or other payments from Group's
investments; and (f) any interest or other non-operating income of Group;
provided, however, that Revenues shall not include the Purchase Price (as
defined in the Asset Purchase Agreement).
2.5 Deposit Accounts. All cash received by Group from whatever
----------------
source shall be deposited into an account or accounts ("Accounts") in the name
--------
of Group at a banking institution selected by Group and approved by Manager.
Group authorizes Manager to bill and collect, in Group's name, all charges and
reimbursements for Group's dental related activities and to deposit such
collections in the Accounts. Group agrees to assist and cooperate with Manager
in the billing and collection process and to immediately deliver to Manager for
deposit any monies Group may receive. Manager shall manage the cash equivalents
of the Group and Manager shall be entitled (and is hereby authorized) to
transfer such cash to the account of Manager and to use such cash for purposes
as Administrator deems appropriate, subject to and consistent with the terms and
provisions of this Agreement. Nothing in this Section 2.5 shall be construed to
limit or otherwise modify the requirement that Manager disburse funds in
fulfillment of the obligations of the Group and Manager under this Agreement.
ARTICLE III
OPERATION OF PRACTICES
----------------------
3.1 Appointment. Subject to applicable laws and requirements
-----------
governing the practice of dentistry and the provisions of this Agreement, Group
hereby appoints Manager as its sole and exclusive Manager for the operation of
the Practice and covenants not to enter into an agreement with any Person other
than Manager to perform or assume any of Manager's rights, duties or
responsibilities as provided herein. Manager hereby accepts full responsibility
for such management as more fully set forth herein.
3.2 Professional Matters. Pursuant to applicable laws and
--------------------
requirements governing the practice of dentistry, Group shall retain ultimate
responsibility for all activities of Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's non-
licensed status.
3.
<PAGE>
3.3 Relationship of Parties. In the performance of its duties and
-----------------------
obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Group. Except as provided in this Agreement or as
required by law, Group shall neither have nor exercise any control or direction
over the methods by which Manager shall perform its obligations hereunder; nor
shall Manager have or exercise any control or direction over the methods by
which Group shall practice dentistry. It is expressly agreed by the parties
that no work, act, commission or omission of manager pursuant to the terms and
conditions of this Agreement shall be construed to make or render Manager or
Manager's employees or agents, the employees of Group. Manager and Group are
not partners or joint venturers with each other and nothing herein shall be
construed so as to make them partners or joint venturers or impose upon either
of them any liability as partners or joint venturers. Group's responsibility is
to assure that the services covered by this Agreement shall be performed and
rendered in a competent, efficient and satisfactory manner.
3.4 Authority and Control. Strategic planning, overall direction and
---------------------
control of the business and affairs of Group, and authority over the day-to-day
activities of Group shall be accomplished as follows:
a. Exclusive Authority. Notwithstanding anything else to the
-------------------
contrary contained herein, Group shall have the sole responsibility and
authority for all aspects of the practice of dentistry and delivery of dental
services by Providers. Providers shall use and occupy at the practice sites
("Practice Sites") the facilities provided by Manager hereunder exclusively for
--------------
the practice of dentistry ("Practice Site Facilities"). Group expressly
------------------------
acknowledges that the Practice or Practices conducted at these Practice Site
Facilities shall be conducted solely by dentists and dental hygienists
associated with Group as Employee Providers or Subcontract Providers. Group
shall consult with Manager or the Joint Operations Committee to the extent
reasonable and not inconsistent with the laws governing the practice of
dentistry.
b. Joint Authority. All other decision-making authority related
---------------
to the business and affairs of Group shall be vested in a joint operations
committee (the "Joint Operations Committee"). Nothing herein shall be construed
--------------------------
as preventing the Joint Operations Committee from appointing representatives and
delegating authority to such representatives so long as the Joint Operations
Committee may revoke such appointment and delegation at any time and so long as
the Joint Operations Committee retains ultimate responsibility for the decisions
of such representatives.
3.5 Joint Operations Committee. Subject to applicable laws and
--------------------------
requirements governing the practice of dentistry, the Joint Operations Committee
shall have authority and responsibility to provide strategic planning, overall
direction and authority over the day-to-day management and administrative
activities of the Group and shall manage the business operations of the Group as
follows:
a. Joint Operations Committee Membership. The Joint Operations
-------------------------------------
Committee shall consist initially of five (5) individuals (the "Committee
---------
Members"). Manager shall designate three (3) Committee Members (the "Manager
- ------- -------
Members"), Group shall designate
- -------
4.
<PAGE>
one (1) Committee Member (the "Group Member") and the remaining one (1)
------------
Committee Member shall be the practice administrator provided however, if at any
time there is not a practice administrator, Group shall designate the final one
(1) Committee Member (together with the Group Member, the "Group Members"). The
-------------
number of Committee Members may be increased or decreased by agreement of the
parties. Each party shall continue to direct the appointment of the same
percentage of Committee Members as described above. Each Committee Member shall
serve at the pleasure of the party designating such Committee Member and may be
replaced, with or without cause, at any time by such party upon the delivery of
written notice thereof to the other Committee Members. Manager, Group and the
Committee Members shall diligently pursue any preliminary activities that are
necessary to allow the Joint Operations Committee to take an action. Where
Committee Members are required to consult with the organization appointing such
Committee Members, the Committee shall establish and agree on a deadline for
accomplishing such consultation.
b. Joint Operations Committee Action.
---------------------------------
(i) Joint Action. Except as otherwise expressly set forth
------------
above, the Joint Operations Committee shall take all other actions that have
been approved by a majority of the Committee Members.
(ii) Consultation Forum. Consultation between Group and
------------------
Manager, if any, shall take place at a meeting of the Joint Operations
Committee, and Group and Manager hereby agree to be bound by the decision of
their Group Member(s) or Manager Members, as the case may be.
c. Joint Operations Committee Meetings. Meetings of the Joint
-----------------------------------
Operations Committee may be held by telephone or similar communications
equipment so long as all Committee Members participating in a meeting can hear
and speak to each other. The Joint Operations Committee shall prepare and
maintain written minutes of all meetings and shall provide a copy of the minutes
to the parties within fifteen (15) business days following each meeting.
(i) Regular Meetings. The Joint Operations Committee shall
----------------
hold not less than four (4) regular meetings each year, at such specific times
and places as the Committee Members may determine.
(ii) Special Meetings. A special meeting of the Joint
----------------
Operations Committee may be called by a majority of the Committee Members.
(iii) Notice Requirement. A Committee Member calling a
------------------
special meeting must provide all other Committee Members with ten (10) days'
advance written or telephonic notice. Notice must be given or sent to the
Committee Member's address or telephone number as shown on the records of the
Joint Operations Committee. Notice may be delivered directly to each Committee
Member or to a person at the Committee Member's principal place
5.
<PAGE>
of business who reasonably would be expected to communicate that notice promptly
to the Committee Member.
(iv) Waiver of Notice Requirement.
----------------------------
(a) Written Waiver, Consent or Approval. Notice of a
-----------------------------------
special meeting need not be given to any Committee Member who, either before or
after the meeting, signs a waiver of notice or a written consent of the holding
of the special meeting, or an approval of the minutes of the special meeting.
Such waiver, consent or approval need not specify the purpose of the special
meeting. All such waivers, consents and approvals shall be filed with the Joint
Operations Committee records or made a part of the minutes of the special
meetings.
(b) Failure to Object. Notice of a special meeting need
-----------------
not be given to any Committee Member who attends the special meeting and does
not protest before or at the commencement of the special meeting such lack of
notice.
(v) Quorum. The smallest number of Committee Members that
------
exceed fifty percent (50%) of all Committee Members shall constitute a quorum of
the Joint Operations Committee, provided, however, that such quorum shall
include at least one Group member and one Manager member.
(vi) Proxies. The Joint Operations Committee shall provide
-------
for the use of proxies, telephonic conference calls, written consents or other
appropriate methods by which the full participation of the Group Member(s),
Manager Members and Administrator Member, if any, can be assured.
d. Limitation of Responsibility. Notwithstanding any other
----------------------------
provisions hereof, Committee Members shall be liable to the parties only for
actions constituting bad faith, gross negligence or breach of an express
provision of this Agreement (so long as such breach remains uncured after ten
(10) days of receiving notice of the nature of such breach). In all other
respects, Committee Members shall not be liable for negligence or mistakes of
judgment.
3.6 Budgets. A capital and operating budget ("Annual Budget") shall
------- -------------
be established regarding all financial aspects of the Practice. The Annual
Budget shall include the following elements and other items, as appropriate:
a. A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
b. An operating budget setting forth an estimate of revenues and
expenses (which the parties contemplate will comprise all reasonable and
necessary expenses to be incurred by the Practice in such year) including,
without limitation, a breakdown of all Group Expenses and Practice Expenses for
the next succeeding fiscal year, together with an explanation of anticipated
changes or modifications, if any, in the Practice's utilization, rates, charges
to
6.
<PAGE>
patients or third party payors, salaries, costs of Provider, non-wage cost
increases, and all other similar factors expected to differ significantly from
those prevailing during the current fiscal year;
c. Other expenses of operation;
d. The amount of a reasonable reserve to satisfy possible
shortfalls from operations. The allocation of such reserve shall be made by the
Joint Operations Committee as and when necessary; and
e. The Management Fee, as defined below, for the next succeeding
fiscal year.
3.7 Budget Process.
--------------
a. Initial Annual Budget. Not later than 45 days after the
---------------------
Effective Date, the Joint Operations Committee will have prepared the initial
Annual Budget for the first fiscal year (which shall initially be the calendar
year) during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains, or, at the option of
the parties, such portion of the then current fiscal year plus the immediately
subsequent fiscal year.
b. Preliminary Budget. Not later than forty-five (45) days prior
------------------
to the end of each fiscal year during the term of this Agreement, the Manager
shall prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
------------------
c. Joint Operations Committee Approval. The Joint Operations
-----------------------------------
Committee shall review and suggest modifications to the Preliminary Budget
within ten (10) days of receipt. Manager shall prepare a revised budget based
upon the Joint Operations Committee's recommendations and the Preliminary Budget
as revised shall become the Annual Budget.
d. Adjustments. In the event of a material deviation between
-----------
financial forecasts and financial performance during a fiscal year, Manager or
Group may propose adjustments to the Annual budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
3.8 Personnel.
---------
a. Providers. Except in unusual circumstances approved by the
---------
Joint Operations Committee, and as permitted by law, Manager shall not employ or
contract with any Provider for the provision of dental services. All Providers
who provide dental services to Group Patients or to Beneficiaries shall be
either (1) Employee Providers, (2) Subcontract Providers, or (3) employees of
Subcontract Providers. Group shall have complete control of and responsibility
for the hiring, engagement, compensation, training, scheduling, supervision,
evaluation, and termination of all Employee Providers and Subcontract Providers,
although at the request of
7.
<PAGE>
Group, Manager shall consult with Group respecting such matters and shall
coordinate the advertising of positions available, interviewing of candidates,
and scheduling of clinical staff meetings and training sessions.
b. Non-Providers. With the exception of employees of Subcontract
-------------
Providers, Manager shall employ all non-Provider personnel necessary for the
operation of the Practice.
c. Salary and Benefits. Subject to Manager's responsibilities
-------------------
under Article VII, each party to this Agreement shall remain liable for the
-----------
salary and benefits paid to such party's own employees and shall be ultimately
responsible for compliance with state and federal laws pertaining to employment
taxes, workers' compensation, unemployment compensation and other employment-
related statutes pertaining to the party's own employees.
d. Payments to Subcontract Providers. Subject to Manager's
---------------------------------
responsibilities under Article VII, Group shall be liable for any payments due
-----------
Subcontract Providers under Provider Subcontracts.
ARTICLE IV
MANAGEMENT SERVICES
-------------------
4.1 General Description of Services. Except as prohibited by law and
-------------------------------
within the limitations set out elsewhere in this Agreement, Manager shall
provide or arrange for the provision to Group of all support services reasonably
necessary and appropriate for the efficient operation of the Practice. Such
services include all administrative services necessary to Group's performance of
its obligations under Payor Contracts, contracting, marketing, capital formation
and assistance with long term strategic planning. Manager shall exercise its
best efforts to fulfill the administrative functions of a well managed dental
group.
4.2 Practice Site Facilities. When appropriate, Manager shall secure
------------------------
and maintain Practice Site Facilities, including, without limitation, office
space, improvements, furnishings, equipment, supplies, and personal property, of
a nature and in a condition necessary and appropriate for the efficient and
effective operations of the Practice subject to the general approval of the
Joint Operations Committee. Group hereby accepts and approves of the Practice
Site Facilities initially provided by Manager. However, Manager from time to
time shall make such Practice Site Facilities changes, including but not limited
to dental equipment purchases, as reasonably may be requested by Group and
consistent with the Annual Budget.
4.3 Purchased Items and Services. Manager shall serve as the
----------------------------
purchasing agent for Group and shall arrange for personnel benefits, insurance,
and any other items and services required for the proper operation of the
Practice.
8.
<PAGE>
4.4 Manager Personnel.
-----------------
a. Management Team. Subject to any approval or consulting rights
---------------
of the Joint Operations Committee, Manager may engage or designate one or more
individuals experienced in dental group management and direction, including, but
not limited to, an administrator, who will be responsible for the overall
administration of the Practice including day-to-day operations and strategic
development activities.
b. Other Manager Personnel. Manager shall select, hire, train,
-----------------------
supervise, monitor and terminate all non-Provider personnel necessary for the
operation and management of the Practice; provided, however, with respect to the
selection, hiring and termination of non-Provider personnel, Manager shall
consult with Group.
4.5 Day-to-Day Management and Supervision. Subject to any approval
-------------------------------------
or consulting rights of the Joint Operations Committee, Manager shall provide
general management including, but not limited to, day-to-day supervision of:
a. manager personnel;
b. equipment and supply acquisition;
c. office space and facility maintenance;
d. patient records organization and retention;
e. third party payor contracting;
f. case management;
g. billing, collections and accounting
activities as set forth below;
h. all operating aspects and policies of the Practice including,
but not limited to, hours of operation, work schedules, standard duties and job
descriptions, for all non-Group personnel; and
i. other related and incidental matters.
4.6 Billing and Collection Payment of Expenses. In addition to the
------------------------------------------
responsibilities of Manager under Article VII, Manager shall be responsible for
-----------
all billing and collection activities required by Group. Manager shall also be
responsible for reviewing and paying accounts payable of Group. Group hereby
appoints the Manager its true and lawful attorney-in-fact to take the following
actions for and on behalf of and in the name of Group:
a. bill and collect in Group's name or the name of the
individual practicing dentist, all charges and reimbursements for Group. Group
shall give Manager all
9.
<PAGE>
necessary access to Patient records to accomplish all billing and collection.
In so doing, Manager will use its best efforts but does not guarantee any
specific level of collections, and Manager will comply with Group's reasonable
and lawful policies regarding courtesy discounts;
b. take possession of and endorse in the name of the Group any
and all instruments received as payment of accounts receivable;
c. deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
d. place accounts for collection, settle and compromise claims,
and institute legal action for the recovery of accounts.
4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
a. Financial Reporting. manager shall prepare, analyze and
-------------------
deliver to the Joint Operations Committee financial reports to the extent
necessary or appropriate for the operation of the Practice, including the
following:
(i) financial statements, including balance sheets and
statements of cash flow and income;
(ii) accounts payable and accounts receivable analysis;
(iii) billing status including any medicaid remittances; and
(iv) reconciliation of assets, liabilities and major
expenses.
b. Audits. Group shall have the right to review and, at its
------
sole cost and expense, obtain an audit (separate from any annual audit or review
of Group's financial statements performed at the direction of the Manager) of
Group's financial books and records maintained by the Manager. Upon prior
written notice, Manager shall allow Group access during reasonable business
hours to all information and documents reasonably required for such review or
audit. Upon Group's request and at Group's expense, Manager shall also provide
copies of such documents.
4.8 Marketing and Public Relations Services. Manager shall provide
---------------------------------------
such marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Group after
consultation with Group. Manager shall provide Group with marketing materials
and activities. Nothing in this Agreement shall be construed to affect or limit
in any way the professional discretion of Group to select patients that may be
effectively treated in the Practice in accordance with professional standards of
patient selection.
10.
<PAGE>
4.9 Group Agreements. Subject to Group's consent, which consent
----------------
shall not be unreasonably withheld, on behalf of Group, Manager shall review,
evaluate and negotiate Payor Contracts and Provider Subcontracts and any other
contracts or agreements regarding the provision of dental related items or
services by Group or Providers.
4.10 Utilization Review Quality Improvement and Outcomes Monitoring.
--------------------------------------------------------------
Manager shall be responsible for providing administrative support for Group's
utilization review, quality improvement and outcomes monitoring activities,
including, without limitation, data collection, analysis and reporting for Group
Patients and Beneficiaries. Manager shall also support the development and
implementation of relevant policies, procedures, protocols, practice guidelines
and other interventions based on such activities.
4.11 Patient Referrals. The parties agree that the benefits to Group
-----------------
hereunder do not require, are not payment for, and are not in any way contingent
upon the admission, referral or any other arrangements for the provision of any
item or service offered by Manager or any affiliate of Manager to any of Group's
Patients in any facility owned or controlled, managed or operated by Manager or
any affiliate of Manager.
4.12 Applicable Law. Manager and Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE V
GROUP RESPONSIBILITIES
----------------------
5.1 Diagnosis, Treatment Planning, Specific Patient Education and
-------------------------------------------------------------
Consultation. Group shall have sole responsibility for all professional dental
- ------------
services provided to Patients with regard to the diagnosis of the patient's
condition and the development of treatment plan alternatives, including, without
limitation, the following:
a. Diagnosis. Group shall have sole responsibility for all
---------
medical and dental history evaluation, examination, obtaining clinical records,
and diagnostic procedures appropriate for complete diagnosis.
b. Treatment Planning. Group shall have sole responsibility
------------------
for all determination of treatment alternatives that may be professionally
acceptable for the treatment of the patient's condition.
c. Specific Patient Education. Group shall have sole
--------------------------
responsibility for all discussion, recommendation, demonstration, and other
educational modalities intended to address the patient's specific condition, as
differentiated from general patient education intended to address the common
concerns of all patients presenting with similar conditions.
11.
<PAGE>
d. Consultation. Group shall have sole responsibility for all
------------
discussion of clinical advantages, disadvantages, complications, and risks of
each alternative treatment plan, and including the likely results of no
treatment.
e. Manager to Assist with Record Procurement. Notwithstanding
-----------------------------------------
the above, Manager shall be responsible for exercising reasonable efforts to
procure, at its own expense, medical and dental history information, previous
clinical records, and X-ray records prior to presentation of the patient for
treatment by Group, in accordance with protocols developed by Group in
consultation with Manager.
5.2 Dental Services. Group shall have sole responsibility for all
---------------
professional dental services provided to Patients with regard to the treatment
of the patient's condition, including, without limitation, the following:
a. Preventive Care. Group shall have sole responsibility for
---------------
all preventive care intended to delay, or intercept the development of
pathologic conditions.
b. Therapeutic Care. Group shall have sole responsibility for
----------------
all therapeutic care intended to ameliorate, or improve existing pathologic
conditions.
c. Referral to Specialists. Group shall have sole
-----------------------
responsibility for all referral to appropriate dental specialists and other
allied health care professionals in accordance with professional dental
standards of care.
d. Continuing Care. Group shall have sole responsibility for
---------------
all development and execution of continuing care protocols intended to maintain
the patient's condition over the course of time.
e. Manager to Assist with Patient Compliance Tracking.
--------------------------------------------------
Notwithstanding the above, Manager shall be responsible for exercising
reasonable efforts to facilitate, coordinate, and document the scheduling,
tracking, and confirmation of Group's recommendations for dental diagnostic and
therapeutic services, treatments, referrals, and continuing care in accordance
with protocols developed by Group in consultation with Manager.
5.3 Provision of Dental Services by Group. Group shall operate the
-------------------------------------
Practice during the Term as a dental practice in accordance with the terms of
this Agreement and the Annual Budget. However, nothing in this Agreement shall
be construed to affect or limit in any way the professional discretion or duty
of Group insofar as such constitutes the practice of dentistry.
5.4 Providers.
---------
a. Professional Dental Services. Group shall employ or
----------------------------
contract with the number of Providers Group deems necessary for the efficient
and effective operation of the Practice and in accordance with the Annual Budget
and quality assurance, credentialing and
12.
<PAGE>
utilization management protocols approved by the Joint Operations Committee.
Group shall provide full and prompt dental coverage for the Practice, including
emergency service twenty-four hours per day, seven days per week, including
holidays, according to policies and schedules approved by the Joint Operations
Committee.
b. Provider Subcontracts and Employment Agreements. Group
-----------------------------------------------
shall not negotiate or execute any Provider Subcontract, Employment Agreement,
or any amendment thereto, or terminate any Provider Subcontract or Employment
Agreement without the approval of the Joint Operations Committee. Subject to
Manager's responsibilities under Article VII, Group shall be responsible for the
-----------
payment, in accordance with the Annual Budget, of all Employee and Subcontract
Providers.
5.5 Peer Review. Group, after consultation with the Joint Operations
-----------
Committee, shall implement, regularly review, modify as necessary or appropriate
and obtain the commitment of Providers to actively participate in peer review
procedures for Providers. Group shall assist Manager in the production of
periodic reports describing the results of such procedures. Group shall provide
Manager with prompt notice of any information that raises a reasonable risk to
the health and safety of Group Patients or Beneficiaries. In any event, after
consultation with the Joint Operations Committee, Group shall take such action
as may be reasonably warranted under the facts and circumstances.
5.6 Fees, Charges and Payor Agreements. Group shall, after
----------------------------------
consultation with Manager, determine the fees, charges, premiums, or other
amounts due in connection with delivery of dental services to Patients. Such
fees, charges, premiums, or other amounts (regardless of whether determined on a
fee-for-service, capitated, prepaid, or other basis) shall be reasonable and
consistent with the fees, charges, premiums, and other amounts due to dental
care providers for similar services within the community under similar types of
reimbursement programs involved if such programs are currently offered within
the community.
5.7 Hours of Clinical Operation. After consultation with the Joint
---------------------------
Operations Committee, Group shall establish hours of operation that are
consistent with good dental practice, and are appropriate to the need to timely
deliver professional dental care services to Group Patients.
5.8 Billing Information and Assignments. Group shall promptly
-----------------------------------
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Group's
services. Group shall use reasonable efforts to procure consents to assignments
and other approvals and documents necessary to enable Manager to obtain payment
or reimbursement from third party payors and patients. With the assistance of
Manager, Group shall obtain all provider numbers necessary to obtain payment or
reimbursement for its services.
5.9 Third Party Contracts. Group shall be in compliance with all
---------------------
contracts, agreements and arrangements, including any contracts that exist on
the Effective Date, between Group and third parties.
13.
<PAGE>
5.10 Use of Manager's Goods and Services. Group shall not use any
-----------------------------------
goods or services provided by Manager pursuant to this Agreement for any purpose
other than the provision of and management of dental services as contemplated by
this Agreement and purposes incidental thereto.
5.11 Negative Covenants. During the Term, Group shall not, without
------------------
the prior approval of the Joint Operations Committee, (a) pledge, mortgage or
otherwise encumber any of its property, (b) merge or consolidate with any other
entity, (c) allow the transfer of any assets (other than in accordance with the
terms and provisions hereof), or (d) take or allow any act that would materially
impair the ability of Group to carry on the business of the Practice or to
fulfill its obligations under this Agreement. Notwithstanding the preceding,
prior to consummating with any third party any transfer, assignment or
conveyance, or any merger or consolidation, in any case as contemplated in
subparagraphs (a), (b) or (c) above, Group shall first offer (the "Offer") to
-----
Manager or its designee the right to acquire the assets of Manager or to effect
a merger or consolidation with Manager upon the same business and economic terms
as proposed to Manager by such third party. Manager or its designee shall have
60 days to elect to accept or reject such Offer, which election shall be binding
on the parties. In addition to the foregoing, at any time upon ten (10) days'
written notice from Manager to Group, Manager (or its designee) shall have the
right to purchase all of the assets of the Group relating to the Practice for a
purchase price of One Thousand Dollars ($1,000.00). This Section 5.11 is
intended to ratify, amend and restate the option contained in the Original
Agreement on the terms set forth herein.
5.12 Group Maintains Full Professional Authority. Notwithstanding
-------------------------------------------
Manager's general and specific rights and responsibilities set forth in this
Agreement, Group shall have full authority and control with respect to all
dental, professional and ethical determinations over Group's Practice to the
extent required by federal, state and local laws, rules and regulation. Manager
shall not engage in activities which constitute the practice of dentistry under
applicable law. Manager shall neither exercise control over nor interfere with
the dentist-patient relationship, which shall be maintained strictly between
Group's Providers and their Patients.
ARTICLE VI
TERM
----
6.1 Term. This Agreement shall be effective the Effective Date, and
----
shall remain in effect for an initial term of forty (40) years from the
Effective Date, expiring on the fortieth (40th) anniversary of the Effective
Date, unless earlier terminated pursuant to the terms of this Agreement. The
word "Term" shall include such initial term and, where applicable, any extension
----
of such initial term (whether extended pursuant to Section 6.2a or otherwise),
subject to earlier termination pursuant to the provisions of this Agreement.
6.2 Termination and Extension.
-------------------------
a. Automatic Extension. At the end of the initial term and any
-------------------
subsequent term, this Agreement shall automatically renew for a five (5) year
term unless one
14.
<PAGE>
of the parties provides the other party with written notice of intent not to
renew, not less than one hundred eighty (180) days prior to the expiration of
the then current term.
b. Early Termination. This Agreement may be terminated
-----------------
according to the provisions of this Section.
(i) Material Breach. In the event either party materially
---------------
breaches this Agreement and such breach is not cured to the reasonable
satisfaction of the non-breaching party within sixty (60) days after the non-
breaching party serves written notice of the default upon the defaulting party
(the "Default Notice"), the Agreement shall automatically terminate at the
--------------
election of the non-breaching party upon the giving of a written notice of
termination to the defaulting party not later than fifteen (15) days after
termination of the 60-day cure period; provided that if such uncured breach is
only capable of being cured within a reasonable period of time in excess of
sixty (60) days, the non-breaching party shall not be entitled to terminate this
Agreement so long as the defaulting party has commenced such cure and thereafter
diligently pursues such cure to completion.
(ii) Refusal to Comply. In the event that Group or Manager
-----------------
refuses or fails to comply with a decision of the Joint Operations Committee,
the aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if such dispute between Group and Manager continues for thirty
(30) days after the date the aggrieved party exercises its option regarding
mediation, the non-complying party shall have thirty (30) days in which to
comply with the decision of the Joint Operations Committee. If the non-complying
party has not complied by the end of such thirty (30) day period, the aggrieved
party shall have the option to terminate this Agreement upon fifteen (15) days'
prior written notice. During such mediation, Manager and Group shall continue to
operate and manage the practice in good faith.
(iii) Bankruptcy. A party may, upon three (3) days' prior
----------
written notice, terminate this Agreement if the other party:
(a) Applies for or consents to the appointment of a
receiver, trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary petition,
makes a general assignment for the benefit of its creditors, files a petition or
answer seeking reorganization or arrangement with its creditors, or admits in
writing its inability to pay its debts when due, or
(b) Suffers any order, judgment or decree to be
entered by any court of competent jurisdiction, adjudicating such party bankrupt
or approving a petition seeking its reorganization or the appointment of a
receiver, trustee or liquidator of such party or of all or a substantial part of
its assets, and such order, judgment or decree continues unstayed and in effect
for ninety (90) days after its entry.
(iv) Nonperformance. Manager may terminate this Agreement
--------------
in the event that in any two consecutive fiscal quarters the Manager has not
been paid all of the
15.
<PAGE>
Reimbursable Expense Portion and at least one-third (1/3) of the Percentage Fee
Portion (i.e. 10%) of the Management Fee and, in the sole discretion of the
Manager, it is not reasonably likely that such amounts of the Management Fee
will be paid in the next fiscal quarter. Any such termination shall be
effective as of the last day of such third fiscal quarter provided at least 60
days notice shall have been given; otherwise, such termination shall be
effective on the sixtieth day after notice is given.
(v) Change in Law. In the event of any material change in
-------------
federal or state law that has a significant adverse impact on either party
hereto in connection with their performance under this Agreement, or if
performance by a party of any duties under this Agreement be deemed illegal by
any administrative agency or in a formal opinion rendered to manager by legal
counsel knowledgeable in health law matter retained by the Manager, the affected
party shall have the right to require that the other party renegotiate the terms
of this Agreement. Unless the parties otherwise mutually agree in writing, such
renegotiated terms shall be effective not later than twenty (20) days after
receipt of written notice of such request for renegotiation. Solely in the event
of illegality, if the parties fail to reach an agreement within thirty (30) days
of the request for renegotiation, either party may (subject to the severability
provision of this Agreement) terminate this Agreement upon thirty (30) days'
prior written notice to the other party.
c. Effect of Termination. Upon termination of this Agreement:
---------------------
(i) Group shall surrender to Manager all of Manager's
property used primarily in the operation of the Practice in the same condition
as received, reasonable wear and tear excepted;
(ii) Manager shall deliver to Group all records related to
the business of and provision of dental care through the Practice including,
without limitation, patient records and any corporate, personnel and financial
records maintained for the Practice and Providers, provided, that except as
limited by law, including, but not limited to laws governing the confidentiality
of patient records, Manager shall have the option to copy (or otherwise
duplicate) at its sole cost and expense such records of Group and to retain and
utilize such records for its own use;
(iii) Manager shall deliver to Group any other property of
Group in Manager's possession;
(iv) Both parties shall cooperate to ensure the provision
of appropriate dental care to Group Patients and Beneficiaries;
(v) Group shall promptly deliver to Manager any Management
Fees due and payable to Manager (such fees prorated for the month of
termination) and any amounts owed to Manager for advances made pursuant to
Section 7.3; and
16.
<PAGE>
(vi) Both parties shall cooperate to ensure the appropriate
billing and collections for dental services rendered by Group prior to the
effective date of termination, and any such cash collected shall be retained by
Group and/or paid to Manager pursuant to Article VII.
ARTICLE VII
FINANCIAL AND SECURITY ARRANGEMENTS
-----------------------------------
7.1 Management Fee. Group and Manager agree that the compensation
--------------
set forth in this Article VII is being paid to Manager in consideration of the
-----------
services provided and the substantial commitment and effort made by Manager
hereunder and that such fees have been negotiated at arms' length and are fair,
reasonable and consistent with fair market value. Manager shall be paid the
management fee (the "Management Fee") as set forth on Exhibit 7.1 hereto.
-------------- -----------
Payment of the Management Fee is not intended to and shall not be interpreted or
implied as permitting Manager to share in Group's fees for medical services but
is acknowledged as the negotiated fair market value compensation to Manager
considering the scope of services and the business risks assumed by Manager.
7.2 Payments. Except as otherwise set forth on Exhibit 7.1 hereto,
-------- -----------
the amounts to be paid to Manager under this Article VII shall be calculated by
-----------
Manager on the accrual basis of accounting and shall be payable monthly.
Payments due for any Management Fee shall be made by Group each calendar month
as provided herein and shall be paid on the 15th day following the end of such
month (or the first preceding day that is a business day if the 15th day is not
a business day) (a "Payment Date"). Such amounts paid shall be estimates based
------------
upon available information for such month, and adjustments to the estimated
payments shall be made to reconcile final amounts due under Section 7.1 on the
-----------
next Payment Date.
7.3 Advances.
--------
a. Group shall be entitled to an advance from Manager of such
additional sums, over and above Group's right to the amounts otherwise set forth
in this Article VII, as shall be required by Group to pay Practice Expenses
-----------
consistent with the Annual Budget of the Practice (prepared as provided in
Section 3.6 hereof), the Management Fee as provided in Exhibit 7.1 hereto and
-----------
Group Expenses at the discretion of Manager. Any amounts advanced to Group
pursuant to this Section 7.3 shall be repaid by Group in such priority as set
-----------
forth in Section 7.5 below and shall bear interest at a rate equal to one
-----------
percent (1%) above the prime rate reported by the Wall Street Journal as
adjusted on a quarterly basis, compounded monthly until all such amounts of
principal and interest are repaid to Manager as provided herein.
7.4 Security Agreement. In order to enforce its rights granted
------------------
hereunder and subject to applicable law, Group shall execute a Security
Agreement in substantially the form attached hereto as Exhibit 7.4 (the
-----------
"Security Agreement"), which Security Agreement grants a security interest in
- -------------------
all of Group's accounts receivable (as more fully described in the Security
Agreement) to Manager. In addition, Group shall cooperate with Manager and
execute all
17.
<PAGE>
necessary documents in connection with the pledge of such accounts receivable to
Manager or at Manager's option, its lenders.
7.5 Priority of Payments. Manager shall administer and make
--------------------
disbursements from amounts deposited into the Accounts or transferred from the
Accounts to pay (including, without limitation the making of advances as
provided in Section 7.3) the Practice Expenses and Group Expenses as the same
become due and payable, and for which Group shall remain responsible. In
performing its obligations pursuant to Article IV, Manager shall apply funds of
Group in the following order of priority:
a. payment of all Group Expenses;
b. payment of all Practice Expenses and the Reimbursable
Expense Portion of the Management Fee;
c. payment of the Percentage Portion of the Management Fee; and
d. payment of amounts advanced to Group, and applicable
interest thereon (as contemplated in Section 7.3).
-----------
If there are not sufficient funds to pay all amounts provided for
above in items (a), (b) and (d) and at least one-third (1/3) of item (c), all
such unpaid amounts shall accumulate and carry over until paid or until the
termination of this Agreement, in which case such unpaid amounts shall be
immediately due and payable as of the date of termination. Any amounts which
remain following the payment of the expenses and fees set forth in subparagraphs
(a) through (d) above shall be retained in the Accounts.
7.6 Accounts Receivable. At the option of Manager, on the first
-------------------
business day of each month, Manager may purchase all or any portion of the
accounts receivable of Group relating to Revenues arising during the previous
month, by payment of cash or other readily available funds into an account for
Group or by offset of amounts owed by Group to Manager. The consideration for
the purchase shall be an amount equal to all fees recorded each month (net of
adjustments for uncollectible accounts, professional courtesies and other such
activities that do not generate a collectible fee) less Management Fees due to
Manager under this Article VII. Manager's purchase shall be effective upon full
-----------
payment of the purchase price. In the event that such purchase shall be
ineffective for any reason, Group is concurrently herewith entering into the
Security Agreement to grant a security interest in the accounts receivable to
Manager. In addition, Group shall cooperate with Manager and execute all
necessary documents in connection with the pledge of such accounts receivable to
Manager or at Manager's option, its lenders. All collections in respect of such
accounts receivable shall be deposited in a bank account at a bank selected by
mutual agreement of Group and Manager. To the extent Group comes into
possession of any payments in respect of such accounts receivable, Group shall
direct such payments to Manager for deposit.
18.
<PAGE>
ARTICLE VIII
INDEMNITY AND INSURANCE
-----------------------
8.1 Indemnity.
---------
a. Indemnification. Each party shall indemnify, defend and hold
---------------
harmless the other party from any and all liability, loss, claim, lawsuit,
injury, cost, damage or expense whatsoever (including reasonable attorneys' fees
and court costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Group agrees
to indemnify, defend and hold harmless Manager for all liability, loss, claim,
lawsuit, injury, cost, damage or expense whatsoever (including reasonably
attorneys' fees and court costs) arising out of the professional negligence of
Group, its employees, agents, contractors or subcontractors, including any
amounts in excess of the professional liability insurance coverage of Group or
its employees, agents, contractors or subcontractors.
b. Mutual Indemnity. Subject to Manager's responsibilities under
----------------
Article VII, each party to this Agreement shall be indemnified by the other
- -----------
party for any claim under this Agreement or otherwise against the indemnified
party for vacation pay, sick leave, retirement benefits, Social Security
benefits, workers' compensation benefits, disability or unemployment, insurance
benefits, or other employee benefits of any kind accrued during the term of this
Agreement by an employee of the indemnifying party.
8.2 Manager's Insurance. Manager shall, on its own behalf and at its
-------------------
sole cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
a. Comprehensive general liability insurance covering the risks
of Manager, in an amount determined by the Joint Operations Committee;
b. Workers' Compensation insurance covering the employees of
Manager, in such amounts as is usual and customary under the circumstances;
c. Property insurance covering the facilities, equipment and
supplies owned or leased by Manager or Group for use in the operation of the
Practice.
8.3 Group's Insurance. At Group's sole cost and expense, Manager
-----------------
shall obtain, and maintain on behalf of Group in full force and effect during
the Term, policies in the following categories in the amount indicated:
19.
<PAGE>
a. Comprehensive professional liability insurance coverage for
Group and Group's Employee Providers, in such amounts as Group shall reasonably
deem necessary; provided, however, such coverage shall be no greater than that
set forth on Schedule B hereto without the prior consent of the Joint Operations
----------
Committee, which consent shall not be unreasonably withheld;
b. Workers' Compensation insurance covering the employees of
Group, in such amounts as is usual and customary under the circumstances;
c. Comprehensive general liability insurance covering the risks
of Group, in an amount determined by the Joint Operations Committee.
ARTICLE IX
BOOKS AND RECORDS
-----------------
9.1 Ownership of Records. All business records and information
--------------------
relating exclusively to the business and activities of either party shall be the
property of that party, irrespective of identity of the party responsible for
producing or maintaining such records and information. Without limiting the
foregoing, all patient charts and records maintained by Manager relating to the
dental services of Group shall be the property of Group. Group also shall be
entitled to a copy at Group's sole cost of all business records pertaining to
Group. Except as limited by law, including, but not limited to laws governing
the confidentiality of patient records, Manager shall be entitled to a copy at
Manager's sole cost of all records of Group.
ARTICLE X
RESTRICTIVE COVENANTS
---------------------
10.1 Covenant Regarding Proprietary Information. In the course of
------------------------------------------
the relationship created pursuant to this Agreement, Group will have access to
certain methods, trade secrets, processes, ideas, systems, procedures,
inventions, discoveries, concepts, software in various stages of development,
designs, drawings, specifications, models, data, documents, diagrams, flow
charts, research, economic and financial analysis, developments, procedures,
know-how, policy manuals, form contracts, marketing and other techniques, plans,
materials, forms, copyrightable materials and trade information (all of which is
referred to in this Agreement as "Proprietary Information") regarding the
-----------------------
operations of Manager and/or of its Affiliates (collectively, the "Protected
---------
Parties"). Group shall maintain all such Proprietary Information in strict
- -------
secrecy and shall not divulge such information to any third parties, except as
may be necessary for the discharge of their obligations under this Agreement.
Group shall take all necessary and proper precautions against disclosure of any
Proprietary Information to unauthorized persons by any of its employees or
agents. Group and all employees, and agents of Group who will have access to
all or any part of the Proprietary Information may be required to execute an
agreement, at the request of Manager, valid under the law of the jurisdiction in
which such agreement is executed, and in a form acceptable to Manager and its
counsel, committing themselves to maintain the Proprietary Information in strict
confidence and not to disclose it to any unauthorized person or entity. The
Protected Parties not party to this
20.
<PAGE>
Agreement are hereby specifically made third party beneficiaries of this
Section, with the power to enforce the provisions hereof. Upon termination of
this Agreement for any reason, Group and each of its Employee Providers and
Subcontract Providers shall cease all use of any of the Proprietary Information
and, at the request of Manager, shall execute such documents as may be necessary
to evidence Group's abandonment of any claim thereto. The parties recognize
that a breach of this Section cannot be adequately compensated in money damages
and therefore agree that injunctive relief shall be available to the Protected
Parties as their respective interests may appear.
The obligations of Group under this Section 10.1 shall not apply to
------------
information: (i) which is a matter of public knowledge on or becomes a matter
of public knowledge after the Effective Date of this Agreement, other than as a
breach of the confidentiality terms of this Agreement or as a breach of the
confidentiality terms of any other agreement between Group and Manager or its
Affiliates; or (ii) which was lawfully obtained by Group on a nonconfidential
basis other than in the course of performance under this Agreement and from some
entity other than Manager or its Affiliates or from some person other than one
employed or engaged by Manager or its Affiliates, which entity or person has no
obligation of confidentiality to Manager or its Affiliates.
10.2 Covenants Not to Compete During the Term. The parties recognize
----------------------------------------
that the services to be provided by Manager shall be feasible only if Group
operates an active dental practice to which Group and its Providers devote full
time and attention. To that end:
a. Restrictive Covenants by Group. During the term of this
------------------------------
Agreement, Group shall not (i) establish, operate or provide dental care
services at any dental office, clinic or other facility providing services
substantially similar to those provided by Group pursuant to this Agreement
anywhere other than at the Practice Sites and as may be approved in writing by
Manager; (ii) enter into any management or administrative services agreement or
other similar arrangement with any person or entity other than Manager without
Manager's prior written approval and (iii) operate or, directly or indirectly,
hold or own any type of ownership or other form of equity interest in, or serve
as a consultant to or otherwise perform services for any person or entity
engaged in the business of providing management and administrative services to
dental practices.
b. Restrictive Covenants by Providers. Group shall use its
----------------------------------
reasonable best efforts to obtain and enforce formal agreements with its owners,
Employee Providers and Subcontract Providers who are dentists not to establish,
operate or provide dental care services, during the term of this Agreement and
for a period of at least two (2) years after any termination of employment with
Group, at any dental office, clinic or facility located within a minimum of ten
(10) miles of any Practice Site at which the owner, Employee Provider or
Subcontract Provider has practiced. Any variation of such restrictive covenants
shall be approved in advance in writing by Manager.
10.3 Covenant Not to Solicit. For three (3) years following the
-----------------------
termination of this Agreement, Group shall not:
21.
<PAGE>
a. directly or indirectly solicit, recruit or hire, or induce
any party to solicit, recruit or hire any person who is an employee of, or who
has entered into an independent contractor arrangement with, Manager or any
Affiliate of Manager;
b. directly or indirectly, whether for itself or for any other
entity or person, call upon, solicit, divert or take away, or attempt to
solicit, call upon, divert or take away any of Manager's customers, business, or
clients; or
c. directly or indirectly solicit, or induce any party to
solicit, any of Manager's contractors or the contractors of any Affiliate of
Manager, to enter into the same or a similar type of contract with any other
party.
10.4 Enforcement. Manager and Group acknowledge and agree that since
-----------
a remedy at law for any breach or attempted breach of the provisions of this
Article X shall be inadequate, either party shall be entitled to specific
- ---------
performance and injunctive or other equitable relief in case of any such breach
or attempted breach, in addition to whatever other remedies may exist by law.
All parties hereto also waive any requirement for the securing or posting of any
bond in connection with the obtaining of any such injunctive or other equitable
relief.
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
11.1 Future Incorporation; Nonrecourse Obligations. The parties
---------------------------------------------
acknowledge that Sam Samudio, D.D.S. intends to form a California professional
corporation (the "New PC") to conduct the Practice, and that the Practice and
this Agreement will be conveyed, transferred and assigned to the New PC at such
time. For so long as Group conducts the Practice in the form of a sole
proprietorship, the parties acknowledge and agree that there shall be no
recourse whatsoever by Manager or the Company against Sam Samudio, D.D.S. for
the failure of Group to perform its obligations under this Agreement, except for
those obligations contemplated in Section 5.11 hereto. As soon as possible
after the transfer of the Practice to the New PC, Sam Samudio covenants to
execute and deliver to Manager a Purchase and Sale of Interests Agreement
relating to his interest in the New PC, substantially in the form of the
Purchase and Sale of Interests Agreements executed between Fremont Dental Group
partners and Manager on or about the date of this Agreement.
11.2 Assignment. Neither party shall assign this Agreement to any
----------
other party or parties without the prior written consent of the other party,
which consent may be withheld arbitrarily or capriciously, for any reason or for
no reason whatsoever and any attempted assignment in violation of this Agreement
shall be null and void. Notwithstanding the preceding, Manager may assign this
Agreement to any direct or indirect wholly-owned subsidiary of either Manager or
Parent or to a financial institution as collateral security for the indebtedness
of Manager, Parent or any of their respective Affiliates.
22.
<PAGE>
11.3 Headings. The article and section headings used in this
--------
Agreement are for purposes of convenience only. They shall not be construed to
limit or to extend the meaning of any part of this Agreement.
11.4 Waiver. Waiver by either Group or Manager of any breach of any
------
provision of this Agreement shall not be deemed to be a waiver of such provision
or of any subsequent breach of the same or of any other provision of this
Agreement.
11.5 Notices. Any notice, demand, approval, consent or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be shall be deemed to have been given when five (5) business
days have elapsed from the date of deposit in the United States mails, certified
and postage prepaid, addressed to the party to be served at the following
address or such other address as may be given in writing to the parties.
Group: Sam Samudio, D.D.S., d/b/a
Pleasanton Dental Care, a Sole
proprietorship
5540-B Springdale Ave.
Pleasanton, CA 94588
Attn: Sam Samudio, D.D.S.
Manager: GMS Dental Group, Inc.
22800 Savi Ranch Parkway
Suite 206
Yorba Linda, California 92887
Attn: Michael T. Fiore, President
and Chief Executive Officer
11.6 Attorneys' Fees. If any legal action or arbitration or other
---------------
proceeding is commenced, whether by Manager or Group concerning this Agreement,
the prevailing party shall recover form the losing party reasonable attorneys'
fees and costs and expenses, including those of appeal and not limited to
taxable costs, incurred by the prevailing party, in addition to all other
remedies to which the prevailing party may be entitled. If a claim or claims
asserted by a third party against Manager or Group or any of them arise from an
action or omission by the other, the party responsible for the action or
omission shall be the losing party, and the other party shall be the prevailing
party, for purposes of the foregoing sentence.
11.7 Successors. Without limiting or otherwise affecting any
----------
restrictions on assignments of this Agreement or rights or duties under this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
successor and assigns of Group and Manager.
23.
<PAGE>
11.8 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between Group and Manager and supersedes all prior negotiation and agreements,
written or oral, concerning or relating to the subject matter of this Agreement,
and this Agreement may not be modified except by a writing executed by all
parties and subject to the provisions thereof.
11.9 Governing Law. This Agreement and the rights and obligations of
-------------
the parties hereto shall be governed by, and construed according to, the laws of
the State of California.
11.10 Severability, Contract Modifications for Prospective Legal
----------------------------------------------------------
Events. Nothing contained in this Agreement shall be construed to require the
- ------
commission of an act contrary to law, and whenever there is any conflict between
any provision of this Agreement and any statute, law, ordinance or regulation,
the latter shall prevail. In such event, and in any case in which any provision
of this Agreement is determined to be in violation of a statute, law, ordinance
or regulation, the affected provision(s) shall be limited only to the extent
necessary to bring it within the requirements of the law and, insofar as
possible under the circumstances, to carry out the purposes of this Agreement.
The other provisions of this Agreement shall remain in full force and effect,
and the invalidity or unenforceability of any provision hereof shall not affect
the validity and enforceability of the other provisions of this Agreement, nor
the availability of all remedies in law or equity to the parties with respect to
such other provisions.
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision, a regulatory agency or legal counsel of both
parties in such a manner as to indicate that the structure of this Agreement may
be in violation of such laws or regulations, Group and Manager shall amend this
Agreement, to the maximum extent possible, to preserve the underlying economic
and financial arrangements between Group and Manager. The parties agree that
such amendment may require reorganization of Group or Manager, or both, and may
require either or both parties to obtain appropriate regulatory licenses and
approvals. If an amendment is not possible, either party shall have the right
to terminate this Agreement upon thirty (30) days notice to the other party.
11.11 Time Is of the Essence. Time is of the essence in this
----------------------
Agreement.
11.12 Authority. Any Person signing this Agreement on behalf of any
---------
entity hereby represents and warrants in its individual capacity that it has
full authority to do so on behalf of such entity.
11.13 Counterparts. This Agreement may be executed in two (2) or
------------
more counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same instrument.
[Signature Page to Follow]
24.
<PAGE>
IN WITNESS WHEREOF, Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
"Group"
Sam Samudio, D.D.S.
dba Pleasanton Dental Care
By: /s/ Sam Samudio, D.D.s.
------------------------
Sam Samudio, D.D.s.
"Manager"
GMS Dental Group Management, Inc.
a Delaware corporation
By:_________________________
Michael T. Fiore
President and Chief Executive Officer
25.
<PAGE>
IN WITNESS WHEREOF, Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
"Group"
Sam Samudio, D.D.S.
dba Pleasanton Dental Care
By:__________________________
Sam Samudio, D.D.S.
"Manager"
GMS Dental Group Management, Inc.
a Delaware corporation
By: /s/ Michael T. Fiore
-------------------------
Michael T. Fiore
President and Chief Executive Officer
25.
<PAGE>
ADDENDUM 1.
----------
For purposes of this Agreement, the following terms shall have the
meaning indicated below or defined at the indicated section:
(1) Accounts. See Section 2.5.
--------
(2) Affiliate. "Affiliate" shall mean, with respect to any Person,
---------
(i) any individual or entity directly or indirectly owned or controlled by such
Person, (ii) any individual or entity directly or indirectly owning or
controlling such Person or (iii) any individual or entity directly or indirectly
owned or controlled by the same family member, individual or entity as owns or
controls such Person. For purposes of this Agreement, neither Group nor Manager
shall be deemed an Affiliate of the Other.
(3) Agreement. "Agreement" means this Group Management Agreement.
---------
(4) Annual Budget. See Section 3.6.
-------------
(5) Asset Purchase Agreement. That certain Asset Purchase Agreement,
------------------------
dated as of the Effective Date by and among the Company, Manager and Group.
(6) Beneficiaries. See Recital A.
-------------
(7) Books and Records. "Books and Records" means Group's books of
-----------------
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
(8) Capital Costs. "Capital Costs" shall mean any and all investments
-------------
that are or would be capitalized pursuant to GAAP.
(9) Committee Members. See Section 3.5a.
-----------------
(10) Default Notice. See Section 6.2b(1).
--------------
(11) Effective Date. See preamble paragraph.
--------------
(12) Employee Providers. See Recital B.
------------------
(13) Employment Agreements. See Recital B.
---------------------
1.
<PAGE>
(14) GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with 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 Manager's financial statement.
(15) Group. See first paragraph of this Agreement.
-----
(16) Group Expenses. "Group Expenses" means salaries and wages,
--------------
compensation, payroll taxes, and employee benefits of Sam Samudio, Employee
Providers and Subcontract Providers, all as set forth in, and subject to and
limited by, the Annual Budget.
(17) Group Member. See Section 3.5a.
------------
(18) Group Patients. See Recital A.
--------------
(19) Joint Operations Committee. See Section 3.4b.
--------------------------
(20) Management Fee. See Section 7.1.
--------------
(21) Manager. See first paragraph of this Agreement.
-------
(22) Manager Members. See Section 3.5a.
---------------
(23) Marks. See Section 2.3a.
-----
(24) Offer. See Section 5.1.
-----
(25) Parent. "Parent" shall mean GMS Dental Group, Inc. or any
------
successor thereto.
(26) Payment Date. See Section 7.2.
------------
(27) Payor Contracts. See Recital A.
---------------
(28) Percentage Fee Portion. See Exhibit 7.1.
---------------------- -----------
(29) Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
(30) Plans. See Recital A.
-----
(31) Practice. See Recital C.
--------
2.
<PAGE>
(32) Practice Expenses. "Practice Expenses" means all costs incurred
-----------------
by Manager including amortization associated with costs of acquiring assets of
the Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which are
attributable to Manager's business operations in accordance with Manager's
corporate allocation policies, all as consistent with and/or contemplated in the
Annual Budget.
(33) Practice Sites. See Section 3.4a.
--------------
(34) Practice Site Facilities. See Section 3.4a.
------------------------
(35) Preliminary Budget. See Section 3.7b.
------------------
(36) Programs. See Section 2.3b.
--------
(37) Proprietary Information. See Section 10.1.
-----------------------
(38) Protected Parties. See Section 10.1.
-----------------
(39) Providers. See Recital B. The term "Providers" shall include
---------
individuals or organizations licensed to practice dentistry (including
specialists) as well as other licensed dental professionals who provide
ancillary reimbursable dental services.
(40) Provider Subcontracts. See Recital A.
---------------------
(41) Reimbursable Expense Portion. See Exhibit 7.1.
---------------------------- -----------
(42) Revenues. See Section 2.4.
--------
(43) Security Agreement. See Section 7.4.
------------------
(44) Subcontract Providers. See Recital B.
---------------------
(45) Term. See Section 6.1.
----
3.
<PAGE>
EXHIBIT 10.47
================================================================================
DENTAL GROUP MANAGEMENT AGREEMENT
effective as of
October 31, 1997
by and among
PREMIER DENTAL CARE, INC.
(an Idaho professional corporation)
and
SJL, P.A.
(an Idaho professional corporation)
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I - DEFINITIONS................................................................ 1.
ARTICLE II - SCOPE OF AGREEMENT........................................................ 2.
Section 2.1 General Scope of Agreement......................................... 2.
Section 2.2 License............................................................ 2.
Section 2.3 Intellectual Property.............................................. 2.
Section 2.4 Revenues........................................................... 2.
Section 2.5 Deposit Accounts................................................... 3.
ARTICLE III - OPERATION OF PRACTICES................................................... 3.
Section 3.1 Appointment........................................................ 3.
Section 3.2 Professional Matters............................................... 3.
Section 3.3 Relationship of Parties............................................ 3.
Section 3.4 Authority and Control.............................................. 3.
Section 3.5 Joint Operations Committee......................................... 4.
Section 3.6 Budgets............................................................ 5.
Section 3.7 Budget Process..................................................... 6.
ARTICLE IV - MANAGEMENT SERVICES....................................................... 7.
Section 4.1 General Description of Services.................................... 7.
Section 4.2 Practice Site Facilities........................................... 7.
Section 4.3 Purchased Items and Services....................................... 7.
Section 4.4 Manager Personnel.................................................. 7.
Section 4.5 Day-to-Day Management and Supervision.............................. 7.
Section 4.6 Billing and Collection Payment of Expenses......................... 8.
Section 4.7 Bookkeeping and Accounting......................................... 8.
Section 4.8 Marketing and Public Relations Services............................ 9.
Section 4.9 Group Agreements................................................... 9.
Section 4.10 Utilization Review Quality Improvement and Outcomes Monitoring..... 9.
Section 4.11 Patient Referrals.................................................. 9.
Section 4.12 Applicable Law..................................................... 9.
ARTICLE V - GROUP RESPONSIBILITIES..................................................... 10.
Section 5.1 Diagnosis, Treatment Planning, Specific Patient Education and
Consultation....................................................... 10.
Section 5.2 Dental Services.................................................... 10.
Section 5.3 Provision of Dental Services by Group.............................. 11.
Section 5.4 Providers.......................................................... 11.
Section 5.5 Peer Review........................................................ 11.
Section 5.6 Fees, Charges and Payor Agreements................................. 11.
Section 5.7 Hours of Clinical Operation........................................ 11.
Section 5.8 Billing Information and Assignments................................ 11.
Section 5.9 Third Party Contracts.............................................. 12.
Section 5.10 Use of Manager's Goods and Services................................ 12.
Section 5.11 Negative Covenants................................................. 12.
Section 5.12 Group Maintains Full Professional Authority........................ 12.
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE VI - TERM...................................................................... 12.
Section 6.1 Term............................................................... 12.
Section 6.2 Termination and Extension.......................................... 12.
ARTICLE VII - FINANCIAL AND SECURITY ARRANGEMENTS...................................... 14.
Section 7.1 Management Fee..................................................... 14.
Section 7.2 Payments........................................................... 15.
Section 7.3 Advances........................................................... 15.
Section 7.4 Security Agreement................................................. 15.
Section 7.5 Priority of Payments............................................... 15.
Section 7.6 Accounts Receivable................................................ 15.
ARTICLE VIII - INDEMNITY AND INSURANCE................................................. 16.
Section 8.1 Indemnity.......................................................... 16.
Section 8.2 Manager's Insurance................................................ 16.
Section 8.3 Group's Insurance.................................................. 17.
ARTICLE IX - BOOKS AND RECORDS......................................................... 17.
Section 9.1 Ownership of Records............................................... 17.
ARTICLE X - RESTRICTIVE COVENANTS...................................................... 17.
Section 10.1 Covenant Regarding Proprietary Information......................... 17.
Section 10.2 Covenants Not to Compete During the Term........................... 18.
Section 10.3 Covenant Not to Solicit............................................ 18.
ARTICLE XI - MISCELLANEOUS PROVISIONS.................................................. 19.
Section 11.1 Assignment......................................................... 19.
Section 11.2 Headings........................................................... 19.
Section 11.3 Waiver............................................................. 19.
Section 11.4 Notices............................................................ 19.
Section 11.5 Attorneys' Fees.................................................... 20.
Section 11.6 Successors......................................................... 20.
Section 11.7 Entire Agreement................................................... 20.
Section 11.8 Governing Law...................................................... 20.
Section 11.9 Severability, Contract Modifications for Prospective Legal Events.. 20.
Section 11.10 Time Is of the Essence............................................. 21.
Section 11.11 Authority.......................................................... 21.
Section 11.12 Counterparts....................................................... 21.
</TABLE>
(ii)
<PAGE>
EXHIBITS
Addendum 1
Schedule A -- Stockholder
Schedule B -- Professional Liability Insurance Coverage
Exhibit 7.1 -- Service Fee
Exhibit 7.4 -- Security Agreement
(iii)
<PAGE>
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
This Dental Group Management Agreement (this "Agreement") is effective as
---------
of October 31, 1997 and is effective as of the date set forth in Section 6.1
("Effective Date") by and between Premier Dental Care, Inc., an Idaho
--------------
corporation ("Manager"), and SJL, P.A., an Idaho professional corporation
-------
("Group").
-----
RECITALS
--------
A. Group engages in the practice of dentistry by providing dental services
to patients of Group ("Group Patients") and to enrollees ("Beneficiaries") of
-------------- -------------
dental plans ("Plans") under contracts ("Payor Contracts") between Group and
----- ---------------
Plans or between Beneficiaries and Plans.
B. Group provides dental services to Beneficiaries and to Group Patients
through arrangements with licensed individuals ("Providers"). Such arrangements
---------
may include contracts ("Employment Agreements") with dentist employees
---------------------
(collectively "Employee Providers") and agreements ("Provider Subcontracts")
------------------ ---------------------
with independent contractor dentists and non-dentist providers of various dental
care services (collectively "Subcontract Providers").
---------------------
C. All activities of Group subject to this Agreement are referenced as
the "Practice." All references to "dental" care and services include general
--------
and specialist dental services. All references to "dentists" include
generalists and specialists.
D. Manager is a management services company that has been organized to
provide certain support services for the Practice and for other dental groups.
Manager is in the business of providing or arranging for management services,
facilities, equipment and certain personnel necessary for the operation of the
Practice.
E. Group desires to retain Manager on an independent contractor basis to
provide management services that are more particularly described below, and
Manager desires to provide such management services under the terms and
conditions set forth in this Agreement.
AGREEMENTS
----------
Now, Therefore, in consideration of the covenants and conditions contained
herein, Manager and Group agrees as follows:
ARTICLE I
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
1.
<PAGE>
ARTICLE II
SCOPE OF AGREEMENT
------------------
Section 2.1 General Scope of Agreement. This Agreement shall apply
--------------------------
to the Practice being conducted by Group, including, without limitation, all
professional, administrative and technical services, marketing, contracting,
case management, ancillary dental services, outpatient services and dental care
facilities, equipment, supplies and items, except as otherwise specifically
provided in this Agreement. Group's Employment Agreements shall encompass
substantially all such activities of Employee Providers and shall provide that
all revenues derived from such activities (and not excluded below) shall be
included in Revenues as such term is defined in Section 2.4 hereof. Nothing in
this Agreement shall be construed to alter or in any way affect the legal,
ethical and professional relationship between and among Provider and Provider's
patients, nor shall anything contained in this Agreement abrogate any right or
obligation arising out of or applicable to the dentist-patient relationship.
Pursuant to that certain Agreement and Plan of Reorganization and Merger of even
date herewith by and between Manager, Group and GMS Dental Group, Inc., a
Delaware corporation (the "Company"), Manager shall be merged with and into the
Company, which will become Manager under this Agreement upon consummation of
such merger.
Section 2.2 License. Except as prohibited by contract or by
-------
applicable laws and requirements governing the practice of dentistry, Group
grants Manager an exclusive license to use any and all of Group's assets,
whether tangible or intangible, in carrying out Manager's duties and
responsibilities under the provisions of this Agreement.
Section 2.3 Intellectual Property. Group hereby grants to manager a
---------------------
non-exclusive, perpetual, royalty-free, worldwide license to use and sublicense
the use of any intellectual property owned by Group. This license shall cover,
but not be limited to, use of the following:
a. Service Mark. Group hereby grants Manager the right to use
------------
all service marks and trademarks of Group (the "Marks") for marketing and
-----
promotional materials in connection with Group's offering of dental services.
Manager agrees to use the Marks solely in the design format used by Group as of
the date of this Agreement or another design format approved in advance in
writing by Group. Group shall have the opportunity to review any marketing or
other materials using the Marks in advance of any public distribution. Manager
agrees that it will include these restrictions on use in any sublicense of the
Marks.
b. Copyrighted Materials. Group hereby grants Manager the right
---------------------
to use any and all copyrighted materials authored or owned by Group including,
specifically, the Group dental management system software programs (the
"Programs"). This license includes the right to sublicense the Programs and the
- ---------
right to prepare and own derivative works based on the Programs, all without a
duty of accounting to Group. Group shall execute all documents required to
enable Manager to own, use and exploit all such rights.
Section 2.4 Revenues. "Revenues" shall mean all of Group's accounts
-------- --------
receivable (net of contractual adjustments and bad debt), and cash collections.
Revenues shall include all funds collected by, or legally due to, Group or any
Affiliate of Group, including, without limitation, the following: (a) all fee-
for-service payments for services to Group Patients or Beneficiaries; (b) all
payments established under Payor Contracts; (c) all coordination of benefits or
deductibles and third-party liability recoveries related to the Group's
services; (d) all payments, dues, fees or other compensation to Group; (e) any
income, profits, dividends, distributions or other payments from Group's
investments; and (f) any interest or other non-operating income of Group.
2.
<PAGE>
Section 2.5 Deposit Accounts. All cash received by Group from
----------------
whatever source shall be deposited into an account or accounts ("Accounts") in
--------
the name of Group at a banking institution selected by Group and approved by
Manager. Group authorizes Manager to bill and collect, in Group's name, all
charges and reimbursements for Group's dental related activities and to deposit
such collections in the Accounts. Group agrees to assist and cooperate with
Manager in the billing and collection process and to immediately deliver to
Manager for deposit any monies Group may receive. Manager shall manage the cash
equivalents of Group and Manager shall be entitled (and is hereby authorized) to
transfer such cash to the account of Manager and to use such cash for purposes
as Administrator deems appropriate, subject to and consistent with the terms and
provisions of this Agreement. Nothing in this Section 2.5 shall be construed to
limit or otherwise modify the requirement that Manager disburse funds in
fulfillment of the obligations of the Group and Manager under this Agreement.
ARTICLE III
OPERATION OF PRACTICES
----------------------
Section 3.1 Appointment. Subject to applicable laws and requirements
-----------
governing the practice of dentistry, Group hereby appoints Manager as its sole
and exclusive Manager for the operation of the Practice and covenants not to
enter into an agreement with any Person other than Manager to perform or assume
any of Manager's rights, duties or responsibilities as provided herein. Manager
hereby accepts full responsibility for such management as more fully set forth
herein.
Section 3.2 Professional Matters. Pursuant to applicable laws and
--------------------
requirements governing the practice of dentistry, Group shall retain ultimate
responsibility for all activities of Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's non-
licensed status.
Section 3.3 Relationship of Parties. In the performance of its
-----------------------
duties and obligations under this Agreement, it is understood and agreed that
Manager shall, at all times, be acting and performing as an independent
contractor and not as an employee of Group. Except as provided in this
Agreement or as required by laws, Group shall neither have nor exercise any
control or direction over the methods by which Manager shall perform its
obligation thereunder; nor shall Manager have or exercise any control or
direction over the methods by which Group shall practice dentistry. It is
expressly agreed by the parties that no work, act, commission or omission of
manager pursuant to the terms and conditions of this Agreement shall be
construed to make or render Manager or Manager's employees or agents, the
employees of Group. Manager and Group are not partners or joint venturers with
each other and nothing herein shall be construed so as to make them partners or
joint venturers or impose upon either of them any liability as partners or joint
venturers. Manager's responsibility is to assure that the services covered by
this Agreement shall be performed and rendered in a competent, efficient and
satisfactory manner.
Section 3.4 Authority and Control. Strategic planning, overall
---------------------
direction and control of the business and affairs of Group, and authority over
the day-to-day activities of Group shall be accomplished as follows:
a. Exclusive Authority:
-------------------
(1) Group. Notwithstanding anything else to the contrary
-----
contained herein, Group shall have the sole responsibility and authority for all
aspects of the practice of dentistry and delivery of dental services by
Providers. Providers shall use and occupy at the practice sites ("Practice
--------
Sites") the facilities provided by Manager hereunder exclusively for the
- -----
practice of dentistry ("Practice Site
-------------
3.
<PAGE>
Facilities"). Group and Manager expressly acknowledge that the Practice or
- ----------
Practices conducted at these Practice Site Facilities shall be conducted solely
by dentists and dental hygienists associated with Group as Employee Providers or
Subcontract Providers. Group shall consult with Manager or the Joint Operations
Committee to the extent reasonable and not inconsistent with the laws governing
the practice of dentistry.
b. Joint Authority. All other decision-making authority related
---------------
to the business and affairs of Group shall be vested in a joint operations
committee (the "Joint Operations Committee"). Nothing herein shall be construed
--------------------------
as preventing the Joint Operations Committee from appointing representatives and
delegating authority to such representatives so long as the Joint Operations
Committee may revoke such appointment and delegation at any time and so long as
the Joint Operations Committee retains ultimate responsibility for the decisions
of such representatives.
Section 3.5 Joint Operations Committee. Subject to applicable laws
--------------------------
and requirements governing the practice of dentistry, the Joint Operations
Committee shall have authority and responsibility to provide strategic planning,
overall direction and authority over the day-to-day management and
administrative activities of the Group and shall manage the business operations
of the Group as follows:
a. Joint Operations Committee Membership. The Joint Operations
-------------------------------------
Committee shall consist initially of three (3) individuals (the "Committee
---------
Members"). Group shall designate one (1) Committee Member who shall be licensed
- -------
dentists (the "Group Member") and the remaining two (2) Committee Members (the
------------
"Manager Members") shall be appointed by Manager. The number of Committee
- ----------------
Members may be increased by agreement of the parties. Each party shall continue
to direct the appointment of the same percentage of Committee Members as
described above. Each Committee Member shall serve at the pleasure of the party
designating such Committee Member and may be replaced, with or without cause, at
any time by such party upon the delivery of written notice thereof to the other
Committee Members. Manager, Group and their respective Committee Members shall
diligently pursue any preliminary activities that are necessary to allow the
Joint Operations Committee to take an action. Where Committee Members are
required to consult with the organization appointing such Committee Members, the
Committee shall establish and agree on a deadline for accomplishing such
consultation.
b. Joint Operations Committee Action.
---------------------------------
(1) Joint Action. Except as otherwise expressly set forth
------------
above, the Joint Operations Committee shall take all other actions that have
been approved by a majority of the Committee Members.
(2) Consultation Forum. Consultation between Group and
------------------
Manager, if any, shall take place at a meeting of the Joint Operations
Committee, and Group and Manager hereby agree to be bound by the decision of
their Group Members or Manager Members, as the case may be.
c. Joint Operations Committee Meetings. Meetings of the Joint
-----------------------------------
Operations Committee may be held by telephone or similar communications
equipment so long as all Committee Members participating in a meeting can hear
and speak to each other. The Joint Operations Committee shall prepare and
maintain written minutes of all meetings and shall provide a copy of the minutes
to the parties within fifteen (15) business days following each meeting.
(1) Regular Meetings. The Joint Operations Committee shall
----------------
hold not less than four (4) regular meetings each year, at such specific times
and places as the Committee Members may determine.
4.
<PAGE>
(2) Special Meetings. A special meeting of the Joint
----------------
Operations Committee may be called by a majority of the Committee Members.
(3) Notice Requirement. A Committee Member calling a special
------------------
meeting must provide all other Committee Members with ten (10) days' advance
written or telephonic notice. Notice must be given or sent to the Committee
Member's address or telephone number as shown on the records of the Joint
Operations Committee. Notice may be delivered directly to each Committee Member
or to a person at the Committee Member's principal place of business who
reasonably would be expected to communicate that notice promptly to the
Committee Member.
(4) Waiver of Notice Requirement.
----------------------------
(a) Written Waiver, Consent or Approval. Notice of a
-----------------------------------
special meeting need not be given to any Committee Member who, either before or
after the meeting, signs a waiver of notice or a written consent of the holding
of the special meeting, or an approval of the minutes of the special meeting.
Such waiver, consent or approval need not specify the purpose of the special
meeting. All such waivers, consents and approvals shall be filed with the Joint
Operations Committee records or made a part of the minutes of the special
meetings.
(b) Failure to Object. Notice of a special meeting need
-----------------
not be given to any Committee Member who attends the special meeting and does
not protest before or at the commencement of the special meeting such lack of
notice.
(5) Quorum. The smallest number of Committee Members that
------
exceed fifty percent (50%) of all Committee Members shall constitute a quorum of
the Joint Operations Committee, provided, however, that such quorum shall
include at least one Group member and one Manager member.
(6) Proxies. The Joint Operations Committee shall provide for
-------
the use of proxies, telephonic conference calls, written consents or other
appropriate methods by which the full participation of the Group Members and
Manager Members can be assured.
d. Limitation of Responsibility. Notwithstanding any other
----------------------------
provisions hereof, Committee Members shall be liable to the parties only for
actions constituting bad faith, gross negligence or breach of an express
provision of this Agreement (so long as such breach remains uncured after ten
(10) days of receiving notice of the nature of such breach). In all other
respects, Committee Members shall not be liable for negligence or mistakes of
judgment.
Section 3.6 Budgets. A capital and operating budget ("Annual
------- ------
Budget") shall be established regarding all financial aspects of the Practice.
The Annual Budget shall include the following elements and other items, as
appropriate:
a. A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
b. An operating budget setting forth an estimate of Net Revenues
and expenses for the next succeeding fiscal year, together with an explanation
of anticipated changes or modifications, if any, in the Practice's utilization,
rates, charges to patients or third party payors, salaries, costs of Provider,
non-wage cost increases, and all other similar factors expected to differ
significantly from those prevailing during the current fiscal year;
5.
<PAGE>
c. Other expenses of operation;
d. The amount of a reasonable reserve to satisfy possible shortfalls
from operations. The allocation of such reserve shall be made by the Joint
Operations Committee as and when necessary; and
e. The Management Fee, as defined below, for the next succeeding
fiscal year.
Section 3.7 Budget Process.
--------------
a. Initial Annual Budget. Not later than 45 days after the Effective
---------------------
Date, the Joint Operations Committee will have prepared the initial Annual
Budget for the first fiscal year (which shall initially be the calendar year)
during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains, or, at the option of
the parties, such portion of the then current fiscal year plus the immediately
subsequent fiscal year.
b. Preliminary Budget. Not later than forty-five (45) days prior to
------------------
the end of each fiscal year during the term of this Agreement, the Manager shall
prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
------------------
c. Joint Operations Committee Approval. The Joint Operations
-----------------------------------
Committee shall review and suggest modifications to the Preliminary Budget
within ten (10) days of receipt. Manager shall prepare a revised budget based
upon the Joint Operations Committee's recommendations and the Preliminary Budget
as revised shall become the Annual Budget.
d. Adjustments. In the event of a material deviation between
-----------
financial forecasts and financial performance during a fiscal year, Manager or
Group may propose adjustments to the Annual budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
3.8 Personnel.
---------
a. Providers. Except in unusual circumstances approved by the Joint
---------
Operations Committee, and as permitted by law, Manager shall not employ or
contract with any Provider for the provision of dental services. All Providers
who provide dental services to Group Patients or to Beneficiaries shall be
either (1) Employee Providers, (2) Subcontract Providers, or (3) employees of
Subcontract Providers. Group shall have complete control of and responsibility
for the hiring, engagement, compensation, training, scheduling, supervision,
evaluation, and termination of all Employee Providers and Subcontract Providers,
although at the request of Group, Manager shall consult with Group respecting
such matters and shall coordinate the advertising of positions available,
interviewing of candidates, and scheduling of clinical staff meetings and
training sessions.
b. Non-Providers. With the exception of employees of Subcontract
-------------
Providers, Manager shall employ all non-Provider personnel necessary for the
operation of the Practice.
c. Salary and Benefits. Subject to Manager's responsibilities under
-------------------
Article VII, each party to this Agreement shall remain liable for the salary and
benefits paid to such party's own
6.
<PAGE>
employees and shall be ultimately responsible for compliance with state and
federal laws pertaining to employment taxes, workers' compensation, unemployment
compensation and other employment-related statutes pertaining to the party's own
employees.
d. Payments to Subcontract Providers. Subject to Manager's
---------------------------------
responsibilities under Article VII, Group shall be liable for any payments due
Subcontract Providers under Provider Subcontracts.
ARTICLE IV
MANAGEMENT SERVICES
-------------------
Section 4.1 General Description of Services. Except as prohibited by
-------------------------------
law and within the limitations set out elsewhere in this Agreement, Manager
shall provide or arrange for the provision to Group of all support services
reasonably necessary and appropriate for the efficient operation of the
Practice. Such services include all administrative services necessary to
Group's performance of its obligations under Payor Contracts, contracting,
marketing, capital formation and assistance with long term strategic planning.
Manager shall exercise its best efforts to fulfill the administrative functions
of a well managed dental group.
Section 4.2 Practice Site Facilities. When appropriate, Manager
------------------------
shall secure and maintain Practice Site Facilities, including, without
limitation, office space, improvements, furnishings, equipment, supplies, and
personal property, of a nature and in a condition necessary and appropriate for
the efficient and effective operations of the Practice subject to the general
approval of the Joint Operations Committee. Group hereby accepts and approves
of the Practice Site Facilities initially provided by Manager. However, Manager
from time to time shall make such Practice Site Facilities changes, including
but not limited to dental equipment purchases, as reasonably may be requested by
Group and consistent with the Annual Budget.
Section 4.3 Purchased Items and Services. Manager shall serve as the
----------------------------
purchasing agent for Group and shall arrange for personnel benefits, insurance,
and any other items and services required for the proper operation of the
Practice.
Section 4.4 Manager Personnel.
-----------------
a. Management Team. Subject to any approval or consulting rights
---------------
of the Joint Operations Committee, Manager may engage or designate one or more
individuals experienced in dental group management and direction, including, but
not limited to, an administrator, who will be responsible for the overall
administration of the Practice including day-to-day operations and strategic
development activities.
b. Other Manager Personnel. Manager shall select, hire, train,
-----------------------
supervise, monitor and terminate all non-Provider personnel necessary for the
operation and management of the Practice; provided, however, with respect to the
selection, hiring and termination of non-Provider clinical staff, Manager shall
obtain the consent of the Group, which consent will not be unreasonably
withheld.
Section 4.5 Day-to-Day Management and Supervision. Subject to any
-------------------------------------
approval or consulting rights of the Joint Operations Committee, Manager shall
provide general management including, but not limited to, day-to-day supervision
of:
7.
<PAGE>
a. manager personnel;
b. equipment and supply acquisition;
c. office space and facility maintenance;
d. patient records organization and retention;
e. third party payor contracting;
f. case management;
g. billing, collections and accounting activities as set forth below;
h. all operating aspects and policies of the Practice including, but
not limited to, hours of operation, work schedules, standard duties and job
descriptions, for all non-Group personnel; and
i. other related and incidental matters.
Section 4.6 Billing and Collection Payment of Expenses. In addition to the
------------------------------------------
responsibilities of Manager under Article VII, Manager shall be responsible for
all billing and collection activities required by Group. Manager shall also be
responsible for reviewing and paying accounts payable of Group. Group hereby
appoints the Manager its true and lawful attorney-in-fact to take the following
actions for and on behalf of and in the name of Group:
a. bill and collect in Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Group. Group shall give
Manager all necessary access to Patient records to accomplish all billing and
collection. In so doing, Manager will use its best efforts but does not
guarantee any specific level of collections, and Manager will comply with
Group's reasonable and lawful policies regarding courtesy discounts;
b. take possession of and endorse in the name of the Group any and
all instruments received as payment of accounts receivable;
c. deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
d. place accounts for collection, settle and compromise claims, and
institute legal action for the recovery of accounts.
Section 4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
a. Financial Reporting. manager shall prepare, analyze and deliver
-------------------
to the Joint Operations Committee financial reports to the extent necessary or
appropriate for the operation of the Practice, including the following:
8.
<PAGE>
(1) financial statements, including balance sheets and
statements of cash flow and income;
(2) accounts payable and accounts receivable analysis;
(3) billing status including any medicaid remittances; and
(4) reconciliation of assets, liabilities and major
expenses.
b. Audits. Group shall have the right to review and, at its
------
sole cost and expense, obtain an audit (separate from any annual audit or review
of Group's financial statements performed at the direction of the Manager) of
Group's financial books and records maintained by the Manager. Upon five (5)
days' prior written notice, Manager shall allow Group access during reasonable
business hours to all information and documents reasonably required for such
review or audit. Upon Group's request and at Group's expense, Manager shall
also provide copies of such documents.
Section 4.8 Marketing and Public Relations Services. Subject to
---------------------------------------
Group's consent, which consent shall not be unreasonably withheld, and subject
to any limitation of law, regulation or ethical standards pertaining to the
practice of dentistry, Manager shall provide such marketing and public relations
services as Manager determines reasonably necessary to promote, market and
develop the dental services of Group. Manager shall provide Group with
marketing materials and activities. Nothing in this Agreement shall be
construed to affect or limit in any way the professional discretion of Group to
select patients that may be effectively treated in the Practice in accordance
with professional standards of patient selection.
Section 4.9 Group Agreements. Subject to Group's consent, which
----------------
consent shall not be unreasonably withheld, on behalf of Group, Manager shall
review, evaluate and negotiate Payor Contracts and Provider Subcontracts and any
other contracts or agreements regarding the provision of dental related items or
services by Group or Providers.
Section 4.10 Utilization Review Quality Improvement and Outcomes
---------------------------------------------------
Monitoring. Manager shall be responsible for providing administrative support
- ----------
for Group's utilization review, quality improvement and outcomes monitoring
activities, including, without limitation, data collection, analysis and
reporting for Group Patients and Beneficiaries. Manager shall also support the
development and implementation of relevant policies, procedures, protocols,
practice guidelines and other interventions based on such activities.
Section 4.11 Patient Referrals. The parties agree that the benefits
-----------------
to Group hereunder do not require, are not payment for, and are not in any way
contingent upon the admission, referral or any other arrangements for the
provision of any item or service offered by Manager or any affiliate of Manager
to any of Group's Patients in any facility or laboratory controlled, managed or
operated by Manager or any affiliate of Manager.
Section 4.12 Applicable Law. Manager and Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
9.
<PAGE>
ARTICLE V
GROUP RESPONSIBILITIES
----------------------
Section 5.1 Diagnosis, Treatment Planning, Specific Patient Education and
---------------------------------------------------------
Consultation. Group shall have sole responsibility for all professional dental
- ------------
services provided to Patients with regard to the diagnosis of the patient's
condition and the development of treatment plan alternatives, including, without
limitation, the following:
a. Diagnosis. Group shall have sole responsibility for all medical
---------
and dental history evaluation, examination, obtaining clinical records, and
diagnostic procedures appropriate for complete diagnosis.
b. Treatment Planning. Group shall have sole responsibility for all
------------------
determination of treatment alternatives that may be professionally acceptable
for the treatment of the patient's condition.
c. Specific Patient Education. Group shall have sole responsibility
--------------------------
for all discussion, recommendation, demonstration, and other educational
modalities intended to address the patient's specific condition, as
differentiated from general patient education intended to address the common
concerns of all patients presenting with similar conditions.
d. Consultation. Group shall have sole responsibility for all
------------
discussion of clinical advantages, disadvantages, complications, and risks of
each alternative treatment plan, and including the likely results of no
treatment.
e. Manager to Assist with Record Procurement. Notwithstanding the
-----------------------------------------
above, Manager shall be responsible for exercising reasonable efforts to
procure, at its own expense, medical and dental history information, previous
clinical records, and X-ray records prior to presentation of the patient for
treatment by Group, in accordance with protocols developed by Group in
consultation with Manager.
Section 5.2 Dental Services. Group shall have sole responsibility for all
---------------
professional dental services provided to Patients with regard to the treatment
of the patient's condition, including, without limitation, the following:
a. Preventive Care. Group shall have sole responsibility for all
---------------
preventive care intended to delay, or intercept the development of pathologic
conditions.
b. Therapeutic Care. Group shall have sole responsibility for all
----------------
therapeutic care intended to ameliorate, or improve existing pathologic
conditions.
c. Referral to Specialists. Group shall have sole responsibility for
-----------------------
all referral to appropriate dental specialists and other allied health care
professionals in accordance with professional dental standards of care.
d. Continuing Care. Group shall have sole responsibility for all
---------------
development and execution of continuing care protocols intended to maintain the
patient's condition over the course of time.
e. Manager to Assist with Patient Compliance Tracking.
--------------------------------------------------
Notwithstanding the above, Manager shall be responsible for exercising
reasonable efforts to facilitate, coordinate, and
10.
<PAGE>
document the scheduling, tracking, and confirmation of Group's recommendations
for dental diagnostic and therapeutic services, treatments, referrals, and
continuing care in accordance with protocols developed by Group in consultation
with Manager.
Section 5.3 Provision of Dental Services by Group. Group shall
-------------------------------------
operate the Practice during the Term as a dental practice in accordance with the
terms of this Agreement and the Annual Budget. However, nothing in this
Agreement shall be construed to affect or limit in any way the professional
discretion or duty of Group insofar as such constitutes the practice of
dentistry.
Section 5.4 Providers.
---------
a. Professional Dental Services. Group shall employ or contract
----------------------------
with the number of Providers Group deems necessary for the efficient and
effective operation of the Practice and in accordance with the Annual Budget and
quality assurance, credentialing and utilization management protocols approved
by the Joint Operations Committee. Group shall provide full and prompt dental
coverage for the Practice, including emergency service twenty-four hours per
day, seven days per week, including holidays, according to policies and
schedules approved by the Joint Operations Committee.
b. Provider Subcontracts and Employment Agreements. Group shall
-----------------------------------------------
not negotiate or execute any Provider Subcontract, Employment Agreement, or any
amendment thereto, or terminate any Provider Subcontract or Employment Agreement
without the approval of the Joint Operations Committee. Subject to Manager's
responsibilities under Article VII, Group shall be responsible for the payment,
in accordance with the Annual Budget, of all Employee and Subcontract Providers.
Section 5.5 Peer Review. Group, after consultation with the Joint
-----------
Operations Committee, shall implement, regularly review, modify as necessary or
appropriate and obtain the commitment of Providers to actively participate in
peer review procedures for Providers. Group shall assist Manager in the
production of periodic reports describing the results of such procedures. Group
shall provide Manager with prompt notice of any information that raises a
reasonable risk to the health and safety of Group Patients or Beneficiaries. In
any event, after consultation with the Joint Operations Committee, Group shall
take such action as may be reasonably warranted under the facts and
circumstances.
Section 5.6 Fees, Charges and Payor Agreements. Group shall, after
----------------------------------
consultation with Manager, determine the fees, charges, premiums, or other
amounts due in connection with delivery of dental services to Patients. Such
fees, charges, premiums, or other amounts (regardless of whether determined on a
fee-for-service, capitated, prepaid, or other basis) shall be reasonable and
consistent with the fees, charges, premiums, and other amounts due to dental
care providers for similar services within the community under similar types of
reimbursement programs involved if such programs are currently offered within
the community.
Section 5.7 Hours of Clinical Operation. After consultation with the
---------------------------
Joint Operations Committee, Group shall establish hours of operation that are
consistent with good dental practice, and are appropriate to the need to timely
deliver professional dental care services to Group Patients.
Section 5.8 Billing Information and Assignments. Group shall
-----------------------------------
promptly provide Manager with all billing and patient encounter information
reasonably requested by Manager for purposes of billing and collecting for
Group's services. Group shall use reasonable efforts to procure consents to
assignments and other approvals and documents necessary to enable Manager to
obtain payment or
11.
<PAGE>
reimbursement from third party payors and patients. With the assistance of
Manager, Group shall obtain all provider numbers necessary to obtain payment or
reimbursement for its services.
Section 5.9 Third Party Contracts. Group shall be in compliance with
---------------------
all contracts, agreements and arrangements, including any contracts that exist
on the Effective Date, between Group and third parties.
Section 5.10 Use of Manager's Goods and Services. Group shall not
-----------------------------------
use any goods or services provided by Manager pursuant to this Agreement for any
purpose other than the provision of and management of dental services as
contemplated by this Agreement and purposes incidental thereto.
Section 5.11 Negative Covenants. During the Term, Group shall not,
------------------
without the prior approval of the Joint Operations Committee, (a) pledge,
mortgage or otherwise encumber any of its property, (b) assign, transfer or
convey all or substantially all of its assets, including its goodwill, (c) merge
or consolidate with any other entity, (d) allow the transfer or issuance of any
of its stock (other than in accordance with the terms and provisions of that
certain Shares Acquisition Agreement dated of even date herewith between Manager
and the person set forth on Schedule A hereto), or (e) take or allow any act
-----------------
that would materially impair the ability of Group to carry on the business of
the Practice or to fulfill its obligations under this Agreement.
Notwithstanding the preceding, prior to consummating with any third party (i)
any transfer, assignment or conveyance as contemplated in subparagraph (a) above
or (ii) any merger or consolidation contemplated in subparagraph (c) above,
Group shall first offer (the "Offer") to Manager or its designee the right to
-----
acquire the assets of Group or to effect a merger or consolidation with Group
upon the same business and economic terms as proposed to Group by such third
party. Manager or its designee shall have 60 days to elect to accept or reject
such Offer, which election shall be binding on the parties.
Section 5.12 Group Maintains Full Professional Authority.
-------------------------------------------
Notwithstanding Manager's general and specific rights and responsibilities set
forth in this Agreement, Group shall have full authority and control with
respect to all dental, professional and ethical determinations over Group's
Practice to the extent required by federal, state and local laws, rules and
regulation. Manager shall not engage in activities which constitute the
practice of dentistry under applicable law. Manager shall neither exercise
control over nor interfere with the dentist-patient relationship, which shall be
maintained strictly between Group's Providers and their Patients.
ARTICLE VI
TERM
----
Section 6.1 Term. This Agreement shall be effective the Effective
----
Date, and shall remain in effect for an initial term of forty (40) years from
the Effective Date, expiring on the fortieth (40th) anniversary of the Effective
Date, unless earlier terminated pursuant to the terms of this Agreement. The
word "Term" shall include such initial term and, where applicable, any extension
----
of such initial term (whether extended pursuant to Section 6.2a or otherwise),
subject to earlier termination pursuant to the provisions of this Agreement.
Section 6.2 Termination and Extension.
-------------------------
a. Automatic Extension. At the end of the initial term and any
-------------------
subsequent term, this Agreement shall automatically renew for a five (5) year
term unless one of the parties provides
12.
<PAGE>
the other party with written notice of intent not to renew, not less than one
hundred eighty (180) days prior to the expiration of the then current term.
b. Early Termination. This Agreement may be terminated according
-----------------
to the provisions of this Section.
(1) Material Breach. In the event either party materially
---------------
breaches this Agreement and such breach is not cured to the reasonable
satisfaction of the non-breaching party within thirty (30) days after the non-
breaching party serves written notice of the default upon the defaulting party
(the "Default Notice"), the Agreement shall automatically terminate at the
--------------
election of the non-breaching party upon the giving of a written notice of
termination to the defaulting party not later than fifteen (15) days after
termination of the 30-day cure period; provided that if such uncured breach is
only capable of being cured within a reasonable period of time in excess of
thirty (30) days, the non-breaching party shall not be entitled to terminate
this Agreement so long as the defaulting party has commenced such cure and
thereafter diligently pursues such cure to completion.
(2) Refusal to Comply. In the event that Group or Manager
-----------------
refuses or fails to comply with a decision of the Joint Operations Committee,
the aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if such dispute between Group and Manager continues for sixty
(60) days after the date the aggrieved party exercises its option regarding
mediation, the non-complying party shall have thirty (30) days in which to
comply with the decision of the Joint Operations Committee. If the non-complying
party has not complied by the end of such thirty (30) day period, the aggrieved
party shall have the option to terminate this Agreement upon fifteen (15) days'
prior written notice. During such mediation, Manager and Group shall continue to
operate and manage the practice in good faith.
(3) Bankruptcy. A party may, upon three (3) days' prior
----------
written notice, terminate this Agreement if the other party:
(a) Applies for or consents to the appointment of a
receiver, trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary petition,
makes a general assignment for the benefit of its creditors, files a petition or
answer seeking reorganization or arrangement with its creditors, or admits in
writing its inability to pay its debts when due, or
(b) Suffers any order, judgment or decree to be
entered by any court of competent jurisdiction, adjudicating such party bankrupt
or approving a petition seeking its reorganization or the appointment of a
receiver, trustee or liquidator of such party or of all or a substantial part of
its assets, and such order, judgment or decree continues unstayed and in effect
for ninety (90) days after its entry.
(4) Nonperformance. Manager may terminate this Agreement in
--------------
the event that in any two consecutive fiscal quarters the Manager has not been
paid the Management Fee and, in the sole discretion of the Manager, it is not
reasonably likely that the Management Fee will be paid in the next fiscal
quarter. Any such termination shall be effective as of the last day of such
third fiscal quarter provided at least 60 days notice shall have been given;
otherwise, such termination shall be effective on the sixtieth day after notice
is given.
(5) Change in Law. In the event of any material change in
-------------
federal or state law that has a significant adverse impact on either party
hereto in connection with their
13.
<PAGE>
performance under this Agreement, or if performance by a party of any duties
under this Agreement be deemed illegal by any administrative agency or in a
formal opinion rendered to manager by legal counsel knowledgeable in health law
matter retained by the Manager, the affected party shall have the right to
require that the other party renegotiate the terms of this Agreement. Unless the
parties otherwise mutually agree in writing, such renegotiated terms shall be
effective not later than twenty (20) days after receipt of written notice of
such request for renegotiation. Solely in the event of illegality, if the
parties fail to reach an agreement within thirty (30) days of the request for
renegotiation, either party may (subject to the severability provision of this
Agreement) terminate this Agreement upon thirty (30) days' prior written notice
to the other party.
c. Effect of Termination. Upon termination of this Agreement:
---------------------
(1) Group shall surrender to Manager all of Manager's
property used primarily in the operation of the Practice in the same condition
as received, reasonable wear and tear excepted.
(2) Manager shall deliver to Group all records related to
the business of and provision of dental care through the Practice including,
without limitation, patient records and any corporate, personnel and financial
records maintained for the Practice and Providers, provided, that except as
limited by law, including, but not limited to laws governing the confidentiality
of patient records, Manager shall have the option to copy (or otherwise
duplicate) at its sole cost and expense such records of Group and to retain and
utilize such records for its own use;
(3) Manager shall deliver to Group any other property of
Group in Manager's possession'
(4) Both parties shall cooperate to ensure the provision of
appropriate dental care to Group Patients and Beneficiaries;
(5) Group shall promptly deliver to Manager any Management
Fees due and payable to Manager (such fees prorated for the month of
termination) and any amounts owed to Manager for advances made pursuant to
Section 7.3; and
(6) Both parties shall cooperate to ensure the appropriate
billing and collections for dental services rendered by Group prior to the
effective date of termination, and any such cash collected shall be retained by
Group and/or paid to Manager pursuant to Article VII.
ARTICLE VII
FINANCIAL AND SECURITY ARRANGEMENTS
-----------------------------------
Section 7.1 Management Fee. Group and Manager agree that the
--------------
compensation set forth in this Article VII is being paid to Manager in
consideration of the services provided and the substantial commitment and effort
made by Manager hereunder and that such fees have been negotiated at arms'
length and are fair, reasonable and consistent with fair market value. Manager
shall be paid the management fee (the "Management Fee") as set forth on Exhibit
-------------- -------
7.1 hereto. Payment of the Management Fee is not intended to and shall not be
- ---
interpreted or implied as permitting Manager to share in Group's fees for
medical services but is acknowledged as the negotiated fair market value
compensation to Manager considering the scope of services and the business risks
assumed by Manager.
14.
<PAGE>
Section 7.2 Payments. Except as otherwise set forth on Exhibit 7.1
-------- -----------
hereto, the amounts to be paid to Manager under this Article VII shall be
calculated by Manager on the accrual basis of accounting and shall be payable
monthly. Payments due for any Management Fee shall be made by Group each
calendar month as provided herein and shall be paid on the 15th day following
the end of such month (or the first preceding day that is a business day if the
15th day is not a business day) (a "Payment Date"). Such amounts paid shall be
------------
estimates based upon available information for such month, and adjustments to
the estimated payments shall be made to reconcile final amounts due under
Section 7.1 on the next Payment Date and shall be paid in such priority as set
forth in Section 7.5 hereof.
Section 7.3 Advances. Group shall be entitled to an advance from
--------
Manager of such additional sums, over and above Group's right to the amounts
otherwise set forth in this Article VII, as shall be required by Group to pay
Practice Expenses consistent with the Annual Budget of the Practice (prepared as
provided in Section 3.6 hereof), the Management Fee as provided in Exhibit 7.1
-----------
hereto and Group Expenses at the discretion of Manager. Any amounts advanced to
Group pursuant to this Section 7.3 shall be repaid by Group in such priority as
set forth in Section 7.5 below and shall bear interest at a rate equal to one
percent (1%) above the prime rate reported by the Wall Street Journal as
adjusted on a quarterly basis, compounded monthly until all such amounts of
principal and interest are repaid to Manager as provided herein.
Section 7.4 Security Agreement. In order to enforce its rights
------------------
granted hereunder and subject to applicable law, Group shall execute a Security
Agreement in substantially the form attached hereto as Exhibit 7.4 (the
-----------
"Security Agreement"), which Security Agreement grants a security interest in
- -------------------
all of Group's accounts receivable (as more fully described in the Security
Agreement) to Manager. In addition, Group shall cooperate with Manager and
execute all necessary documents in connection with the pledge of such accounts
receivable to Manager or at Manager's option, its lenders.
Section 7.5 Priority of Payments. Manager shall administer and make
--------------------
disbursements from amounts deposited into the Accounts or transferred from the
Accounts to pay (including, without limitation the making of advances as
provided in Section 7.3) the Practice Expenses and Group Expenses as the same
become due and payable, and for which Group shall remain responsible. In
performing its obligations pursuant to Article IV, Manager shall apply funds of
Group in the following order of priority:
a. payment of all Group Expenses;
b. payment of all Practice Expenses;
c. payment of the Management Fee; and
d. payment of amounts advanced to Group, and applicable interest
thereon (as contemplated in Section 7.3).
If there are not sufficient funds to pay all amounts provided for
above, all unpaid amounts shall accumulate and carry over until paid or until
the termination of this Agreement, in which case such unpaid amounts shall be
immediately due and payable as of the date of termination. Any amounts which
remain following the payment of the expenses and fees set forth in subparagraphs
(a) through (d) above shall be retained in the Accounts.
Section 7.6 Accounts Receivable. At the option of Manager, on the
-------------------
first business day of each month, Manager may purchase all or any portion of the
accounts receivable of Group relating to Revenues arising during the previous
month, by payment of cash or other readily available funds into an
15.
<PAGE>
account for Group or by offset of amounts owed by Group to Manager. The
consideration for the purchase shall be an amount equal to all fees recorded
each month (net of adjustments for uncollectible accounts, professional
courtesies and other such activities that do not generate a collectible fee)
less Management Fees due to Manager under this Article VII. Manager's purchase
shall be effective upon full payment of the purchase price. In the event that
such purchase shall be ineffective for any reason, Group is concurrently
herewith entering into the Security Agreement to grant a security interest in
the accounts receivable to Manager. In addition, Group shall cooperate with
Manager and execute all necessary documents in connection with the pledge of
such accounts receivable to Manager or at Manager's option, its lenders. All
collections in respect of such accounts receivable shall be deposited in a bank
account at a bank selected by mutual agreement of Group and Manager. To the
extent Group comes into possession of any payments in respect of such accounts
receivable, Group shall direct such payments to Manager for deposit.
ARTICLE VIII
INDEMNITY AND INSURANCE
-----------------------
Section 8.1 Indemnity.
---------
a. Indemnification. Each party shall indemnify, defend and hold
---------------
harmless the other party from any and all liability, loss, claim, lawsuit,
injury, cost, damage or expense whatsoever (including reasonable attorneys' fees
and court costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Group agrees
to indemnify, defend and hold harmless Manager for all liability, loss, claim,
lawsuit, injury, cost, damage or expense whatsoever (including reasonably
attorneys' fees and court costs) arising out of the professional negligence of
Group, its employees, agents, contractors or subcontractors, including any
amounts in excess of the professional liability insurance coverage of Group or
its employees, agents, contractors or subcontractors.
b. Mutual Indemnity. Subject to Manager's responsibilities under
----------------
Article VII, each party to this Agreement shall be indemnified by the other
party for any claim under this Agreement or otherwise against the indemnified
party for vacation pay, sick leave, retirement benefits, Social Security
benefits, workers' compensation benefits, disability or unemployment, insurance
benefits, or other employee benefits of any kind accrued during the term of this
Agreement by an employee of the indemnifying party.
Section 8.2 Manager's Insurance. Manager shall, on its own behalf and at
-------------------
its sole cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
a. Comprehensive general liability insurance covering the risks of
Manager, in an amount determined by the Joint Operations Committee;
b. Workers' Compensation insurance covering the employees of Manager,
in such amounts as is usual and customary under the circumstances;
16.
<PAGE>
c. Property insurance covering the facilities, equipment and supplies
owned or leased by Manager or Group for use in the operation of the Practice.
Section 8.3 Group's Insurance. At Group's sole cost and expense, Manager
-----------------
shall obtain, and maintain on behalf of Group in full force and effect during
the Term, policies in the following categories in the amount indicated:
a. Comprehensive professional liability insurance coverage for Group
and Group's Employee Providers, in such amounts as Group shall reasonably deem
necessary; provided, however, such coverage shall be no greater than that set
forth on Schedule B hereto without the prior consent of the Joint Operations
Committee, which consent shall not be unreasonably withheld;
b. Workers' Compensation insurance covering the employees of Group,
in such amounts as is usual and customary under the circumstances;
c. Comprehensive general liability insurance covering the risks of
Group, in an amount determined by the Joint Operations Committee.
ARTICLE IX
BOOKS AND RECORDS
-----------------
Section 9.1 Ownership of Records. All business records and information
--------------------
relating exclusively to the business and activities of either party shall be the
property of that party, irrespective of identity of the party responsible for
producing or maintaining such records and information. Without limiting the
foregoing, all patient charts and records maintained by Manager relating to the
dental services of Group shall be the property of Group. Group also shall be
entitled to a copy at Group's sole cost of all business records pertaining to
Group. Except as limited by law, including, but not limited to laws governing
the confidentiality of patient records, Manager shall be entitled to a copy at
Manager's sole cost of all records of Group.
ARTICLE X
RESTRICTIVE COVENANTS
---------------------
Section 10.1 Covenant Regarding Proprietary Information. In the course of
------------------------------------------
the relationship created pursuant to this Agreement, Group will have access to
certain methods, trade secrets, processes, ideas, systems, procedures,
inventions, discoveries, concepts, software in various stages of development,
designs, drawings, specifications, models, data, documents, diagrams, flow
charts, research, economic and financial analysis, developments, procedures,
know-how, policy manuals, form contracts, marketing and other techniques, plans,
materials, forms, copyrightable materials and trade information (all of which is
referred to in this Agreement as "Proprietary Information") regarding the
-----------------------
operations of Manager and/or of its Affiliates (collectively, the "Protected
---------
Parties"). Group shall maintain all such Proprietary Information in strict
- -------
secrecy and shall not divulge such information to any third parties, except as
may be necessary for the discharge of their obligations under this Agreement.
Group shall take all necessary and proper precautions against disclosure of any
Proprietary Information to unauthorized persons by any of its employees or
agents. Group and all employees, and agents of Group who will have access to
all or any part of the Proprietary Information may be required to execute an
agreement, at the request of Manager, valid under the law of the jurisdiction in
which such agreement is executed, and in a form acceptable to Manager and its
counsel, committing themselves to maintain the Proprietary Information in strict
confidence and not to disclose it to any unauthorized person or entity. The
Protected Parties not
17.
<PAGE>
party to this Agreement are hereby specifically made third party beneficiaries
of this Section, with the power to enforce the provisions hereof. Upon
termination of this Agreement for any reason, Group and each of its Employee
Providers and Subcontract Providers shall cease all use of any of the
Proprietary Information and, at the request of Manager, shall execute such
documents as may be necessary to evidence Group's abandonment of any claim
thereto. The parties recognize that a breach of this Section cannot be
adequately compensated in money damages and therefore agree that injunctive
relief shall be available to the Protected Parties as their respective interests
may appear.
The obligations of Group under this Section 10.1 shall not apply to
information: (i) which is a matter of public knowledge on or becomes a matter
of public knowledge after the Effective Date of this Agreement, other than as a
breach of the confidentiality terms of this Agreement or as a breach of the
confidentiality terms of any other agreement between Group and Manager or its
Affiliates; or (ii) which was lawfully obtained by Group on a nonconfidential
basis other than in the course of performance under this Agreement and from some
entity other than Manager or its Affiliates or from some person other than one
employed or engaged by Manager or its Affiliates, which entity or person has no
obligation of confidentiality to Manager or its Affiliates.
Section 10.2 Covenants Not to Compete During the Term. The parties
----------------------------------------
recognize that the services to be provided by Manager shall be feasible only if
Group operates an active dental practice to which Group and Clinical Staff
devote full time and attention. To that end:
a. Restrictive Covenants by Group. During the term of this
------------------------------
Agreement and except as otherwise agreed to in writing by Manager, Group shall
not (i) establish, operate or provide dental care services at any dental office,
clinic or other facility providing services substantially similar to those
provided by Group pursuant to this Agreement anywhere other than at the Practice
Sites and as may be approved in writing by Manager; (ii) enter into any
management or administrative services agreement or other similar arrangement
with any person or entity other than Manager without Manager's prior written
approval and (iii) operate or, directly or indirectly, hold or own any type of
ownership or other form of equity interest in, or serve as a consultant to or
otherwise perform services for any person or entity engaged in the business of
providing management and administrative services to dental practices; provided,
however, that nothing in this Agreement shall prohibit Provider from
establishing, owning, organizing, opening, operating, participating in, working,
managing, advising, teaching, or from being in any way involved, affiliated or
associated with a dental school or with a dental hygienist school, whether now
existing or hereafter organized, public or private, so long as such activity by
Provider does not detract from Provider's obligations to perform services in
accordance with this Agreement, including, without limitation, the provision of
dental services for the number of hours described in Section 2.1 hereof.
b. Restrictive Covenants by Providers. Group shall use its
----------------------------------
best efforts to obtain and enforce formal agreements with its Employee Providers
and Subcontract Providers who are dentists not to establish, operate or provide
dental care services, during the term of this Agreement and for a period of two
(2) years after any termination of employment with Group (except a termination
caused by a material breach by Manager which shall remain uncured for a period
of sixty (60) days after receipt of notice in accordance with Section 11.4
hereof, or by nonpayment of a material amount owed by Manager to or to be paid
by Manager on behalf of Group), at any dental office, clinic or facility located
within 20 miles of any Practice Site at which the Employee Provider or
Subcontract Provider has practiced. Any variation of such restrictive covenants
shall be approved in advance in writing by Manager.
Section 10.3 Covenant Not to Solicit. For three (3) years following
-----------------------
the termination of this Agreement, except for a valid termination by Group
pursuant to Section 6.2(b), Group shall not:
18.
<PAGE>
a. directly or indirectly solicit, recruit or hire, or induce
any party to solicit, recruit or hire any person who is an employee of, or who
has entered into an independent contractor arrangement with, Manager or any
Affiliate of Manager;
b. directly or indirectly, whether for itself or for any other
person or entity, call upon, solicit, divert or take away, or attempt to
solicit, call upon, divert or take away any of Manager's customers, business, or
clients; or
c. directly or indirectly solicit, or induce any party to
solicit, any of Manager's contractors or the contractors of any Affiliate of
Manager, to enter into the same or a similar type of contract with any other
party.
10.4 Enforcement. Manager and Group acknowledge and agree that since
-----------
a remedy at law for any breach or attempted breach of the provisions of this
Article X shall be inadequate, either party shall be entitled to specific
performance and injunctive or other equitable relief in case of any such breach
or attempted breach, in addition to whatever other remedies may exist by law.
All parties hereto also waive any requirement for the securing or posting of any
bond in connection with the obtaining of any such injunctive or other equitable
relief.
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
Section 11.1 Assignment. Neither party shall assign this Agreement
----------
to any other party or parties without the prior written consent of the other
party, which consent may be withheld arbitrarily or capriciously, for any reason
or for no reason whatsoever and any attempted assignment in violation of this
Agreement shall be null and void. Notwithstanding the preceding, Manager may
assign this Agreement to any direct or indirect wholly-owned subsidiary of
either Manager or Parent or to a financial institution as collateral security
for the indebtedness of Manager, Parent or any of their respective Affiliates.
Section 11.2 Headings. The article and section headings used in this
--------
Agreement are for purposes of convenience only. They shall not be construed to
limit or to extend the meaning of any part of this Agreement.
Section 11.3 Waiver. Waiver by either Group or Manager of any breach
------
of any provision of this Agreement shall not be deemed to be a waiver of such
provision or of any subsequent breach of the same or of any other provision of
this Agreement.
Section 11.4 Notices. Any notice, demand, approval, consent or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be shall be deemed to have been given when five (5) business
days have elapsed from the date of deposit in the United States mails, certified
and postage prepaid, addressed to the party to be served at the following
address or such other address as may be given in writing to the parties.
Group: SJL, P.A.
1088 North Skyline Drive
Idaho Falls, Idaho 83405-1358
Attn: Steven J. Larsen, D.D.S., F.A.G.D.
19.
<PAGE>
Manager: GMS Dental Group, Inc.
22800 Savi Ranch Parkway
Suite 206
Yorba Linda, California 92887
Attn: Michael T. Fiore
Section 11.5 Attorneys' Fees. If any legal action or arbitration or
---------------
other proceeding is commenced, whether by Manager or Group concerning this
Agreement, the prevailing party shall recover form the losing party reasonable
attorneys' fees and costs and expenses, including those of appeal and not
limited to taxable costs, incurred by the prevailing party, in addition to all
other remedies to which the prevailing party may be entitled. If a claim or
claims asserted by a third party against Manager or Group or any of them arise
from an act or omission by the other, the party responsible for the act or
omission shall be the losing party, and the other party shall be the prevailing
party, for purposes of the foregoing sentence.
Section 11.6 Successors. Without limiting or otherwise affecting any
----------
restrictions on assignments of this Agreement or rights or duties under this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
successor and assigns of Group and Manager, including, without limitation, GMS
pursuant to the Merger described in Section 2.1.
Section 11.7 Entire Agreement. This Agreement sets forth the entire
----------------
agreement between Group and Manager and supersedes all prior negotiation and
agreements, written or oral, concerning or relating to the subject matter of
this Agreement, and this Agreement may not be modified except by a writing
executed by all parties and subject to the provisions thereof.
Section 11.8 Governing Law. This Agreement and the rights and
-------------
obligations of the parties hereto shall be governed by, and construed according
to, the laws of the State of California.
Section 11.9 Severability, Contract Modifications for Prospective
----------------------------------------------------
Legal Events. Nothing contained in this Agreement shall be construed to require
- ------------
the commission of an act contrary to law, and whenever there is any conflict
between any provision of this Agreement and any statute, law, ordinance or
regulation, the latter shall prevail. In such event, and in any case in which
any provision of this Agreement is determined to be in violation of a statute,
law, ordinance or regulation, the affected provision(s) shall be limited only to
the extent necessary to bring it within the requirements of the law and, insofar
as possible under the circumstances, to carry out the purposes of this
Agreement. The other provisions of this Agreement shall remain in full force and
effect, and the invalidity or unenforceability of any provision hereof shall not
affect the validity and enforceability of the other provisions of this
Agreement, nor the availability of all remedies in law or equity to the parties
with respect to such other provisions.
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision, a regulatory agency or legal counsel of both
parties in such a manner as to indicate that the structure of this Agreement may
be in violation of such laws or regulations, Group and Manager shall amend this
Agreement, to the maximum extent possible, to preserve the underlying economic
and financial arrangements between Group and Manager. In the event legal counsel
of both parties disagree as to whether the structure or any provision of this
Agreement may be in violation of applicable laws and regulations and one of the
parties therefore refuses to amend this Agreement in light of the reasonable
concerns of the other party and such party's legal counsel, then such party
refusing to amend shall indemnify and hold harmless the other party for any and
all harm and damages caused by or related to the offending provision. A party to
this
20.
<PAGE>
Agreement may choose to, but shall not be required to, take any action or to
make any amendment to this Agreement if such action or amendment would put them
in a substantially and materially worse economic or financial position than that
contemplated by the terms of this Agreement. The parties acknowledge that such
amendment may require reorganization of Group or Manager, or both, and may
require either or both parties to obtain appropriate regulatory licenses and
approvals. If an amendment is not possible, either party shall have the right
to terminate this Agreement upon thirty (30) days notice to the other party.
Section 11.10 Time Is of the Essence. Time is of the essence in this
----------------------
Agreement.
Section 11.11 Authority. Any Person signing this Agreement on behalf
---------
of any entity hereby represents and warrants in its individual capacity that it
has full authority to do so on behalf of such entity.
Section 11.12 Counterparts. This Agreement may be executed in two
------------
(2) or more counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, Group and Manager have caused their authorized
representatives to execute this Dental Group Management Agreement as of the date
first above written.
"Group"
SJL, P.A.
an Idaho professional corporation
By: /s/ Steven J. Larsen
----------------------------------
Steven J. Larsen, D.D.S., F.A.G.D.
President
"Manager"
PREMIER DENTAL CARE, INC.
an Idaho corporation
By: /s/ Steven J. Larsen
----------------------------------
Steven J. Larsen, D.D.S., F.A.D.G.,
President
<PAGE>
ADDENDUM 1.
----------
For purposes of this Agreement, the following terms shall have the
meaning indicated below or defined at the indicated section:
(1) Accounts. See Section 2.5.
--------
(2) Affiliate. "Affiliate" shall mean, with respect to any Person,
---------
(i) any individual or entity directly or indirectly owned or controlled by such
Person, (ii) any individual or entity directly or indirectly owning or
controlling such Person or (iii) any individual or entity directly or indirectly
owned or controlled by the same family member, individual or entity as owns or
controls such Person. For purposes of this Agreement, neither Group nor Manager
shall be deemed an Affiliate of the Other.
(3) Agreement. "Agreement" means this Group Management Agreement.
---------
(4) Annual Budget. See Section 3.6.
-------------
(5) Beneficiaries. See Recital A.
-------------
(6) Books and Records. "Books and Records" means Group's books of
-----------------
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
(7) Capital Costs. "Capital Costs" shall mean any and all investments
-------------
that are or would be capitalized pursuant to GAAP.
(8) Committee Members. See Section 3.5a.
-----------------
(9) Default Notice. See Section 6.2b(1).
--------------
(10) Effective Date. See preamble paragraph.
--------------
(11) Employee Providers. See Recital B.
------------------
(12) Employment Agreements. See Recital B.
---------------------
(13) GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with 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 Manager's financial statement.
(14) Group. See first paragraph of this Agreement.
-----
22.
<PAGE>
(15) Group Expenses. "Group Expenses" means salaries and wages,
--------------
compensation, payroll taxes, and employee benefits of Employee Providers and
Subcontract Providers, all as set forth in, and subject to and limited by, the
Annual Budget.
(16) Group Member. See Section 3.5a.
------------
(17) Group Patients. See Recital A.
--------------
(18) Joint Operations Committee. See Section 3.4b.
--------------------------
(19) Management Fee. See Section 7.1.
--------------
(20) Manager. See first paragraph of this Agreement.
-------
(21) Manager Members. See Section 3.5a.
---------------
(22) Marks. See Section 2.3a.
-----
(23) Offer. See Section 5.1.
-----
(24) Parent. "Parent" shall mean GMS Dental Group, Inc. or any
------
successor thereto.
(25) Payment Date. See Section 7.2.
------------
(26) Payor Contracts. See Recital A.
---------------
(27) Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
(28) Plans. See Recital A.
-----
(29) Practice. See Recital C.
--------
(30) Practice Expenses. "Practice Expenses" means all costs incurred
-----------------
by Manager including amortization associated with costs of acquiring assets of
the Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which are
attributable to Manager's business operations in accordance with Manager's
corporate allocation policies, all as consistent with and/or contemplated in the
Annual Budget.
(31) Practice Sites. See Section 3.4a.
--------------
(32) Practice Site Facilities. See Section 3.4a.
------------------------
(33) Preliminary Budget. See Section 3.7b.
------------------
(34) Programs. See Section 2.3b.
--------
(35) Proprietary Information. See Section 10.1.
-----------------------
23.
<PAGE>
(36) Protected Parties. See Section 10.1.
-----------------
(37) Providers. See Recital B. The term "Providers" shall include
---------
individuals or organizations licensed to practice dentistry (including
specialists) as well as other licensed dental professionals who provide
ancillary reimbursable dental services.
(38) Provider Subcontracts. See Recital A.
---------------------
(39) Revenues. See Section 2.4.
--------
(40) Security Agreement. See Section 7.4.
------------------
(41) Subcontract Providers. See Recital B.
---------------------
(42) Term. See Section 6.1.
----
24.
<PAGE>
EXHIBIT 10.48[*]
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
THIS DENTAL GROUP MANAGEMENT AGREEMENT (this "Agreement") is dated as of
February 24, 1997 and is effective as of the date set forth in Section 6.1
("Effective Date") by and between NAISMITH DENTAL CORPORATION, a California
---------------------------
professional dental corporation ("Manager") and BURNS DENTAL CORPORATION, a
------------------------
California professional dental corporation ("Dental Group").
RECITALS:
A. Prior to the execution of this Agreement, pursuant to the terms of
that certain Assignment Agreement ("Assignment Agreement") dated as of January
20, 1997 all of Manager's right, title and interest in the "Dental Practice
Assets" relating to its San Francisco, California dental center
("Facility(ies)") were assigned to Dental Group, which Dental Practice Assets
consist of all contracts with dentist employees and independent contractors and
other licensed health professional employees and independent contractors, all
independent practitioner association and managed care plan contracts, all
patient records, and any and all other assets required by statute, rule or
regulation to be owned or held by an entity licensed to practice dentistry,
together with all goodwill associated with the foregoing. Dental Group operates
a dental practice at the Facility(ies) and may operate a dental practice at one
or more additional sites in the future.
B. Dental Group engages in the practice of dentistry by providing dental
services to patients of Dental Group ("Group Patients") and to enrollees
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
between Dental Group and Plans or between Beneficiaries and Plans.
C. Dental Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
arrangements may include contracts ("Employment Agreements") with dentist
employees and allied health professional employees (collectively "Employee
Providers") and agreements ("Provider Subcontracts") with independent contractor
dentists and non-dentist providers of various dental care services (collectively
"Subcontract Providers").
D. All activities of Dental Group subject to this Agreement are
referenced as the "Practice." All references to "dental" care and services
include general and specialist dental services. All references to "dentists"
include generalists and specialists.
E. Manager desires to provide certain support services for the Practice.
__________
[*] Confidential Treatment Requested.
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<PAGE>
F. Dental Group desires to retain Manager on an independent contractor
basis to provide management services that are more particularly described below,
and Manager desires to provide such management services under the terms and
conditions set forth in this Agreement.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the covenants and conditions contained
herein, Manager and Dental Group agree as follows:
ARTICLE 1
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
ARTICLE 2
SCOPE OF AGREEMENT
------------------
2.1 General Scope of Agreement. This Agreement shall apply to the
--------------------------
Practice, including, without limitation, all professional, administrative and
technical services, marketing, contracting, case management, ancillary dental
services, outpatient services and dental care facilities, equipment, supplies
and items, except as otherwise specifically provided in this Agreement. Dental
Group's Employment Agreements shall encompass substantially all such activities
of Employee Providers and shall provide that all revenues derived from such
activities (and not excluded below) are Revenues. Nothing in this Agreement
shall be construed to alter or in any way affect the legal, ethical and
professional relationship between and among Providers and Providers' patients,
nor shall anything contained in this Agreement abrogate any right or obligation
arising out of or applicable to the dentist-patient relationship.
2.2 License. Dental Group grants Manager an exclusive license to use any
-------
and all of Dental Group's assets, whether tangible or intangible, in carrying
out Manager's duties and responsibilities under the provisions of this
Agreement.
2.3 Intellectual Property. Dental Group hereby grants to Manager a non-
---------------------
exclusive, perpetual, royalty-free, worldwide license to use and sublicense the
use of any intellectual property owned by Dental Group. This license shall
cover, but not be limited to, use of the following:
-2-
<PAGE>
(a) Service Mark. Dental Group hereby grants Manager the right to use all
------------
service marks and trademarks of Dental Group (the "Marks") for marketing and
promotional materials in connection with Dental Group's offering of dental
services. Manager agrees to use the Marks solely in the design format used by
Dental Group as of the date of this Agreement or another design format approved
in advance in writing by Dental Group. Dental Group shall have the opportunity
to review any marketing or other materials using the Marks in advance of any
public distribution. Manager agrees that it will include these restrictions
on use in any sublicense of the Marks.
(b) Copyrighted Materials. Dental Group hereby grants Manager the right to
---------------------
use any and all copyrighted materials authored or owned by Dental Group
including, specifically, the Dental Group dental management system software
programs (the "Programs"). This license includes the right to sublicense the
Programs and the right to prepare and own derivative works based on the
Programs, all without a duty of accounting to Dental Group. Dental Group shall
execute all documents required to enable Manager to own, use and exploit all
such rights.
2.4 Revenues. "Revenues" shall mean all of Dental Group's accounts
--------
receivable (net of contractual adjustments and bad debt), and cash collections
which exist at the Effective Date or which are acquired after the Effective Date
and during the Term. Revenues shall include all funds collected by, or legally
due to, Dental Group or any Affiliate of Dental Group, including, without
limitation, the following: (a) all fee-for-service payments for services to
Group Patients or Beneficiaries; (b) all payments established under Payor
Contracts; (c) all coordination of benefits or deductibles and third-party
liability recoveries related to the Group's services; (d) all payments, dues,
fees or other compensation to Dental Group, (e) any income, profits, dividends,
distributions or other payments from Dental Group's investments; and (f) any
interest or other non-operating income of Dental Group.
2.5 Deposit Accounts. All cash received by Dental Group from whatever
----------------
source shall be deposited into an account or accounts ("Accounts") in the name
of Dental Group at a banking institution selected by Dental Group and approved
by Manager. Dental Group authorizes Manager to bill and collect, in Dental
Group's name, all charges and reimbursements for Dental Group's dental related
activities and to deposit such collections in the Accounts. Dental Group agrees
to assist and cooperate with Manager in the billing and collection process and
to immediately deliver to Manager for deposit any monies Dental Group may
receive.
2.6 Assignment.
----------
(a) Assets. Except as prohibited by contract or by law, Dental Group
------
hereby assigns, sells, conveys, transfers, and
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<PAGE>
delivers to Manager, and Manager hereby accepts from Dental Group, all of the
assets and properties of Dental Group of every kind, character and description,
whether tangible, intangible, real, personal, or mixed, and wherever located,
including, but not limited to, all Revenues, cash, accounts receivable,
advances, prepaid expenses, deposits, equipment and improvements which exist on
the Effective Date or which are acquired after the Effective Date and during the
Term. Dental Group hereby grants to Manager a security interest in all such
assets to secure the performance of its obligation to assign such assets to
Manager and to secure the performance of its other obligations under this
Agreement. The assets shall be valued at their fair market value which has been
determined to be their respective book values. Manager shall have the
authority, and Dental Group shall execute any and all documents as may be
necessary or appropriate to transfer the assets to Manager, authorize Manager to
transfer the funds in the Accounts to a separate account in the name of Manager,
and effectuate the intention of this provision. Dental Group shall execute and
deliver any and all financing statements and other documents as may be necessary
or appropriate to effectuate and perfect the grant of the security interest in
such assets made by Dental Group to Manager under this provision.
(b) Liabilities. Manager shall be responsible for paying all claims and
-----------
obligations associated with the operation of Dental Group pursuant to this
Agreement; provided, Manager shall be deemed to fully discharge its
responsibility to Dental Group for the liabilities described in this
subparagraph by its timely payment on Dental Group's behalf of, or delivery to
Dental Group of an amount sufficient to discharge, all of Dental Group's
obligations and liabilities now existing or arising in the future, including
those under Provider Subcontracts, Employment Agreements, Dental Group's
professional liability insurance and any other operational expenses for which
Dental Group retains responsibility or that are delegated to Dental Group,
whether pursuant to this Agreement or any other agreement of the parties or
action of the Joint Operations Committee ("Dental Expenses"). Notwithstanding
the foregoing, Manager does not assume any liabilities of Dental Group which are
unrelated to the dental business or any liabilities for income taxes.
ARTICLE 3
GOVERNANCE AND CONTROL
----------------------
3.1 Appointment. Dental Group hereby appoints Manager as its sole and
-----------
exclusive manager for the operation of the Practice and covenants not to enter
into an agreement with any Person other than Manager to perform or assume any of
Manager's rights, duties or responsibilities as provided herein. Manager hereby
accepts full responsibility for such management as more fully set forth herein.
-4-
<PAGE>
3.2 Professional Matters. Pursuant to applicable laws and requirements
--------------------
governing the practice of dentistry, Dental Group shall retain ultimate
responsibility for all activities of Dental Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's non-
licensed status. The parties understand and agree that during the term of this
Agreement, Dental Group shall be the provider of dental services for all
purposes, including, but not limited to, licensure and reimbursement.
3.3 Relationship of Parties. In the performance of its duties and
-----------------------
obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Dental Group. Except as provided in this Agreement or as
required by law, Dental Group shall neither have nor exercise any control or
direction over the methods by which Manager shall perform its obligation
thereunder; nor shall Manager have or exercise any control or direction over the
methods by which Dental Group shall practice dentistry. It is expressly agreed
by the parties that no work, act, commission or omission of Manager pursuant to
the terms and conditions of this Agreement shall be construed to make or render
Manager or Manager's employees or agents, the employees of Dental Group.
Manager and Dental Group are not partners or joint venturers with each other and
nothing herein shall be construed so as to make them partners or joint venturers
or impose upon either of them any liability as partners or joint venturers.
Dental Group's responsibility is to assure that the services covered by this
Agreement shall be performed and rendered in a competent, efficient and
satisfactory manner.
3.4 Authority and Control. Strategic planning, overall direction and
---------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group shall be accomplished as follows:
(a) Exclusive Authority.
-------------------
(1) Dental Group. Dental Group shall have the sole responsibility and
------------
authority for all aspects of the practice of dentistry and delivery of dental
services by Providers. Dental Group shall consult with Manager or the Joint
Operations Committee to the extent reasonable and not inconsistent with the
licensure of dentists.
(2) Manager. After reasonable consultation with Dental Group or the
-------
Joint Operations Committee, Manager shall have the sole responsibility and
authority for decisions related to the administration of the Practice.
(b) Joint Authority. All other decision-making authority related to the
---------------
business and affairs of Dental Group shall be vested in a joint operations
committee (the "Joint Operations
-5-
<PAGE>
Committee"). Nothing herein shall be construed as preventing the Joint
Operations Committee from appointing representatives and delegating authority to
such representatives so long as the Joint Operations Committee may revoke such
appointment and delegation at any time and so long as the Joint Operations
Committee retains ultimate responsibility for the decisions of such
representatives.
3.5 Joint Operations Committee. Strategic planning, overall direction and
--------------------------
control of the business and affairs of Dental Group, and authority over the day-
to-day activities of Dental Group shall be overseen by the Joint Operations
Committee as follows:
(a) Joint Operations Committee Membership. The Joint Operations Committee
-------------------------------------
shall consist initially of three (3) individuals (the "Committee Members").
Dental Group shall designate one (1) Committee Member (the "Dental Group
Member") and the remaining two (2) Committee Members (the "Manager Members")
shall be appointed by Manager. The number of Committee Members may be increased
by agreement of the parties. Each party shall continue to direct the
appointment of the same percentage of Committee Members as described above.
Each Committee Member shall serve at the pleasure of the party designating such
Committee Member and may be replaced, with or without cause, at any time by such
party upon the delivery of written notice thereof to the other Committee
Members. Manager, Dental Group and their respective Committee Members shall
diligently pursue any preliminary activities that are necessary to allow the
Joint Operations Committee to take an action. Where Committee Members are
required to consult with the organization appointing such Committee Members, the
Committee shall establish and agree on a deadline for accomplishing such
consultation.
(b) Joint Operations Committee Action.
---------------------------------
(1) Joint Action. Except as otherwise expressly set forth above, the
------------
Joint Operations Committee shall take all other actions that have been approved
by a majority of the Committee Members.
(2) Consultation Forum. Consultation between Dental Group and
------------------
Manager, if any, shall take place at a meeting of the Joint Operations
Committee, and Dental Group and Manager hereby agree to be bound by the decision
of their Dental Group Members or Manager Members, as the case may be.
(c) Joint Operations Committee Meetings. Meetings of the Joint Operations
-----------------------------------
Committee may be held by telephone or similar communications equipment so long
as all Committee Members participating in a meeting can hear and speak to each
other. The Joint Operations Committee shall prepare and maintain written
minutes of all meetings and shall provide a copy of the
-6-
<PAGE>
minutes to the parties within fifteen (15) business days following each meeting.
(1) Regular Meetings. The Joint Operations Committee shall hold not
----------------
less than four (4) regular meetings each year, at such specific times and places
as the Committee Members may determine.
(2) Special Meetings. A special meeting of the Joint Operations
----------------
Committee may be called by a majority of the Committee Members.
(3) Notice Requirement. A Committee Member calling a special meeting
------------------
must provide all other Committee Members with ten (10) days' advance written or
telephonic notice. Notice must be given or sent to the Committee Member's
address or telephone number as shown on the records of the Joint Operations
Committee. Notice may be delivered directly to each Committee Member or to a
person at the Committee Member's principal place of business who would
reasonably be expected to communicate that notice promptly to the Committee
Member.
(4) Waiver of Notice Requirement.
----------------------------
(A) Written Waiver, Consent or Approval. Notice of a special
-----------------------------------
meeting need not be given to any Committee Member who, either before or after
the meeting, signs a waiver of notice or a written consent to the holding of the
special meeting, or an approval of the minutes of the special meeting. Such
waiver, consent or approval need not specify the purpose of the special meeting.
All such waivers, consents, and approvals shall be filed with the Joint
Operations Committee records or made a part of the minutes of the special
meetings.
(B) Failure to Object. Notice of a special meeting need not be
-----------------
given to any Committee Member who attends the special meeting and does not
protest before or at the commencement of the special meeting such lack of
notice.
(5) Quorum. The smallest number of Committee Members that exceed
------
fifty percent (50%) of all Committee Members shall constitute a quorum of the
Joint Operations Committee.
(6) Proxies. The Joint Operations Committee shall provide for the use
-------
of proxies, telephonic conference calls, written consents or other appropriate
methods by which the full participation of the Dental Group Members and Manager
Members can be assured.
(d) Limitation of Responsibility. Notwithstanding any other provisions
----------------------------
hereof, Committee Members shall be liable to the parties only for actions
constituting bad faith, gross negligence or breach of an express provision of
this Agreement (so long as such breach remains uncured after ten (10) days of
-7-
<PAGE>
receiving notice of the nature of such breach). In all other respects,
Committee Members shall not be liable for negligence or mistakes of judgment.
3.6 Budgets. A capital and operating budget ("Annual Budget") shall be
-------
established regarding all financial aspects of the Practice. The Annual Budget
shall include the following elements and other items, as appropriate:
(a) A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
(b) An operating budget setting forth an estimate of Revenues and expenses
for the next succeeding fiscal year, together with an explanation of anticipated
changes or modifications, if any, in the Practice's utilization, rates, charges
to patients or third party payors, salaries, costs of Providers, non-wage cost
increases, and all other similar factors expected to differ significantly from
those prevailing during the current fiscal year;
(c) Other expenses of operation;
(d) The amount of a reasonable reserve to satisfy possible shortfalls from
operations. The allocation of such reserve shall be made by the Joint
Operations Committee as and when necessary; and
(e) The Management Fee, as defined below, for the next succeeding fiscal
year.
3.7 Budget Process.
--------------
(a) Initial Annual Budget. Not later than 45 days after the Effective
---------------------
Date, the Joint Operations Committee will have prepared the initial Annual
Budget for the first fiscal year (which shall initially be the calendar year)
during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains, or, at the option of
the parties, such portion of the then current fiscal year plus the immediately
subsequent fiscal year.
(b) Preliminary Budget. Not later than forty-five (45) days prior to the
------------------
end of each fiscal year during the term of this Agreement, the Manager shall
prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
(c) Joint Operations Committee Approval. The Joint Operations Committee
-----------------------------------
shall review and suggest modifications to the Preliminary Budget within ten (10)
days of receipt. Manager
-8-
<PAGE>
shall prepare a revised budget based upon the Joint Operations Committee's
recommendations and the Preliminary Budget as revised shall become the Annual
Budget.
(d) Adjustments. In the event of a material deviation between financial
-----------
forecasts and financial performance during a fiscal year, Manager or Dental
Group may propose adjustments to the Annual Budget which adjustments shall be
approved or disapproved pursuant to the procedures set forth above.
3.8 Personnel.
---------
(a) Providers. Except in unusual circumstances approved by the Joint
---------
Operations Committee, Manager shall not employ or contract with any Providers
for the provision of dental services. All Providers who provide dental services
to Group Patients or to Beneficiaries shall be either (1) Employee Providers,
(2) Subcontract Providers or (3) employees of Subcontract Providers.
(b) Non-Providers. With the exception of employees of Subcontract
-------------
Providers, Manager shall employ all non-Provider personnel necessary for the
operation of the Practice.
(c) Salary and Benefits. Each party to this Agreement shall remain liable
-------------------
for the salary and benefits paid to such party's own employees and shall be
ultimately responsible for compliance with state and federal laws pertaining to
employment taxes, workers' compensation, unemployment compensation and other
employment-related statutes pertaining to the party's own employees.
(d) Payments to Subcontract Providers. Dental Group shall be liable for
---------------------------------
any payments due Subcontract Providers under Provider Subcontracts after receipt
of funds from Manager.
ARTICLE 4
MANAGEMENT SERVICES
-------------------
4.1 General Description of Services. Within the limitations set out
-------------------------------
elsewhere in this Agreement, Manager shall provide or arrange for the provision
to Dental Group of all support services reasonably necessary and appropriate for
the efficient operation of the Practice. Such services include all
administrative services necessary to Dental Group's performance of its
obligations under Payor Contracts, contracting, marketing, capital formation and
assistance with long term strategic planning.
4.2 Facilities. When appropriate, Manager shall secure and maintain
----------
facilities, including, without limitation, office space, improvements,
furnishings, equipment, supplies and personal property, of a nature and in a
condition necessary and
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<PAGE>
appropriate for the efficient and effective operations of the Practice subject
to the general approval of the Joint Operations Committee. Manager shall secure
and maintain said facilities in the name of Dental Group.
4.3 Purchased Items and Services. Manager shall serve as the purchasing
----------------------------
agent for Dental Group and shall arrange for personnel benefits, insurance, and
any other items and services required for the proper operation of the Practice.
4.4 Manager Personnel.
-----------------
(a) Management Team. Subject to any approval or consulting rights of the
---------------
Joint Operations Committee, Manager shall engage or designate one or more
individuals experienced in dental group management and direction, including, but
not limited to, an administrator, who will be responsible for the overall
administration of the Practice including day-to-day operations and strategic
development activities.
(b) Other Manager Personnel. Manager shall select, hire, train, supervise,
-----------------------
monitor and terminate all non-Provider personnel necessary for the operation and
management of the Practice. During the two year period following the date of
this Agreement, Manager shall maintain in effect for the benefit of all non-
Provider personnel of Manager assigned to the operation and management of the
Practice, the following programs and benefits currently being provided by
Manager: holiday bonus program; health club membership; and annual incentive
trip for employees and family.
4.5 Day-to-Day Management and Supervision. Subject to any approval or
-------------------------------------
consulting rights of the Joint Operations Committee, Manager shall provide
general management including, but not limited to, day-to-day supervision of:
(a) Manager personnel;
(b) Equipment and supply acquisition;
(c) Office space and facility maintenance;
(d) Patient records organization and retention;
(e) Third party payor contracting;
(f) Case management tracking;
(g) Billing, collections and accounting activities as set forth below;
(h) All operating aspects and policies of the Practice including, but not
limited to, hours of operation, work
-10-
<PAGE>
schedules, standard duties and job descriptions, for all nondentist personnel;
and
(i) Other related and incidental matters.
4.6 Billing and Collection Payment of Expenses. Manager shall be
------------------------------------------
responsible for all billing and collecting activities required by Dental Group.
Manager shall also be responsible for reviewing and paying accounts payable of
Dental Group. Dental Group hereby appoints the Manager its true and lawful
attorney-in-fact to take the following actions for and on behalf of and in the
name of Dental Group:
(a) Bill and collect in Dental Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Dental Group. Dental
Group shall give Manager all necessary access to Patient records to accomplish
all billing and collection. In so doing, Manager will use its best efforts but
does not guarantee any specific level of collections, and Manager will comply
with Dental Group's reasonable and lawful policies regarding courtesy discounts;
(b) Take possession of and endorse in the name of Dental Group any and all
instruments received as payment of accounts receivable;
(c) Deposit all such collections directly into Accounts and make
withdrawals from such Accounts in accordance with this Agreement; and
(d) Place accounts for collection, settle and compromise claims, and
institute legal action for the recovery of accounts.
4.7 Bookkeeping and Accounting. Manager shall provide bookkeeping
--------------------------
services, financial reports, and shall implement and manage a computerized
management information system appropriate for the Practice.
(a) Financial Reporting. Manager shall prepare, analyze, and deliver to
-------------------
the Joint Operations Committee financial reports to the extent necessary or
appropriate for the operation of the Practice, including the following:
(1) Financial statements, including balance sheets and statements of
cash flow and income;
(2) Accounts payable and accounts receivable analysis;
(3) Billing status including any Medicaid remittances; and
(4) Reconciliation of assets, liabilities and major expenses.
-11-
<PAGE>
(b) Audits. Dental Group shall have the right to review and, at its sole
------
cost and expense, obtain an audit (separate from any annual audit or review of
Dental Group's financial statements performed at the direction of the Manager)
of Dental Group's financial books and records maintained by the Manager. Upon
five (5) days' prior written notice, Manager shall allow Dental Group access
during reasonable business hours to all information and documents reasonably
required for such review or audit. Upon Dental Group's request and at Dental
Group's expense, Manager shall also provide copies of such documents.
4.8 Marketing and Public Relations Services. Manager shall provide such
---------------------------------------
marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Dental Group.
Manager shall provide Dental Group with marketing materials and activities.
4.9 Dental Group Agreements. On behalf of Dental Group, Manager shall
-----------------------
review, evaluate and negotiate Payor Contracts and Provider Subcontracts and any
other contracts or agreements regarding the provision of dental related items or
services by Dental Group or Providers.
4.10 Utilization Review Quality Improvement and Outcomes Monitoring.
--------------------------------------------------------------
Manager shall be responsible for providing administrative support for Dental
Group's utilization review, quality improvement and outcomes monitoring
activities, including, without limitation, data collection, analysis and
reporting for Group Patients and Beneficiaries. Manager shall also support the
development and implementation of relevant policies, procedures, protocols,
practice guidelines and other interventions based on such activities.
4.11 Applicable Law. Manager and Dental Group shall comply with all
--------------
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE 5
DENTAL GROUP SERVICES
---------------------
5.1 Provision of Dental Services by Dental Group. Dental Group shall
--------------------------------------------
operate the Practice during the Term as a dental practice in accordance with
terms of this Agreement and the Annual Budget.
5.2 Providers.
---------
(a) Professional Dental Services. Dental Group shall employ or contract
----------------------------
with the number of Providers Dental Group
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<PAGE>
deems necessary for the efficient and effective operation of the Practice and in
accordance with quality assurance, credentialing and utilization management
protocols approved by Manager. Dental Group shall provide full and prompt
dental coverage for the Practice, including emergency service twenty-four hours
per day, seven days per week, including holidays according to policies and
schedules approved by the Joint Operations Committee.
(b) Provider Subcontracts and Employment Agreements. Dental Group shall not
-----------------------------------------------
negotiate or execute any Provider Subcontract, Employment Agreement, or any
amendment thereto, without the approval of the Joint Operations Committee. The
Joint Operations Committee shall have the right of review and reasonable
approval of any Provider Subcontract and Employment Agreement. Dental Group
shall be responsible for the payment, in accordance with the Annual Budget, of
all Employee and Subcontract Providers.
5.3 Peer Review. Dental Group, after consultation with the Joint
-----------
Operations Committee, shall implement, regularly review, modify as necessary or
appropriate and obtain the commitment of Providers to actively participate in
peer review procedures for Providers. Dental Group shall assist Manager in the
production of periodic reports describing the results of such procedures.
Dental Group shall provide Manager with prompt notice of any information that
raises a reasonable risk to the health and safety of Group Patients or
Beneficiaries. In any event, after consultation with the Joint Operations
Committee, Dental Group shall take such action as may be reasonably warranted
under the facts and circumstances.
5.4 Billing Information and Assignments. Dental Group shall promptly
-----------------------------------
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Dental Group's
services. Dental Group shall use reasonable efforts to procure consents to
assignments and other approvals and documents necessary to enable Manager to
obtain payment or reimbursement from third party payors and patients. With the
assistance of Manager, Dental Group shall obtain all provider numbers necessary
to obtain payment or reimbursement for its services.
5.5 Third Party Contracts. Dental Group shall be in compliance with all
---------------------
contracts, agreements and arrangements, including any contracts that exist on
the Effective Date, between Dental Group and third parties.
5.6 Use of Manager's Goods and Services. Dental Group shall not use any
-----------------------------------
goods or services provided by Manager pursuant to this Agreement for any purpose
other than the provision of and management of dental services as contemplated by
this Agreement and purposes incidental thereto.
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<PAGE>
5.7 Negative Covenants. During the Term, Dental Group shall not, without
------------------
the prior approval of the Joint Operations Committee, (a) assign, pledge,
mortgage or otherwise encumber any of its property, (b) transfer substantially
all of its assets, including its goodwill, (c) merge or consolidate with any
other entity, (d) allow the transfer or issuance of any of its stock (other than
in accordance with the terms and provisions of that certain Share Acquisition
Agreement dated February 24, 1997, between GMS Dental Group Management, Inc., a
Delaware corporation and John Burns, D.M.D.), or (e) take or allow any act that
would materially impair the ability of Dental Group to carry on the business of
the Practice or to fulfill its obligations under this Agreement.
ARTICLE 6
TERM
----
6.1 Term. This Agreement shall be effective as of February 24, 1997 (the
----
"Effective Date"), and shall remain in effect for an initial term of forty (40)
years from the Effective Date, expiring on the fortieth (40th) anniversary of
the Effective Date, unless earlier terminated pursuant to the terms of this
Agreement. The word "Term" shall include such initial term and, where
applicable, any extension of such initial term (whether extended pursuant to
Section 6.2(a) or otherwise), subject to earlier termination pursuant to the
provisions of this Agreement.
6.2 Termination and Extension.
-------------------------
(a) Automatic Extension. At the end of the initial term and any subsequent
-------------------
term, this Agreement shall automatically renewed for a five (5) year term unless
one of the parties provides the other party with written notice of intent not to
renew, not less than one hundred eighty (180) day prior to the expiration of the
then current term.
(b) Early Termination. This Agreement may be terminated according to the
-----------------
provisions of this Section.
(1) Material Breach. In the event either party materially breaches
---------------
this Agreement and such breach is not cured to the reasonable satisfaction of
the non-breaching party within thirty (30) days after the non-breaching party
serves written notice of the default upon the defaulting party (the "Default
Notice"), the Agreement shall automatically terminate at the election of the
non-breaching party upon the giving of a written notice of termination to the
defaulting party not later than forty-five (45) days after service of the
Default Notice; provided that if such uncured breach is only capable of being
cured within a reasonable period of time in excess of thirty (30) days, the non-
breaching party shall not be entitled to
-14-
<PAGE>
terminate this Agreement so long as the defaulting party has commenced such cure
and thereafter diligently pursue such cure to completion.
(2) Refusal To Comply. In the event that Dental Group or Manager
-----------------
refuses or fails to comply with a decision of the Joint Operations Committee,
the aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if such dispute between Dental Group and Manager continues for
sixty (60) days after the date the aggrieved party exercises its option
regarding mediation, the non-complying party shall have thirty (30) days in
which to comply with the decision of the Joint Operations Committee. If the
non-complying party has not complied by the end of such thirty (30) day period,
the aggrieved party shall have the option to terminate this Agreement upon
fifteen (15) days prior written notice. During such mediation, Manager and
Dental Group shall continue to operate and manage the Practice in good faith.
Neither Dental Group nor Manager shall be required to participate in such good
faith mediation if it reasonably concludes that the delay associated with
pursuing such mediation likely would cause harm or injury to it or the Practice.
(3) Bankruptcy. A party may, upon three (3) days' prior written
----------
notice, terminate this Agreement if the other party:
(A) Applies for or consents to the appointment of a receiver,
trustee or liquidator of all or a substantial part of its assets, files a
voluntary petition in bankruptcy or consents to an involuntary petition, makes a
general assignment for the benefit of its creditors, files a petition or answer
seeking reorganization or arrangement with its creditors, or admits in writing
its inability to pay its debts when due, or
(B) Suffers any order, judgment or decree to be entered by any
court of competent jurisdiction, adjudicating such party bankrupt or approving a
petition seeking its reorganization or the appointment of a receiver, trustee or
liquidator of such party or of all or a substantial part of its assets, and such
order, judgment or decree continues unstayed and in effect for ninety (90) days
after its entry.
(4) Nonperformance. Manager may terminate this Agreement in the event
--------------
that in any two consecutive fiscal quarters the Manager has not been paid the
Management Fee and, in the sole discretion of the Manager, it is not reasonably
likely that the Management Fee will be paid in the next fiscal quarter. Any
such termination shall be effective as of the last day of such third fiscal
quarter provided at least ninety (90) days notice shall have been given;
otherwise, such termination shall be effective on the sixtieth day after notice
is given.
-15-
<PAGE>
(5) Change in Law. In the event of any material change in federal or
-------------
state law that has a significant adverse impact on either party hereto in
connection with their performance under this Agreement, or if performance by a
party of court or any duties under this Agreement be deemed illegal by any
administrative agency or in a formal opinion rendered to Manager by legal
counsel knowledgeable in health law matter retained by the Manager, the affected
party shall have the right to require that the other party renegotiate the terms
of this Agreement. Unless the parties otherwise mutually agree in writing, such
renegotiated terms shall be effective not later than twenty (20) days after
receipt of written notice of such request for renegotiation. Solely in the
event of illegality, if the parties fail to reach an agreement within thirty
(30) days of the request for renegotiation, either party may (subject to the
severability provision of this Agreement) terminate this Agreement upon thirty
(30) days' prior written notice to the other party.
(c) Effect of Termination. Upon termination of this Agreement:
---------------------
(1) Dental Group shall surrender to Manager all of Manager's property
used primarily in the operation of the Practice in the same condition as
received, reasonable wear and tear excepted.
(2) Manager shall deliver to Dental Group all records related to the
business of and provision of dental care through the Practice including, without
limitation, patient records and any corporate, personnel and financial records
maintained for the Practice and Providers, provided, that except as limited by
law, including, but not limited to laws governing the confidentiality of patient
records, Manager shall have the option to copy (or otherwise duplicate) at its
sole cost and expense such records of Dental Group and to retain and utilize
such records for its own use;
(3) Manager shall deliver to Dental Group any other property of Dental
Group in Manager's possession;
(4) Both parties shall cooperate to ensure the provision of
appropriate dental care to Group Patients and Beneficiaries;
(5) Dental Group shall promptly deliver to Manager any Revenues that
it may receive in payment for dental services rendered by Dental Group prior to
termination; and
(6) Both parties shall cooperate to ensure the appropriate billing and
collections for dental services rendered by Dental Group prior to the effective
date of termination, and any such cash collected shall be retained by Dental
Group and/or paid to Manager pursuant to Article 7.
-16-
<PAGE>
(d) Manager's Option. Upon the termination of this Agreement pursuant to
----------------
Section 6.2(b), Manager shall have the option exercisable within 180 days after
the effective date of termination to require Dental Group to: (i) assume the
accounts payable and other liabilities and obligations under facilities leases,
equipment leases and other contracts, and (ii) purchase the accounts receivable,
inventories and supplies, furniture, fixtures and equipment, leasehold
improvements and intangible assets, in each case which relate solely to the
performance by Manager of its obligations under this Agreement, at their
respective fair market values. The fair market value of the assumed liabilities
and acquired assets shall be determined in each case based upon their respective
book values as reflected on the books and records of Manager in accordance with
GAAP, except that the fair market value of equipment shall be the greater of its
book value as so determined or its appraised value as determined in good faith
by a reputable appraiser selected by Manager. The consideration to be paid by
Dental Group shall consist of (i) the amount of the liabilities assumed by
Dental Group in the transaction as valued based on their book values, and (ii)
cash for the balance. Dental Group shall indemnify and hold harmless Manager
from and against and to the extent practicable arrange for the release of
Manager from any and all labilities and obligations assumed by Dental Group.
The option shall be exercisable by Manager by giving written notice to Dental
Group. If Manager exercises its option pursuant to this section prior to the
effective date of termination of this Agreement, then the effective date of
termination of this Agreement shall be continued until the closing date of the
acquisition transaction provided for under this section. The closing of the
transaction shall take place at the principal office of Manager not more than
thirty (30) days following the exercise of the option by Manager.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF DENTAL GROUP
----------------------------------------------
Dental Group hereby represents and warrants to Manager as of the date
hereof as follows:
7.1 Organization. Dental Group is a professional corporation duly
------------
organized, validly existing and in good standing under the laws of the State of
California. Dental Group does not need to be qualified in any jurisdiction
other than where it is currently qualified except where the failure to be so
qualified will not have a material adverse effect on Dental Group. Dental Group
has all requisite power to own, lease and operate its properties and assets, and
to carry on its business as presently conducted. Complete and correct copies of
the Articles of Incorporation and Bylaws of Dental Group have been delivered to
the Manager. Such copies are true, correct, complete and
-17-
<PAGE>
properly executed and contain all amendments through the date of this Agreement.
7.2 Capitalization. The authorized capital stock of Dental Group consists
--------------
of 1,000 shares of Common Stock, of which 100 shares are issued and outstanding
and owned of record and beneficially by John Burns, D.M.D.
7.3 Subsidiaries; Conduct of Business. The sole activity of Dental Group
---------------------------------
is the operation of dental care centers and ancillary activities associated
therewith, and Dental Group is not now and has not engaged in any other
activities of any nature. Dental Group has no subsidiaries, nor any long-term
or short-term investments in, nor ownership of securities of, any business,
corporation, partnership, enterprise, entity or organization, public or private.
7.4 Authority. Dental Group has all requisite power and authority to
---------
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
all necessary action on the part of Dental Group. This Agreement has been duly
executed and delivered by Dental Group and constitutes a valid and binding
obligation of Dental Group, enforceable in accordance with its terms, subject to
the effect of applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar federal or state laws affecting the
rights of creditors and the effect or availability of rules of law governing
specific performance, injunctive relief or other equitable remedies (regardless
of whether any such remedy is considered in a proceeding at law or in equity).
No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality is required by or with respect
to Dental Group in connection with the execution and delivery of this Agreement
by Dental Group or the consummation by Dental Group of the transactions
contemplated hereby.
7.5 No Conflict. The execution, delivery and performance of this
-----------
Agreement by Dental Group and the consummation of the transactions contemplated
hereby and the conduct of the business of Dental Group as currently conducted
will not result in any violation of, be in conflict with, or constitute a
default or give rise to a right of termination, cancellation or acceleration
under any provision of (a) any judgment, decree or order or any material
agreement, contract, understanding, indenture or other instrument to which
Dental Group is a party or by which it is bound; or (b) any statute, rule or
governmental regulation applicable to Dental Group.
-18-
<PAGE>
7.6 Providers. A list of all agreements between Dental Group and
---------
dentists, nurses, hygienists, and other dental care Providers are set forth on
the schedule delivered by Dental Group to Manager concurrently with the
execution hereof. The Providers have all necessary credentials, licenses and
permits required for the work performed for Dental Group. All Providers carry
malpractice insurance in amounts adequate for their performance of services for
Dental Group.
ARTICLE 8
MANAGEMENT FEE
--------------
For its services hereunder, which shall include the providing of all
facilities and furniture, fixtures and equipment at the Practice, all non-
dentist employees of Manager who perform services at or for the Practice and all
management services provided hereunder, Manager shall retain as a management fee
(collectively, the "Management Fee") the following:
8.1 Base Management Fee. As a base management fee (the "Base Management
-------------------
Fee") Manager shall retain that portion of Revenues equal to the sum of the
amount of Manager's Costs plus [*]% of Revenues.
8.2 Performance Management Fee. As a bonus for meeting performance
--------------------------
standards goals as set by the Joint Operations Committee, Manager shall be
eligible for a Performance Management Bonus that is calculated in accordance
with the applicable exhibit to the Annual Budget.
8.3 Adjustments. If there are not sufficient funds to pay the Base
-----------
Management Fee, all unpaid amounts shall accumulate and carry over until paid or
until the termination of this Agreement, in which case such unpaid amounts shall
be immediately due and payable as of the date of termination.
8.4 Reasonable Value. Payment of the Base Management Fee and the
----------------
Performance Management Fee is acknowledged as the parties' negotiated agreement
as to the reasonable fair market value of the services furnished by Manager
pursuant to this Agreement, considering the nature and volume of the services
required and risks assumed by Manager.
ARTICLE 9
INDEMNITY AND INSURANCE
-----------------------
9.1 Indemnity.
---------
(a) Indemnification. Each party shall indemnify, defend and hold harmless
---------------
the other party from any and all liability,
_________
[*] Confidential Treatment Requested.
-19-
<PAGE>
loss, claim, lawsuit, injury, cost, damage or expense whatsoever (including
reasonable attorneys' fees and court costs) arising out of, incident to or in
any manner occasioned by the performance or nonperformance of any duty or
responsibility under this Agreement by such indemnifying party, or any of their
employees, agents, contractors or subcontractors; provided, however, that
neither party shall be liable to the other party hereunder for any claim covered
by insurance, except to the extent that the liability of such party exceeds the
amount of such insurance coverage. Specifically, and without limiting the
generality of the foregoing, Dental Group agrees to indemnify, defend and hold
harmless Manager for all liability, loss, claim, lawsuit, injury, cost, damage
or expense whatsoever (including reasonable attorneys' fees and court costs)
arising out of the professional negligence of Dental Group, its employees,
agents, contractors or subcontractors, including any amounts in excess of the
professional liability insurance coverage of Dental Group or its employees,
agents, contractors or subcontractors.
(b) Mutual Indemnity. Each party to this Agreement shall be indemnified by
----------------
the other party for any claim under this Agreement or otherwise against the
indemnified party for vacation pay, sick leave, retirement benefits, Social
Security benefits, workers' compensation benefits, disability or unemployment,
insurance benefits, or other employee benefits of any kind accrued during the
term of this Agreement by an employee of the indemnifying party.
9.2 Manager's Insurance. Manager shall, on its own behalf and at its sole
-------------------
cost and expense, procure and maintain in force during the term of this
Agreement policies in the following categories in the amount indicated:
(a) Comprehensive general liability insurance covering the risks of
Manager, in an amount determined by the Joint Operations Committee;
(b) Workers' compensation insurance covering the employees of Manager, in
such amounts as is usual and customary under the circumstances;
(c) Property insurance covering the facilities, equipment and supplies
owned or leased by Manager or Dental Group for use in the operation of the
Practice.
9.3 Dental Group's Insurance. At Dental Group's sole cost and expense,
------------------------
Manager shall obtain, and maintain on behalf of Dental Group in full force and
effect during the Term, policies in the following categories in the amount
indicated:
(a) Comprehensive professional liability insurance coverage for Dental
Group and Dental Group's Employee Providers, in such amounts as Manager shall
reasonably deem necessary;
-20-
<PAGE>
(b) Workers' compensation insurance covering the employees of Dental Group,
in such amounts as is usual and customary under the circumstances;
(c) Comprehensive general liability insurance covering the risks of Dental
Group, in an amount determined by the Joint Operations Committee.
ARTICLE 10
PROPRIETARY INFORMATION AND UNFAIR COMPETITION
----------------------------------------------
10.1 Protection of Proprietary Information. Dental Group recognizes that
-------------------------------------
due to the nature of this Agreement, Dental Group will have access to trade
secrets and other confidential information of a proprietary nature owned by
Manager ("Proprietary Information"). "Proprietary Information" includes all
information and any idea which a reasonable person would believe is
confidential, in whatever form, tangible or intangible, pertaining in any
manner to the business of Manager or any subsidiary or affiliate of Manager,
unless (i) the information is or becomes publicly known through lawful means,
(ii) the information was rightfully in Dental Group's possession or part of its
general knowledge prior to the Effective Date or (iii) the information is
subsequently disclosed to Dental Group by a third party without breach of this
Agreement and without restriction on its use. Proprietary Information includes,
but is not limited to, any and all computer programs (whether or not completed
or in use) and any and all operating manuals or similar materials which
constitute the non-medical systems, policies and procedures, and methods of
doing business developed by or for the operation of facilities managed by
Manager. Dental Group acknowledges and agrees that Manager has a proprietary
interest in all such Proprietary Information and that all such information
constitutes confidential and proprietary information and is the trade secret
property of Manager. Dental Group hereby waives any and all right, title and
interest in and to such Proprietary Information and agrees to return all copies
thereof and Proprietary Information related thereto to Manager, at Dental
Group's expense, upon the termination of this Agreement.
Dental Group further acknowledges and agrees that Manager is entitled to
prevent its competitors from obtaining and utilizing its Proprietary
Information. Therefore, Dental Group agrees to hold Manager's Proprietary
Information in strictest confidence and not to disclose it or allow it to be
disclosed, directly or indirectly, to any person or entity other than those
persons or entities who are employed by or affiliated with Manager or Dental
Group, without the prior written consent of Manager. Dental Group shall not,
either during the term of this Agreement, or at any time after the expiration or
earlier termination of this Agreement, disclose to anyone other than persons or
entities who are employed by or affiliated with Manager or
-21-
<PAGE>
Dental Group any Proprietary Information obtained by Dental Group from Manager,
except as otherwise required by law.
10.2 Restrictions on Unfair Competition. Dental Group agrees that during
----------------------------------
the term of this Agreement and for a period of two (2) years after termination
of this Agreement Dental Group shall not (a) solicit in any way on behalf of
itself or in conjunction with others for the purpose of providing management
services any dental group being managed by or being or having been solicited by
Manager or any subsidiary, affiliate or successor in interest thereof, and (b)
solicit in any way or make offers of employment to, on behalf of itself or in
conjunction with others, any person employed by Manager or any subsidiary,
affiliate or successor in interest thereof. Dental Group acknowledges and
agrees that these restrictions are reasonable and necessary to protect Manager's
Proprietary Information and to ensure that it will not be subject to unfair
competition.
10.3 Enforcement. Dental Group agrees to require each independent
-----------
contractor and employee of the Dental Group, and any persons or entities to whom
such Proprietary Information is disclosed for the purpose of performance of
Manager's or Dental Group's obligations under this Agreement, to execute a
proprietary information agreement in the form supplied by or approved by
Manager pursuant to which they agree to abide by the restrictions on Dental
Group's activities set forth in this Article 9. Dental Group acknowledges and
agrees that a breach of the provisions of this Article 9 will result in
irreparable harm to Manager which cannot be reasonably or adequately compensated
in damages, and therefore Manager shall be entitled to injunctive and/or
equitable relief to prevent a breach and to secure enforcement thereof, in
addition to any of the relief or award to which Manager may be entitled.
ARTICLE 11
BOOKS AND RECORDS
-----------------
11.1 Ownership of Records. All business records and information relating
--------------------
exclusively to the business and activities of either party shall be the property
of that party, irrespective of identity of the party responsible for producing
or maintaining such records and information. Without limiting the foregoing,
all patient charts and records maintained by Manager relating to the dental
services of Dental Group shall be the property of Dental Group. Dental Group
also shall be entitled to a copy at Dental Group's sole cost of all business
records pertaining to Dental Group. Except as limited by law, including, but
not limited to laws governing the confidentiality of patient records, Manager
shall be entitled to a copy at Manager's sole cost of all records of Dental
Group.
-22-
<PAGE>
ARTICLE 12
MISCELLANEOUS PROVISIONS
------------------------
12.1 Assignment. Except for an assignment by Manager to GMS Dental Group
----------
Management, Inc., or an affiliate of GMS Dental Group Management, Inc., neither
party shall assign this Agreement to any other party or parties without the
prior written consent of the other party, which consent may be withheld
arbitrarily or capriciously, for any reason or for no reason whatsoever and any
attempted assignment in violation of this Agreement shall be null and void.
12.2 Headings. The article and section headings used in this Agreement
--------
are for purposes of convenience only. They shall not be construed to limit or
to extend the meaning of any part of this Agreement.
12.3 Waiver. Waiver by either Dental Group or Manager of any breach of
------
any provision of this Agreement shall not be deemed to be a waiver of such
provision or of any subsequent breach of the same or of any other provision of
this Agreement.
12.4 Notices. Any notice, demand, approval, consent, or other
-------
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be deemed to have been given when five (5) business days have
elapsed from the date of deposit in the United States mails, certified and
postage prepaid, addressed to the party to be served at the following address or
such other address as may be given in writing to the parties.
Dental Group: Burns Dental Corporation
235 West MacArthur Boulevard, Suite 700
Oakland, CA 94611
Attn: President
Manager: Naismith Dental Corporation, A Professional Corporation
235 West MacArthur Boulevard, Suite 700
Oakland, CA 94611
Attn: President
12.5 Attorneys' Fees. If any legal action, arbitration, mediation or
---------------
other proceeding is commenced, whether by Manager or Dental Group concerning
this Agreement, the prevailing party shall recover from the losing party
reasonable attorneys' fees and costs and expenses, including those of appeal and
not limited to taxable costs, incurred by the prevailing party, in addition to
all other remedies to which the prevailing party may be entitled. If a claim or
claims asserted by a third party against Manager or Dental Group or any of them
arise from an action or omission by the other, the party responsible for the
-23-
<PAGE>
action or omission shall be the losing party, and the other party shall be the
prevailing party, for purposes of the foregoing sentence.
12.6 Successors. Without limiting or otherwise affecting any restrictions
----------
on assignments of this Agreement or rights or duties under this Agreement, this
Agreement shall be binding upon and inure to the benefit of the successors and
assigns of Dental Group and Manager.
12.7 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between Dental Group and Manager and supersedes all prior negotiations and
agreements, written or oral, concerning or relating to the subject matter of
this Agreement, and this Agreement may not be modified except by a writing
executed by all parties and subject to the provisions thereof.
12.8 Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereto shall be governed by, and construed according to, the laws of the
State of California.
12.9 Severability. If any provision of this Agreement is held to be
------------
invalid or unenforceable by any court or administrative agency of competent
jurisdiction, or in a written opinion to the Manager by legal counsel
knowledgeable in health law matters retained by the Manager, such holding or
opinion shall not affect the validity and enforceability of the other provisions
of this Agreement and the remainder of this Agreement shall be considered valid
and operative to the fullest extent permitted by law, but only if and to the
extent such enforcement would not materially and adversely frustrate the parties
essential objectives as expressed herein.
12.10 Time is of the Essence. Time is of the essence in this Agreement.
----------------------
12.11 Authority. Any Person signing this Agreement on behalf of any
---------
entity hereby represents and warrants in its individual capacity that it has
full authority to do so on behalf of such entity.
12.12 Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, each of which shall be deemed an
-24-
<PAGE>
original, but all of which taken together shall constitute on and the same
instrument.
IN WITNESS WHEREOF, Dental Group and Manager have caused their authorized
representatives to execute this Agreement on the date first above written.
DENTAL GROUP
------------
BURNS DENTAL CORPORATION, a California
professional dental corporation
By /s/ John Burns, D.M.D.
-----------------------------
John Burns, D.M.D., President
MANAGER
-------
NAISMITH DENTAL CORPORATION, a California
professional corporation
By /s/ John Burns, D.M.D.
-----------------------------
John Burns, D.M.D., President
-25-
<PAGE>
ADDENDUM 1
----------
For purposes of this Agreement, the following terms shall have the meaning
indicated below or defined at the indicated section:
1. Accounts. See Section 2.5(a).
--------
2. Affiliate. "Affiliate" shall mean, with respect to any Person, any
---------
individual or entity directly or indirectly owned or controlled by such Person,
any individual or entity directly or indirectly owning or controlling such
Person or any individual or entity directly or indirectly owned or controlled
by the same family member, individual or entity as owns or controls such Person.
For purposes of this Agreement, neither Dental Group nor Manager shall be deemed
an Affiliate of the other.
3. Agreement. "Agreement" means this Dental Group Management Agreement.
---------
4. Annual Budget. See Section 3.6, first sentence.
-------------
5. Beneficiaries. See Recital A.
-------------
6. Books and Records. "Books and Records" means Dental Group's books of
-----------------
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
7. Capital Costs. "Capital Costs" shall mean any and all investments
-------------
that are or would be capitalized pursuant to GAAP.
8. Committee Members. See Section 3.5(a).
-----------------
9. Default Notice. See Section 6.2(b)(1).
--------------
10. Dental Group. See first paragraph of this Agreement.
------------
11. Dental Group Members. See Section 3.5(a).
--------------------
12. Dental Expenses. See Section 2.6(b).
---------------
13. Effective Date. See Section 6.1.
--------------
14. Employee Providers. See Recital B.
------------------
15. Employment Agreements. See Recital B.
---------------------
A-1
<PAGE>
16. GAAP. "GAAP" means at any particular time generally accepted
----
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with 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 Manager's financial
statements.
17. Group Patients. See Recital A.
--------------
18. Joint Operations Committee. See Section 3.4(b).
--------------------------
19. Management Fee. See Article 8.
--------------
20. Manager. See first paragraph of this Agreement.
-------
21. Manager Members. See Section 3.5(a).
---------------
22. Manager's Costs. "Manager's Costs" means all costs incurred by
---------------
Manager including amortization associated with costs acquiring assets of the
Dental Group or covering operations and Capital Costs, direct labor costs,
supplies, direct overhead and indirect overhead expense attributable to the
management and operation of the Practice and direct and indirect corporate
overhead of Manager including all interest expense and other expenses which are
attributable to Manager's business operations in accordance with Manager's
corporate allocation policies.
23. Marks. See Section 2.3(a).
-----
24. Payor Contracts. See Recital A.
---------------
25. Person. "Person" shall mean any natural person, corporation,
------
partnership or other business structure recognized as a separate legal entity.
26. Plans. See Recital A.
-----
27. Practice. See Recital A.
--------
28. Preliminary Budget. See Section 3.7(b).
------------------
29. Programs. See Section 2.3(b).
--------
30. Proprietary Information. See Section 10.1.
-----------------------
31. Providers. "Providers" shall mean individuals or organizations
---------
licensed to practice dentistry (including specialists) as well as other dental
professionals who provide ancillary reimbursable dental services.
32. Provider Subcontracts. See Recital A.
---------------------
A-2
<PAGE>
33. Revenues. "Revenues" means all amounts assigned hereunder by Dental
--------
Group to Manager pursuant to Section 2.6(a).
34. Subcontract Providers. See Recital B.
---------------------
35. Term. See Section 6.1.
----
A-3
<PAGE>
Exhibit 10.49
EXECUTION COPY
CREDIT AGREEMENT
By and Among
GMS DENTAL GROUP MANAGEMENT, INC.
as Borrower,
GMS DENTAL GROUP, INC.
and
THE OTHER CREDIT PARTIES PARTY HERETO,
and
IMPERIAL BANK
as Agent,
and
THE FINANCIAL INSTITUTIONS PARTY HERETO
Dated as of October 10, 1996
$10,000,000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page(s)
<S> <C>
ARTICLE I - DEFINITIONS. . . . . . . . . . . . . . . . . . . . . 1
1.1 Certain Defined Terms . . . .. . . . . . . . . . . . . 1
1.2 Other Interpretive Provisions .. . . . . . . . . . . . 18
1.3 Accounting Principles . . . . .. . . . . . . . . . . . 19
ARTICLE II - THE CREDITS . . . . . . . . . . . . . . . . . . . . 20
2.1 Amounts and Terms of Commitments . . . . . . . . . . . 20
2.2 Loan Accounts . . . . . . . . . . . . . . . . . . . . 20
2.3 Procedure for Borrowing . . . . . . . . . . . . . . . 21
2.4 Conversion and Continuation Elections for
Borrowings . . . . . . . . . . . . . . . . . . . . . . 22
2.5 Voluntary Termination or Reduction of
Commitments . . . . . . . . . . . . . . . . . . . . . 23
2.6 Optional Prepayments . . . . . . . . . . . . . . . . . 23
2.7 Repayment . . . . . . . . . . . . . . . . . . . . . . 23
2.8 Interest . . . . . . . . . . . . . . . . . . . . . . . 24
2.9 Fees . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.10 Computation of Fees and Interest . . . . . . . . . . . 25
2.11 Payments by the Borrower. . . . . . . . . . . . . . . 25
2.12 Payments by the Banks to the Agent . . . . . . . . . . 26
2.13 Sharing of Payments, Etc . . . . . . . . . . . . . . . 27
2.14 Security Documents . . . . . . . . . . . . . . . . . . 27
ARTICLE III - TAXES, YIELD PROTECTION AND ILLEGALITY . . . . . . 27
3.1 Taxes . . . . . . . . . . . . . . . . . . . . . . . . 27
3.2 Illegality . . . . . . . . . . . . . . . . . . . . . . 29
3.3 Increased Costs and Reduction of Return . . . . . . . 29
3.4 Funding Losses . . . . . . . . . . . . . . . . . . . . 30
3.5 Inability to Determine Rates . . . . . . . . . . . . . 31
3.6 Certificates of Banks . . . . . . . . . . . . . . . . 31
3.7 Survival . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE IV - CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . 32
4.1 Commitment Closing . . . . . . . . . . . . . . . . . . 32
4.2 Condition of Initial Loans . . . . . . . . . . . . . . 34
4.3 Conditions to All Borrowings . . . . . . . . . . . . . 36
ARTICLE V - REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . 36
5.1 Existence and Power . . . . . . . . . . . . . . . . . 36
5.2 Corporate Authorization; No Contravention . . . . . . 37
5.3 Governmental Authorization . . . . . . . . . . . . . . 37
5.4 Binding Effect . . . . . . . . . . . . . . . . . . . . 37
5.5 Litigation . . . . . . . . . . . . . . . . . . . . . . 37
</TABLE>
<PAGE>
<TABLE>
<S> <C>
5.6 No Default . . . . . . . . . . . . . . . . . . . . . . 38
5.7 Financial Condition. . . . . . . . . . . . . . . . . . 38
5.8 ERISA Compliance . . . . . . . . . . . . . . . . . . . 38
5.9 Use of Proceeds; Margin Regulations. . . . . . . . . . 39
5.10 Real Property. . . . . . . . . . . . . . . . . . . . . 39
5.11 Equipment. . . . . . . . . . . . . . . . . . . . . . . 39
5.12 Contracts. . . . . . . . . . . . . . . . . . . . . . . 39
5.13 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . 40
5.14 Environmental Matters. . . . . . . . . . . . . . . . . 40
5.15 Regulated Entities . . . . . . . . . . . . . . . . . . 41
5.16 No Burdensome Restrictions . . . . . . . . . . . . . . 41
5.17 Copyrights, Patents, Trademarks and Licenses,
etc. . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.18 Capital Stock. . . . . . . . . . . . . . . . . . . . . 41
5.19 Insurance. . . . . . . . . . . . . . . . . . . . . . . 42
5.20 Business Activity. . . . . . . . . . . . . . . . . . . 42
5.21 Accreditation, Etc . . . . . . . . . . . . . . . . . . 42
5.23 Fiscal Year. . . . . . . . . . . . . . . . . . . . . . 42
5.24 Initial Acquisition Agreements . . . . . . . . . . . . 42
5.25 Full Disclosure. . . . . . . . . . . . . . . . . . . . 42
ARTICLE VI - AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . 43
6.1 Financial Statements . . . . . . . . . . . . . . . . . 43
6.2 Certificates; Other Information. . . . . . . . . . . . 44
6.3 Notices. . . . . . . . . . . . . . . . . . . . . . . . 45
6.4 Preservation of Corporate Existence, Etc . . . . . . . 46
6.5 Maintenance of Property. . . . . . . . . . . . . . . . 46
6.6 Insurance. . . . . . . . . . . . . . . . . . . . . . . 47
6.7 Payment of Obligations . . . . . . . . . . . . . . . . 47
6.8 Compliance with Laws . . . . . . . . . . . . . . . . . 47
6.9 Compliance with ERISA. . . . . . . . . . . . . . . . . 47
6.10 Inspection of Property and Books and Records . . . . . 47
6.11 Environmental Laws . . . . . . . . . . . . . . . . . . 48
6.12 Acquisitions . . . . . . . . . . . . . . . . . . . . . 48
6.13 Concentration Account. . . . . . . . . . . . . . . . . 49
6.14 Financial Covenants. . . . . . . . . . . . . . . . . . 49
6.15 Required Future Action . . . . . . . . . . . . . . . . 49
ARTICLE VII - NEGATIVE COVENANTS . . . . . . . . . . . . . . . . 50
7.1 Limitation on Liens. . . . . . . . . . . . . . . . . . 50
7.2 Disposition of Assets. . . . . . . . . . . . . . . . . 51
7.3 Consolidations and Mergers . . . . . . . . . . . . . . 52
7.4 Change of Business . . . . . . . . . . . . . . . . . . 52
7.5 Loans and investments. . . . . . . . . . . . . . . . . 52
7.6 Limitation on Indebtedness . . . . . . . . . . . . . . 52
7.7 Contingent Obligations . . . . . . . . . . . . . . . . 52
7.8 Lease Obligations. . . . . . . . . . . . . . . . . . . 52
7.9 Restricted Payments. . . . . . . . . . . . . . . . . . 53
7.10 Prepayments of Subordinated Permitted
Indebtedness . . . . . . . . . . . . . . . . . . . . . 53
7.11 Transactions with Affiliates . . . . . . . . . . . . . 53
7.12 Use of Proceeds. . . . . . . . . . . . . . . . . . . . 53
</TABLE>
<PAGE>
<TABLE>
<S> <C>
7.13 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . 54
7.14 Accounting Changes . . . . . . . . . . . . . . . . . . 54
ARTICLE VIII - EVENTS OF DEFAULT . . . . . . . . . . . . . . . . 54
8.1 Event of Default . . . . . . . . . . . . . . . . . . . 54
8.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . 57
8.3 Rights Not Exclusive . . . . . . . . . . . . . . . . . 57
ARTICLE IX - THE AGENT . . . . . . . . . . . . . . . . . . . . . 58
9.1 Appointment and Authorization. . . . . . . . . . . . . 58
9.2 Delegation of Duties . . . . . . . . . . . . . . . . . 58
9.3 Liability of Agent . . . . . . . . . . . . . . . . . . 58
9.4 Reliance by Agent . . . . . . . . . . . . . . . . . . 59
9.5 Notice of Default . . . . . . . . . . . . . . . . . . 59
9.6 Credit Decision . . . . . . . . . . . . . . . . . . . 59
9.7 Indemnification of Agent . . . . . . . . . . . . . . . 60
9.8 Agent in Individual Capacity . . . . . . . . . . . . . 61
9.9 Successor Agent. . . . . . . . . . . . . . . . . . . . 61
9.10 Withholding Tax. . . . . . . . . . . . . . . . . . . . 61
ARTICLE X - MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . 63
10.1 Amendments and Waivers . . . . . . . . . . . . . . . . 63
10.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . 64
10.3 No Waiver; Cumulative Remedies . . . . . . . . . . . . 64
10.4 Costs and Expenses . . . . . . . . . . . . . . . . . . 65
10.5 Borrower Indemnification . . . . . . . . . . . . . . . 65
10.6 Payments Set Aside . . . . . . . . . . . . . . . . . . 66
10.7 Successors and Assigns . . . . . . . . . . . . . . . . 66
10.8 Assignments, Participations, etc . . . . . . . . . . . 66
10.9 Confidentiality. . . . . . . . . . . . . . . . . . . . 68
10.10 Set-off. . . . . . . . . . . . . . . . . . . . . . . . 69
10.11 Notification of Addresses, Lending Offices, Etc. . . . 69
10.12 Counterparts . . . . . . . . . . . . . . . . . . . . . 69
10.13 Severability . . . . . . . . . . . . . . . . . . . . . 69
10.14 No Third Parties Benefited . . . . . . . . . . . . . . 70
10.15 Governing Law and Jurisdiction . . . . . . . . . . . . 70
10.16 Waiver of Jury Trial . . . . . . . . . . . . . . . . . 70
10.17 Entire Agreement . . . . . . . . . . . . . . . . . . . 71
10.18 Additional Credit Parties. . . . . . . . . . . . . . . 71
</TABLE>
<PAGE>
EXHIBITS
Exhibit A Form of Promissory Note
Exhibit B Form of Guaranty
Exhibit C Form of Security Agreement
Exhibit D Form of Compliance Certificate
Exhibit E Form of Notice of Borrowing
Exhibit F Form of Notice of Conversion/Extension
Exhibit G Form of Certificate re Real Property and Business
Locations
Exhibit H Terms and Conditions of Permitted Subordinated
Indebtedness
Exhibit I Form of Legal Opinion of Counsel to GMS Holding
and Its Subsidiaries
Exhibit J Form of Assignment and Acceptance Agreement
Exhibit K Form of Credit Agreement Supplement
<PAGE>
SCHEDULES
Schedule 1.1(b) Existing Permitted Indebtedness
Schedule 2.1 Commitment
Schedule 4.1(f) Initial Permitted Acquisitions
Schedule 4.2(e) Perfection of Liens and Security Interests
Schedule 5.1 Jurisdictions of Subsidiaries
Schedule 5.5 Litigation
Schedule 5.8 ERISA Compliance
Schedule 5.12 Material Contracts
Schedule 5.14 Environmental Matters
Schedule 5.15 Regulated Entities
Schedule 5.17 Intellectual Property Rights
Schedule 5.18 Ownership of Subsidiaries
Schedule 5.19 Insured Properties
Schedule 7.1 Existing Liens
Schedule 7.6 Indebtedness on Closing Date
Schedule 7.7 Contingent Obligations of Credit Parties as
of Commitment Closing Date and Closing Date
Schedule 10.2 Addresses
<PAGE>
CREDIT AGREEMENT
This CREDIT AGREEMENT is entered into as of October 10, 1996, among GMS
DENTAL GROUP MANAGEMENT, INC., a Delaware corporation (the "Borrower"), GMS
DENTAL GROUP, INC., a Delaware corporation ("GMS Holding"), GMS CALIFORNIA
ACQUISITION COMPANY, a Delaware corporation ("GMS California"), GMS HAWAII
ACQUISITION COMPANY, a Delaware corporation ("GMS Hawaii"), and the Additional
Credit Parties (as defined in Section 10.18 hereof) (each of the Borrower, GMS
Holding, GMS California, GMS Hawaii and the Additional Credit Parties herein
called a "Credit Party" and collectively the "Credit Parties"), the financial
institutions from time to time party to this Agreement (collectively, the
"Banks" and individually, a "Bank"), and IMPERIAL BANK, as agent (the "Agent")
for the Banks.
ARTICLE I
DEFINITIONS
1.1 Certain Defined Terms. The following terms have the following meanings:
"Acquisition" means any transaction or series of related transactions for
the purpose of or resulting, directly or indirectly, in (a) the acquisition of
all or substantially all of the assets of a Person, or of any line or segment of
business or division of a Person or (b) the acquisition of in excess of 50% of
the capital stock, partnership interests, membership interests or equity of any
Person, or otherwise causing any Person to become a Subsidiary.
"Affiliate" means, as to any Person, any other Person which, directly or
indirectly, is in control of, is controlled by, or is under common control with,
such Person. A Person shall be deemed to control another Person if the
controlling Person possesses, directly or indirectly, the power to direct or
cause the direction of the management policies of the other Person, whether
through the owners of voting securities, membership interests, by contract,
otherwise; provided that no Person shall be deemed to be an Affiliate of GMS
Holding or any of its Subsidiaries solely as a result of management or
consulting agreements between such Person and GMS Holding or any of its
Subsidiaries executed by GMS Holding or any of its Subsidiaries in the ordinary
course of business and pursuant to which GMS Holding or its Subsidiaries provide
such services.
"Agent" means Imperial Bank in its capacity as agent for the Banks
hereunder, and any successor agent arising under Section 9.9 hereof.
"Agent-Related Persons" means Imperial Bank and any successor agent arising
under Section 9.9 hereof, together with
<PAGE>
their respective Affiliates, and the officers, directors, employees, agents and
attorneys-in-fact of such Persons and Affiliates.
"Agent's Payment Office" means 9777 Wilshire Boulevard, Beverly Hills, 4th
Floor, Beverly Hills, California 90212, or such other address as the Agent may
from time to time specify.
"Agreement" means this Credit Agreement.
"Applicable Margin" means, subject to the following proviso, the rates per
annum set forth below:
<TABLE>
<CAPTION>
LEVERAGE RATIO REFERENCE RATE LIBOR
MARGIN MARGIN
<S> <C> <C> <C>
less than 2.50:1 0.5% 2.50% o
2.50:1 but less than 3.00:1 0.5% 2.75% o
3.00:1 but less than 3.50:1 0.75% 3.00% o
3.50:1 1.0% 3.25%
</TABLE>
The Applicable Margin shall be based on the Leverage Ratio as set forth in the
most recent Compliance Certificate, and shall be effective from and including
the date required by Section 6.2(b) hereof if the Agent receives such Compliance
Certificate on or before such date, to but excluding the next date of delivery
of the Compliance Certificate required by Section 6.2(b) hereof; provided,
however, that if the Agent does not receive the Compliance Certificate by the
date required by Section 6.2(b) hereof, the Applicable Margin shall be,
effective as of such date, the highest Applicable Margin to but excluding the
date the Agent receives such Compliance Certificate. Subject to the foregoing
proviso, until the delivery of the first Compliance Certificate after the
Closing Date, the Applicable Margin for Prime Rate Loans shall be 1.0% and the
Applicable Margin for LIBOR Loans shall be 3.25%.
"Assignee" has the meaning specified in Section 10.8.
"Attorney Costs" means and includes all reasonable fees and disbursements
of any law firm or other external counsel, the allocated cost of internal legal
services and all disbursements of internal counsel.
"Bank" has the meaning specified in the introductory clause hereto.
"Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11
U.S.C. 101, et seq.).
"Base LIBOR" means, for any Interest Period, the rate of interest per annum
determined by the Agent to be the arithmetic mean (rounded upward, if necessary,
to the nearest 1/16th of it) of the rates of interest per annum notified to the
Agent by the
<PAGE>
Reference Bank as the rate of interest at which dollar deposits in the
approximate amount of the LIBOR Loan to be made by the Reference Bank, and
having a maturity comparable to such Interest Period, would be offered to major
banks in the London interbank market at their request at approximately 11:00
a.m. (London time) two (2) Business Days prior to the commencement of such
Interest Period.
"Borrower's Business" means providing, directly or indirectly, management,
administrative or other support services to providers of dental care services.
"Borrowing" means a Borrowing hereunder consisting of Loans made on the
same day by the Banks ratably according to their respective Pro Rata Shares and,
in the case of LIBOR Loans, having the same Interest Periods.
"Borrowing Date" means any date on which a Borrowing occurs under Sections
2.3 or 2.12 hereof.
"Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks in Los Angeles are authorized or required by law to close
and, if the applicable Business Day relates to any LIBOR Loan, means, in
addition to the foregoing, such a day on which dealings are carried on in the
applicable offshore dollar interbank market.
"Capital Adequacy Regulation" means any guideline, request or directive of
any central bank or other Governmental Authority, or any other law, rule or
regulation, whether or not having the force of law, in each case, regarding
capital adequacy of any bank or of any corporation controlling a bank.
"Capital Expenditures" means, for any period, the sum of
(a) the aggregate amount of all expenditures of GMS Holding and its
Subsidiaries for fixed or capital assets made during such period which, in
accordance with GAAP, would be classified as capital expenditures; and
(b) the aggregate amount of all monetary obligations of GMS Holding
or any of its Subsidiaries under any Capital Lease incurred during such period.
"Capital Lease" means any lease of property which in accordance with GAAP
should be capitalized on the lessee's balance sheet or disclosed in a footnote
thereto as a capitalized lease.
"Change of Control" means the acquisition by any Person or by two or more
Persons acting in concert of beneficial ownership (within the meaning of Rule
13d-3 of the Securities and Exchange Commission under the Securities Exchange
Act of 1934) of 20% or more of the outstanding shares of voting stock of GMS
Holding or
<PAGE>
the Borrower.
"Closing Date" means the date on which all conditions precedent set forth
in Section 4.2 are satisfied or waived by all Banks.
"Code" means the Internal Revenue Code of 1986, as amended, and regulations
promulgated thereunder.
"Combined Commitments" shall have the meaning set forth in Section 2.1
hereof.
"Commitment," as to each Bank, has the meaning specified in Section 2.1.
"Commitment Closing Date" means the date on which all conditions precedent
set forth in Section 4.1 are satisfied or waived by all Banks.
"Compliance Certificate" means a certificate substantially in the form of
Exhibit D attached hereto.
"Contingent Obligation" means, as to any Person, any direct or indirect
liability of that Person, whether or not contingent, with or without recourse,
(a) with respect to any indebtedness, lease, dividend, letter of credit or other
obligation (the "primary obligations") of another Person (the "primary
obligor"), including any obligation of that Person (i) to purchase, repurchase
or otherwise acquire such primary obligations or any security therefor, (ii) to
advance or provide funds for the payment or discharge of any such primary
obligation, or to maintain working capital or equity capital of the primary
obligor or otherwise to maintain the net worth or solvency or any balance sheet
item, level of income or financial condition of the primary obligor, (iii) to
purchase property, securities or service primarily for the purpose of assuring
the owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation, or (iv) otherwise to assure or hold
harmless the holder of any such primary obligation against loss in respect
thereof (each, a "Guaranty Obligation"); (b) with respect to any Surety
Instrument issued for the account of that Person or as to which that Person is
otherwise liable for reimbursement of drawings or payments; or (c) to purchase
any materials, supplies or other property from, or to obtain the services of,
another Person if the relevant contract or other related document or obligation
requires that payment for such materials, supplies or other property, or for
such service shall be made regardless of whether delivery of such materials,
supplies or other property is ever made or tendered, or such services are ever
performed or tendered. The amount of any Contingent Obligation shall, in the
case of Guaranty Obligations, be deemed equal to the stated or determinable
amount of the primary obligation-in respect of which such Guaranty Obligation is
made or, if not stated or if indeterminable, the maximum
<PAGE>
reasonably anticipated liability in respect thereof, and in the case of other
Contingent Obligations, shall be equal to the maximum reasonably anticipated
liability in respect thereof.
"Contractual Obligation" means, as to any Person, any provision of any
security issued by such Person or of any agreement, undertaking, contract,
indenture, mortgage, deed of trust or other instrument, document or agreement to
which such Person is a party or by which it or any of its property is bound.
"Conversion/Continuation Date" means any date on which, under Section 2.4,
the Borrower (a) converts Loans of one Type to another Type, or (b) continues as
Loans of the same Type, but with a new Interest Period, Loans having Interest
Periods expiring on such date.
"Coverage Ratio" means, as of the last day of any fiscal quarter of GMS
Holding, the ratio of (i) EBITDAR for the period of four consecutive fiscal
quarters ending on or most recently ended prior to such date, to (ii) Fixed
Charges for such period; provided, however, that (A) the Coverage Ratio as of
the last day of each of the fiscal quarters ending December 31, 1996, March 31,
1997, June 30, 1997 and September 30, 1997 shall be determined by multiplying
EBITDAR as of each such date by four (4) and (B) the Coverage Ratio as of the
last day of each of the subsequent fiscal quarters, commencing with the fiscal
quarter ending December 31, 1997, shall be determined by multiplying EBITDAR for
two fiscal quarters ending on such date by two (2), in each case so as to
represent the four-quarter equivalent of EBITDAR for such periods.
"Current Assets" means, for any period, for GMS Holding and its
Subsidiaries on a consolidated basis, all items that would, in accordance with
GAAP, be classified as current assets of GMS Holding and its Subsidiaries, after
deducting adequate reserves in each case in which a reserve is proper in
accordance with GAAP.
"Current Liabilities" means, for any period, for GMS Holding and its
Subsidiaries on a consolidated basis, all items that would, in accordance with
GAAP, be classified as current liabilities of GMS Holding and its Subsidiaries,
including the current portion of long-term Indebtedness and the Loans hereunder.
"Current Ratio" means, as of the last day of any fiscal quarter of GMS
Holding, the ratio of (i) Current Assets for such period to (ii) Current
Liabilities for such period.
"Default" means any event or circumstance which, with the giving of notice,
the lapse of time, or both, would (if not cured or otherwise remedied during
such time) constitute an Event of Default.
<PAGE>
"Dental Practices" means the dental groups engaged in the practice of
dentistry for which the Borrower, directly or indirectly, provides management,
administrative or other support services under long-term management agreements
or other similar agreements and which under GAAP are considered Subsidiaries of
the Borrower for the purposes of determining the Persons whose financial results
are to be consolidated with those of the Borrower.
"Dollars," "dollars" and "$" each mean lawful money of the United States.
"EBITDAR" means, for any fiscal period, for GMS Holding and its
Subsidiaries on a consolidated basis, earnings before Interest Expense, income
taxes, depreciation, amortization and Operating Lease Rentals.
"Eligible Assignee" means (a) a commercial bank organized under the laws of
the United States, or any state thereof, and having a combined capital and
surplus of at least $100,000,000, (b) a commercial bank organized under the laws
of any other country which is a member of the organization for Economic
Cooperation and Development (the "OECD"), or a political subdivision of any such
country, and having a combined capital and surplus of at least $100,000,000,
provided that such bank is acting through a branch or agency located in the
United States and (c) a Person that is primarily engaged in the business of
commercial banking and that is (i) a Subsidiary of a Bank, (ii) a Subsidiary of
a Person of which a Bank is a Subsidiary, or (iii) a Person of which a Bank is a
Subsidiary, in each case approved by the Borrower pursuant to Section 10.8
hereof.
"Environmental Claims" means all claims asserted by any Governmental
Authority or other Person alleging potential liability or responsibility for
violation of any Environmental Law, or for release or injury to the environment.
"Environmental Laws" means all federal, state or local laws, statutes,
rules, regulations, ordinances and codes, together with all administrative
orders, directed duties, requests, licenses, authorizations and permits of, and
agreements with, any Governmental Authorities, in each case relating to
environmental, health, safety and land use matters.
"ERISA" means the Employee Retirement Income Security Act of 1974, and
regulations promulgated thereunder.
"ERISA Affiliate" means any trade or business (whether or not incorporated)
under common control with the Borrower within the meaning of Section 414(b) or
(c) of the Code (and Sections 414(m) and (o) of the Code for purposes of
provisions relating to Section 412 of the Code).
"ERISA Event" means (a) a Reportable Event with respect to a
<PAGE>
Pension Plan; (b) a withdrawal by the Borrower or any ERISA Affiliate from a
Pension Plan subject to Section 4063 of ERISA during a plan year in which it was
a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a
cessation of operations which is treated as such a withdrawal under Section
4062(e) of ERISA; (c) a complete or partial withdrawal by the Borrower or any
ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer
Plan is in reorganization; (d) the filing of a notice of intent to terminate,
the treatment of a Plan amendment as a termination under Section 4041 or 4041A
of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension
Plan or Multiemployer Plan; (e) an event or condition which might reasonably be
expected to constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Pension Plan or
Multiemployer Plan; or (f) the imposition of any liability under Title IV of
ERISA, other than PBGC premiums due but not delinquent under Section 4007 of
ERISA, upon the Borrower or any ERISA Affiliate.
"Event of Default" means any of the events or circumstances specified in
Section 8.1.
"Exchange Act" means the Securities and Exchange Act of 1934, and
regulations promulgated thereunder.
"FDIC" means the Federal Deposit Insurance Corporation, and any
Governmental Authority succeeding to any of its principal functions.
"Federal Funds Rate" means, for any day, the rate set forth in the weekly
statistical release designated as H.15(519), or any successor publication,
published by the Federal Reserve Bank of New York (including any such successor,
"H.15(519)11) on the preceding Business Day opposite the caption "Federal Funds
(Effective)"; or, if for any relevant day such rate is not so published on any
such preceding Business Day, the rate for such day will be the arithmetic mean
as determined by the Agent of the rates for the last transaction in overnight
Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by
each of three leading brokers of Federal funds transactions in New York City
selected by the Agent.
"Fee Letter" has the meaning specified in Section 2.9(a).
"Fixed Charges" means, for any period and without duplication, for GMS
Holding and its Subsidiaries on a consolidated basis, the sum of (i) Interest
Expense and fees paid on, and amortization of debt discount in respect of, all
Indebtedness plus (ii) Operating Lease Rentals paid during such period plus
(iii) the aggregate principal amount of all current maturities of long term
Indebtedness (including the principal portion of rentals under Capital Leases)
obligated to be paid by GMS Holding and its Subsidiaries.
<PAGE>
"FRB" means the Board of Governors of the Federal Reserve System, and any
Governmental Authority succeeding to any of its principal functions.
"GAAP" means generally accepted accounting principles set forth from time
to time in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the U.S. accounting
profession).
"GMS Holding" means GMS Dental Group, Inc., a newly-formed Delaware
corporation, and the sole shareholder of the Borrower.
"Governmental Approvals" shall mean any authorization, consent, approval,
license, lease, ruling, permit, waiver, exemption, filing, registration or
notice by or with any Governmental Authority.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
and any corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
"Guaranty Obligation" has the meaning specified in the definition of
"Contingent Obligation."
"Indebtedness" of any Person means, without duplication, (a) all
indebtedness for borrowed money; (b) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than trade
payables entered into in the ordinary course of business on ordinary terms); (c)
all non-contingent reimbursement or payment obligations with respect to Surety
Instruments; (d) all obligations evidenced by notes, bonds, debentures or
similar instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses; (e) all indebtedness
created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to property
acquired by the Person (even though the rights and remedies of the seller or
bank under such agreement in the event of default are limited to repossession or
sale of such property); (f) all obligations with respect to Capital Leases; (g)
all indebtedness referred to in clauses (a) through (f) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien upon or in property (including accounts
and contracts rights) owned by such Person, even though such Person has not
assumed or become liable for the payment of such Indebtedness; and (h) all
Guaranty
<PAGE>
Obligations in respect of indebtedness or obligations of others of the
kinds referred to in clauses (a) through (f) above.
"Indemnified Liabilities" has the meaning specified in Section 10.5.
"Indemnified Person" has the meaning specified in Section 10.5.
"Independent Auditor" has the meaning specified in Section 6.1(a).
"Insolvency Proceeding" means (a) any case, action or proceeding before any
court or other Governmental Authority relating to bankruptcy, reorganization,
insolvency, liquidation, receivership, dissolution, winding-up or relief of
debtors, or (b) any general assignment for the benefit of creditors,
composition, marshalling of assets for creditors, or other, similar arrangement
in respect of its creditors generally or any substantial portion of its
creditors; undertaken under U.S. Federal, state or foreign law, including the
Bankruptcy Code.
"Interest Expense" of GMS Holding and its Subsidiaries for any period means
the aggregate amount of interest paid, accrued or scheduled to be paid or
accrued in respect of any Indebtedness (including the interest portion of
rentals under Capital Leases) and all but the principal component of payments in
respect of conditional sales, equipment trust or other title retention
agreements or under a Capital Lease paid, accrued or scheduled to be paid or
accrued by GMS Holding and its Subsidiaries during such period, in each case
determined in accordance with GAAP on a consolidated basis and excluding
periodic maintenance, insurance, taxes and similar charges not properly
characterized as interest expense under GAAP.
"Interest Payment Date" means, as to any LIBOR Loan, the last day of each
Interest Period applicable to such Loan and, as to any Prime Rate Loan, the last
Business Day of each calendar quarter; provided, however, that if any Interest
Period for a LIBOR Loan exceeds three months, the date that falls three months
after the beginning of such Interest Period and after each Interest Payment Date
thereafter is also an Interest Payment Date.
"Interest Period" means, as to any LIBOR Loan, the period commencing on the
Borrowing Date on which such Loan is disbursed, or on the
Conversion/Continuation Date on which the Loan is converted into or continued as
a LIBOR Loan, and ending on the date one, two, three or six months thereafter as
selected by the Borrower in its Notice of Borrowing or Notice of
Conversion/Continuation, as the case may be; provided, however, that:
(a) if any Interest Period would otherwise end on a
<PAGE>
day that is not a Business Day, that Interest Period shall be extended to the
following Business Day unless the result of such extension would be to carry
such Interest Period into another calendar month, in which event such Interest
Period shall end on the preceding Business Day;
(b) any Interest Period pertaining to a LIBOR Loan that begins on the
last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of the calendar month at the end of
such Interest Period; and
(c) no Interest Period for any Loan shall extend beyond the Maturity
Date.
"IRS" means the Internal Revenue Service, and any Governmental Authority
succeeding to any of its principal functions under the Code.
"Lending Office" means, as to any Bank, the office or as its "Lending
Office" or "Domestic Lending Office" or "Offshore Lending Office," as the case
may be, on Schedule 10.2 attached hereto, or such other office or offices as
such Bank may from time to time notify the Borrower and the Agent.
"Leverage Ratio" means, as of the last day of any fiscal quarter of GMS
Holding, the ratio of (i) the sum of (x) the aggregate principal amount of
Indebtedness (including the principal portion of rentals under Capital Leases
and Permitted Subordinated Indebtedness) of GMS Holding and its Subsidiaries on
a consolidated basis which matures more than one year from the date of
determination plus (y) the aggregate principal amount of all Indebtedness
(including the principal portion of rentals under Capital Leases) which is
scheduled to be paid by GMS Holding and its Subsidiaries on a consolidated basis
within one year from the date of determination to (ii) the Operating Cash Flow
for the period of four consecutive fiscal quarters ending on such date;
provided, however, that (A) the Leverage Ratio as of the last day of each of the
fiscal quarters ending December 31, 1996, March 31, 1997, June 30, 1997 and
September 30, 1997 shall be determined by multiplying Operating Cash Flow as of
each such date by four (4) and (B) the Leverage Ratio as of the last day of each
of the subsequent fiscal quarters, commencing with the fiscal quarter ending
December 31, 1997, shall be determined by multiplying Operating Cash Flow for
two fiscal quarters ending on such date by two (2), in each case so as to
represent the four-quarter equivalent of Operating Cash Flow for such periods.
"LIBOR Loan" means any Loan that bears interest based on the LIBOR Rate.
"LIBOR Rate" means, for any Interest Period with respect to a LIBOR Loan,
the rate per annum (rounded upward, if necessary,
<PAGE>
to the nearest 1/100 of 1%) determined by the Agent to be equal to the Base
LIBOR for such Loan for such Interest Period divided by 1 minus the Reserve
Requirement for such Loan for such Interest Period.
"Lien" means any security interest, mortgage, deed of trust, pledge,
hypothecation, assignment, charge or deposit arrangement, encumbrance, lien
(statutory or other) or preferential arrangement of any kind or nature
whatsoever in respect of any property (including those created by, arising under
or evidenced by any conditional sale or other title retention agreement, the
interest of a lessor under a capital lease, any financing lease having
substantially the same economic effect as any of the foregoing, or the filing of
any financing statement naming the owner of the asset to which such lien relates
as debtor, under the Uniform Commercial Code or any comparable law) and any
contingent or other agreement to provide any of the foregoing, but not including
the interest of a lessor under an operating lease.
"Loan" means a Loan by a Bank to the Borrower under Section 2.3, and may be
a LIBOR Loan or a Prime Rate Loan (each, a "Type" of Loan).
"Loan Documents" means this Agreement, any Notes, the Fee Letter, the
Guaranty, the Security Agreement and all other documents delivered to the Agent
or any Bank in connection herewith.
"Majority Banks" means at any time Banks holding more than 50% of the then
aggregate unpaid principal amount of the Loans, or, if no such principal amount
is then outstanding, Banks having in excess of 50% of the Combined Commitments.
"Margin Stock" means "margin stock" as such term is defined in Regulation
G, T, U or X of the FRB.
"Material Adverse Effect" means (a) a material adverse change in, or a
material adverse effect upon, the operations, business, properties or condition
(financial or otherwise) of GMS Holding and its Subsidiaries taken as a whole;
(b) a material impairment of the ability of GMS Holding or any of its
Subsidiaries, including the Borrower, to perform under any Loan Document and to
avoid any Event of Default; or (c) a material adverse effect upon the legality,
validity, binding effect or enforceability against GMS Holding or any of its
Subsidiaries of any Loan Document.
"Maturity Date" shall mean the fifth anniversary of the Closing Date.
"Multiemployer Plan" means a "multiemployer plan", within the meaning of
Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate makes,
is making, or is obligated to make
<PAGE>
contributions or, during the preceding three calendar years, has made, or been
obligated to make, contributions.
"Net Worth" means, for any period, for GMS Holding and its Subsidiaries on
a consolidated basis an amount equal to the excess of Total Assets over Total
Liabilities.
"Note" means a promissory note executed by the Borrower in favor of a Bank
at its request pursuant to Section 2.2(b) substantially in the form of Exhibit A
attached hereto and evidencing such Bank's Loans.
"Notice of Borrowing" means a notice in substantially the form of Exhibit E
attached hereto.
"Notice of Conversion/Continuation" means a notice in substantially the
form of Exhibit F attached hereto.
"Obligations" means all advances, debts, liabilities, obligations,
covenants and duties arising under any Loan Document, owing by the Borrower to
any Bank, the Agent, or any Indemnified Person, whether direct or indirect
(including those acquired by assignment), absolute or contingent, due or to
become due, now existing or hereafter arising.
"Operating Cash Flow" means, for any period, for GMS Holding and its
Subsidiaries (i) net income (before extraordinary gains but after extraordinary
losses) for such period plus (ii) Interest Expense, income tax expense,
depreciation and amortization (all to the extent deducted in determining net
income) for such period, all determined on a consolidated basis in accordance
with GAAP.
"Operating Lease" means any noncancellable lease of property (real,
personal or mixed) which does not constitute a Capital Lease.
"Operating Lease Rentals" means all rents and other amounts paid or accrued
by the Borrower and its Subsidiaries under and with respect to operating Leases
during and for the relevant period, but excluding periodic maintenance,
insurance, taxes and similar charges not properly characterized as rent under
GAAP.
"Organization Documents" means, for any corporation, the certificate or
articles of incorporation, the bylaws, any certificate of determination or
instrument relating to the rights of preferred shareholders of such corporation,
any shareholder rights agreement, and all applicable resolutions of the board of
directors (or any committee thereof) of such corporation.
"Other Taxes" means any present or future stamp or documentary taxes or any
other excise or property taxes, charges or similar levies which arise from any
payment made hereunder or from the execution, delivery or registration of, or
otherwise
<PAGE>
with respect to, this Agreement or any other Loan Documents.
"Participant" has the meaning specified in Section 10.8(d).
"PBGC" means the Pension Benefit Guaranty Corporation, or any Governmental
Authority succeeding to any of its principal functions under ERISA.
"Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA)
subject to Title IV of ERISA which the Borrower sponsors, maintains, or to which
it makes, is making, or is obligated to make contributions, or in the case of a
multiple employer plan (as described in Section 4064(a) of ERISA) has made
contributions at any time during the immediately preceding five (5) plan years.
"Permitted Acquisitions" means Acquisitions by the Borrower or any of its
Subsidiaries of assets of a Person which are to be used by Borrower or any of
its Subsidiaries in Borrower's Business, including, without limitation, the
Acquisitions described in Schedule 4.1(f) hereto (collectively, the "Initial
Permitted Acquisitions"); provided, however, that (a) immediately before and
after giving effect to the consummation of each such Acquisition, no Default has
occurred and is continuing or will exist; (b) for each such Acquisition, the
prior written consent of the Agent and the Majority Banks has been obtained; and
(c) the Borrower shall have complied with the requirements of Section 6.12(a)
hereof.
"Permitted Capital Expenditures" means Capital Expenditures made or used by
the Borrower or any of its Subsidiaries in connection with the Borrower's
Business, provided that (a) immediately before and after giving effect to the
consummation of each such Capital Expenditure, no Default has occurred and is
continuing or will exist, (b) such Capital Expenditures in excess of $250,000 in
the aggregate, computed on a cumulative consolidated basis for the Borrower and
the Subsidiaries, during any fiscal year of the Borrower shall have been
approved in writing by the Agent and the Majority Banks; and (c) the Borrower
shall have complied with the requirements of Section 6.12(b) hereof.
"Permitted Capital Leases" means Capital Leases entered into by the
Borrower or any of its Subsidiaries in the ordinary course of business during
any fiscal year of the Borrower, provided that the aggregate amount of all
obligations created, incurred or assumed thereunder during such fiscal year does
not exceed $500,000, computed on a cumulative consolidated basis for the
Borrower and the Subsidiaries.
"Permitted Encumbrances" has the meaning specified in Section 7.1 hereof.
"Permitted Indebtedness" means:
<PAGE>
(i) The Obligations of the Borrower and its Subsidiaries under
the Loan Documents;
(ii) Indebtedness of the Borrower and its Subsidiaries listed
in Schedule 1.1(b) and existing on the date of this Agreement;
(iii) Indebtedness of the Borrower and its Subsidiaries arising
from the endorsement of instruments for collection in the ordinary course of the
Borrower's or a Subsidiary's business ;
(iv) Indebtedness of the Borrower and its Subsidiaries for
trade accounts payable, provided that (A) such accounts arise in the ordinary
course of business and (B) no material part of such account is more than ninety
(90) days past due (unless subject to a bona fide dispute and for which adequate
reserves have been established);
(v) Permitted Subordinated Indebtedness;
(vi) Indebtedness of the Borrower and its Subsidiaries under
initial or subsequent refinancings of any Indebtedness permitted by clause (ii)
above, provided that (A) the principal amount of any such refinancing does not
exceed the principal amount of the Indebtedness being refinanced and (B) the
material terms and provisions of any such refinancing (including maturity,
redemption, prepayment, default and subordination provisions) are no less
favorable to the Banks than the Indebtedness being refinanced;
(vii) Indebtedness of the Borrower and its Subsidiaries under
purchase money financing incurred by the Borrower or any of its Subsidiaries to
finance the acquisition by such Person of fixtures or equipment; provided,
however, that in each case (A) such Indebtedness is incurred at the time of the
acquisition of such fixture or equipment, (B) such Indebtedness does not exceed
100% of the purchase price of such fixture or equipment so financed and (C) such
Indebtedness in the aggregate at any time outstanding during any fiscal year of
the Borrower, together with the Indebtedness permitted under subsection (viii)
below, does not exceed $250,000;
(viii) Indebtedness of the Borrower and its Subsidiaries with
respect to Surety Instruments incurred in the ordinary course of business;
(ix) Guaranty Obligations of the Borrower in respect of
Permitted Indebtedness of its Subsidiaries;
(x) Indebtedness of the Borrower to any of its Subsidiaries,
Indebtedness of any of the Borrower's Subsidiaries to the Borrower or
Indebtedness of any of the Borrower's
<PAGE>
Subsidiaries to any the Borrower's other Subsidiaries; provided, however, that
(A) such Subsidiaries shall be Credit Parties and (B) such Indebtedness shall be
evidenced by promissory notes and pledged to the Agent pursuant to the terms of
the Security Agreement.
"Permitted Market Investments" means investments having a maturity of not
greater than 180 days from the date of acquisition thereof in (a) obligations
issued or unconditionally guaranteed by the United States or any agency thereof,
(b) certificates of deposit of any commercial bank organized under the laws of
the United States or any State thereof reasonably acceptable to the Agent or (c)
other investments agreed to from time to time between the Borrower and the
Agent.
"Permitted Subordinated Indebtedness" means unsecured Indebtedness of the
Borrower or its Subsidiaries evidencing seller financing incurred in connection
with a Permitted Acquisition, which Indebtedness is subordinated to the
Obligations upon substantially the terms set forth on Exhibit H attached hereto
or upon such other terms as may be satisfactory to the Agent and the Majority
Banks.
"Person" means an individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association,
joint venture or Governmental Authority.
"Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA)
which the Borrower sponsors or maintains or to which the Borrower makes, is
making, or is obligated to make contributions and includes any Pension Plan.
"Prime Rate" means, for any day, the rate of interest in effect for such
day as publicly announced from time to time by Imperial Bank in Los Angeles,
California, as its "prime rate." (The "prime rate" is a rate set by Imperial
Bank based upon various factors including Imperial Bank's costs and desired
return, general economic conditions and other factors, and is used as a
reference point for pricing some loans, which may be priced at, above, or below
such announced rate.) Any change in the prime rate announced by Imperial Bank
shall take effect at the opening of business on the day specified in the public
announcement of such change.
"Prime Rate Loan" means a Loan that bears interest based on the Prime Rate.
"Pro Rata Share" means, as to any Bank at any time, the percentage
equivalent (expressed as a decimal, rounded to the ninth decimal place) at such
time of such Bank's Commitment divided by the Combined Commitments of all Banks.
"Real Property Certificate" means a certificate
<PAGE>
substantially in the form of Exhibit G attached hereto.
"Reportable Event" means any of the events set forth in Section 4043(b) of
ERISA or the regulations thereunder, other than any such event for which the 30-
day notice requirement under ERISA has been waived in regulations issued by the
PBGC.
"Requirement of Law" means, as to any Person, any law (statutory or
common), treaty, rule or regulation or determination of an arbitrator or of a
Governmental Authority, in each case applicable to or binding upon the Person or
any of its property or to which the Person or any of its property is subject.
"Reserve Requirement" shall mean, for any Interest Period with respect to a
LIBOR Loan, the average maximum rate in effect at which reserves (including any
marginal, supplemental or emergency reserves) are required to be maintained
during such Interest Period under Regulation D by member banks of the Federal
Reserve System in New York City with deposits exceeding one billion Dollars
against "Eurocurrency liabilities" (as such term is used in Regulation D).
Without limiting the effect of the foregoing, the Reserve Requirement shall
include any other reserves required to be maintained by such member banks by
reason of any regulatory change with respect to (i) any category of liabilities
that includes deposits by reference to which the LIBOR Rate is to be determined
as provided in the definition of "LIBOR Rate" in this Article I or (ii) any
category of extensions of credit or other assets that includes LIBOR Loans.
"Responsible Officer" means a chief executive officer, a president or a
chief financial officer of GMS Holding, or any other officer having
substantially the same authority and responsibility.
"Revolving Termination Date" means the earlier to occur
(a) the second anniversary of the Closing Date; and
(b) the date on which the Combined Commitments terminate in
accordance with the provisions of this Agreement.
"SEC" means the Securities and Exchange Commission, or any Governmental
Authority succeeding to any of its principal functions.
"Solvent" means, when used with respect to any Person, that at the time of
determination:
(a) the fair value of its assets (both at fair valuation and at
present fair salable value) is in excess of the total amount of all of its debts
and liabilities, including contingent, subordinated, unmatured and unliquidated
liabilities; and
<PAGE>
(b) it is then able to pay its debts as they become due; and
(c) it owns property having a value (both at fair valuation and at
present fair salable value) in excess of the total amount required to pay its
debts; and
(d) it has capital sufficient to carry on its business.
"Subsidiary" of a Person means any corporation, association, partnership,
limited liability company, joint venture or other business entity of which more
than 50% of the voting stock, membership interests or other equity interests (in
the case of Persons other than corporations), is owned or controlled directly or
indirectly by the Person, or one or more of the Subsidiaries of, the Person, or
a combination thereof. Unless the context otherwise clearly requires, references
herein to a "Subsidiary" refer to a Subsidiary of the Borrower. The Dental
Practices shall not be deemed to be Subsidiaries except as provided in Section
1.3 hereof.
"Surety Instruments" means all letters of credit (including standby and
commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds
and similar instruments.
"Taxes" means any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of each Bank and the Agent, such taxes (including income
taxes or franchise taxes) as are imposed on or measured by each Bank's net
income by the jurisdiction (or any politic subdivision thereof) under the laws
of which such Bank or the Agent, as the case may be, is organized or maintains a
lending office.
"Total Assets" means, for GMS Holding and its Subsidiaries on a
consolidated basis, all property, whether real, personal, tangible, intangible
or otherwise, that, in accordance with GAAP, should be included in determining
total assets as shown on the assets side of a consolidated balance sheet.
"Total Liabilities" means, for GMS Holding and its Subsidiaries on a
consolidated basis, all obligations that, in accordance with GAAP, should be
included in determining total liabilities as shown on the liabilities side of a
consolidated balance sheet.
"Type" has the meaning specified in the definition of "Loan."
"Unfunded Pension Liability" means the excess of a Plan's benefit
liabilities under Section 4001(a)(16) of ERISA, over the current value of that
Plan's assets, determined in accordance
<PAGE>
with the assumptions used for funding the Pension Plan pursuant to Section 412
of the Code for the applicable plan year.
"United States" and "U.S." each means the United States of America.
"Warrants" means warrants to purchase two and one-half percent (2.5%) of
GMS Holding's common stock, on a fully-diluted basis, at an exercise price of
$1.762 per share.
"Working Capital Loan" means a Loan of any Type made by a Bank to the
Borrower under Section 2.3 hereof the proceeds of which are used to meet the
working capital requirements of the Borrower.
1.2 Other Interpretive Provisions.
(a) The meanings of defined terms are equally applicable to the
singular and plural forms of the defined terms.
(b) The words "hereof," "herein," "hereunder" and similar words
refer to this Agreement as a whole and not to any particular provision of this
Agreement; and subsection, section, Schedule and Exhibit references are to this
Agreement unless otherwise specified.
(c) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other writings,
however evidenced. The term "including" is not limiting and means "including
without limitation." In the computation of periods of time from a specified date
to a later specified date, the word "from" means "from and including'" the words
"to" and "until" each mean "to but excluding," and the word "through" means "to
and including."
(d) Unless otherwise expressly provided herein, (i) references to
agreements (including this Agreement) and other contractual instruments shall be
deemed to include all subsequent amendments and other modifications thereto
(including, in the case of this Agreement, all amendments and modifications
validly entered into pursuant to Section 10.1 hereof), but only to the extent
such amendments and other modifications to agreements other than this Agreement
and the other Loan Documents are not prohibited by the terms of any Loan
Document, and (ii) references to any statute or regulation are to be construed
as including all statutory and regulatory provisions consolidating, amending,
replacing, supplementing or interpreting the statute or regulation.
(e) The captions and headings of this Agreement are for convenience
of reference only and shall not affect the interpretation of this Agreement.
(f) This Agreement and other Loan Documents may use
<PAGE>
several different limitations, tests or measurements to regulate the same or
similar matters. All such limitations, tests and measurements are cumulative and
shall each be performed in accordance with their terms.
(g) This Agreement and the other Loan Documents are the result of
negotiations among and have been reviewed by counsel to the Agent, the Borrower
and the other parties, and are the products of all parties. Accordingly, they
shall not be construed against the Banks or the Agent merely because of the
Agent's or Banks, involvement in their preparation.
1.3 Accounting Principles. Unless the context otherwise clearly requires,
(a) all accounting terms not expressly defined herein shall be construed, and
all financial computations required under this Agreement shall be made, in
accordance with GAAP, consistently applied, (b) references herein to "fiscal
year" and "fiscal quarter" refer to such fiscal periods of GMS Holding (c)
references herein to "Subsidiary" in Sections 5.7, 6.1, 6.2 and 6.14 hereof
include Dental Practices.
ARTICLE II
THE CREDITS
2.1 Amounts and Terms of Commitments. Each Bank severally agrees, on the
terms and conditions set forth herein, to make revolving loans to the Borrower
(each such loan, a "Loan") from time to time on any Business Day during the
period from the Closing Date to the Revolving Termination Date, in an aggregate
amount not to exceed at any time outstanding the amount set forth on Schedule
2.1 attached hereto (such amount as the same may be reduced under Section 2.5 or
as a result of one or more assignments under Section 10.8, the Bank's
"Commitment" and all such Commitments, referred to herein, collectively, as the
"Combined Commitments"); provided, however, that, after giving effect to any
Borrowing, (a) the aggregate principal amount of all outstanding Loans shall not
at any time exceed the Combined Commitments and (b) the aggregate principal
amount of all outstanding Working Capital Loans shall not at any time exceed
$2,000,000. Within the limits of each Bank's Commitment, and subject to the
other terms and conditions hereof, the Borrower may borrow under this Section
2.1, prepay under Section 2.6 and reborrow under this Section 2.1.
2.2 Loan Accounts.
(a) The Loans made by each Bank shall be evidenced by one or more
loan accounts or records maintained by such Bank in the ordinary course of
business. The loan accounts or records maintained by the Agent and each Bank
shall be conclusive absent manifest error of the amount of the Loans made by the
Banks to the Borrower and the interest and payments thereon. Any failure so to
record or any error in doing so shall not, however, limit
<PAGE>
or otherwise affect the obligation of the Borrower hereunder to pay any amount
owing with respect to the Loans.
(b) Upon the request of any Bank made through the Agent, the Loans
made by such Bank may be evidenced by one or more Notes, instead of loan
accounts. Each such Bank shall endorse on the schedules annexed to its Note the
date, amount and maturity of each Loan made by it and the amount of each payment
of principal made by the Borrower with respect thereto. Each such Bank is
irrevocably authorized by the Borrower to endorse its Note and each Bank's
record shall be conclusive absent manifest error; provided, however, that the
failure of a Bank to make, or an error in making, a notation thereon with
respect to any Loan shall not limit or otherwise affect the obligations of the
Borrower hereunder or under any such Note to such Bank.
2.3 Procedure for Borrowing.
(a) Each Borrowing shall be made upon the Borrower's irrevocable
telephonic notice (such notice to be immediately confirmed in writing) delivered
to the Agent in the form of a Notice of Borrowing (which notice must be received
by the Agent prior to 9:00 a.m. (Los Angeles time) (i) three (3) Business Days
prior to the requested Borrowing Date, in the case of LIBOR Loans, and (ii) one
(1) Business Day prior to the requested Borrowing Date, in the case of Prime
Rate Loans, specifying:
(A) the amount of the Borrowing, which shall be (1) in the case
of a Prime Rate Loan, in an aggregate minimum amount of $100,000 or any multiple
of $100,000 in excess thereof and (2) in the case of a LIBOR Loan, in an
aggregate minimum amount of $1,000,000 or any multiple of $500,000 in excess
thereof;
(B) the requested Borrowing Date, which shall be a Business
Day;
(C) the Type of Loans comprising the Borrowing; and
(D) with respect to the LIBOR Loans only, the duration of the
Interest Period applicable to such Loans included in such notice. If the Notice
of Borrowing fails to specify the duration of the Interest Period for any
Borrowing comprised of LIBOR Loans, such Interest Period shall be three months.
(b) The Agent will promptly notify each Bank of receipt of any
Notice of Borrowing and of the amount of such Bank's Pro Rata Share of that
Borrowing.
(c) Each Bank will make the amount of its Pro Rata Share of each
Borrowing available to the Agent for the account of the Borrower at the Agent's
Payment Office by 12:00 noon (Los Angeles time) on the Borrowing Date requested
by the Borrower in
<PAGE>
funds immediately available to the Agent. The proceeds of all such Loans will
then be made available to the Borrower or the Borrower's designee by the Agent
by wire transfer in accordance with written instructions provided to the Agent
by the Borrower in like funds as received by the Agent.
(d) After giving effect to any Borrowing, there may not be more than
3 different Interest Periods in effect in respect of all LIBOR Loans then
outstanding.
2.4 Conversion and Continuation Elections for Borrowings.
(a) The Borrower may, upon irrevocable telephonic notice (such
notice to be immediately confirmed in writing), to the Agent in accordance with
Section 2.4(b) elect, as of any Business Day, in the case of Prime Rate Loans,
or as of the last day of the applicable Interest Period, in the case of LIBOR
Loans, to convert any such Loans (or any part thereof in an amount not less than
$1,000,000, or that is in an integral multiple of $500,000 in excess thereof);
provided, however, that if at any time the aggregate amount of LIBOR Loans in
respect of any Borrowing is reduced, by payment, prepayment, or conversion of
part thereof to be less than $1,000,000, such LIBOR Loans shall automatically
convert into Prime Rate Loans, and on and after such date the right of the
Borrower to continue such Loans as, and convert such Loans into, LIBOR Loans
shall terminate.
(b) The Borrower shall deliver a Notice of Conversion/Continuation
to be received by the Agent not later than 9:00 a.m. (Los Angeles time) at least
(i) three (3) Business Days in advance of the Conversion/Continuation Date, if
the Loans are to be converted into or continued as LIBOR Loans; and (ii) one (1)
Business Day in advance of the Conversion/Continuation Date, if the Loans are to
be converted into Prime Rate Loans, specifying:
(A) the proposed Conversion/Continuation Date;
(B) the aggregate amount of Loans to be converted or continued;
(C) the Type of Loans resulting from the proposed conversion or
continuation; and
(D) other than in the case of conversions into Prime Rate
Loans, the duration of the requested Interest Period.
(c) If upon the expiration of any Interest Period applicable to
LIBOR Loans, the Borrower has failed to select timely a new Interest Period to
be applicable to such LIBOR Loans, or if any Default or Event of Default then
exists, the Borrower shall be deemed to have elected to convert such LIBOR Loans
into Prime Rate Loans effective as of the expiration date of such Interest
Period.
<PAGE>
(d) The Agent will promptly notify each Bank of its receipt of a
Notice of Conversion/Continuation, or, if no timely notice is provided by the
Borrower, the Agent will promptly notify each Bank and the Borrower of the
details of any automatic conversion. All conversions and continuation shall be
made ratably according to the respective outstanding principal amounts of the
Loans with respect to which the notice was given held by each Bank.
(e) Unless the Majority Banks otherwise agree, during the existence
of a Default or Event of Default, the Borrower may not elect to have a Loan be
made as or converted into or continued as a LIBOR Loan.
(f) After giving effect to any conversion or continuation of Loans,
there may not be more than three different Interest Periods in effect in respect
of all LIBOR Loans then outstanding.
2.5 Voluntary Termination or Reduction of Commitments. The Borrower may,
upon not less than five (5) Business Days' prior notice to the Agent, terminate
the Combined Commitments, or permanently reduce the Combined Commitments by an
aggregate minimum amount of $1,000,000 or any multiple of $500,000 in excess
thereof, unless, after giving effect thereto and to any prepayments of Loans
made on the effective date thereof, the then outstanding principal amount of the
Loans would exceed the amount of the Combined Commitments then in effect. Once
reduced in accordance with this Section 2.5, the Combined Commitments may not be
increased. Any reduction of the Combined Commitments shall be applied to each
Bank according to its Pro Rata Share. All accrued unused commitment fees due and
owing, pursuant to Section 2.9(b) hereof, to, but not including the effective
date of any reduction or termination of Combined Commitments, shall be paid on
the effective date of such reduction or termination.
2.6 Optional Prepayments. (a) Subject to Section 3.4, the Borrower may,
at any time or from time to time, upon not less than three (3) Business Days'
irrevocable notice to the Agent, ratably prepay Loans in whole or in part, in
minimum amounts of $1,000,000 or any multiple of $500,000 in excess thereof.
Such notice of prepayment shall specify the date and amount of such prepayment
and the Type(s) of Loans to be prepaid. The Agent will promptly notify each Bank
of its receipt of any such notice, and of such Bank's Pro Rata Share of such
prepayment. If such notice is given by the Borrower, the Borrower shall make
such prepayment and the payment amount specified in such notice shall be due and
payable on the date specified therein, together with, in the case of LIBOR Loans
only, accrued interest to each such date on the amount prepaid and any amounts
required pursuant to Section 3.4.
2.7 Repayment. The Borrower shall repay to the Banks the
<PAGE>
aggregate principal amount of Loans outstanding on the Revolving Termination
Date in 12 equal, consecutive quarterly installments commencing ninety days
after the second anniversary of the Closing Date and ending on the Maturity
Date; provided, however, that the last such installment shall be in the amount
necessary to pay in full the unpaid principal amount of the Loans.
2.8 Interest.
(a) Each Loan shall bear interest on the outstanding principal
amount thereof from the applicable Borrowing Date at a rate per annum equal to
the LIBOR Rate or the Prime Rate, as the case may be (and subject to the
Borrower's right to convert to other Types of Loans under Section 2.4), plus the
Applicable Margin.
(b) Interest on each Loan shall be paid in arrears on each Interest
Payment Date. Interest shall also be paid on the date of conversion to another
Type of Loan, on the date of any prepayment for the portion of the Loans so
prepaid and upon payment (including prepayment) in full thereof and, during the
existence of any Event of Default, interest shall be paid on demand of the Agent
at the request or with the consent of the Majority Banks.
(c) Notwithstanding Section (a) of this Section, while any Event of
Default exists or after acceleration, the Borrower shall pay interest (after as
well as before entry of judgment thereon to the extent permitted by law) on the
principal amount of all outstanding Obligations, at a rate per annum which is
determined by adding 2% per annum, to the Applicable Margin then in effect for
such Loans; provided, however, that, on and after the expiration of any Interest
Period applicable to any LIBOR Loan outstanding on the date of occurrence of
such Event of Default or acceleration, the principal amount of such Loan shall,
during the continuation of such Event of Default or after acceleration, bear
interest at a rate per annum equal to the Prime Rate, plus Applicable Margin
plus 2%.
(d) Anything herein to the contrary notwithstanding, the obligations
of the Borrower to any Bank hereunder shall be subject to the limitation that
payments of interest shall not be required for any period for which interest is
computed hereunder, to the extent (but only to the extent) that contracting for
or receiving such payment by such Bank would be contrary to the provisions of
any law applicable to such Bank limiting the highest rate of interest that may
be lawfully contracted for, charged or received by such Bank, and in such event
the Borrower shall pay such Bank interest at the highest rate permitted by
applicable law.
2.9 Fees.
(a) Agency Fees. The Borrower shall pay the
<PAGE>
commitment fee to the Agent for the Agent's own account, as required by the
letter agreement between the Borrower and the Agent dated August 2, 1996, as
amended on September 13, 1996 and October 7, 1996 (the "Fee Letter").
(b) Unused Commitment Fees. The Borrower shall pay to the Agent,
for the period from and including the Commitment Closing Date to the Revolving
Termination Date, for the account of each Bank an unused-commitment fee at the
rate of 0.50% per annum on the average daily amount by which the Combined
Commitments exceeds the aggregate amount of all Loans outstanding from time to
time. Such commitment fee shall be payable in arrears on the last Business Day
of each calendar quarter and on the Revolving Termination Date.
2.10 Computation of Fees and Interest.
(a) All computations of fees and interest shall be made on the basis
of a 360-day year and actual days elapsed (which results in more interest being
paid than if computed on the basis of a 365-day year). Interest and fees shall
accrue during each period during which interest or such fees are computed from
the first day thereof to the last day thereof.
(b) Each determination of an interest rate by the Agent shall be
conclusive and binding on the Borrower and the Banks in the absence of manifest
error.
2.11 Payments by the Borrower.
(a) All payments to be made by the Borrower shall be made without
set-off, recoupment or counterclaim. Except as otherwise expressly provided
herein, all payments by the Borrower shall be made to the Agent for the account
of the Banks to the Agent's account no. 14-076-484, regarding: GMS Dental Group
Management, Inc., ABA No. 122201444, or at such other account as the Agent may
from time to time designate by notice to the Borrower, and shall be made in
dollars and in immediately available funds, no later than 12:00 noon (Los
Angeles time) on the date specified herein. The Agent will promptly distribute
to each Bank its Pro Rata Share (or other applicable share as expressly provided
herein) of such payment in like funds as received. Any payment received by the
Agent later than 12:00 noon (Los Angeles time) shall be deemed to have been
received on the following Business Day and any applicable interest or fee shall
continue to accrue.
(b) Subject to the provisions set forth in the definition of
"Interest Period" herein, whenever any payment is due on a day other than a
Business Day, such payment shall be made on the following Business Day, and such
extension of time shall in such case be included in the computation of interest
or fees, as the case may be.
<PAGE>
(c) Unless the Agent receives notice from the Borrower prior to the
date on which any payment is due to the Banks that the Borrower will not make
such payment in full as and when required, the Agent may assume that the
Borrower has made such payment in full to the Agent on such date in immediately
available funds and the Agent may (but shall not be so required), in reliance
upon such assumption, distribute to each Bank on such due date an amount equal
to the amount then due such Bank. If and to the extent the Borrower has not made
such payment in full to the Agent, each Bank, shall repay to the Agent on demand
such amount distributed to such Bank, together with interest thereon at the
Federal Funds Rate for each day from the date such amount is distributed to such
Bank until the date repaid.
2.12 Payments by the Banks to the Agent.
(a) Unless the Agent receives notice from a Bank on or prior to the
Closing Date or, with respect to any Borrowing after the Closing Date, at least
one Business Day prior to the date of such Borrowing, that such Bank will not
make available as and when required hereunder to the Agent for the account of
the Borrower the amount of that Bank's Pro Rata Share of the Borrowing, the
Agent may assume that each Bank has made such amount available to the Agent in
immediately available funds on the Borrowing Date and the Agent may (but shall
not be so required), in reliance upon such assumption, make available to the
Borrower on such date a corresponding amount. If and to the extent any Bank
shall not have made its full amount available to the Agent in immediately
available funds and the Agent in such circumstances has made available to the
Borrower such amount, such Bank and the Borrower severally agree to repay to the
Agent forthwith on demand such corresponding amount, together with interest
thereon, for each day from the date such amount is made available to the
Borrower until the date such amount is repaid to the Agent, (i) in the case of
the Borrower, at a rate per annum equal to the interest rate applicable at the
time to the Loans comprising such Borrowing and (ii) in the case of such Bank,
at the Federal Funds Rate for each day during such period. A notice of the Agent
submitted to any Bank and the Borrower with respect to amounts owing under this
Section 2.12(a) shall be conclusive, absent manifest error. If such Bank shall
repay to the Agent such corresponding amount, such payment so repaid shall
constitute such Bank's Loan as part of such Borrowing for all purposes of this
Agreement.
(b) The failure of any Bank to make any Loan on any Borrowing Date
shall not relieve any other Bank of any obligation hereunder to make a Loan on
such Borrowing Date, but no Bank shall be responsible for the failure of any
other Bank to make the Loan to be made by such other Bank on any Borrowing Date.
The Borrower reserves the right to seek compensation from any Bank wrongfully
failing to make a Loan on a Borrowing Date for any costs, losses and expenses
incurred by the Borrower resulting from such failure.
<PAGE>
2.13 Sharing of Payments, Etc. If, other than as expressly provided
elsewhere herein, any Bank shall obtain on account of the Loans made by it any
payment (whether voluntary, involuntary, through the exercise of any right of
set-off, or otherwise) in excess of its Pro Rata Share, such Bank shall
immediately (a) notify the Agent of such fact, and (b) purchase from the other
Banks such participations in the Loans made by them as shall be necessary to
cause such purchasing Bank to share the excess payment pro rata with each of
them; provided, however, that if all or any portion of such excess payment is
thereafter recovered from the purchasing Bank, such purchase shall to that
extent be rescinded and each other Bank shall repay to the purchasing Bank the
purchase price paid therefor, together with an amount equal to such paying
Bank's ratable share (according to the proportion of (i) the amount of such
paying Bank's required repayment to (ii) the total amount so recovered from the
purchasing Bank) of any interest or other amount paid or payable by the
purchasing Bank in respect of the total amount so recovered. The Borrower agrees
that any Bank so purchasing a participation from another Bank may, to the
fullest extent permitted by law, exercise all its rights of payment (including
the right of set-off, but subject to Section 10.10) with respect to such
participation as fully as if such Bank were the direct creditor of the Borrower
in the amount of such participation. The Agent will keep records (which shall be
conclusive and binding in the absence of manifest error) of participations
purchased under this Section and will in each case notify the Banks following
any such purchases or repayments.
2.14 Security Documents. The Obligations shall be (a) unconditionally
guaranteed as set forth in a Guaranty to be executed and delivered by GMS
Holding and each of its Subsidiaries (other than the Borrower) (as amended,
modified or supplemented from time to time, the "Guaranty") in the form of
Exhibit B attached hereto and (b) secured by a Security Agreement to be executed
and delivered by each of GMS Holding, the Borrower and by each of the other
Subsidiaries of GMS Holding (as amended, modified or supplemented from time to
time, the "Security Agreement") in the form of Exhibit C attached hereto.
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY
3.1 Taxes. (a) Any and all payments by the Borrower to each Bank or the
Agent under this Agreement and any other Loan Document shall be made free and
clear of, and without deduction or withholding for any Taxes. In addition, the
Borrower shall pay all Other Taxes.
(b) The Borrower agrees to indemnify and hold harmless each Bank and
the Agent for the full amount of Taxes or Other Taxes (including any Taxes or
Other Taxes imposed by any
<PAGE>
jurisdiction on amounts payable under this Section) paid by the Bank or the
Agent and any liability (including penalties, interest, additions to tax and
expenses) arising therefrom or with respect thereto, whether or not such Taxes
or Other Taxes were correctly or legally asserted. Payment under this
indemnification shall be made within thirty (30) days after the date the Bank or
the Agent makes written demand therefor.
(c) If the Borrower shall be required by law to deduct or withhold
any Taxes or Other Taxes from or in respect of any sum payable hereunder to any
Bank or the Agent, then:
(i) the sum payable shall be increased as necessary so that
after making all required deductions and withholdings (including deductions and
withholdings applicable to additional sums payable under this Section) such Bank
or the Agent, as the case may be, receives an amount equal to the sum it would
have received had no such deductions or withholdings been made;
(ii) the Borrower shall make such deductions and withholdings;
(iii) the Borrower shall pay the full amount deducted or
withheld to the relevant taxing authority or other authority in accordance with
applicable law; and
(iv) the Borrower shall also pay to each Bank or the Agent for
the account of such Bank at the time interest is paid, all additional amounts
which the respective Bank specifies as necessary to preserve the after-tax yield
the Bank would have received if such Taxes or Other Taxes had not been imposed.
(d) Within thirty (30) days after the date of any payment by the
Borrower of Taxes or Other Taxes, the Borrower shall furnish the Agent the
original or a certified copy of a receipt evidencing payment thereof, or other
evidence of payment satisfactory to the Agent.
(e) If the Borrower is required to pay additional amounts to any
Bank or the Agent pursuant to subsection (c) of this Section, then such Bank
shall use reasonable efforts (consistent with legal and regulatory restrictions)
to change the jurisdiction of its Lending Office so as to eliminate any such
additional payment by the Borrower which may thereafter accrue, if such change
in the judgment of such Bank is not otherwise disadvantageous to such Bank.
3.2 Illegality.
(a) If any Bank determines that the introduction of any Requirement
of Law, or any change in any Requirement of Law, or in the interpretation or
administration of any Requirement of Law, has made it unlawful, or that any
central bank or other
<PAGE>
Governmental Authority has asserted that it is unlawful, for any Bank or its
applicable Lending Office to make LIBOR Loans, then, on notice thereof by the
Bank to the Borrower through the Agent, any obligation of that Bank to make
LIBOR Loans shall be suspended until the Bank notifies the Agent and the
Borrower that the circumstances giving rise to such determination no longer
exist.
(b) If a Bank determines that it is unlawful to maintain any LIBOR
Loan, the Borrower shall, upon its receipt of notice of such fact and demand
from such Bank (with a copy to the Agent), prepay in full such LIBOR Loans of
that Bank then outstanding, together with interest accrued thereon and amounts
required under Section 3.4, either on the last day of the Interest Period
thereof, if the Bank may lawfully continue to maintain such LIBOR Loans to such
day, or immediately, if the Bank may not lawfully continue to maintain such
LIBOR Loan. If the Borrower is required to so prepay any LIBOR Loan, then
concurrently with such prepayment, the Borrower shall borrow from the affected
Bank, in the amount of such repayment, a Prime Rate Loan.
(c) If the obligation of any Bank to make or maintain LIBOR Loans
has been so terminated or suspended, the Borrower may elect, by giving notice to
the Bank through the Agent that all Loans which would otherwise be made by the
Bank as LIBOR Loans shall be instead Prime Rate Committee Loans.
(d) Before giving any notice to the Agent under this Section, the
affected Bank shall designate a different Lending Office with respect to its
LIBOR Loans if such designation will avoid the need for giving such notice or
making such demand and will not, in the judgment of the Bank, be illegal or
otherwise disadvantageous to the Bank.
3.3 Increased Costs and Reduction of Return.
(a) If any Bank determines that, due to either (i) the introduction
of or any change in or in the interpretation of any law or regulation or (ii)
the compliance by that Bank with any guideline or request from any central bank
or other Governmental Authority (whether or not having the force of law), there
shall be any increase in the cost to such Bank of agreeing to make or making,
funding or maintaining any LIBOR Loans then, in any such case, such Bank shall
notify the Borrower of any such event of which it has knowledge and shall
deliver to the Agent and the Borrower a written statement specifying in
reasonable detail the losses or expenses sustained or incurred. The Borrower
shall within ten (10) days following demand therefor, pay the amount sufficient
to compensate such Bank for such increased costs.
(b) If any Bank shall have determined that (i) the introduction of
any Capital Adequacy Regulation, (ii) any change
<PAGE>
in any Capital Adequacy Regulation, (iii) any change in the interpretation or
administration of any Capital Adequacy Regulation by any central bank or other
Governmental Authority charged with the interpretation or administration
thereof, or (iv) compliance by the Bank (or its Lending Office) or any
corporation controlling the Bank with any Capital Adequacy Regulation, affects
or would affect the amount of capital required or expected to be maintained by
the Bank or any corporation controlling the Bank and (taking into consideration
such Bank's or such corporation's policies with respect to capital adequacy and
such Bank's desired return on capital) determines that the amount of such
capital is increased as a consequence of its Commitment, loans, credits or
obligations under this Agreement; then, in any such case, such Bank shall notify
the Borrower of any such event of which it has knowledge and shall deliver to
the Agent and the Borrower a written statement specifying in reasonable detail
the losses or expense sustained or incurred. The Borrower shall within ten (10)
days following demand therefor, pay the amount sufficient to compensate such
Bank for such increased costs.
3.4 Funding Losses. The Borrower shall reimburse each Bank and hold each
Bank harmless from any loss or expense which the Bank may sustain or incur as a
consequence of:
(a) the failure of the Borrower to make on a timely basis any
payment of principal of any LIBOR Loan;
(b) the failure of the Borrower to borrow, continue or convert a
Loan after the Borrower has given (or is deemed to have given) a Notice of
Borrowing or a Notice of Conversion/Continuation;
(c) the failure of the Borrower to make any prepayment of any Loan
in accordance with any notice delivered under Section 2.6;
(d) the prepayment (including pursuant to Section 2.6 or 3.7) or
other payment (including after acceleration thereof) of any LIBOR Loan on a day
that is not the last day of the relevant Interest Period; or
(e) the automatic conversion under Section 2.4(a) of any LIBOR Loan
to a Prime Rate Loan on a day that is not the last day of the relevant Interest
Period; including any such loss or expense arising from the liquidation or
reemployment of funds obtained by it to maintain its LIBOR Loans or from fees
payable to terminate the deposits from which such funds were obtained.
For purposes of calculating amounts payable by the Borrower to the Banks under
this Section and under subsection 3.3(a), each LIBOR Loan made by a Bank (and
each related reserve, special deposit or similar requirement) shall be
conclusively deemed to have been funded at the LIBOR Rate for such LIBOR Loan by
a
<PAGE>
matching deposit or other borrowing in the interbank eurodollar market for a
comparable amount and for a comparable period, whether or not such LIBOR Loan is
in fact so funded. Each Bank that claims compensation under this section shall
deliver to the Agent and the Borrower a written statement specifying in
reasonable detail any amounts due to the Banks as provided above.
3.5 Inability to Determine Rates. If the Agent determines that for any
reason adequate and reasonable means do not exist for determining the LIBOR Rate
for any requested Interest Period with respect to a proposed LIBOR Loan, or that
the LIBOR Rate for any requested Interest Period with respect to a proposed
LIBOR Loan does not adequately and fairly reflect the cost to the Banks of
funding such Loan, the Agent will promptly so notify the Borrower and each Bank.
Thereafter, the obligation of the Banks to make or maintain LIBOR Loans,
hereunder shall be suspended until the Agent revokes such notice in writing.
Upon receipt of such notice, the Borrower may revoke any Notice of Borrowing or
Notice of Conversion/Continuation then submitted by it. If the Borrower does not
revoke such Notice, the Banks shall make, convert or continue the Loans, as
proposed by the Borrower, in the amount specified in the applicable notice
submitted by the Borrower, but such Loans shall be made, converted or continued
as Prime Rate Loans instead of LIBOR Loans.
3.6 Certificates of Banks. Any Bank claiming reimbursement or
compensation under this Article III shall deliver to the Borrower (with a copy
to the Agent) a certificate setting forth in reasonable detail the amount
payable to the Bank hereunder and such certificate shall be conclusive and
binding on the Borrower in the absence of manifest error.
3.7 Survival. The agreements and obligations of the Borrower in this
Article III shall survive the payment of all other Obligations.
ARTICLE IV
CONDITIONS PRECEDENT
4.1 Commitment Closing. The obligation of each Bank to enter into this
Agreement is subject to the condition that the Agent has received on or before
the Commitment Closing Date all of the following, in form and substance
satisfactory to the Agent and each Bank, and in sufficient copies for each Bank:
(a) Credit Agreement. This Agreement executed by each party
thereto;
(b) Resolutions; Incumbency.
(i) Copies of the resolutions of the board of directors of each
of GMS Holding, the Borrower and other Subsidiaries parties to any Loan Document
authorizing the transactions contemplated hereby or thereby, certified as of the
<PAGE>
Commitment Closing Date by the Secretary or an Assistant Secretary of such
party; and
(ii) A certificate of the Secretary or Assistant Secretary of
each of GMS Holding, the Borrower and other Subsidiaries parties to any Loan
Document certifying the names and true signatures of the officers of such party
authorized to execute, deliver and perform, as applicable, this Agreement and
all other Loan Documents to be delivered by such party hereunder;
(c) Organization Documents: Good Standing. Each of the following
documents:
(i) the articles or certificate of incorporation and the
bylaws of each of GMS Holding, the Borrower and other Subsidiaries parties to
any Loan Document as in effect on the Commitment Closing Date, certified by the
Secretary or Assistant Secretary of such party as of the Commitment Closing
Date; and
(ii) a good standing and tax good standing certificate for each
of GMS Holding, the Borrower and other Subsidiaries parties to any Loan Document
from the Secretary of State (or similar, applicable Governmental Authority) of
such party's state of incorporation and each state where such party is qualified
to do business as a foreign corporation as of a recent date;
(d) Payment of Fees. Evidence of payment to the Agent by the Borrower
of all accrued and unpaid fees, costs and expenses to the extent then due and
payable on the Commitment Closing Date, together with Attorney Costs of Imperial
Bank to the extent invoiced prior to or on the Commitment Closing Date, plus
such additional amounts of Attorney Costs as shall constitute Imperial Bank's
reasonable estimate of Attorney Costs incurred or to be incurred by it through
the closing proceedings (provided that such estimate shall not thereafter
preclude final settling of accounts between the Borrower and Imperial Bank);
including any such costs, fees and expenses arising under or referenced in
Section 2.9(a) and Section 10.4;
(e) Certificate. A certificate signed by a Responsible Officer,
dated as of the Commitment Closing Date:
(i) stating that the representations and warranties contained
in Article V are true and correct on and as of such date, as though made on and
as of such date;
(ii) stating that no Default or Event of Default exists; and
(iii) stating that there has occurred since June 30, 1996, no
event or circumstance that has resulted or could reasonably be expected to
result in a Material Adverse Effect.
<PAGE>
(f) Initial Acquisition Agreements. Copies of all acquisition and
merger agreements (the "Initial Acquisition Agreements") relating to the Initial
Permitted Acquisitions described in Schedule 4.1(f) attached hereto, together
with copies of the business plans, financial projections and budgets relating
thereto and evidence satisfactory to the Banks that the Initial Permitted
Acquisitions have been consummated;
(g) Venture Commitment. Evidence satisfactory to the Banks that the
private placement of $10,500,000 in Series B-1 Preferred Stock under the Series
B Preferred Stock Purchase Agreement between GMS Holding and the investors named
therein, dated as of the date hereof (the "Series B Preferred Stock Purchase
Agreement"), has been consummated and the investors named therein have committed
to purchase from GMS Holding $10,500,000 in Series B-2 Preferred Stock upon the
satisfaction of certain milestones subject to and upon the conditions set forth
in the Series B Preferred Stock Purchase Agreement;
(h) Warrants. Imperial Bank shall have received the Warrants; and
(i) Other Documents. Such other approvals, opinions, documents or
materials as the Agent or any Bank may reasonably request.
4.2 Condition of Initial Loans. The obligation of each Bank to make its
initial Loan hereunder is subject to the condition that the Agent has received
on or before the Closing Date all of the following, in form and substance
satisfactory to the Agent and each Bank, and in sufficient copies for each Bank:
(a) Note. The Note executed by the Borrower;
(b) Security Documents. The Guaranty and the Security Agreement
executed by each party thereto;
(c) Resolutions; Incumbency. A certificate of the Secretary or
Assistant Secretary of each of GMS Holding, the Borrower and other Subsidiaries
parties to any Loan Document certifying that the resolutions of the board of
directors and the incumbency certificate of each of GMS Holding, the Borrower
and other Subsidiaries parties to any Loan Document previously delivered on the
Commitment Closing Date under Section 4.1(b) have not been amended, modified or
revoked and are in full force and effect on the Closing Date;
(d) Organization Documents: Good Standing. Each of the following
documents:
(i) the articles or certificate of incorporation and the
bylaws of each of GMS Holding, the Borrower and other Subsidiaries parties to
any Loan Document as in effect on the Closing Date, certified by the Secretary
or Assistant Secretary
<PAGE>
of such party as of the Closing Date; and
(ii) a good standing and tax good standing certificate for each
of GMS Holding, the Borrower and other Subsidiaries parties to any Loan Document
from the Secretary of State (or similar, applicable Governmental Authority) of
such party's state of incorporation and each state where such party is qualified
to do business as a foreign corporation as of a recent date;
(e) Perfection of Liens and Security Interests. The Banks shall have
obtained assurance satisfactory to Majority Banks (including UCC search reports,
confirmation of filing or recording, and opinions of counsel) that the security
interests created by the Security Agreement and the Guaranty in the property
specified in Schedule 4.2(e) attached hereto shall have been duly perfected
under applicable law and shall be of first priority, subject only to Permitted
Encumbrances;
(f) Legal Opinion. An opinion of Pillsbury Madison & Sutro, counsel
to each of GMS Holding, the Borrower and other Subsidiaries parties to any Loan
Document, and addressed to the Agent and the Banks, substantially in the form of
Exhibit I attached hereto, together with opinions of counsel in Hawaii and Idaho
with respect to the laws of Hawaii and Idaho, respectively, in form reasonably
satisfactory to the Agent and the Banks;
(g) Payment of Fees. Evidence of payment to the Agent by the Borrower
of all accrued and unpaid fees, costs and expenses to the extent then due and
payable on the Closing Date, together with Attorney Costs of Imperial Bank to
the extent invoiced prior to or on the Closing Date, plus such additional
amounts of Attorney Costs as shall constitute Imperial Bank's reasonable
estimate of Attorney Costs incurred or to be incurred by it through the closing
proceedings (provided that such estimate shall not thereafter preclude final
settling of accounts between the Borrower and Imperial Bank); including any such
costs, fees and expenses arising under or referenced in Section 10.4;
(h) Certificate. A certificate signed by a Responsible Officer, dated
as of the Closing Date:
(i) stating that the representations and warranties contained
in Article V are true and correct on and as of such date, as though made on and
as of such date;
(ii) stating that no Default or Event of Default exists or
would result from the initial Borrowing; and
(iii) stating that there has occurred since June 30, 1996, no
event or circumstance that has resulted or could reasonably be expected to
result in a Material Adverse Effect.
<PAGE>
(i) No Existing Default. No Event of Default or event which, upon the
lapse of time or the giving of notice or both, would constitute an Event of
Default shall exist on the Closing Date or after giving effect to the
transactions contemplated to take place hereunder on such date;
(j) Representations and Warranties Correct. The representations and
warranties set forth in Article V hereof shall be true and correct on the
Closing Date, and after giving effect to the transactions contemplated to occur
on such date;
(k) Insurance. Evidence of insurance called for in Section 5.19
hereof and evidence satisfactory to the Majority Banks that such insurance is in
effect;
(l) Solvency. The Agent shall have received a certificate of the
Responsible Officer, in form and substance satisfactory to the Majority Banks
that GMS Holding, the Borrower and each of its other Subsidiaries is Solvent on
and as of the Closing Date;
(m) Regulatory Compliance. A certificate of a Responsible Officer on
behalf of each of the Subsidiaries to the effect that such Subsidiary is in
compliance in all material respects with the Requirements of Law;
(n) Other Documents. Such other approvals, opinions, documents or
materials as the Agent or any Bank may reasonably request.
4.3 Conditions to All Borrowings. The obligation of each Bank to make any
Loan to be made by it (including its initial Loan), is subject to the
satisfaction of the following conditions precedent on the relevant Borrowing
Date:
(a) Notice of Borrowing. As to any Loan, the Agent shall have
received (with, in the case of the initial Loan only, a copy for each Bank) a
Notice of Borrowing;
(b) Continuation of Representations and Warranties. The
representations and warranties in Article V shall be true and correct on and as
of such Borrowing Date with the same effect as if made on and as of such
Borrowing Date (except to the extent such representations and warranties
expressly refer to an earlier date, in which case they shall be true and correct
as of such earlier date); and
(c) No Existing Default. No Default or Event of Default shall exist
or shall result from such Borrowing. Each Notice of Borrowing submitted by the
Borrower hereunder shall constitute a representation and warranty by the
Borrower hereunder, as of the date of each such notice or request and as of each
Borrowing Date that the conditions in this Section 4.3 are satisfied.
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Each of the Credit Parties represents and warrants to the Agent and each
Bank that:
5.1 Existence and Power. Such Credit Party and each of its Subsidiaries
(a) is a corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation, (b) has the power and
authority and all material Governmental Approvals to own its material assets,
carry on its business and to execute, deliver, and perform its obligations under
this Agreement and the other Loan Documents to which it is a party, (c) is duly
qualified as a foreign corporation and is licensed and in good standing under
the laws of each jurisdiction where its ownership, lease or operation of
property or the conduct of its business requires such qualification or license
(except for jurisdictions in which the failure to so qualify or remain in good
standing could not reasonably be expected to have a Material Adverse Effect) and
(d) is in compliance in all material respects with all Requirements of Law. Set
forth in Schedule 5.1 attached hereto is a complete and accurate list of such
Credit Party's Subsidiaries, showing their respective jurisdictions of
incorporation or organization and, as of the Commitment Closing Date and the
Closing Date, the jurisdictions in which each is qualified to do business.
5.2 Corporate Authorization; No Contravention. The execution, delivery and
performance by such Credit Party of this Agreement and each other Loan Document
to which such Credit Party is party, have been duly authorized by all necessary
corporate action, and do not and will not (a) contravene the terms of any of
such Credit Party's Organization Documents, (b) conflict with or result in any
breach or contravention of, or the creation of any Lien under, any document
evidencing any material Contractual Obligation to which such Credit Party is a
party or any material order, injunction, writ or decree of any Governmental
Authority to which such Credit Party or its property is subject or (c) violate
any Requirement of Law.
5.3 Governmental Authorization. No Governmental Approval is necessary or
required in connection with the execution, delivery or performance by, or
enforcement against, such Credit Party of this Agreement or any other Loan
Document.
5.4 Binding Effect. This Agreement and each other Loan Document to which
such Credit Party is a party constitute the legal, valid and binding obligations
of such Credit Party, enforceable against such Credit Party in accordance with
their respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable
<PAGE>
principles relating to enforceability.
5.5 Litigation. Except as specifically disclosed in Schedule 5.5 attached
hereto, there are no actions, suits, proceedings, claims or disputes pending, or
to the best knowledge of such Credit Party, threatened or contemplated, at law,
in equity, in arbitration or before any Governmental Authority, against such
Credit Party, or its Subsidiaries or any of their respective properties which
(i) purport to affect or pertain to this Agreement or any other Loan Document,
or any of the transactions contemplated hereby or thereby, or (ii) if determined
adversely to such Credit Party or its Subsidiaries, would reasonably be expected
to have a Material Adverse Effect. No injunction, writ, temporary restraining
order or any order of any nature has been issued by any court or other
Governmental Authority purporting to enjoin or restrain the execution, delivery
or performance of this Agreement or any other Loan Document, or directing that
the transactions provided for herein or therein not be consummated as herein or
therein provided.
5.6 No Default. No Default or Event of Default has occurred and is
continuing or would result from the execution, delivery or performance of this
Agreement, the Security Agreement and the other Loan Documents.
5.7 Financial Condition.
(a) The pro forma consolidated financial statements of Credit
Parties, dated as of the semi-annual period ended June 30, 1996, have been
delivered to the Agent. Except as disclosed in such financial statements or
otherwise disclosed in writing to the Banks, neither such Credit Party nor any
Subsidiary of such Credit Party is liable for any material liability, direct or
contingent, including, but not limited to, liabilities for taxes, long-term
leases or long-term commitments, which would be required to be shown as a
liability or otherwise disclosed in current financial statements.
(b) Since June 30, 1996, there has been no Material Adverse Effect
and there is no fact known to such Credit Party which could reasonably be
expected to have a Material Adverse Effect which has not been disclosed in
documents furnished to the Banks in connection with this Agreement.
5.8 ERISA Compliance. Except as specifically disclosed in Schedule 5.8
attached hereto:
(a) Each Plan is in compliance in all material respects with the
applicable provisions of ERISA, the Code and other federal or state law. Each
Plan which is intended to qualify under Section 401(a) of the Code has received
a favorable determination letter from the IRS and to the best knowledge of such
Credit Party, nothing has occurred which would cause the loss of such
qualification. Such Credit Party and each ERISA
<PAGE>
Affiliate has made all required contributions to any Plan subject to Section 412
of the Code, and no application for a funding waiver or an extension of any
amortization period pursuant to Section 412 of the Code has been made with
respect to any Plan.
(b) There are no pending or, to the best knowledge of such Credit
Party, threatened claims, actions or lawsuits, or action by any Governmental
Authority, with respect to any Plan which has resulted or could reasonably be
expected to result in a Material Adverse Effect. There has been no prohibited
transaction or violation of the fiduciary responsibility rules with respect to
any Plan which has resulted or could reasonably be expected to result in a
Material Adverse Effect.
(c) (A) No ERISA Event has occurred or is reasonably expected to
occur, (B) no Pension Plan has any Unfunded Pension Liability, (C) neither such
Credit Party nor any ERISA Affiliate has incurred, or reasonably expects to
incur, any liability under Title IV of ERISA with respect to any Pension Plan
(other than premiums due and not delinquent under Section 4007 of ERISA), (D)
neither such Credit Party nor any ERISA Affiliate has incurred, or reasonably
expects to incur, any liability (and no event has occurred which, with the
giving of notice under Section 421 of ERISA, would result in such liability)
under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan and (E)
neither such Credit Party nor any ERISA Affiliate has engaged in a transaction
that could be subject to Section 406 or 4212(c) of ERISA.
5.9 Use of Proceeds; Margin Regulations. The proceeds of the Loans are to
be used solely for the purposes set forth in and permitted by Sections 6.12 and
7.12 of this Agreement. Neither such Credit Party nor any Subsidiary is
generally engaged in the business of purchasing or selling Margin Stock or
extending credit for the purpose of purchasing or carrying Margin Stock.
5.10 Real Property. Such Credit Party and each Subsidiary have good record
and marketable title in fee simple to, or valid leasehold interests in, all real
property necessary or used in the ordinary conduct of their respective
businesses, except for such defects in title as could not, individually or in
the aggregate, have a Material Adverse Effect. As of the Commitment Closing Date
and the Closing Date, the property of such Credit Party and its Subsidiaries is
subject to no Liens, other than Permitted Encumbrances.
5.11 Equipment. Such Credit Party and its Subsidiaries own or have the
right to use under valid and subsisting leases, equipment and fixtures,
reasonably necessary for the operation of their business as a whole.
Substantially all of the tangible property of such Credit Party and its
Subsidiaries used in connection with their business is in good operating
condition (ordinary wear and tear excepted), usable in the ordinary course of
business, and is adequate for the operation of their business.
<PAGE>
5.12 Contracts. Schedule 5.12 attached hereto contains a list of each
material contract to which such Credit Party or any of its Subsidiaries is a
party (the "Material Contracts"). Each of the Material Contracts is in effect.
Except as disclosed in Schedule 5.12 attached hereto, neither such Credit Party,
nor any of its Subsidiaries nor, to the best knowledge of such Credit Party, any
other party to any of the Material Contracts is in material default thereunder,
and there are no presently existing facts or circumstances which, if continued
or on notice, could reasonably be expected to result in such a material default
on the part of such Credit Party or any of its Subsidiaries, or, to the best
knowledge of such Credit Party, on the part of the other party thereto. Such
Credit Party does not have any knowledge that any other party to any of the
Material Contracts intends to terminate such Material Contract. Each contract
with a supplier to which such Credit Party or any of its Subsidiaries is a party
is on normal trade terms and has been entered into in the ordinary course of
business. Each contract with a customer of such Credit Party or any of its
Subsidiaries has been entered into in the ordinary course of business.
Performance by the parties to all contracts and other commitments of such Credit
Party and its Subsidiaries would not in the aggregate have a Material Adverse
Effect.
5.13 Taxes. Such Credit Party and its Subsidiaries have filed all Federal
and other material tax returns and reports required to be filed, and have paid
all Federal and other material taxes, assessments, fees and other governmental
charges levied or imposed upon them or their properties, income or assets
otherwise due and payable, except those which are being contested in good faith
by appropriate proceedings and for which adequate reserves have been provided in
accordance with GAAP. There is no proposed tax assessment against such Credit
Party or any Subsidiary that would, if made, have a Material Adverse Effect.
5.14 Environmental Matters. Except as specifically disclosed in Schedule
5.14 attached hereto, (i) the properties and operations of such Credit Party and
each of its Subsidiaries comply in all material respects with all applicable
Environmental Laws; (ii) none of the properties or operations of such Credit
Party or any of its Subsidiaries is subject to any judicial or administrative
proceeding alleging the violation of any Environmental Law; (iii) none of the
properties or operations of such Credit Party or any of its Subsidiaries is the
subject of any federal or state investigation concerning any use or release of
any Hazardous Substance; (iv) neither such Credit Party nor any of its
Subsidiaries, nor, to the best knowledge of such Credit Party, any predecessor
of such Credit Party or any of its Subsidiaries, has filed any notice under any
federal or state law indicating past or present treatment, storage or disposal
of a Hazardous Substance or reporting a spill or release of a Hazardous
Substance into the environment; (v) neither such Credit Party nor any of its
Subsidiaries has any contingent liability in
<PAGE>
connection with any release of any Hazardous Substance into the environment and
no such release which could, under applicable law, require remediation has
occurred; (vi) neither such Credit Party's nor any of its Subsidiaries'
operations involve the generation, transportation, treatment, storage or
disposal of Hazardous Substances, except for the generation of Hazardous
Substances in the ordinary course of business, and except for such activities
carried out through licensed independent contractors; (vii) neither such Credit
Party nor any of its Subsidiaries has disposed of any Hazardous Substance in, on
or about any premises owned, leased or used by such Credit Party or any of its
Subsidiaries and, to the best of the knowledge of such Credit Party, neither has
any lessee, prior owner, or other Person; and (viii) no surface impoundments or,
to the best of such Credit Party, underground storage tanks are located in, on
or about any of the premises owned, leased or used by such Credit Party or any
of its Subsidiaries.
5.15 Regulated Entities. None of such Credit Party, any Person controlling
such Credit Party, or any Subsidiary, is an "Investment Company" within the
meaning of the Investment Company Act of 1940. Such Credit Party is not subject
to regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act, the Interstate Commerce Act, any state public utilities code, or
except as specifically disclosed in Schedule 5.15 attached hereto, any other
Federal or state statute or regulation limiting its ability to incur
Indebtedness.
5.16 No Burdensome Restrictions. Neither such Credit Party nor any
Subsidiary is a party to or bound by any Contractual Obligation, or subject to
any restriction in any Organization Document, or any Requirement of Law, which
could reasonably be expected to have a Material Adverse Effect.
5.17 Copyrights, Patents, Trademarks and Licenses, etc. Schedule 5.17
attached hereto contains a complete and correct list of all material patents,
copyrights, trademarks, licenses, service marks, trade names and other similar
rights (the "Intellectual Property Rights") used by such Credit Party or any of
its Subsidiaries. No proceedings have been instituted or are pending or have
been threatened in writing which challenge the validity, ownership or use of any
such Intellectual Property Rights. To the best knowledge of such Credit Party,
no infringement of any Intellectual Property Right of any third party has
occurred or would result in any way from the operations or business of such
Credit Party or any of its Subsidiaries, and, except as set forth in Schedule
5.5 attached hereto, no claim has been made by any such third party based on
allegation of any such infringement.
5.18 Capital Stock. All of the outstanding capital stock of such Credit
Party and its Subsidiaries has been validly issued in compliance with all
federal and state securities laws and is fully paid and nonassessable. Schedule
5.18 attached hereto
<PAGE>
contains a list of all Subsidiaries of such Credit Party and its ownership
interest in each of such Subsidiaries. All of the capital stock of or other
ownership interest in and each of such Subsidiaries is owned by such Credit
Party or one of its Subsidiaries free and clear of all mortgages, deeds of
trust, pledges, liens, security interests and other charges or encumbrances
other than pursuant to the Loan Documents. Neither such Credit Party nor any of
its Subsidiaries is subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of its capital stock or any
other equity interest therein.
5.19 Insurance. Except as specifically disclosed in Schedule 5.19 attached
hereto, the properties of such Credit Party and its Subsidiaries are insured or
self-insured, in such amounts, with such deductibles and covering such risks as
are customary for companies of like size and nature.
5.20 Business Activity. Neither such Credit Party nor any of its
Subsidiaries is engaged in any line or lines of business activity other than the
Dentistry Business.
5.21 Accreditation, Etc. Each of such Credit Party and the Subsidiaries
maintains (i) all material licenses and certifications required pursuant to any
Requirement of Law, (ii) all material certifications and authorizations
necessary to ensure that each of such Credit Party and the Subsidiaries is
eligible for all reimbursements available under the Requirements of Law to the
extent applicable and (iii) all material licenses, permits, authorizations and
qualifications required under the Requirements of Law in connection with the
ownership or operation of its business.
5.22 Solvency. As of the Commitment Closing Date and the Closing Date and
after giving effect to the transactions contemplated by the Credit Agreement and
the other Loan Documents, including all of the Loans made and to be made
hereunder, such Credit Party is Solvent and each of the Subsidiaries is Solvent.
5.23 Fiscal Year. The fiscal year of such Credit Party ends on December 31.
5.24 Initial Acquisition Agreements. The Banks have received complete
copies of all Initial Acquisition Agreements relating to the Initial Permitted
Acquisitions. Each of the Initial Acquisition Agreements sets forth the entire
agreement among the parties thereto relating to the applicable Initial Permitted
Acquisition. Each of the Initial Acquisition Agreements is in full force and
effect and, to the best knowledge of such Credit Party, no default exists
thereunder on the part of any party thereto.
5.25 Full Disclosure. None of the representations or
<PAGE>
warranties made by such Credit Party or any Subsidiary in this Agreement or in
any of the documents previously delivered to the Agent and the Banks as of the
date such representations and warranties are made or deemed made, and none of
the statements contained in any exhibit, report, statement or certificate
furnished by or on behalf of such Credit Party or any Subsidiary pursuant to
Sections 6.1, 6.2 or 6.3 hereof, contains any untrue statement of material fact
or omits any material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under which they are
made, not materially misleading as of the time when made or delivered.
ARTICLE VI
AFFIRMATIVE COVENANTS
So long as any Bank shall have any Commitment hereunder, or any of the
Obligations shall remain unpaid or unsatisfied, unless the Majority Banks waive
compliance in writing:
6.1 Financial Statements. GMS Holding shall deliver to the Agent and the
Banks, in form and detail reasonably satisfactory to the Agent and the Majority
Banks:
(a) as soon as available, but not later than ninety (90) days after
the end of each fiscal year (commencing with the fiscal year ended December 31,
1996), a copy of the audited consolidated and consolidating balance sheet of GMS
Holding and its Subsidiaries as at the end of such fiscal year and the related
consolidated and consolidating statements of income or operations, shareholders'
equity and cash flows for such fiscal year, setting forth in each case in
comparative form the figures for the previous fiscal year (except for the
figures for the fiscal year ended December 31, 1995), and accompanied by the
opinion of a nationally-recognized independent public accounting firm (the
"Independent Auditor") which report shall state that such consolidated and
consolidating financial statements present fairly the financial position for the
periods indicated in conformity with GAAP applied on a basis consistent with
prior years. Such opinion shall not be qualified or limited because of a
restricted or limited examination by the Independent Auditor of any material
portion of GMS Holding's or any Subsidiary's records;
(b) as soon as available, but not later than forty-five (45) days
after the end of each fiscal quarter of each fiscal year (commencing with the
fiscal quarter ended December 31, 1996), a copy of the unaudited consolidated
and consolidating balance sheet of GMS Holding and its Subsidiaries as of the
end of such fiscal quarter and the related consolidated and consolidating
statements of income, shareholders' equity and cash flows for the period
commencing on the first day and ending on the last day of such fiscal quarter,
and certified by a Responsible Officer as fairly presenting, in accordance with
GAAP
<PAGE>
(subject to ordinary, good faith year-end audit adjustments), the financial
position and the results of operations of such Credit Party and the
Subsidiaries; and
(c) as soon as available, but not later than thirty (30) days after
the end of each calendar month (commencing with the calendar month ended October
1996), a copy of the unaudited consolidated balance sheet of GMS Holding and its
Subsidiaries as of the end of such calendar month and the related consolidated
statements of income, shareholders' equity and cash flows for the period
commencing on the first day and ending on the last day of such calendar month,
and certified by a Responsible Officer as fairly presenting, in accordance with
GAAP (subject to ordinary, good faith year-end audit adjustments), the financial
position and the results of operations of such Credit Party and the
Subsidiaries.
6.2 Certificates; Other Information. Such Credit Party shall furnish to
the Agent and the Banks:
R\M concurrently with the delivery of the financial statements
referred to in Section 6.1(a), a certificate of the Independent Auditor, to the
effect that in the course of the regular annual examination of the business of
GMS Holding and its Subsidiaries, which examination was conducted by the
Independent Auditor in accordance with generally accepted auditing standards,
the Independent Auditor has obtained no knowledge that a Default or an Event of
Default has occurred and is continuing as of the date of certification, or if,
in the opinion of the Independent Auditor, a Default or an Event of Default has
occurred and is continuing, a statement as to the nature thereof;
(b) concurrently with the delivery of the financial statements
referred to in Sections 6.1(a) and 6.1(b), a Compliance Certificate and a Real
Property Certificate each executed by a Responsible Officer;
(c) concurrently with the delivery of the financial statements
referred to in Section 6.1(b), an aging report on accounts receivable of GMS
Holding and its Subsidiaries in form and detail satisfactory to the Agent;
(d) promptly, copies of all financial statements and reports that
such Credit Party or any of its Subsidiaries sends to its shareholders, copies
of all letters and reports prepared by the Independent Auditor and delivered to
the management of such Credit Party, and copies of all financial statements and
regular, periodical or special reports (including Forms 10K, 10Q and 8K) that
such Credit Party or any Subsidiary thereof may make to, or file with, the SEC;
(e) promptly following the receipt of the same, a copy of each notice
relating to the loss by such Credit Party or any Subsidiary of any material
operating permit, license or
<PAGE>
certification by any Governmental Authority;
DAT promptly following the receipt of the same, all correspondence
received by such Credit Party or any Subsidiary from a Governmental Authority
which asserts that such Credit Party or any Subsidiary is not in substantial
compliance with any Requirement of Law or which threatens the taking of any
action against such Credit Party or any Subsidiary under any Requirement of Law;
(g) from time to time upon receipt of a request by any Bank through
the Agent specifying in reasonable detail the types of documents to be provided,
copies of any and all statements, audits, studies or reports submitted by or on
behalf of such Credit Party or any Subsidiary to any Governmental Authority; and
(h) promptly, such additional information regarding the business,
financial or corporate affairs of such Credit Party or any Subsidiary as the
Agent, at the request of any Bank, may from time to time reasonably request.
6.3 Notices. Such Credit Party shall promptly, but in no event more than
three (3) Business Days thereafter, notify the Agent and each Bank:
(a) of the occurrence of any Default or Event of Default, and of the
occurrence or existence of any event or circumstance that foreseeably will
become a Default or Event of Default;
(b) of any matter that has resulted or would be reasonably likely to
result in a Material Adverse Effect, including, without limitation, (A) breach
or non-performance of, or any default under, a material Contractual Obligation
of such Credit Party or any Subsidiary, (B) any material dispute, litigation,
investigation, proceeding or suspension between such Credit Party or any
Subsidiary and any Governmental Authority or (C) the commencement of, or any
material development in, any material litigation or proceeding affecting such
Credit Party or any Subsidiary, including pursuant to any applicable
Environmental Laws;
(c) of the occurrence of any of the following events affecting such
Credit Party or any ERISA Affiliate (but in no event more than ten (10) days
after such event), and deliver to the Agent and each Bank a copy of any notice
with respect to such event that is filed with a Governmental Authority and any
notice delivered by a Governmental Authority to such Credit Party or any ERISA
Affiliate with respect to such event: (A) an ERISA Event; (B) a material
increase in the Unfunded Pension Liability of any Pension Plan; (C) the adoption
of, or the commencement of contributions to, any Plan subject to Section 412 of
the Code by such Credit Party or any ERISA Affiliate; or (D) the adoption of
<PAGE>
any amendment to a Plan subject to Section 412 of the Code, if such amendment
results in a material increase in contributions or Unfunded Pension Liability;
and
(d) of any material change in accounting policies or financial
reporting practices by such Credit Party or any of its Subsidiaries.
Each notice under this Section 6.3 shall be accompanied by a written
statement by a Responsible Officer setting forth details of the occurrence
referred to therein, and stating what action such Credit Party or any affected
Subsidiary proposes to take with respect thereto and at what time. Each notice
under Section 6.3(a) shall describe with particularity any and all clauses or
provisions of this Agreement or other Loan Document that have been (or
foreseeably will be) breached or violated.
6.4 Preservation of Corporate Existence, Etc. Such Credit Party shall, and
shall cause each Subsidiary to:
(a) preserve and maintain in full force and effect its corporate
existence and good standing under the laws of its state or jurisdiction of
incorporation;
(b) except as otherwise expressly permitted by this Agreement,
preserve and maintain in full force and effect all material governmental rights,
privileges, qualifications, permits, licenses and franchises necessary or
desirable in the normal conduct of its business, including all material licenses
and certifications required pursuant to any Requirement of Law, all material
certifications and authorizations necessary to ensure that each of the
Subsidiaries is eligible for all reimbursements available under the Requirement
of Law to the extent applicable, and all material licenses, permits,
authorization and qualifications required under the Requirement of Law in
connection with the ownership or operation of dental practice groups;
(c) except as otherwise expressly permitted by this Agreement, use
reasonable efforts, in the ordinary course of business, to preserve its business
organization and goodwill; and
(d) preserve or renew all of its registered patents, trademarks,
trade names and service marks, the non-preservation of which could reasonably be
expected to have a Material Adverse Effect.
6.5 Maintenance of Property. Such Credit Party shall maintain, and shall
cause each Subsidiary to maintain, and preserve all its property which is
material to its business in good working order and condition, ordinary wear and
tear excepted.
6.6 Insurance. Such Credit Party shall maintain, and
<PAGE>
shall cause each Subsidiary to maintain, insurance or self-insurance with
respect to its properties and business against loss or damage of such types and
in such amounts as are customary for companies of like size and nature.
6.7 Payment of Obligations. Such Credit Party shall, and shall cause each
Subsidiary to, pay and discharge as the same shall become due and payable, all
their respective obligations and liabilities, including:
(a) all tax liabilities, assessments and governmental charges or
levies upon it or its properties or assets, unless the same are being contested
in good faith by appropriate proceedings and adequate reserves in accordance
with GAAP are being maintained by such Credit Party or such Subsidiary;
(b) all lawful claims which, if unpaid, would by law become a Lien
upon its property, except for any such claims that are being contested in good
faith and by appropriate proceedings; and
(c) all Indebtedness, as and when due and payable, but subject to any
subordination provisions contained in any instrument or agreement evidencing
such Indebtedness, and except for any such Indebtedness that is being contested
in good faith and by appropriate proceedings.
6.8 Compliance with Laws. Such Credit Party shall comply, and shall cause
each Subsidiary to comply, in all material respects with all Requirements of Law
of any Governmental Authority having jurisdiction over it or its business,
except such as may be contested in good faith or as to which a bona fide dispute
may exist.
6.9 Compliance with ERISA. Such Credit Party shall, and shall cause each
of its ERISA Affiliates to, (i) maintain each Plan in compliance in all material
respects with the applicable provisions of ERISA, the Code and other federal or
state law, (ii) cause each Plan which is qualified under Section 401(a) of the
Code to maintain such qualification and (iii) make all required contributions to
any Plan subject to Section 412 of the Code.
6.10 Inspection of Property and Books and Records. Such Credit Party shall
maintain, and shall cause each Subsidiary to maintain, proper books of record
and account to the extent necessary to permit the preparation of the financial
statements in conformity with GAAP consistently applied. Such Credit Party shall
permit, and shall cause each Subsidiary to permit, representatives and
independent contractors of the Agent, at the request of any Bank, or any Bank to
visit and inspect any of their respective properties, to examine their
respective corporate, financial and operating records, and make copies thereof
or abstracts therefrom, and to discuss their respective
<PAGE>
affairs, finances and accounts with their respective officers and independent
public accountants, all at the expense of such Credit Party and at such
reasonable times during normal business hour and as often as may be reasonably
desired, upon reasonable advance notice to such Credit Party; provided, however,
when a Default or an Event of Default exists the Agent or any Bank may do any of
the foregoing at the expense of such Credit Party at any time during normal
business hours and without advance notice.
6.11 Environmental Laws. Such Credit Party shall, and shall cause each
Subsidiary to, conduct its operations and keep and maintain its property in
material compliance with all Environmental Laws.
6.12 Acquisitions. (a) Prior to consummating any Permitted Acquisition,
the Borrower shall have delivered to the Agent (in form and detail satisfactory
to each Bank and in sufficient copies for each Bank) the following: (i) At least
thirty (30) days prior to the consummation of such Permitted Acquisition, a
brief summary of the substantive terms thereof and a certified copy of the
executed purchase or acquisition agreement, together with copies of business
plans, financial projections and budgets; and (ii) an officer's certificate,
executed by a Responsible Officer, certifying that immediately before and after
giving effect to such Permitted Acquisition (A) no Default has occurred and is
continuing or will exist and (B) that the Borrower will be in compliance with
each of the financial ratios specified in Section 6.14 hereof, together with a
reasonably detailed worksheet setting forth the calculation of such ratios.
(b) Prior to consummating Capital Expenditures in excess of $250,000 in
the aggregate during any fiscal year of the Borrower, computed on a cumulative
consolidated basis, the Borrower shall have delivered to the Agent (in form and
detail satisfactory to each Bank and in sufficient copies for each Bank) a
written request for such Capital Expenditure, together with the following: (i)
At least thirty (30) days prior to the consummation of such Capital Expenditure,
a brief summary of the substantive terms thereof and a certified copy of the
executed purchase or acquisition agreement and (ii) an officer's certificate,
executed by a Responsible Officer, certifying that immediately before and after
giving effect to such Capital Expenditure (A) no Default has occurred and is
continuing or will exist and (B) that the GMS Holding and its Subsidiaries, on a
consolidated basis, will be in compliance with each of the financial ratios
specified in Section 6.14 hereof, together with a reasonably detailed worksheet
setting forth the calculation of such ratios. The Agent and each Bank may accept
or reject any such request in their sole and absolute discretion within 30 days
after receipt thereof. The failure by the Agent or a Bank to respond to such a
request shall be deemed to be a rejection thereof.
<PAGE>
6.13 Concentration Account. GMS Holding shall maintain the Concentration
Account with the Agent. Within 30 days after the Closing Date, all other bank
accounts maintained by GMS Holding or any of its Subsidiaries shall be and at
all times remain subject to instructions to transfer all funds out of such
accounts into the Concentration Account no less frequently than Friday of each
week (or, when a Friday is not a Banking Day, then on the previous Banking Day).
6.14 Financial Covenants. GMS Holding shall, on a consolidated basis:
(a) maintain a Current Ratio not less than 1.50 to 1.00 at all
times;
(b) maintain a Leverage Ratio of not more that 3.75 to 1.00 at all
times after the fiscal year ended December 31, 1996;
(c) maintain a Net Worth at all times of not less than the sum of
(A) the Net Worth as of the Closing Date, minus $500,000, and (B) 100% of
extraordinary gains arising after the Closing Date, computed on a cumulative
consolidated basis, (C) 100% of net proceeds from any sale of common stock of
GMS Holding or any of its Subsidiaries arising after the Closing Date, computed
on a cumulative consolidated basis, (D) 100% of any capital stock issued by GMS
Holding or any of its Subsidiaries as consideration in the Permitted
Acquisitions arising after the Closing Date, computed on a cumulative
consolidated basis, and (E) 70% of positive net income of GMS Holding and its
Subsidiaries arising after the Closing Date, computed on a cumulative
consolidated basis; and
(d) maintain a Coverage Ratio of not less than 1.30 to 1.00 at all
times after the fiscal quarter ended December 31, 1996.
6.15 Required Future Action. Any Subsidiary of such Credit Party formed
after the Commitment Closing Date shall promptly execute and deliver this
Agreement and any Subsidiary of such Credit Party formed after the Closing Date
shall promptly execute and deliver all instruments and documents, including, but
not limited to, this Agreement, the Guaranty and the Security Agreement, that
may be necessary, or that the Agent may request, in order to enable the Agent to
exercise its rights hereunder.
ARTICLE VII
NEGATIVE COVENANTS
So long as any Bank shall have any Commitment hereunder, or any Loan or
other Obligation shall remain unpaid or unsatisfied, unless the Majority Banks
waive compliance in writing:
<PAGE>
7.1 Limitation on Liens. Such Credit Party shall not, and shall not
suffer or permit any Subsidiary to, directly or indirectly, make, create, incur,
assume or suffer to exist any Lien upon or with respect to any part of its
property, whether now owned or hereafter acquired, other than the following
("Permitted Encumbrances"):
(a) Liens in favor of Agent or any Bank securing the Obligations;
(b) Liens listed in Schedule 7.1 and existing on the date of this
Agreement;
(c) Liens for taxes or other governmental charges not at the time
delinquent or thereafter payable without penalty or being contested in good
faith, provided that adequate reserves for the payment thereof have been
established in accordance with GAAP;
(d) Liens of carriers, warehousemen, mechanics, materialmen,
vendors, and landlords and other similar Liens imposed by law incurred in the
ordinary course of business for sums not overdue or being contested in good
faith, provided that adequate reserves for the payment thereof have been
established in accordance with GAAP;
(e) Deposits under workers' compensation, unemployment insurance and
social security laws or to secure the performance of bids, tenders, contracts
(other than for the repayment of borrowed money) or leases, or to secure
statutory obligations of surety or appeal bonds or to secure indemnity,
performance or other similar bonds in the ordinary course of business, provided
all such Liens in the aggregate would not (even if enforced) cause a Material
Adverse Effect;
(f) Zoning restrictions, easements, rights-of-way, title
irregularities and other similar encumbrances, which alone or in the aggregate
are not substantial in amount and do not materially detract from the value of
the property subject thereto or interfere with the ordinary conduct of the
business of Borrower or any of its Subsidiaries;
(g) Liens on property or assets of any corporation which becomes a
Subsidiary of the Borrower or which are acquired by a Subsidiary or the Borrower
after the date of this Agreement, provided that (i) such Liens exist at the time
the stock of such corporation or property is acquired and (ii) such Liens were
not created in anticipation of such acquisition and provided further that all
such Liens in the aggregate at any time outstanding, together with Liens
permitted under Section 7.1(h) below, do not exceed $500,000, computed on a
cumulative consolidated basis for the Borrower and the Subsidiaries;
<PAGE>
(h) Liens securing Indebtedness which constitutes Permitted Capital
Expenditures provided that, in each case, such Lien (i) attaches solely to the
property financed by such Permitted Capital Expenditures and (ii) the principal
amount of such Indebtedness secured thereby does not exceed 100% of the cost of
such property;
(i) Liens on the property or assets of any Subsidiary of the
Borrower in favor of the Borrower or any other Subsidiary of the Borrower,
provided that such Subsidiary is a party to this Agreement, the Security
Agreement and the Guaranty;
(j) Liens incurred in connection with the extension, renewal or
refinancing of the Indebtedness secured by the Liens described in clause (b) or
(h) above, provided that any extension, renewal or replacement (i) is limited to
the property covered by the existing Lien and (ii) secures Indebtedness which is
no greater in amount and has material terms no less favorable to the Banks than
the Indebtedness secured by the existing Lien;
(k) Banker's Liens, rights of setoff or similar rights as to deposit
accounts; provided that (i) such deposit account is not a dedicated cash
collateral account and is not subject to restrictions against access by such
Credit Party in excess of those set forth by regulations promulgated by the FRB
and (ii) such deposit account is not intended by such Credit Party to provide
collateral to the depository institution; and
(l) Rights of (i) vendors or lessors under conditional sale
agreements or other title retention agreements, provided that (A) any such right
covers only the equipment so acquired and (B) the Indebtedness secured thereby
is permitted under Section 7.6 hereof, (ii) lessors under Operating Leases
permitted by the Agent under Section 7.8(b) hereof and (iii) Permitted Capital
Leases.
7.2 Disposition of Assets. Such Credit Party shall not, and shall not
suffer or permit any Subsidiary to, directly or indirectly, sell, assign, lease,
convey, transfer or otherwise dispose of any property (including accounts and
notes receivable, with or without recourse) or enter into any agreement to do
any of the foregoing, except (a) dispositions of inventory, equipment or
operations, all in the ordinary course of business and (b) the sale of equipment
or operations to the extent that such assets are exchanged for credit against
the purchase price of similar replacement assets, or the proceeds of such sale
are reasonably promptly applied to the purchase price of such replacement
assets.
7.3 Consolidations and Mergers. Such Credit Party shall not, and shall
not suffer or permit any Subsidiary to, enter into any merger, consolidation,
reorganization or recapitalization, or any agreement to do any of the foregoing,
except that the Borrower or any of its Subsidiaries may make Permitted
<PAGE>
Acquisitions.
7.4 Change of Business. Neither such Credit Party nor any of its
Subsidiaries shall change the nature of its business or engage in any other
business other than the businesses which are substantially similar to the lines
of business in which such Credit Party and its Subsidiaries are engaged as of
the Closing Date.
7.5 Loans and investments. Such Credit Party shall not purchase or
acquire, or suffer or permit any Subsidiary to purchase or acquire, or make any
commitment therefor, any capital stock, equity interest, or any obligations or
other securities of, or any interest in, any Person, or make or commit to make
any Acquisitions, or make or commit to make any advance, loan, extension of
credit or capital contribution to or any other investment in, any Person, except
for (a) Permitted Market Investments, (b) extensions of credit in the nature of
accounts receivable or notes receivable arising from the sale or lease of goods
or services in the ordinary course of business, (c) Permitted Acquisitions and
(d) wholly-owned Subsidiaries of the Borrower formed in connection with
Permitted Acquisitions.
7.6 Limitation on Indebtedness. Such Credit Party shall not, and shall
not suffer or permit any Subsidiary to, create, incur, assume, suffer to exist,
or otherwise become or remain directly or indirectly liable with respect to, any
Indebtedness, except Permitted Indebtedness.
7.7 Contingent Obligations. Such Credit Party shall not, and shall not
suffer or permit any Subsidiary to, create, incur, assume or suffer to exist any
Contingent Obligations, except (a) endorsements for collection or deposit in the
ordinary course of business and (b) Contingent Obligations of such Credit Party
and its Subsidiaries existing as of the Closing Date and listed in Schedule 7.7
attached hereto or assumed in connection with Permitted Acquisitions.
7.8 Lease Obligations. Such Credit Party shall not, and shall not suffer
or permit any Subsidiary to, create or suffer to exist any obligations for the
payment of rent for any property under lease or agreement to lease, except for
(a) leases of such Credit Party and of Subsidiaries in existence on the Closing
Date, (b) Operating Leases entered into by such Credit Party or any Subsidiary
after the Closing Date in the ordinary course of business and (c) Permitted
Capital Leases approved by the Agent.
7.9 Restricted Payments. Such Credit Party shall not, and shall not
suffer or permit any Subsidiary to, (a) declare or make any dividend payment or
other distribution of assets, properties, cash, rights, obligations or
securities on account of any shares of any class of its capital stock or (b)
purchase, redeem or otherwise acquire for value any shares of its capital stock
or any warrants, rights or options to acquire such shares, now or
<PAGE>
hereafter outstanding; provided, however, GMS Holding may make the 10%
cumulative dividend payments payable on its Series B-1 and Series B-2 Preferred
Stock upon any initial public offering of the equity securities of GMS Holding.
7.10 Prepayments of Subordinated Permitted Indebtedness. Neither the
Borrower nor any of its Subsidiaries shall purchase, redeem, retire or otherwise
acquire for value, or set apart any money for a sinking, defeasance or other
analogous fund for, the purchase, redemption, retirement or other acquisition
of, or make any payment or prepayment of the principal of or interest on, or any
other amount owing in respect of, any Subordinated Permitted Indebtedness,
except that the Borrower or such Subsidiary may make regularly scheduled
payments of interest and principal in respect of such Permitted Subordinated
Indebtedness required pursuant to the instruments evidencing such Permitted
Subordinated Indebtedness in accordance with the terms and conditions set forth
in Exhibit H attached hereto.
7.11 Transactions with Affiliates. Such Credit Party shall not, and shall
not suffer or permit any Subsidiary to, enter into any transaction with any
Affiliate of such Credit Party, except upon fair and reasonable terms no less
favorable to such Credit Party or such Subsidiary than would obtain in a
comparable arm's-length transaction with a Person not an Affiliate of such
Credit Party or such Subsidiary.
7.12 Use of Proceeds. The Borrower shall not, and shall not suffer or
permit any Subsidiary to, use any portion of the Loan proceeds, directly or
indirectly, (a) for any purpose other than for Permitted Acquisitions, Permitted
Capital Expenditures, and working capital purposes, provided that the aggregate
outstanding principal amount of Working Capital Loans shall not exceed
$2,000,000 at any time, (b) to purchase or carry Margin Stock, (c) to repay or
otherwise refinance indebtedness of the Borrower or others incurred to purchase
or carry Margin Stock, (d) to extend credit for the purpose of purchasing or
carrying any Margin Stock or (e) to acquire any security in any transaction that
is subject to Section 13 or 14 of the Exchange Act. No part of the proceeds of
the Loans will be used for any purpose which violates the provisions of
Regulations G, T, U or X of the FRB.
7.13 ERISA. Such Credit Party shall not, and shall not suffer or permit
any of its ERISA Affiliates to: (a) engage in a prohibited transaction or
violation of the fiduciary responsibility rules with respect to any Plan which
has resulted or could reasonably expected to result in liability of such Credit
Party in an aggregate amount in excess of $100,000; or (b) engage in a
transaction that could be subject to Section 4069 or 4212 (c) of ERISA.
7.14 Accounting Changes. Such Credit Party shall not, and shall not
suffer or permit any Subsidiary to, make any
<PAGE>
significant change in accounting treatment or reporting practices, except as
required by GAAP or as required to conform the practices of a Person acquired in
connection with a Permitted Acquisition, or change the fiscal year of such
Credit Party or of any Subsidiary.
ARTICLE VIII
EVENTS OF DEFAULT
8.1 Event of Default. Any of the following shall constitute an "Event of
Default":
(a) Non-Payment. The Borrower fails to pay, (i) when and as
required to be paid herein, any amount of principal of any Loan or any amount of
interest on any Loan, or (ii) within three (3) Business Days after the same
becomes due, any interest, fee or any other amount payable hereunder or under
any other Loan Document; or
(b) Representation or Warranty. Any representation or warranty by
any Credit Party made or deemed made herein, in any other Loan Document, or
which is contained in any certificate, document or financial or other statement
by any Credit Party or any Responsible Officer, furnished at any time under this
Agreement, or in or under any other Loan Document, is incorrect in any material
respect on or as of the date made or deemed made; or
(c) Specific Defaults. Any Credit Party fails to perform or observe
any term, covenant or agreement contained in (i) Section 6.3, 6.14 or 6.15; (ii)
any of Section 6.1, 6.2, or 6.9 and such default shall continue unremedied for a
period of ten (10) days after the earlier of (A) the date upon which a
Responsible Officer knew or reasonably should have known of such failure or (B)
the date upon which written notice thereof is given to such Credit Party by the
Agent or any Bank; or (iii) Article VII; or
(d) Other Defaults. Such Credit Party fails to perform or observe
any other term or covenant contained in this Agreement or any other Loan
Document, and such default shall continue unremedied for a period of thirty (30)
days after the earlier of (i) the date upon which a Responsible Officer knew or
reasonably should have known of such failure or (ii) the date upon which written
notice thereof is given to such Credit Party by the Agent or any Bank; or
(e) Cross-Default. Any Credit Party (i) fails to make any payment
in respect of any Indebtedness or Contingent Obligation having an aggregate
principal amount (including undrawn committed or available, amounts and
including amounts owing to all creditors under any combined or syndicated credit
arrangement) of more than $100,000 when due (whether by scheduled
<PAGE>
maturity, required prepayment, acceleration, demand, or otherwise) and such
failure continues after any applicable grace or notice period, if any; (ii)
fails to perform or observe any other condition or covenant, or any other event
shall occur or condition exist, under any agreement or instrument relating to
any such Indebtedness or Contingent Obligation, and such failure continues after
the applicable grace or notice period, if any, specified in the relevant
document on the date of such failure if the effect of such failure, event or
condition is to cause, or to permit the holder or holders of such Indebtedness
or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on
behalf of such holder or holders or beneficiary or beneficiaries) to cause such
Indebtedness to be declared to be due and payable prior to its stated maturity,
or such Contingent Obligation to become payable or cash collateral in respect
thereof to be demanded; or (iii) fails to make any payment in respect of any
Permitted Subordinated Indebtedness when due (whether by scheduled maturity,
required prepayment, acceleration, demand, or otherwise) and such failure
continues after any applicable grace or notice period, if any; or
(f) Insolvency; Voluntary Proceedings. Any Credit Party (i) ceases
or fails to be Solvent, or generally fails to pay, or admits in writing its
inability to pay, its debts as they become due, subject to applicable grace
periods, if any, whether at stated maturity or otherwise; (ii) except as
otherwise expressly provided in this Agreement, voluntarily ceases to conduct
its business in the ordinary course; (iii) commences any Insolvency Proceeding
with respect to itself; or (iv) takes any action to effectuate or authorize any
of the foregoing; or
(g) Involuntary Proceedings. (i) Any involuntary Insolvency
Proceeding is commenced or filed against any Credit Party, or any writ,
judgment, warrant of attachment, execution or similar process, is issued or
levied against a substantial part of any Credit Party's properties, and any such
proceeding or petition shall not be dismissed, or such writ, judgment, warrant
of attachment, execution or similar process shall not be released, vacated or
fully bonded within sixty (60) days after commencement, filing or levy; (ii) any
Credit Party admits the material allegations of a petition against it in any
Insolvency Proceeding, or an order for relief (or similar order under non-U.S.
law) is ordered in any Insolvency Proceeding; or (iii) any Credit Party
acquiesces in the appointment of a receiver, trustee, custodian, conservator,
liquidator, mortgagee it possession (or agent therefor), or other similar Person
for itself or a substantial portion of its property or business; or
(h) ERISA. (i) An ERISA Event shall occur with respect to a Pension
Plan or Multiemployer Plan which has resulted or could reasonably be expected to
result in liability of any Credit Party under Title IV of ERISA to the Pension
Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of
$100,000; (ii) the aggregate amount of Unfunded Pension
<PAGE>
Liability among all Pension Plans at any time exceeds $100,000; or (iii) any
Credit Party or any ERISA Affiliate shall fail to pay when due, after the
expiration of any applicable grace period, any installment payment with respect
to its withdrawal liability under Section 4201 of ERISA under a Multiemployer
Plan in an aggregate amount in excess of $100,000; or
(i) Monetary Judgments. One or more final judgments, final orders,
decrees or arbitration awards is entered against any Credit Party involving in
the aggregate a liability (to the extent not covered by independent third-party
insurance as to which the insurer does not dispute coverage) as to any single or
related series of transactions, incidents or conditions, of $100,000 or more,
and the same shall remain unsatisfied, unvacated and unstayed pending appeal for
a period of twenty (20) days after the entry thereof or such Credit Party shall
not settle such judgment or award for less than $100,000 within ten (10) days
after the entry thereof; or
(j) Non-Monetary Judgments. Any non-monetary judgment, order or
decree is entered against any Credit Party which does or would reasonably be
expected to have a Material Adverse Effect, and there shall be any period of ten
(10) consecutive days during which a stay of enforcement of such judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect; or
(k) Change of Control. There occurs any Change of Control; or
(l) Material Adverse Effect. An event occurs which constitutes a
Material Adverse Effect; or
(m) Invalidity of Security Document Provisions. The provisions of
the Guaranty, the Security Agreement or any agreement or instrument relating
thereto is for any reason revoked or invalidated, or otherwise ceases to be in
full force and effect, any Person contests in any manner the validity or
enforceability thereof or denies that it has any further liability or obligation
thereunder, or the Indebtedness secured by the Security Agreement fails to
maintain, for any reason, the priority contemplated by the Security Agreement.
(n) Invalidity of Subordination Provisions. The subordination
provisions of the Permitted Subordinated Indebtedness set forth in Exhibit H
attached hereto or any agreement or instrument governing any such Permitted
Subordinated Indebtedness is for any reason revoked or invalidated, or otherwise
cease to be in full force and effect, any Person contests in any manner the
validity or enforceability thereof or denies that it has any further liability
or obligation thereunder, or the Indebtedness hereunder is for any reason
subordinated or does not have the priority contemplated by this Agreement or
such subordination provisions.
<PAGE>
8.2 Remedies. If any Event of Default occurs, the Agent shall, at the
request of, or may, with the consent of, the Majority Banks,
(a) declare the Commitment of each Bank to make Loans to be
terminated, whereupon such Commitments shall be terminated;
(b) declare the unpaid principal amount of all outstanding Loans,
all interest accrued and unpaid thereon, and all other amounts owing or payable
hereunder or under any other Loan Document to be immediately due and payable,
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by the Borrower; and
(c) exercise on behalf of itself and the Banks all rights and
remedies available to it and the Banks under the Loan Documents or applicable
law; provided, however, that upon the occurrence of any event specified in
subsection (f) or (g) of Section 8.1 (in the case of clause (i) of subsection
(g) upon the expiration of the 60-day period mentioned therein), the obligation
of each Bank to make Loans shall automatically terminate and the unpaid
principal amount of all outstanding Loans and all interest and other amounts as
aforesaid shall automatically become due and payable without further act of the
Agent or any Bank.
8.3 Rights Not Exclusive. The rights provided for in this Agreement and
the other Loan Documents are cumulative and are not exclusive of any other
rights, powers, privileges or remedies provided by law or in equity, or under
any other instrument, document or agreement now existing or hereafter arising.
ARTICLE IX
THE AGENT
9.1 Appointment and Authorization. Each Bank hereby irrevocably (subject
to Section 9.9) appoints, designates and authorizes the Agent to take such
action on its behalf under the provisions of this Agreement and each other Loan
Document and to exercise such powers and perform such duties as are expressly
delegated to it by the terms of this Agreement or any other Loan Document,
together with such powers as are reasonably incidental thereto. Notwithstanding
any provision to the contrary contained elsewhere in this Agreement or in any
other Loan Document, the Agent shall not have any duties or responsibilities,
except those expressly set forth herein, nor shall the Agent have or be deemed
to have any fiduciary relationship with any Bank, and no implied covenants,
functions, responsibilities, duties, obligations or liabilities shall be read
into this Agreement or any other Loan Document or otherwise exist against the
Agent.
9.2 Delegation of Duties. The Agent may execute any of
<PAGE>
its duties under this Agreement or any other Loan Document by or through agents,
employees or attorneys-in-fact and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. The Agent shall not be
responsible for the negligence or misconduct of any agent or attorney-in-fact
that it selects with reasonable care.
9.3 Liability of Agent. None of the Agent-Related Persons shall (a) be
liable for any action taken or omitted to be taken by any of them under or in
connection with this Agreement or any other Loan Document or the transactions
contemplated hereby (except for its own gross negligence or willful misconduct),
or (b) be responsible in any manner to any of the Banks for any recital,
statement, representation or warranty made by the Borrower or any Subsidiary or
Affiliate of the Borrower, or any officer thereof, contained in this Agreement
or in any other Loan Document, or in any certificate, report, statement or other
document referred to or provided for in, or received by the Agent under or in
connection with, this Agreement or any other Loan Document, or the validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
any other Loan Document, or for any failure of the Borrower or any other party
to any Loan Document to perform its obligations hereunder or thereunder. No
Agent-Related Person shall be under any obligation to any Bank to ascertain or
to inquire as to the observance or performance of any of the agreements
contained in, or conditions of, this Agreement or any other Loan Document, or to
inspect the properties, books or records of the Borrower or any of the
Borrower's Subsidiaries or Affiliates.
<PAGE>
9.4 Reliance by Agent.
(a) The Agent shall be entitled to rely, and shall be fully
protected in relying, upon any writing, resolution, notice, consent,
certificate, affidavit, letter, telegram, facsimile, telex or telephone message,
statement or other document or conversation believed by it to be genuine and
correct and to have been signed, sent or made by the proper Person or Persons,
and upon advice and statements of legal counsel (including counsel to the
Borrower), independent accountants and other experts selected by the Agent. The
Agent shall be fully justified in failing or refusing to take any action under
this Agreement or any other Loan Document unless it shall first receive such
advice or concurrence of the majority Banks as it deems appropriate and, if it
so requests, it shall first be indemnified to its satisfaction by the Banks
against any and all liability and expense which may be incurred by it by reason
of taking or continuing to take any such action. The Agent shall in all cases be
fully protected in acting, or in refraining from acting, under this Agreement or
any other Loan Document in accordance with a request or consent of the Majority
Banks and such request and any action taken or failure to act pursuant thereto
shall be binding upon all of the Banks.
(b) For purposes of determining compliance with the conditions
specified in Sections 4.1 and 4.2, each Bank that has executed this Agreement
shall be deemed to have consented to, approved or accepted or to be satisfied
with, each document or other matter either sent by the Agent to such Bank for
consent, approval, acceptance or satisfaction, or required thereunder to be
consented to or approved by or acceptable or satisfactory to the Bank.
9.5 Notice of Default. The Agent shall not be deemed to have knowledge
or notice of the occurrence of any Default or Event of Default, except with
respect to defaults in the payment of principal, interest and fees required to
be paid to the Agent for the account of the Banks, unless the Agent shall have
received written notice from a Bank or the Borrower referring to this Agreement,
describing such Default or Event of Default and stating that such notice is a
"notice of default". The Agent will notify the Banks of its receipt of any such
notice. The Agent shall take such action with respect to such Default or Event
of Default as may be requested by the Majority Banks in accordance with Article
VIII; provided, however, that unless and until the Agent has received any such
request, the Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable or in the best interest of the Banks.
:\D Credit Decision. Each Bank acknowledges that none of the Agent-
Related Persons has made any representation or warranty to it and that no act by
the Agent hereinafter taken, including
<PAGE>
any review of the affairs of the Borrower and its subsidiaries, shall be deemed
to constitute any representation or warranty by any Agent-Related Person to any
Bank. Each Bank represents to the Agent that it has, independently and without
reliance upon any Agent-Related Person and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, prospects, operations, property, financial and
other condition and credit worthiness of the Borrower and its Subsidiaries, and
all applicable bank regulatory laws relating to the transactions contemplated
hereby, and made its own decision to enter into this Agreement and to extend
credit to the Borrower hereunder. Each Bank also represents that it will,
independently and without reliance upon any Agent-Related Person and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit analysis, appraisals and decisions in taking or
not taking action under this Agreement and the other Loan Documents, and to make
such investigations as it deems necessary to inform itself as to the business,
prospects, operations, property, financial and other condition and credit
worthiness of the Borrower. Except for notices, reports and other documents
expressly herein required to be furnished to the Banks by the Agent, the Agent
shall not have any duty or responsibility to provide any Bank with any credit or
other information concerning the business, prospects, operations, property,
financial and other condition or credit worthiness of the Borrower which may
come into the possession of any of the Agent-Related Persons.
9.7 Indemnification of Agent. Whether or not the transactions
contemplated hereby are consummated, the Banks shall indemnify upon demand the
Agent-Related Persons (to the extent not reimbursed by or on behalf of the
Borrower and without limiting the obligation of the Borrower to do so), pro
rata, from and against any and all Indemnified Liabilities; provided, however,
that no Bank shall be liable for the payment to the Agent-Related Persons of any
portion of such Indemnified Liabilities resulting solely from such Person's
gross negligence or willful misconduct. Without limitation of the foregoing,
each Bank shall reimburse the Agent upon demand for its ratable share of any
costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent
in connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, any other Loan Document, or any document
contemplated by or referred to herein, to the extent that the Agent is not
reimbursed for such expenses by or on-behalf of the Borrower. The undertaking in
this Section 9.7 shall survive the payment of all Obligations hereunder and the
resignation or replacement of the Agent.
9.8 Agent in Individual Capacity. Imperial Bank and its Affiliates may
make loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and
<PAGE>
generally engage in any kind of banking, trust, financial advisory, underwriting
or other business with the Borrower and its Subsidiaries and Affiliates as
though Imperial Bank were not the Agent hereunder and without notice to or
consent of the Banks. The Banks acknowledge that, pursuant to such activities,
Imperial Bank or its Affiliates may receive information regarding the Borrower
or its Affiliates (including information that may be subject to confidentiality
obligations in favor of the Borrower or such Subsidiary) and acknowledge that
the Agent shall be under no obligation to provide such information to them. With
respect to its Loans, Imperial Bank shall have the same rights and powers under
this Agreement as any other Bank and may exercise the same as though it were not
the Agent, and the terms "Bank" and "Banks" include Imperial Bank in its
individual capacity.
9.9 Successor Agent. The Agent may, and at the request of the Majority
Banks shall, resign as Agent upon thirty (30) days, notice to the Banks and the
Borrower. If the Agent resigns under this Agreement, the Majority Banks shall
appoint from among the Banks a successor agent for the Banks. If no successor
agent is appointed prior to the effective date of the resignation of the Agent,
the Agent may appoint, after consulting with the Banks and the Borrower, a
successor agent from among the Banks. Upon the acceptance of its appointment as
successor agent hereunder, such successor agent shall succeed to all the rights,
powers and duties of the retiring Agent and the term "Agent" shall mean such
successor agent and the retiring Agent's appointment, powers and duties as Agent
shall be terminated. After any retiring Agent's resignation hereunder as Agent,
the provisions of this Article IX and Sections 10.4, 10.5 and 10.6 shall inure
to its benefit as to any actions taken or omitted to be taken by it while it was
Agent under this Agreement. If no successor agent has accepted appointment as
Agent by the date which is thirty (30) days following a retiring Agent's notice
of resignation, the retiring Agent's resignation shall nevertheless thereupon
become effective and the Banks shall perform all of the duties of the Agent
hereunder until such time, if any, as the Majority Banks appoint a successor
agent as provided for above.
9.10 Withholding Tax.
(a) If any Bank is a "foreign corporation, partnership or trust"
within the meaning of the Code and such Bank claims exemption from, or a
reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such
Bank agrees with and in favor of the Agent, to deliver to the Agent:
(i) if such Bank claims an exemption from, or a reduction of,
withholding tax under a United States tax treaty, properly completed IRS Forms
1001 and W-8 prior to the Closing Date and prior to the first day of each
calendar year thereafter;
(ii) if such Bank claims that interest paid under this
Agreement is exempt from United States withholding tax
<PAGE>
because it is effectively connected with a United States trade or business of
such Bank, two properly completed and executed copies of IRS Form 4224 prior to
the Closing Date and prior to the first day of each calendar year thereafter and
IRS Form W-9; and
(iii) such other form or forms as may be required under the
Code or other laws of the United States as a condition to exemption from, or
reduction of, United States withholding tax.
Such Bank agrees to promptly notify the Agent of any change in
circumstances which would modify or render invalid any claimed exemption or
reduction.
(b) If any Bank claims exemption from, or reduction of, withholding
tax under a United States tax treaty by providing IRS Form 1001 and such Bank
sells, assigns, grants a participation in, or otherwise transfers all or part of
the Obligations of the Borrower to such Bank, such Bank agrees to notify the
Agent of the percentage amount in which it is no longer the beneficial owner of
Obligations of the Borrower to such Bank. To the extent of such percentage
amount, the Agent will treat such Bank's IRS Form 1001 as no longer valid.
(c) If any Bank claiming exemption from United States withholding
tax by filing IRS Form 4224 with the Agent sells, assigns, grants a
participation in, or otherwise transfers all or part of the Obligations of the
Borrower to such Bank, such Bank agrees to undertake sole responsibility for
complying with the withholding tax requirements imposed by Sections 1441 and
1442 of the Code.
(d) If any Bank is entitled to a reduction in the applicable
withholding tax, the Agent may withhold from any interest payment to such Bank
an amount equivalent to the applicable withholding tax after taking into account
such reduction. If the forms or other documentation required by subsection (a)
of this Section are not delivered to the Agent, then the Agent may withhold from
any interest payment to such Bank not providing such forms or other
documentation an amount equivalent to the applicable withholding tax.
(e) If the IRS or any other Governmental Authority of the United
States or other jurisdiction asserts a claim that the Agent did not properly
withhold tax from amounts paid to or for the account of any Bank (because the
appropriate form was not delivered, was not properly executed, or because such
Bank failed to notify the Agent of a change in circumstances which rendered the
exemption from, or reduction of, withholding tax ineffective, or for any other
reason) such Bank shall indemnify the Agent fully for all amounts aid, directly
or indirectly, by the Agent as tax or otherwise, including penalties and
interest, and including any taxes imposed by any jurisdiction on the amounts
payable to the Agent under this Section, together with all costs
<PAGE>
and expenses (including Attorney Costs). The obligation of the Banks under this
subsection shall survive the payment of all Obligations and the resignation or
replacement of the Agent.
ARTICLE X
MISCELLANEOUS
10.1 Amendments and Waivers. No amendment or waiver of any provision of
this Agreement or any other Loan Document, and no consent with respect to any
departure by the Borrower therefrom, shall be effective unless the same shall be
in writing and signed by the Majority Banks (or by the Agent at the written
request of the Majority Banks) and the Borrower and acknowledged by the Agent,
and then any such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given; provided, however, that
no such waiver, amendment, or consent shall, unless in writing and signed by all
the Banks and the Borrower and acknowledged by the Agent, do any of the
following:
(a) increase or extend the Commitment of any Bank (or reinstate any
Commitment terminated pursuant to Section 8.2);
(b) postpone or delay any date fixed by this Agreement or any other
Loan Document for any payment of principal, interest, fees or other amounts due
to the Banks (or any of them) hereunder or under any other Loan Document;
(c) reduce the principal of, or the rate of interest specified
herein on any Loan, or (subject to clause (ii) below) any fees or other amounts
payable hereunder or under any other Loan Document;
(d) change the percentage of the Combined Commitments or of the
aggregate unpaid principal amount of the Loans which is required for the Banks
or any of them to take any action hereunder;
(e) amend this Section, Section 2.13 or Section 7.1, or any
provision herein providing for consent or other action by all Banks; or
(f) amend the definition of "Change of Control" or waive any Event
of Default under Section 8.1(k).
and, provided further, that (i) no amendment, waiver or consent shall, unless in
writing and signed by the Agent in addition to the Majority Banks or all the
Banks, as the case may be, affect the rights or duties of the Agent under this
Agreement or any other Loan Document, and (ii) the Fee Letter may be amended, or
rights or privileges thereunder waived, in a writing executed by the parties
thereto.
<PAGE>
10.2 Notices.
(a) All notices, requests and other communications shall be in
writing (including, unless the context expressly otherwise provides, by
facsimile transmission, provided that any matter transmitted by the Borrower by
facsimile (i) shall be immediately confirmed by a telephone call to the
recipient at the number specified on Schedule 10.2, and (ii) shall be followed
promptly by delivery of a hard copy original thereof) and mailed, faxed or
delivered, to the address or facsimile number specified for notices on Schedule
10.2; or, as directed to the Borrower or the Agent, to such other address as
shall be designated by such party in a written notice to the other parties, and
as directed to any other party, at such other address as shall be designated by
such party in a written notice to the Borrower and the Agent.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery, or faxed, be effective when delivered for
overnight (next-day) delivery, or transmitted in legible form by facsimile
machine, respectively, or if mailed, upon the third Business Day after the date
deposited into the U.S. mail, or if delivered, upon delivery; except that
notices pursuant to Article II or IX shall not be effective until actually
received by the Agent.
(c) Any agreement of the Agent and the Banks herein to receive
certain notices by telephone or facsimile is solely for the convenience and at
the request of the Borrower. The Agent and the Banks shall be entitled to rely
on the authority of any Person purporting to be a Person authorized by the
Borrower to give such notice and the Agent and the Banks shall not have any
liability to the Borrower or other Person on account of any action taken or not
taken by the Agent or the Banks in reliance upon such telephonic or facsimile
notice. The obligation of the Borrower to repay the Loans shall not be affected
in any way or to any extent by any failure by the Agent and the Banks to receive
written confirmation of any telephonic or facsimile notice or the receipt by the
Agent and the Banks of a confirmation which is at variance with the terms
understood by the Agent and the Banks to be contained in the telephonic or
facsimile notice.
10.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay
in exercising, on the part of the Agent or any Bank, any right, remedy, power or
privilege hereunder, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege.
10.4 Costs and Expenses. The Borrower shall:
(a) subject to the terms of the Fee Letter, whether or not the
transactions contemplated hereby are consummated, pay
<PAGE>
or reimburse the Agent within fifteen (15) Business Days after demand (subject
to Section 4.1(e)) for all costs and expenses incurred by the Agent in
connection with the development, preparation, delivery, administration and
execution of, and any amendment, supplement, waiver or modification to (in each
case, whether or not consummated), this Agreement, any Loan Document and any
other documents prepared in connection herewith or therewith, and the
consummation of the transactions contemplated hereby and thereby, including
reasonable Attorney Costs incurred by the Agent with respect thereto; and
(b) pay or reimburse the Agent and each Bank within five (5)
Business Days after demand for all costs and expenses (including Attorney Costs)
incurred by them in connection with the enforcement, attempted enforcement, or
preservation of any rights or remedies under this Agreement or any other Loan
Document during the existence of an Event of Default or after acceleration of
the Loans (including in connection with any "workout" or restructuring regarding
the Loans, and including in any Insolvency Proceeding or appellate proceeding).
10.5 Borrower Indemnification. Whether or not the transactions
contemplated hereby are consummated, the Borrower shall indemnify and hold the
Agent-Related Persons, and each Bank and each of its respective officers,
directors, employees, counsel, agents and attorneys-in-fact (each, an
"Indemnified Person") harmless from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
charges, expenses and disbursements (including Attorney Costs) of any kind or
nature whatsoever which may at any time (including at any time following
repayment of the Loans and the termination, resignation or replacement of the
Agent or replacement of any Bank) be imposed on, incurred by or asserted against
any such Person in any way relating to or arising out of this Agreement or any
document contemplated by or referred to herein, or the transactions contemplated
hereby, or any action taken or omitted by any such Person under or in connection
with any of the foregoing, including with respect to any investigation,
litigation or proceeding (including any Insolvency Proceeding or appellate
proceeding) related to or arising out of this Agreement or the Loans or the use
of the proceeds thereof, whether or not any Indemnified Person is a party
thereto (all the foregoing, collectively, the "Indemnified Liabilities");
provided, that the Borrower shall have no obligation hereunder to any
Indemnified Person with respect to Indemnified Liabilities resulting solely from
the gross negligence or willful misconduct of such Indemnified Person. The
agreements in this Section shall survive payment of all other Obligations.
10.6 Payments Set Aside. To the extent that the Borrower makes a payment
to the Agent or the Banks, or the Agent or the Banks exercise their right of
set-off, and such payment or the proceeds of such set-off or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside
<PAGE>
or required (including pursuant to any settlement entered into by the Agent or
such Bank in its discretion) to be repaid to a trustee, receiver or any other
party, in connection with any Insolvency Proceeding or otherwise, then (a) to
the extent of such recovery the obligation or part thereof originally intended
to be satisfied shall be revived and continued in full force and effect as if
such payment had not been made or such set-off had not occurred, and (b) each
Bank severally agrees to pay to the Agent upon demand its pro rata share of any
amount so recovered from or repaid by the Agent.
10.7 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that the Borrower may not assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of the Agent and each Bank.
10.8 Assignments, Participations, etc.
(a) Any Bank may, with the written consents of the Borrower and the
Agent, which consents shall be at the sole discretion of the Borrower and the
Agent, at any time assign and delegate to one or more Eligible Assignees
(provided that (i) no written consent of the Borrower shall be required during
the existence of an Event of Default after the Agent has declared the Commitment
of each Bank to make Loans to be terminated and (ii) no written consent of the
Borrower or the Agent shall be required in connection with any assignment and
delegation by a Bank to an Eligible Assignee that is an Affiliate of such Bank)
(each an "Assignee") all, or any ratable part of all, of the Loans, the Combined
Commitments and the other rights and obligations of such Bank hereunder, in a
minimum amount of $5,000,000; provided, however, that the Borrower and the Agent
may continue to deal solely and directly with such Bank in connection with the
interest so assigned to an Assignee until (i) written notice of such assignment,
together with payment instructions, addresses and related information with
respect to the Assignee, shall have been given to the Borrower and the Agent
such Bank and the Assignee; (ii) such Bank and its Assignee shall have delivered
to the Borrower and the Agent an Assignment and Acceptance in the form of
Exhibit J ("Assignment and Acceptance") together with any Note or Notes subject
to such assignment and (iii) the assignor Bank or Assignee has paid to the Agent
a processing fee in the amount of $2,500.
(b) From and after the date that the Agent notifies the assignor
Bank that it has received (and provided its consent with respect to) an executed
Assignment and Acceptance and payment of the above-referenced processing fee,
(i) the Assignee thereunder shall be a party hereto and, to the extent that
rights and obligations hereunder have been assigned to it pursuant to such
Assignment and Acceptance, shall have the rights and obligations of a Bank under
the Loan Documents, and (ii) the
<PAGE>
assignor Bank shall, to the extent that rights and obligations hereunder and
under the other Loan Documents have been assigned by it pursuant to such
Assignment and Acceptance, relinquish its rights and be released from its
obligations under the Loan Documents.
(c) Within five (5) Business Days after its receipt of notice by the
Agent that it has received an executed Assignment and Acceptance and payment of
the processing fee, (and provided that it consents to such assignment in
accordance with Section 10.8(a)), the Borrower shall execute and deliver to the
Agent, new Notes evidencing such Assignee's assigned Loans and Commitment and,
if the assignor Bank has retained a portion of its Loans and its Commitment,
replacement Notes in the principal amount of the Loans retained by the assignor
Bank (such Notes to be in exchange for, but not in payment of, the Notes held by
such Bank). Immediately upon each Assignee's making its processing fee payment
under the Assignment and Acceptance, this Agreement shall be deemed to be
amended to the extent, but only to the extent, necessary to reflect the addition
of the Assignee and the resulting adjustment of the Combined Commitments arising
therefrom. The Commitment allocated to each Assignee shall reduce such
Commitments of the assigning Bank pro tanto.
(d) Any Bank may at any time sell to one or more commercial banks or
other Persons not Affiliates of the Borrower (a "Participant") participating
interests in any Loans, the Commitment of that Bank and the other interests of
that Bank (the "Originator") hereunder and under the other Loan Documents;
provided, however, that (i) the Originator's obligations under this Agreement
shall remain unchanged, (ii) the Originator shall remain solely responsible for
the performance of such obligations, (iii) the Borrower and the Agent shall
continue to deal solely and directly with the Originator in connection with the
Originator's rights and obligations under this Agreement and the other Loan
Documents, and (iv) no Bank shall transfer or grant any participating interest
under which the Participant has rights to approve any amendment to, or any
consent or waiver with respect to, this Agreement or any other Loan Document,
except to waiver would require unanimous consent of the Banks as described in
the first proviso to Section 10.1. In the case of any such participation, the
Participant shall be entitled to the benefit of Sections 3.1, 3.3 and 10.5 as
though it were also a Bank hereunder, and if amounts outstanding under this
Agreement are due and unpaid, or shall have been declared or shall have become
due and payable upon the occurrence of an Event of Default, each Participant
shall be deemed to have the right of set-off in respect of its participating
interest in amounts owing under this Agreement to the same extent as if the
amount of its participating interest were owing directly to it as a Bank under
this Agreement.
(e) Notwithstanding any other provision in this Agreement, any Bank
may at any time assign all or any portion of
<PAGE>
its rights under and interest in this Agreement and the Note held by it for the
purpose of creating a security interest in favor of any Federal Reserve Bank in
accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR
203.14, and such Federal Reserve Bank may enforce such pledge or security
interest in any manner permitted under applicable law.
10.9 Confidentiality. Each Bank agrees to take and to cause its
Affiliates to take normal and reasonable precautions and exercise due care to
maintain the confidentiality of all information identified as "confidential" or
"secret" by the Borrower and provided to it by the Borrower or any Subsidiary,
or by the Agent on such Company's or Subsidiary's behalf, under this Agreement
or any other Loan Document, and neither it nor any of its Affiliates shall use
any such information other than in connection with or in enforcement of this
Agreement and the other Loan Documents or in connection with other business now
or hereafter existing or contemplated with the Borrower or any Subsidiary;
except to the extent such information (i) was or becomes generally available to
the public other than as a result of disclosure by the Bank, or (ii) was or
becomes available on a non-confidential basis from a source other than the
Borrower, provided that such source is not bound by a legal or contractual
obligation known to the Bank; provided, however, that any Bank may disclose such
information (A) at the request or pursuant to any requirement of any
Governmental Authority to which the Bank is subject or in connection with an
examination of such Bank by any such authority; (B) pursuant to subpoena or
other court process; (C) when required to do so in accordance with the
provisions of any applicable Requirement of Law; (D) to the extent reasonably
required in connection with any litigation or proceeding to which the Agent, any
Bank or their respective Affiliates may be party; (E) after the occurrence of a
Default, to the extent reasonably required in connection with the exercise of
any remedy hereunder or under any other Loan Document; (F) to such Bank's
independent auditors and other professional advisors; (G) to any Participant or
Assignee, actual or potential, provided that such Person agrees in writing to
keep such information confidential to the same extent required of the Banks
hereunder; (H) as to any Ban or its Affiliates, as expressly permitted under the
terms of any other document or agreement regarding confidentiality to which the
Borrower or any Subsidiary is party with such Bank or such Affiliate; and (I) to
its Affiliates; provided, however, that in the event any Bank is requested to
disclose confidential information pursuant to this Section 10.9 (A), (B), (C) or
(D), such Bank shall notify the Borrower promptly, if it may lawfully so do, so
that the Borrower may seek a protective order or other appropriate remedy.
10.10 Set-off. In addition to any rights and remedies of the Banks
provided by law, if an Event of Default exists or the Loans have been
accelerated, each Bank or any Affiliate, which is an Eligible Assignee, thereof
is authorized at any time and from time to time, without prior notice to the
Borrower, any such
<PAGE>
notice being waived by the Borrower to the fullest extent permitted by law, to
set off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held by, and other indebtedness at any time
owing by, such Bank to or for the credit or the account of the Borrower against
any and all Obligations owing to such Bank, now or hereafter existing,
irrespective of whether or not the Agent or such Bank shall have made demand
under this Agreement or any Loan Document and although such obligations may be
contingent or unmatured and each such Affiliate is hereby irrevocably authorized
to permit such set-off and appropriation. Each Bank agrees promptly to notify
the Borrower and the Agent after any such set-off and application made by such
Bank; provided, however, that the failure to give such notice shall not affect
the validity of such set-off and application.
10.11 Notification of Addresses, Lending Offices, Etc. Each Bank shall
notify the Agent in writing of any changes in the address to which notices to
the Bank should be directed, of addresses of any Lending Office, of payment
instructions in respect of all payments to be made to it hereunder and of such
other administrative information as the Agent shall reasonably request.
10.12 Counterparts. This Agreement may be executed in any number of
separate counterparts, each of which, when so executed, shall be deemed an
original, and all of said counterparts taken together shall be deemed to
constitute but one and the same instrument.
10.13 Severability. The illegality or unenforceability of any provision of
this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
10.14 No Third Parties Benefited. This Agreement is made and entered into
for the sole protection and legal benefit of the Borrower, the Banks, the Agent
and the Agent-Related Persons, and successors and assigns and no other Person
shall be a direct or indirect legal beneficiary of, or have any direct or
indirect cause of action or claim in connection with, this Agreement or any of
the other Loan Documents.
10.15 Governing Law and Jurisdiction.
(a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT THE AGENT
AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA
OR OF THE UNITED STATES FOR THE
<PAGE>
SOUTHERN DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS
AGREEMENT, EACH OF The Borrower, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE
COURTS. EACH OF The Borrower, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY
OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE
GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS
AGREEMENT OR ANY DOCUMENT RELATED HERETO. The Borrower, THE AGENT AND THE BANKS
EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH
MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW.
10.16 Waiver of Jury Trial. THE CREDIT PARTIES, THE BANKS AND THE AGENT
EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST
ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER
WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE CREDIT PARTIES,
THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL
BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE
PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED
BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF
THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF.
THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
10.17 Entire Agreement. This Agreement, together with the other Loan
Documents, embodies the entire agreement and understanding among the Credit
Parties, the Banks and the Agent, and supersedes all prior or contemporaneous
agreements and understandings of such Persons, verbal or written, relating to
the subject matter hereof and thereof.
10.18 Additional Credit Parties. Upon the execution and delivery by any
Person of a supplement substantially in the form of Exhibit I hereto (each a
"Credit Agreement Supplement"), such Person shall be referred to as an
"Additional Credit Party" and shall be and become a Credit Party, and each
reference in this Agreement to "Credit Party" shall also mean and be a reference
to such Additional Credit Party.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered in Los Angeles by their proper and duly authorized
officers as of the day and year first above written.
GMS DENTAL GROUP MANAGEMENT, INC.
By:
Title:
GMS DENTAL GROUP, INC.
By:
Title:
GMS CALIFORNIA ACQUISITION COMPANY
By:
Title:
GMS HAWAII ACQUISITION COMPANY
By:
Title:
IMPERIAL BANK, as Agent
By:
Title:
IMPERIAL BANK, as a Bank
By:
Title:
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered in Los Angeles by their proper and duly authorized
officers as of the day and year first above written.
GMS DENTAL GROUP MANAGEMENT,
INC.
By: /s/ Grant Sadler
-------------------------
Title: President
GMS DENTAL GROUP, INC.
By: /s/ Grant Sadler
--------------------------
Title: President
GMS CALIFORNIA ACQUISITION
COMPANY
By: /s/ Grant Sadler
---------------------------
Title: President
GMS HAWAII ACQUISITION
COMPANY
By: /s/ Grant Sadler
--------------------------
Title: President
IMPERIAL BANK, as Agent
By: /s/ John Harris
--------------------------
Title: Senior Vice President
IMPERIAL BANK, as a Bank
By: /s/ John Harris
--------------------------
Title: Senior Vice President
-72-
<PAGE>
EXECUTION COPY
FIRST AMENDMENT TO
CREDIT AGREEMENT
This Amendment, dated as of April 21, 1997, is entered into by among GMS
DENTAL GROUP MANAGEMENT, INC., a Delaware corporation (the "Borrower"), GMS
DENTAL GROUP, INC., a Delaware corporation ("GMS Holding"), GMS DENTAL GROUP
MANAGEMENT OF SOUTHERN CALIFORNIA, INC., a California corporation ("GMS
California"), GMS HAWAII ACQUISITION COMPANY, a Delaware corporation ("GMS
Hawaii Acquisition"), GMS DENTAL GROUP MANAGEMENT OF HAWAII, INC., a Hawaii
corporation ("GMS Hawaii"), and GMS DENTAL GROUP OF THE MOUNTAIN STATES, INC., a
Delaware corporation ("GMS Mountain") (each of the Borrower, GMS Holding, GMS
California, GMS Hawaii Acquisition, GMS Hawaii and GMS Mountain herein called a
"Credit Party" and collectively the "Credit Parties"), and the financial
institutions from time to time party hereto (collectively, the "Banks" and
individually, a "Bank"), and IMPERIAL BANK, as agent (the "Agent") for the
Banks.
Recitals
A. The Credit Parties, the Banks and the Agent have entered into the
Credit Agreement, dated as of October 10, 1996 (the "Credit Agreement"). Terms
defined in the Credit Agreement and not otherwise defined herein have the same
respective meanings when used herein, and the rules of construction set forth in
the Credit Agreement are incorporated herein by reference.
B. The Credit Parties, the Banks and the Agent have agreed to amend the
Credit Agreement as hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit Agreement is,
effective as of the date hereof, hereby amended as follows:
(a) The definition of "Permitted Subordinated Indebtedness" in Section 1.1
of the Credit Agreement is hereby amended in full to read as follows:
"'Permitted Subordinated Indebtedness' means unsecured Indebtedness of
GMS Holding evidencing seller financing incurred in connection with a
Permitted Acquisition, which Indebtedness is subordinated to the
Obligations upon substantially the terms set forth on Exhibit H attached
hereto or upon such other terms as may be satisfactory to the Agent and the
Majority Banks."
<PAGE>
(b) Section 6.12 of the Credit Agreement is hereby amended to read in full
as follows:
"6.12 Acquisitions and Capital Expenditures. (a) Prior to consummating
any Permitted Acquisition, the Borrower shall have delivered to the Agent
(in form and detail satisfactory to each Bank and in sufficient copies for
each Bank) the following: (i) at least thirty (30) days prior to the
consummation of such Permitted Acquisition, a brief summary of the
substantive terms thereof and the proposed execution copies of all material
agreements relating to such Permitted Acquisition, including, without
limitation, the acquisition agreement, the management agreement, the
promissory note evidencing Permitted Subordinated Indebtedness and copies
of business plans, financial projections and budgets relating to such
Permitted Acquisition and (ii) an officer's certificate, executed by a
Responsible Officer, certifying that immediately before and after giving
effect to such Permitted Acquisition (A) no Default has occurred and is
continuing or will exist and (B) that the Borrower will be in compliance
with each of the financial ratios specified in Section 6.14 hereof,
together with a reasonably detailed worksheet setting forth the calculation
of such ratios.
(b) Prior to consummating Capital Expenditures in excess of
$250,000 in the aggregate during any fiscal year of the Borrower, computed
on a cumulative consolidated basis, the Borrower shall have delivered to
the Agent (in form and detail satisfactory to each Bank and in sufficient
copies for each Bank) a written request for such Capital Expenditure,
together with the following: (i) at least thirty (30) days prior to the
consummation of such Capital Expenditure, a brief summary of the
substantive terms thereof and the proposed execution copies of all material
agreements relating to such Capital Expenditure, including, without
limitation, the purchase or acquisition agreement and (ii) an officer's
certificate, executed by a Responsible Officer, certifying that immediately
before and after giving effect to such Capital Expenditure (A) no Default
has occurred and is continuing or will exist and (B) that GMS Holding and
its Subsidiaries, on a consolidated basis, will be in compliance with each
of the financial ratios
<PAGE>
specified in Section 6.14 hereof, together with a reasonably detailed
worksheet setting forth the calculation of such ratios. The Agent and each
Bank may accept or reject any such request in their sole and absolute
discretion within 30 days after receipt thereof. The failure by the Agent
or a Bank to respond to such a request shall be deemed to be a rejection
thereof."
<PAGE>
(c) Section 7.9 of the Credit Agreement is hereby amended to read in full
as follows:
"7.9 Restricted Payments. Such Credit Party shall not, and shall not
suffer or permit any Subsidiary to, (a) declare or make any dividend
payment or other distribution of assets, properties, cash, rights,
obligations or securities on account of any shares of any class of its
capital stock or (b) purchase, redeem or otherwise acquire for value any
shares of its capital stock or any warrants, rights or options to acquire
such shares, now or hereafter outstanding; provided, however, (i) GMS
Holding may make the 10% cumulative dividend payments payable on its Series
B-1 and Series B-2 Preferred Stock upon any initial public offering of the
equity securities of GMS Holding and (ii) so long as no Default or Event of
Default has occurred and is continuing, the Borrower may make dividend
payments to GMS Holding from time to time in an amount not to exceed the
amount required to make the regularly scheduled payment of interest and
principal in respect of any Permitted Subordinated Indebtedness."
(d) Section 7.10 of the Credit Agreement is hereby amended to read in full
as follows:
"7.10 Prepayments of Subordinated Permitted Indebtedness. GMS Holding
shall not purchase, redeem, retire or otherwise acquire for value, or set
apart any money for a sinking, defeasance or other analogous fund for, the
purchase, redemption, retirement or other acquisition of, or make any
payment or prepayment of the principal of or interest on, or any other
amount owing in respect of, any Subordinated Permitted Indebtedness, except
that GMS Holding may make regularly scheduled payments of interest and
principal in respect of such Permitted Subordinated Indebtedness required
pursuant to the instruments evidencing such Permitted Subordinated
Indebtedness in accordance with the terms and conditions set forth in
Exhibit H attached hereto."
(e) Exhibit H to the Credit Agreement (Terms and Conditions of Permitted
Subordinated Indebtedness) is hereby amended and restated to read in full in the
form attached hereto as Exhibit H. On and after the date hereof, each reference
in the Credit Agreement and the other Loan Documents to "Exhibit H," "Terms and
<PAGE>
Conditions of Permitted Subordinated Indebtedness" or words of like import shall
mean and be a reference to Exhibit H attached hereto.
<PAGE>
SECTION 3. Reference to and Effect on the Credit Agreement. On and after
the date hereof, each reference in the Credit Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import, and each reference in
the other Loan Documents to the Credit Agreement, shall mean and be a reference
to the Credit Agreement as amended hereby. Except as hereby expressly amended,
the Credit Agreement shall remain in full force and effect, and is hereby
ratified and confirmed in all respects on and as of the date hereof.
SECTION 4. Execution in Counterparts. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute one and the same
instrument.
SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
by their duly authorized representatives.
GMS DENTAL GROUP MANAGEMENT,
INC.
By: /s/ Grant M. Sadler
--------------------------
Title: Chairman,
Secretary and
Treasurer
GMS DENTAL GROUP, INC.
By: /s/ Grant M. Sadler
--------------------------
Title: Chairman,
Secretary and
Treasurer
GMS DENTAL GROUP MANAGEMENT OF
SOUTHERN CALIFORNIA, INC.
By: /s/ Grant M. Sadler
--------------------------
Title: Chairman,
Secretary and
Treasurer
GMS HAWAII ACQUISITION COMPANY
By: /s/ Grant M. Sadler
--------------------------
Title: Chairman,
Secretary and
Treasurer
GMS DENTAL GROUP MANAGEMENT OF
HAWAII, INC.
By: /s/ Grant M. Sadler
--------------------------
Title: Chairman,
Secretary and
Treasurer
GMS DENTAL GROUP OF THE
MOUNTAIN STATES, INC.
By: /s/ Grant M. Sadler
--------------------------
Title: Chairman,
Secretary and
Treasurer
<PAGE>
IMPERIAL BANK, as Agent
By: John Harris
---------------------------
Title: Sr. Vice-President
IMPERIAL BANK, as a Bank
By: John Harris
---------------------------
Title: Sr. Vice-President
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to
be executed by their duly authorized representatives.
GMS DENTAL GROUP MANAGEMENT,
INC.
By: /s/ Grant M. Sadler
--------------------------
Title: Chairman, Secretary
and Treasurer
GMS DENTAL GROUP, INC.
By: /s/ Grant M. Sadler
--------------------------
Title: Chairman, Secretary
and Treasurer
GMS DENTAL GROUP MANAGEMENT OF
SOUTHERN CALIFORNIA, INC.
By: /s/ Grant M. Sadler
--------------------------
Title: Chairman,Secretary
and Treasurer
GMS HAWAII ACQUISITION COMPANY
By: /s/ Grant M. Sadler
--------------------------
Title: Chairman,Secretary
and Treasurer
GMS DENTAL GROUP MANAGEMENT OF
HAWAII, INC.
By: /s/ Grant M. Sadler
--------------------------
Title: Chairman, Secretary
and Treasurer
GMS DENTAL GROUP OF THE
MOUNTAIN STATES, INC.
By: /s/ Grant M. Sadler
--------------------------
Title: Chairman,Secretary
and Treasurer
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to
be executed by their duly authorized representatives.
GMS DENTAL GROUP MANAGEMENT, INC.
By: /s/ Grant M. Sadler
--------------------------------------
Title: CHAIRMAN, SECRETARY & TREASURER
GMS DENTAL GROUP, INC.
By: /s/ Grant M. Sadler
--------------------------------------
Title: CHAIRMAN, SECRETARY & TREASURER
GMS DENTAL GROUP MANAGEMENT OF
SOUTHERN CALIFORNIA, INC.
By: /s/ Grant M. Sadler
--------------------------------------
Title: CHAIRMAN, SECRETARY & TREASURER
GMS HAWAII ACQUISITION COMPANY
By: /s/ Grant M. Sadler
--------------------------------------
Title: CHAIRMAN, SECRETARY & TREASURER
GMS DENTAL GROUP MANAGEMENT OF
HAWAII, INC.
By: /s/ Grant M. Sadler
--------------------------------------
Title: CHAIRMAN, SECRETARY & TREASURER
GMS DENTAL GROUP MANAGEMENT OF THE
MOUNTAIN STATES, INC.
By: /s/ Grant M. Sadler
--------------------------------------
Title: CHAIRMAN, SECRETARY & TREASURER
-7-
<PAGE>
IMPERIAL BANK, as Agent
By: /s/ John Harris
--------------------------
Title:
IMPERIAL BANK, as a Bank
By: /s/ John Harris
--------------------------
Title:
-8-
<PAGE>
EXECUTION COPY
CREDIT AGREEMENT SUPPLEMENT
April 21, 1997
Imperial Bank, as Agent
9920 South La Cienega Boulevard
Suite 1010
Inglewood, California 90301
Re: Credit Agreement Made as of October 10, 1996 by the
Credit Parties Listed Therein and Imperial Bank, as
Agent
Ladies and Gentlemen:
Reference is made to the above-captioned Credit Agreement (said Credit
Agreement, as in effect on the date hereof and as it may hereafter be amended,
modified or supplemented from time to time, herein called the "Credit
Agreement"). Terms defined in or pursuant to the Credit Agreement and not
otherwise defined herein are used herein as therein defined.
Each of the undersigned hereby agrees, as of the date first written above,
to become a Credit Party under the Credit Agreement as if it were an original
party thereto and agrees that each reference in the Credit Agreement to "Credit
Party" shall also mean and be a reference to the undersigned.
Each of the undersigned has attached hereto supplements to all of the
Schedules to the Credit Agreement, and each of the undersigned hereby certifies
that such supplements have been prepared by the undersigned substantially in the
form of such schedules and are accurate and complete as of the date hereof.
Each of the undersigned hereby makes each representation and warranty set
forth in Article V of the Credit Agreement to the same extent as each other
Credit Party and hereby agrees to be bound as a Credit Party to each affirmative
covenant and negative covenant set forth in Articles VI and VII, respectively,
of the Credit Agreement and all other terms and provisions of the Credit
Agreement to the same extent as each other Credit Party.
<PAGE>
THIS LETTER AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA.
EACH OF THE UNDERSIGNED WAIVES ANY RIGHT TO TRIAL BY JURY WITH
REGARD TO ANY ACTION OF ANY TYPE OR NATURE WHATSOEVER UNDER OR
CONCERNING THE CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR
IN ANY WAY RELATED TO THE ADMINISTRATION OR ENFORCEMENT THEREOF.
Very truly yours,
GMS DENTAL GROUP MANAGEMENT OF
SOUTHERN CALIFORNIA, INC.
By: ___________________________
Title:
Address: 22800 Savi Ranch
Parkway, Suite 206
Yorba Linda, CA 92887
GMS DENTAL GROUP MANAGEMENT OF
HAWAII, INC.
By: ___________________________
Title:
Address: 22800 Savi Ranch
Parkway, Suite 206
Yorba Linda, CA 92887
GMS DENTAL GROUP MANAGEMENT OF THE
MOUNTAIN STATES, INC.
By: ___________________________
Title:
Address: 22800 Savi Ranch
Parkway, Suite 206
Yorba Linda, CA 92887
<PAGE>
THIS LETTER AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA.
EACH OF THE UNDERSIGNED WAIVES ANY RIGHT TO TRIAL BY JURY
WITH REGARD TO ANY ACTION OF ANY TYPE OR NATURE WHATSOEVER UNDER
OR CONCERNING THE CREDIT AGREEMENT OR ANY OF THE OTHER LOAN
DOCUMENTS OR IN ANY WAY RELATED TO THE ADMINISTRATION OR
ENFORCEMENT THEREOF.
Very truly yours,
GMS DENTAL GROUP MANAGEMENT OF
SOUTHERN CALIFORNIA, INC.
By: /s/ Grant M. Sadler
---------------------------
Title: Chairman
Address: 22800 Savi Ranch
Parkway, Suite 206
Yorba Linda, CA 92887
GMS DENTAL GROUP MANAGEMENT OF
HAWAII, INC.
By: /s/ Grant M. Sadler
---------------------------
Title: Chairman
Address: 22800 Savi Ranch
Parkway, Suite 206
Yorba Linda, CA 92887
GMS DENTAL GROUP MANAGEMENT OF THE
MOUNTAIN STATES, INC.
By: /s/ Grant M. Sadler
---------------------------
Title: Chairman
Address: 22800 Savi Ranch
Parkway, Suite 206
Yorba Linda, CA 92887
<PAGE>
EXECUTION COPY
SECOND AMENDMENT TO
CREDIT AGREEMENT
This Amendment, dated as of May 1, 1997, is entered into by and among GMS
DENTAL GROUP MANAGEMENT, INC., a Delaware corporation (the "Borrower"), GMS
DENTAL GROUP, INC., a Delaware corporation ("GMS Holding"), GMS DENTAL GROUP
MANAGEMENT OF SOUTHERN CALIFORNIA, INC., a California corporation ("GMS
California"), GMS HAWAII ACQUISITION COMPANY, a Delaware corporation ("GMS
Hawaii Acquisition"), GMS DENTAL GROUP MANAGEMENT OF HAWAII, INC., a Hawaii
corporation ("GMS Hawaii"), and GMS DENTAL GROUP MANAGEMENT OF THE MOUNTAIN
STATES, INC., a Delaware corporation ("GMS Mountain") (each of the Borrower, GMS
Holding, GMS California, GMS Hawaii Acquisition, GMS Hawaii and GMS Mountain
herein called a "Credit Party" and collectively the "Credit Parties"), and the
financial institutions from time to time party hereto (collectively, the "Banks"
and individually, a "Bank"), and IMPERIAL BANK, as agent (the "Agent") for the
Banks.
Recitals
A. The Credit Parties, the Banks and the Agent have entered into the
Credit Agreement, dated as of October 10, 1996, as amended by the First
Amendment to Credit Agreement, dated as of April 21, 1997 (as so amended, the
"Credit Agreement"). Terms defined in the Credit Agreement and not otherwise
defined herein have the same respective meanings when used herein, and the rules
of construction set forth in the Credit Agreement are incorporated herein by
reference.
B. The Credit Parties, the Banks and the Agent have agreed to amend the
Credit Agreement as hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit Agreement is,
effective retroactively as of October 10, 1996, hereby amended as follows:
(a) The definition of "Coverage Ratio" in Section 1.1 of
the Credit Agreement is hereby amended in full to read as follows:
"'Coverage Ratio' means, as of the last day of any fiscal quarter
of GMS Holding, the ratio of (i) EBITDAR for the fiscal quarter ending
on such date to (ii) Fixed Charges as of such date; provided, however,
that EBITDAR as of each such date shall be multiplied by four (4), so
as to represent the four-quarter equivalent of EBITDAR for such
period."
(b) The definition of "EBITDAR" in Section 1.1 of the Credit
Agreement is hereby amended in full to read as follows:
<PAGE>
"'EBITDAR' means, for any fiscal period, for GMS Holding and its
Subsidiaries on a consolidated basis, earnings before Interest
Expense, income taxes, depreciation, amortization and Operating Lease
Rentals; provided, however, that with respect to any fiscal quarter
during which a Permitted Acquisition has been consummated, EBITDAR for
such quarter may be adjusted to reflect EBITDAR applicable to such
Permitted Acquisition for the entire quarter based on its annual run-
rate for such quarter as shown on the financial projections delivered
to and approved by the Agent in connection with such Permitted
Acquisition under Section 6.12(a) hereof."
(c) The definition of "Fixed Charges" in Section 1.1 of
the Credit Agreement is hereby amended in full to read as follows:
"'Fixed Charges' means, for any fiscal quarter and without
duplication, for GMS Holding and its Subsidiaries on a consolidated
basis the sum of (i) Interest Expense and fees paid on, and
amortization of debt discount in respect of, all Indebtedness,
multiplied by four (4) plus (ii) Operating Lease Rentals paid during
such period, multiplied by four (4) plus (iii) the aggregate principal
amount of all current maturities of long term Indebtedness (including
the principal portion of rentals under Capital Leases) obligated to be
paid by GMS Holding and its Subsidiaries.
(d) The definition of "Leverage Ratio" in Section 1.1 of the Credit
Agreement is hereby amended in full to read as follows:
"'Leverage Ratio' means, as of the last day of any fiscal quarter
of GMS Holding, the ratio of (i) the sum of (x) the aggregate
principal amount of Indebtedness (including the principal portion of
rentals under Capital Leases and Permitted Subordinated Indebtedness)
of GMS Holding and its Subsidiaries on a consolidated basis which
matures more than one year from the date of determination plus (y) the
aggregate principal amount of all Indebtedness (including the
principal portion of rentals under Capital Leases) which is scheduled
to be paid by GMS Holding and its Subsidiaries on a consolidated basis
within one year from the date of determination to (ii) the Operating
Cash Flow for the fiscal quarter ending on such date; provided,
however, that Operating Cash Flow as of each such date shall be
multiplied by four (4), so as to represent the four-quarter equivalent
of Operating Cash Flow for such period."
(e) The definition of "Operating Cash Flow" in Section 1.1 of the
Credit Agreement is hereby amended in full to read as follows:
"'Operating Cash Flow' means, for any period, for GMS Holding and
its Subsidiaries (i) net income (before extraordinary gains but after
extraordinary losses) for
<PAGE>
such period plus (ii) Interest Expense, income tax expense,
depreciation and amortization (all to the extent deducted in
determining net income) for such period, all determined on a
consolidated basis in accordance with GAAP; provided, however, that
with respect to any fiscal quarter during which a Permitted
Acquisition has been consummated, Operating Cash Flow for such quarter
may be adjusted to reflect Operating Cash Flow applicable to such
Permitted Acquisition for the entire quarter based on its annual run-
rate for such quarter as shown on the financial projections delivered
to and approved by the Agent in connection with such Permitted
Acquisition under Section 6.12(a) hereof."
(f) Section 6.2(b) of the Credit Agreement is hereby amended to read
in full as follows:
"(b) concurrently with the delivery of the financial
statements referred to in Sections 6.1(a) and 6.1(b), a Compliance
Certificate and a Real Property Certificate each executed by a
Responsible Officer; provided, however, that with respect to any
fiscal quarter during which a Permitted Acquisition has been
consummated, the financial ratios described in the Compliance
Certificate for such fiscal quarter may be adjusted to reflect the
financial ratios applicable to such Permitted Acquisition for the
entire quarter based on its annual run-rate for such quarter as shown
on the financial projections delivered to and approved by the Agent in
connection with such Permitted Acquisition under Section 6.12(a)
hereof;"
(g) Section 6.12 of the Credit Agreement is hereby amended to read in
full as follows:
"6.12 Acquisitions. (a) Prior to consummating any Permitted
Acquisition, the Borrower shall have delivered to the Agent (in form
and detail satisfactory to each Bank and in sufficient copies for each
Bank) a written request for such Permitted Acquisition, together with
the following: (i) At least thirty (30) days prior to the consummation
of such Permitted Acquisition, a description of the substantive terms
and conditions thereof and certified copies of (A) the executed letter
of intent or a memorandum of understanding and (B) the most recent
drafts of the purchaser or acquisition agreement (including all
exhibits attached thereto) relating to such Permitted Acquisition,
together with copies of business plans, financial projections and
budgets; (ii) an officer's certificate, executed by a Responsible
Officer, certifying that immediately before and after giving effect to
such Permitted Acquisition (A) no Default has occurred and is
continuing or will exist and (B) that the Borrower will be in
compliance with each of the financial ratios specified in Section 6.14
hereof, together with a reasonably detailed worksheet setting forth
the calculation of such ratios; and (iii) copies of
<PAGE>
the executed purchase or acquisition agreement, certified by a
Responsible Officer, as soon as such agreement is executed and
delivered by the parties thereto. The Agent and each Bank may accept
or reject any such request in their sole and absolute discretion
within 30 days after receipt thereof. The failure by the Agent or a
Bank to respond to such a request shall be deemed to be a rejection
thereof.
(b) Prior to consummating Capital Expenditures in excess of
$1,000,000 in the aggregate during any fiscal year of the Borrower,
computed on a cumulative consolidated basis, the Borrower shall have
delivered to the Agent (in form and detail satisfactory to each Bank
and in sufficient copies for each Bank) a written request for such
Capital Expenditure, together with the following: (i) At least thirty
(30) days prior to the consummation of such Capital Expenditure, a
description of the substantive terms and conditions thereof, including
a list of items being purchased and the source of funds for such
Capital Expenditure; (ii) an officer's certificate, executed by a
Responsible Officer, certifying that immediately before and after
giving effect to such Capital Expenditure (A) no Default has occurred
and is continuing or will exist and (B) that the GMS Holding and its
Subsidiaries, on a consolidated basis, will be in compliance with each
of the financial ratios specified in Section 6.14 hereof, together
with a reasonably detailed worksheet setting forth the calculation of
such ratios; and (iii) copies of the executed purchase agreement
relating to such Capital Expenditure, certified by a Responsible
Officer, as soon as such agreement is executed and delivered by the
parties thereto. The Agent and each Bank may accept or reject any such
request in their sole and absolute discretion within 30 days after
receipt thereof. The failure by the Agent or a Bank to respond to such
a request shall be deemed to be a rejection thereof."
(h) Section 6.14 of the Credit Agreement is hereby amended to read in
full as follows:
"6.14 Financial Covenants. GMS Holding shall, on a consolidated
basis:
(a) maintain a Current Ratio not less than 1.40 to 1.00 at
all times;
(b) maintain a Leverage Ratio of not more that 3.75 to 1.00
at all times after December 30, 1997;
(c) maintain a Net Worth at all times of not less than the
sum of (A) the Net Worth as of December 31, 1996 minus the sum of (1)
$500,000, (2) the lesser of (y) 100% of net losses incurred by GMS
Holding and its Subsidiaries during a fiscal quarter commencing
January 1, 1997, computed on a cumulative consolidated basis, or
<PAGE>
(z) $650,000 and (3) the lesser of (y) 100% of net losses incurred by
GMS Holding and its Subsidiaries during a fiscal consecutive quarter
commencing April 1, 1997, computed on a cumulative consolidated basis,
or (z) $550,000, (4) the lesser of (y) 100% of net losses incurred by
GMS Holding and its Subsidiaries during a fiscal quarter commencing
July 1, 1997, computed on a cumulative consolidated basis, or (z)
$525,000 and (5) the lesser of (y) 100% of net losses incurred by GMS
Holding and its Subsidiaries during a fiscal quarter commencing
October 1, 1997, computed on a cumulative consolidated basis, or (z)
$450,000, (B) 100% of extraordinary gains arising after the December
31, 1996, computed on a cumulative consolidated basis, (C) 100% of net
proceeds from any sale of common stock of GMS Holding or any of its
Subsidiaries arising after the December 31, 1996, computed on a
cumulative consolidated basis, (D) 100% of any capital stock issued by
GMS Holding or any of its Subsidiaries as consideration in the
Permitted Acquisitions arising after the December 31, 1996, computed
on a cumulative consolidated basis, and (E) 70% of positive net income
of GMS Holding and its Subsidiaries arising after the December 31,
1996, computed on a cumulative consolidated basis; and
<PAGE>
(d) maintain a Coverage Ratio of not less than (A) 0.90 to 1.00
at all times during the fiscal quarter ending December 31, 1997, (B)
1.05 to 1.00 at all times during the fiscal quarter ending March 31,
1998, (C) 1.15 to 1.00 at all times during the fiscal quarter ending
June 30, 1998, (D) 1.20 to 1.00 at all times during the fiscal quarter
ending September 30, 1998 and (E) 1.25 to 1.00 at all times after the
fiscal quarter ended September 30, 1998."
SECTION 3. Reference to and Effect on the Credit Agreement. On and after
the date hereof, each reference in the Credit Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import, and each reference in
the other Loan Documents to the Credit Agreement, shall mean and be a reference
to the Credit Agreement as amended hereby. Except as hereby expressly amended,
the Credit Agreement shall remain in full force and effect, and is hereby
ratified and confirmed in all respects on and as of the date hereof.
SECTION 4. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
by their duly authorized representatives.
GMS DENTAL GROUP MANAGEMENT, INC.
By:
Title:
GMS DENTAL GROUP, INC.
By: Michael T. Fiore
------------------------
Title: C.E.O
GMS DENTAL GROUP MANAGEMENT OF
SOUTHERN CALIFORNIA, INC.
By: Michael T. Fiore
------------------------
Title: C.E.O
GMS HAWAII ACQUISITION COMPANY
By: Michael T. Fiore
------------------------
Title: C.E.O
GMS DENTAL GROUP MANAGEMENT OF
HAWAII, INC.
By: Michael T. Fiore
------------------------
Title: C.E.O
GMS DENTAL GROUP MANAGEMENT OF THE
MOUNTAIN STATES, INC.
By: Michael T. Fiore
------------------------
Title: C.E.O
<PAGE>
IMPERIAL BANK, as Agent
By: /s/ John Harris
------------------------
Title: Sr. Vice President
IMPERIAL BANK, as a Bank
By: /s/ John Harris
-------------------------
Title:
<PAGE>
EXHIBIT 10.49
EXECUTION COPY
THIRD AMENDMENT TO
CREDIT AGREEMENT
This Amendment, dated as of July 23, 1997, is entered into by and among GMS
DENTAL GROUP MANAGEMENT, INC., a Delaware corporation (the "Borrower"), GMS
DENTAL GROUP, INC., a Delaware corporation ("GMS Holding"), GMS DENTAL GROUP
MANAGEMENT OF SOUTHERN CALIFORNIA, INC., a California corporation ("GMS
California"), GMS HAWAII ACQUISITION COMPANY, a Delaware corporation ("GMS
Hawaii Acquisition"), GMS DENTAL GROUP MANAGEMENT OF HAWAII, INC., a Hawaii
corporation ("GMS Hawaii"), and GMS DENTAL GROUP MANAGEMENT OF THE MOUNTAIN
STATES, INC., a Delaware corporation ("GMS Mountain") (each of the Borrower, GMS
Holding, GMS California, GMS Hawaii Acquisition, GMS Hawaii and GMS Mountain
herein called a "Credit Party" and collectively the "Credit Parties"), and the
financial institutions from time to time party hereto (collectively, the "Banks"
and individually, a "Bank"), and IMPERIAL BANK, as agent (the "Agent") for the
Banks.
Recitals
A. The Credit Parties, the Banks and the Agent have entered into the
Credit Agreement, dated as of October 10, 1996, as amended by the First
Amendment to Credit Agreement, dated as of April 21, 1997 and the Second
Amendment to Credit Agreement, dated as of May 1, 1997 (as so amended, the
"Credit Agreement"). Terms defined in the Credit Agreement and not otherwise
defined herein have the same respective meanings when used herein, and the rules
of construction set forth in the Credit Agreement are incorporated herein by
reference.
B. The Credit Parties, the Banks and the Agent have agreed to amend the
Credit Agreement as hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit Agreement is
hereby amended as follows:
(a) Clause (v) in the definition of "Permitted Indebtedness" in
Section 1.1 of the Credit Agreement is hereby amended in full to read as
follows:
<PAGE>
" (v) (A) Permitted Subordinated Indebtedness of GMS
Holding, (B) the Indebtedness of the Borrower evidenced by that
certain promissory note, dated July 23, 1997, in the principal amount
of up to $6,229,174 (the "Fremont Subordinated Indebtedness"), made by
the Borrower in favor of Fremont Dental Group, which Indebtedness is
subordinated to in right to payment to the Obligations hereunder
pursuant to that certain Intercreditor Agreement, dated as of July 23,
1997 (the "Fremont Intercreditor Agreement"), among the Borrower, GMS
Holding, the Agent and Fremont Dental Group and (C) the Guaranty
Obligations of GMS Holding in respect of the Fremont Subordinated
Indebtedness (the "Fremont Guaranty Obligations")."
(b) The following provision shall be added to Section 7.1 of the
Credit Agreement as paragraph (m) thereof:
" (m) Liens securing the Fremont Subordinated Indebtedness and the
Fremont Guaranty Obligations."
SECTION 3. Reference to and Effect on the Credit Agreement. On and after
the date hereof, each reference in the Credit Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import, and each reference in
the other Loan Documents to the Credit Agreement, shall mean and be a reference
to the Credit Agreement as amended hereby. Except as hereby expressly amended,
the Credit Agreement shall remain in full force and effect, and is hereby
ratified and confirmed in all respects on and as of the date hereof.
SECTION 4. Execution in Counterparts. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute one and the same
instrument.
SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
by their duly authorized representatives.
GMS DENTAL GROUP MANAGEMENT, INC.
By: /s/ Michael T. Fiore
---------------------
Title: C.E.O.
GMS DENTAL GROUP, INC.
BY: /s/ Michael T. Fiore
---------------------
Title: C.E.O.
GMS DENTAL GROUP MANAGEMENT OF
SOUTHERN CALIFORNIA, INC.
BY: /s/ Michael T. Fiore
---------------------
Title: C.E.O.
GMS HAWAII ACQUISITION COMPANY
By: /s/ Michael T. Fiore
---------------------
Title: C.E.O.
GMS DENTAL GROUP MANAGEMENT OF
HAWAII, INC.
By: /s/ Michael T. Fiore
---------------------
Title: C.E.O.
GMS DENTAL GROUP MANAGEMENT OF THE
MOUNTAIN STATES, INC.
BY: /s/ Michael T. Fiore
---------------------
Title: C.E.O.
<PAGE>
IMPERIAL BANK, as Agent
By: /s/ John Harris
---------------------------------
Title: Sr. Vice President
IMPERIAL BANK, as Bank
By: /s/ John Harris
---------------------------------
Title: Sr. Vice President
<PAGE>
EXHIBIT 10.50
Support Services Agreement
between
Gentle Dental Service Corporation
and
Arena Dental Corporation
Date: March 31, 1997
D-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
------- ----
<C> <S> <C>
1. Facilities 4
2. Furniture, Fixtures and Equipment 4
3. Administrative Services 5
4. Duties of Group 9
5. Relationship of Parties 10
6. Confidential Information and Trade Secrets 12
7. GDSC's Compensation 13
8. Definitions 13
9. Miscellaneous Authority and Duties of the Parties 14
10. Term and Termination 14
11. Indemnification 15
12. Assignment 16
13. Governing Law 16
14. Waiver 16
15. Amendment 16
16. Entire Agreement 16
17. Notice 16
18. Arbitration 17
19. Miscellaneous Provisions 18
</TABLE>
ANNEX I - SECURITY AGREEMENT
D-2
<PAGE>
SUPPORT SERVICES AGREEMENT
--------------------------
This Agreement is effective as of March 31, 1997 (the "Effective Date") by and
between Gentle Dental Service Corporation, a Washington corporation ("GDSC"),
and Arena Dental Corporation, a California professional corporation, d/b/a Blue
Oak Dental Group, a Dental Office of Dr. Mark Arena ("Group"), and is made with
reference to the following facts:
1. Group is a California professional corporation able to practice
dentistry in and pursuant to the laws of the State of California.
2. 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.
3. Group employs dentists, hygienists, nurses and dental assistants only.
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 GDSC to provide business
support services which will enable Group to concentrate on the development and
management of the professional aspects of its dental practice.
4. Group wishes to lease or utilize certain offices and facilities,
equipment, furnishings and supplies which are owned or leased by GDSC and which
are necessary for Group to operate dental clinics.
5. GDSC has special expertise and experience in the operation and marketing
of dental clinics of the type intended to be operated by Group. GDSC 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.
6. Group wishes to engage GDSC 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.
NOW, THEREFORE, Group hereby exclusively engages GDSC, and GDSC 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:
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<PAGE>
1. Facilities.
During the term of this Agreement, and all renewals and extensions hereof, GDSC
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. GDSC 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 GDSC, and upon termination of
this Agreement, Group shall immediately surrender the Clinics to GDSC. Group
shall comply with all reasonable requirements concerning use of Clinics as may
be established by GDSC from time to time. Without limiting the generality of
the foregoing, Group shall not take or fail to take any action that would cause
a breach or default under the terms of any lease between GDSC and any third
party with respect to any Clinic.
2. Furniture, Fixtures and Equipment.
During the term of this Agreement, and all renewals and extensions hereof, GDSC
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:
1. Title to all such furniture fixtures, furnishings, and equipment
shall remain in GDSC and upon termination of this Agreement, Group
shall immediately return and surrender all such furniture, fixtures,
furnishings, and equipment to GDSC 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 GDSC.
2. GDSC 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
GDSC of any and all needed repairs and equipment failures.
3. Administrative Services.
D-4
<PAGE>
During the term of this Agreement, and all renewals and extensions hereof, Group
hereby engages GDSC as the exclusive provider of all non-dental functions and
non-dentist services relating to the operation of the Clinics; and GDSC 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:
1. Bookkeeping and Accounts.
GDSC 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 GDSC with a complete copy of all such
documents, records, and papers at Group's expense upon termination of this
Agreement.
2. Contract Administration.
GDSC 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.
3. Non-dentist Personnel.
GDSC 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:
D-5
<PAGE>
1. GDSC 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 GDSC for the proper and
efficient operation of the Clinics;
2. GDSC 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
3. GDSC 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.
GDSC agrees to provide staffing as reasonably required to permit operation
of the Clinics during extended hours of operation.
4. Supplies.
GDSC 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.
5. Security and Maintenance.
GDSC 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, GDSC shall furnish to or obtain for Group all
laundry, linens, uniforms, printing, stationery,
D-6
<PAGE>
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.
6. Dentist Recruiting.
GDSC 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.
7. Insurance.
GDSC 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 (with Group as a named insured) which GDSC 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. GDSC
shall assist Group in obtaining dental malpractice insurance for Group and
its dentist employees.
8. Billing and Collection
In order to relieve Group of the administrative burden of handling the
billing and collection of sums due for the delivery of dental services, GDSC
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 hereby appoints GDSC as its true and
lawful agent for the term of this Agreement in Group's name and on its
behalf (i) to bill for services rendered by Group; (ii) to collect accounts
receivable generated by such billings; (iii) to receive payments for
services rendered by Group; and (iv) to deposit in the Accounts described in
subparagraph i. below any amounts received in payment of services rendered
by Group. Group agrees that it will keep and provide to GDSC 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 GDSC 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
D-7
<PAGE>
the sole discretion of GDSC (but subject to all applicable governmental
regulations and the terms and conditions of applicable provider agreements)
and that GDSC does not guarantee the extent to which any charges billed will
be collected. Group may, on its own, continue collection efforts with
respect to any accounts which GDSC has determined to be uncollectible.
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 GDSC pertaining to such fees, charges, billings, and
collections.
9. Bank Accounts and Disbursements.
During the term of this Agreement, GDSC shall establish and maintain bank
accounts in the name of Group (the "Accounts") for the deposit of all sums
received by Group from the provision of dental services or otherwise. Group
hereby authorizes GDSC to deposit checks and other funds received by Group
into the Accounts. GDSC and its authorized officers shall at all times
during the term of this Agreement have authority to sign checks and stop
payment on checks drawn on the Accounts. GDSC is hereby expressly authorized
to, and shall, disburse from the Accounts sums for the payment of Group's
expenses as described in Section 4, GDSC's compensation as described in
Section 7, and all other costs, expenses and disbursements which are
required or authorized by this Agreement.
10. Market Research and Activities.
GDSC shall conduct market research with respect to rates, charges,
competitive conditions, competition and business opportunities for GDSC and
Group. GDSC shall compile such information and provide marketing reports and
analyses to Group. Subject to prior approval of Group, GDSC shall develop
and distribute marketing materials (such as yellow page advertisements) that
communicate a philosophy of high quality customer-oriented dental care, as
GDSC determines to be appropriate. GDSC shall assist Group in improving
patient satisfaction in order to maintain existing patients, expand services
to existing patients and generate new referrals from existing patients. In
providing such marketing services, GDSC will act solely in its capacity as
administrator for Group. At no time shall GDSC hold itself out as providing
dental services on behalf of 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.
11. Contract Negotiations.
GDSC 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
D-8
<PAGE>
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.
12. Management and Planning Reports.
GDSC 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. GDSC 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.
4. Duties of Group
1. 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.
GDSC 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.
2. 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.
3. 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
D-9
<PAGE>
for licensed personnel in accordance with all legal requirements and good
professional practice.
4. 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. GDSC shall
provide payroll processing and accounts payable services as provided in this
Agreement.
5. 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
subsection 4.f.
6. 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.
5. Relationship of Parties.
The President of Group, or another licensed dentist designated by Group, shall
act as Group's liaison to GDSC. 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 GDSC 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 GDSC, Group
shall take all reasonable steps to promptly refer the matter for decision to
Group's directors or shareholders, as appropriate.
Group designates GDSC's 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
D-10
<PAGE>
behalf of Group, including, but not limited to health plan agreements and
employment agreements. As Attorney-In-Fact, GDSC's 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. GDSC 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
GDSC. GDSC 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 GDSC 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 Group's Personnel are not employees of GDSC, GDSC 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 indemnify and
hold harmless GDSC 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 GDSC 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. GDSC 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.
D-11
<PAGE>
Group shall not solicit, employ or contract with any employee of GDSC or any
entity or person that employs or contracts with any employee of GDSC, for a
period of two years after any such employee ceases to be employed by GDSC.
Should Group breach this specific provision, Group acknowledges that the damages
to GDSC would be difficult to ascertain, and shall as reasonable compensation
and liquidated damages promptly pay GDSC the sum of $40,000.
6. 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 GDSC 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 GDSC. Consequently, Group acknowledges and agrees that GDSC has a
proprietary interest in all such information and that all such information
constitutes confidential and proprietary information and trade secrets of GDSC.
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 GDSC, at Group's
expense, upon the termination of this Agreement.
Group further acknowledges and agrees that GDSC is entitled to prevent its
competitors from obtaining and utilizing its trade secrets and confidential
information. Therefore, Group agrees to hold GDSC's 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 affiliated with GDSC
or Group, without the prior written consent of GDSC. 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 GDSC or Group any confidential or
proprietary information or trade secret information obtained by Group from GDSC,
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 GDSC's 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 GDSC.
Group acknowledges and agrees that a breach of this Section 6 will result in
irreparable harm to GDSC which cannot be reasonably or adequately compensated in
damages, and therefore GDSC 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 GDSC may be entitled.
7. GDSC's Compensation.
For its services hereunder, including lease of all facilities, furniture,
fixtures and equipment at the Clinics, provision of all employees of GDSC who
perform services at or for the Clinics, and
D-12
<PAGE>
provision of insurance, supplies and management support services contemplated
hereunder, Group shall pay GDSC the following service fee:
during the remainder of 1997, *% of Net Revenues,
during 1998, *% of Net Revenues,
during 1999 and for the remainder of the term of this Agreement and
any renewal term, *% of Net Revenues.
The service fee can be adjusted by mutual agreement from time to time. Monthly
accruals of service fees shall be made based on estimated Net Revenues year-to-
date; final adjustment of the fee shall be made based on the final Net Revenue
for the calendar year determined after the closing of Group's books for the
year. GDSC shall be entitled to collect the accrued service fees from Group by
deducting from Group's cash collections on a daily basis that percentage of such
collections equal to the current service fee percentage according to the
schedule set forth above. Such deductions shall be made from funds collected in
the Accounts as provided in subsection 4.i. above.
To secure payment of all amounts due to GDSC hereunder, Group hereby grants GDSC
a security interest in all of Group's accounts receivable and proceeds
therefrom. Group will execute a Security Agreement in the form attached hereto
as Annex I and such financing statements and other documents as GDSC may
reasonably request from time to time to evidence and perfect such security
interest.
8. 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 GDSC'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 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 GDSC.
9. Miscellaneous Authority and Duties of the Parties.
D-13
<PAGE>
GDSC is hereby exclusively authorized by Group to perform all services required
of GDSC pursuant to the terms of this Agreement as GDSC deems reasonable and
appropriate in order to meet the day-to-day requirements of Group. GDSC may
subcontract with other persons or entities to perform any part or all of the
services required of GDSC 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 GDSC maintaining the
confidentiality of patient records and Group's confidential information, Group
shall provide to GDSC full and complete access to Group's premises, and to
Group's charts, Books and Records, in order that GDSC can perform its functions
hereunder.
During the term of this Agreement, at Group's direction GDSC 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. GDSC 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 GDSC as described in this
Agreement.
Notwithstanding any other provisions contained herein, GDSC 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 GDSC 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 GDSC.
10. Term and Termination.
1. 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 prior to the end of
the initial term or any renewal term either party gives notice of
termination.
2. This Agreement may be terminated by any of the following:
1. 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
D-14
<PAGE>
party no later than sixty (60) 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.
2. GDSC may terminate this Agreement upon one (1) day's notice in
the event of the dissolution or liquidation of the Group.
3. 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.
3. Upon any termination of this Agreement, it is understood and agreed
that the right of Group to occupy the Clinics and to the use and
possession of the furniture, fixtures, furnishings, equipment and
leasehold improvements shall terminate, and Group shall immediately
vacate and surrender possession to GDSC 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.
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. After termination of
this Agreement for any reason, GDSC shall be entitled to recover from Group
(out of the Accounts or otherwise) all fees and other amounts owed to GDSC
that had accrued but were unpaid as of the date of termination, and GDSC's
signing authority over the Accounts shall continue until all such amounts are
paid.
11. 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
D-15
<PAGE>
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.
12. 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 GDSC. 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 GDSC. Subject to the foregoing, this Agreement shall
be binding upon and inure to the benefit of the parties, their heirs, executors
and assigns.
13. Governing Law.
This Agreement shall be governed by and construed under the laws of the State of
California.
14. 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.
15. 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.
16. 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.
17. 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:
D-16
<PAGE>
(i) If to GDSC to:
Gentle Dental Service Corporation
900 Washington Street
Vancouver, WA 98660
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:
Arena Dental Corporation
15 Sierra Gate Plaza
Roseville, CA 95678
Attention: President
18. 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 for 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 California law to the extent not inconsistent with the Federal
Arbitration Act.
D-17
<PAGE>
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 18, the parties shall keep all matters relating to
any arbitration confidential, including the existence and subject of the
arbitration.
19. Miscellaneous Provisions.
1. 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 18.
2. 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.
3. 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.
4. 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.
5. 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.
D-18
<PAGE>
6. 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.
7. Attorneys' Fees; Prejudgment Interest.
If the services of an attorney are required by any party to secure the
performance of this Agreement or otherwise upon the breach or default of
another party to this Agreement, or if any judicial remedy or arbitration is
necessary to enforce or interpret any provision of this Agreement or the
rights and duties of any person in relation thereto, the prevailing party
shall be entitled to reasonable attorneys' fees, costs and other expenses, in
addition to any other relief to which such party may be entitled. Any award
of damages following judicial remedy or arbitration as a result of the breach
of this Agreement or any of its provisions shall include an award of
prejudgment interest from the date of the breach at the maximum amount of
interest allowed by law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as of the Effective Date.
GENTLE DENTAL SERVICE CORPORATION ARENA DENTAL CORPORATION
Dany Y. Tse Mark E. Arena
President President
D-19
<PAGE>
EXHIBIT 10.51
"THIS NOTE IS EXPRESSLY SUBJECT TO AND CONDITIONED UPON THE TERMS, PROVISIONS
AND CONDITIONS SET FORTH IN THAT CERTAIN INTERCREDITOR AGREEMENT DATED AS OF THE
DATE HEREOF. ANY TRANSFEREE OF THIS NOTE SHALL BE BOUND BY ALL OF THE TERMS OF
THE INTERCREDITOR AGREEMENT."
GMS DENTAL GROUP MANAGEMENT, INC.
Promissory Note
---------------
$6,229,174 San Francisco, California
July 24, 1997
GMS Dental Group Management, Inc., a Delaware corporation (the "Company"),
for value received, hereby promises to pay to Fremont Dental Group, a California
general partnership (the "Holder") or order, the principal amount of Six Million
Two Hundred Twenty-Nine Thousand One Hundred Seventy-Four Dollars ($6,229,174),
or such lesser amount as may be due hereunder in accordance with the following
paragraph, without interest thereon. Payment shall be made in lawful money of
the United States of America at the Holder's principal place of business or at
such other place in the United States as Holder shall have designated to the
Company in writing.
Payment of the principal amount of this Note shall be made as follows: (i)
equal monthly installments of Fourteen Thousand One Hundred Dollars ($14,100)
for a period of sixty (60) consecutive months, with the first such installment
due on August 1, 1997 and the final such installment due July 1, 2002, (ii) a
lump sum payment in the amount of Five Hundred Thousand Dollars ($500,000) due
and payable on July 24, 1999, (iii) a lump sum payment in the amount of Two
Million Eighty-Three Thousand One Hundred Seventy-Four Dollars ($2,083,174) due
and payable on July 24, 2002 and (iv) a lump sum payment in the amount of Two
Million Eight Hundred Thousand Dollars ($2,800,000), or such lesser amount which
may become due and payable under and in accordance with that certain Earn-Out
Agreement (the "Earn-Out Agreement") of even date herewith, which amount shall
be due and payable on October 15, 2002 or such earlier date as may be set forth
in the Earn-Out Agreement. Any payment coming due hereunder on a Saturday,
Sunday or legal holiday shall be due on the next following business day.
Unless otherwise defined herein, capitalized terms shall have the meaning
as in that certain Asset Purchase Agreement (the "Asset Purchase Agreement") of
even date herewith by and among the Company, Holder and GMS Dental Group, Inc.,
a Delaware corporation (hereinafter "Guarantor").
This Note hereby incorporates by reference and is subject to the terms and
conditions contained in that certain Intercreditor Agreement of even date
herewith, as amended from time to time (the "Intercreditor Agreement"), among
the Company, Guarantor, Holder and Imperial Bank. In the event of a conflict
between the provisions of the Intercreditor Agreement and this Note, the
provisions of the Intercreditor Agreement shall prevail. This Note is secured by
that certain Security Agreement (the "Security Agreement") entered into by the
Company and
<PAGE>
Guarantor in favor of Holder of even date herewith, which Security Agreement is
likewise subject to the terms and conditions contained in the Intercreditor
Agreement.
The Company's obligation to make payments under this Note is guaranteed by
GMS Dental Group, Inc., a Delaware corporation (the "Guarantor") under and in
accordance with that certain Guaranty of even date herewith by and between the
Holder and Guarantor, which Guaranty is likewise subject to the terms and
conditions contained in the Intercreditor Agreement.
If any of the events specified below (each, an "Event of Default") shall
occur, the Holder of this Note may, so long as such condition exists, declare
the entire principal amount immediately due and payable, by notice in writing to
the Company:
(i) Default in the payment of any amount of this Note when due and
payable if such default is not cured by the Company within ten (10) days after
the Holder has given the Company written notice of such default;
(ii) The institution by the Company or the Guarantor (as the case
may be) of proceedings to be adjudicated as bankrupt or insolvent, or the
consent by it to institution of bankruptcy or insolvency proceedings against it
or the filing by it of a petition or answer or consent seeking reorganization or
release under the federal Bankruptcy Act, or any other applicable federal or
state law, or the consent by it to the filing of any such petition or the
appointment of a receiver, liquidator, assignee, trustee, or other similar
official, of the Company or the Guarantor (as the case may be), or of any
substantial part of its property, or the making by it of an assignment for the
benefit of creditors, or the taking of corporate action by the Company or the
Guarantor (as the case may be) in furtherance of such action;
(iii) If, within sixty (60) days after the commencement of an action
against the Company or the Guarantor (and service of process in connection
therewith on the Company or the Guarantor (as the case may be)) seeking any
bankruptcy, insolvency, reorganization, liquidation, dissolution or similar
relief under any present or future statute, law or regulation, such action shall
not have been resolved in favor of the Company or the Guarantor (as the case may
be) or all orders or proceedings thereunder affecting the operations or the
business of the Company or the Guarantor (as the case may be) stayed, or if the
stay of any such order or proceeding shall thereafter be set aside, or if,
within sixty (60) days after the appointment without the consent or acquiescence
of the Company or the Guarantor (as the case may be) of any trustee, receiver or
liquidator of the Company or the Guarantor (as the case may be) or of all or any
substantial part of the properties of the Company or the Guarantor (as the case
may be), such appointment shall not have been vacated;
(iv) Any declared default of the Company or the Guarantor (as the
case may be) under any senior line of indebtedness from Imperial Bank or a
similar institutional lender (the "Senior Indebtedness") that gives the holder
thereof the right to accelerate such Senior Indebtedness, and such Senior
Indebtedness is in fact accelerated by such holder;
(v) If the Company or the Guarantor (as the case may be) fails to
maintain its corporate existence or takes any steps towards winding up its
affairs or dissolution;
2
<PAGE>
(vi) If the Company sells, assigns or otherwise disposes of or
transfers greater than 50% of the value of its assets, whether pursuant to one
transaction or a series of transactions, unless prior to such disposal or
transfer the transferee has agreed to become jointly and severally liable with
the Company under this Note and the Earn-Out Agreement;
(vii) If the Company or the Guarantor (as the case may be)
consolidates with, or merges into or with, or enters into any other similar
transaction unless the Company or the Guarantor (as the case may be) is the
surviving corporation, and has expressly ratified in writing the obligations of
the Company or the Guarantor (as the case may be) under this Note, the Earn-Out
Agreement and the Guaranty, as applicable;
(viii) If the Guarantor ceases to own, directly or indirectly through
one or more wholly-owned subsidiaries, 100% of the outstanding capital stock of
the Company;
(ix) If the Company or the Guarantor (as the case may be) incurs, or
becomes a guarantor of, any indebtedness arising out of an acquisition or series
of acquisitions by the Company or Guarantor of dental groups or other similar
professional entities where the material terms of such indebtedness, including,
without limitation, any standstill or subordination provision, when taken as a
whole, are more favorable to the acquisition creditor than those set forth in
this Note, the Intercreditor Agreement and the Security Agreement (it being
acknowledged, however, that any such indebtedness which does not contain
standstill periods (during which remedies and rights may not be exercised) at
least as long as the duration of the standstill periods applicable to Holder set
forth in the Intercreditor Agreement, shall be deemed to more favorable, when
taken as a whole); or
(x) In the event (A) of any default in any material respect by
Guarantor or Company under the Guaranty or the Security Agreement if such
default is not cured within thirty (30) days after written notice thereof from
the Holder (or such longer period of time as may be reasonably necessary to cure
such default so long as (i) the Guarantor or the Company (as the case may be)
diligently commences and pursues such cure and (ii) the extension of such cure
periods does not have a material adverse effect on Holder) or (B) that any of
the representations or warranties of the Guarantor or the Company made in
Guaranty or Security Agreement proves to have been false or misleading in any
material respect when made, unless the Guarantor or company, as the case may be,
remedies the same to the reasonable satisfaction of the Holder within thirty
(30) days of written notice of the same from the Holder (or such longer period
of time as may be reasonably necessary to cure the same so long as (i) the
Guarantor or the Company, as the case may be, diligently commences and pursues
such cure and (ii) the extension of such cure period does not have a material
adverse effect on Holder).
The Company acknowledges and agrees that its obligations under this Note
are absolute, unconditional and irrevocable, and the company shall have no
offset or other similar rights under this Note in any circumstances, including,
without limitation, an early termination of the Management Agreement for any
reason, except that the Company may offset against amounts coming due hereunder
------ ----
any amounts which are finally determined to be due and payable (and which are
not timely paid) by Holder to the Company pursuant to Section 8.1 of the Asset
Purchase Agreement, in accordance with the provisions of Article 8 of the Asset
Purchase Agreement.
<PAGE>
Notwithstanding the preceding paragraph, in the event that the Company
asserts a bona fide claim pursuant to Section 8.1 of the Asset Purchase
Agreement (a "Claim"), then, pending the final determination of the Company's
rights under Article 8 of the Asset Purchase Agreement in respect of such Claim,
the Company shall be entitled to withhold from amounts coming due under this
Note an aggregate amount up to the amount of any such Claim; provided that as a
condition to such withholding, the Company shall establish a joint bank account
(the "Separate Account") in the name of the Company and the Holder (which
account shall require signatures of representatives of both the Holder and the
Company for any withdrawals) and shall deposit all such withheld amounts
("Disputed Funds") into such account. The Disputed Funds shall be held in the
Separate Account until the Claim is finally settled. Holder shall take all
reasonable steps requested by the Company to facilitate the creation of the
Separate Account and the depositing therein of the Disputed Funds.
In the event the Company and/or its affiliates desire to incur an aggregate
principal amount of Senior Liabilities (as defined in the Intercreditor
Agreement) at any time in an amount exceeding Twelve Million Dollars
($12,000,000) (such aggregate desired amount, the "Desired Senior Liabilities
Amount"), then, as a condition thereto, the Company shall first provide written
notice (an "Increase Notice") to the Holder (along with financial statements of
the Company certified by an officer of the Company) evidencing in reasonable
detail that the Guarantor's Leverage Ratio (as defined below) for each of its
two (2) fiscal quarters immediately preceding the date of such notice was not
greater than 3.75 to 1. Upon receipt of an Increase Notice from Company, Holder
shall within five (5) business days provide a written notice to Company, with a
copy to the Agent (as defined in the Intercreditor Agreement) either (i)
confirming Holder's consent and agreement to the information contained in
Company's Increase Notice or (ii) explaining in reasonable detail any
disagreement with Company's Increase Notice. If Holder fails to so respond to an
Increase Notice within such five (5) business days, Holder shall be deemed to
have agreed to the increase in Senior Liabilities up to the Desired Senior
Liabilities Amount as described in the Increase Notice. For purposes hereof, the
Guarantor's Leverage Ratio shall be determined by taking a fraction (i) the
numerator of which equals the Desired Senior Liabilities Amount and (ii) the
denominator of which equals the earnings of the Guarantor and its subsidiaries
taken on a consolidated basis before accounting for interest, taxes,
depreciation and amortization (EBIDTA), determined on an annualized basis and
otherwise in accordance with GAAP. The Company shall be deemed to have committed
an Event of Default hereunder if the Company causes or permits the Senior
Liabilities to be so increased without first providing an Increase Notice and
obtaining prior approval of Holder as required hereunder.
For so long as amounts remain outstanding under this Note the Company will
provide the Holder with (i) unaudited quarterly financial statements of the
Guarantor within 60 days following the close of each of the Guarantor's fiscal
quarters and (ii) audited financial statements of the Guarantor within 120 days
following the close of the Guarantor's fiscal year.
At the end of each quarterly period during the term of this Note, an
appropriate officer of the Company shall send written notice to the Holder
certifying that no Event of Default exists under either this Note or the
outstanding Senior Indebtedness, unless such default exists, in which case the
Company shall follow the default notice provisions in this Note and the
Intercreditor Agreement.
4
<PAGE>
The Company reserves the right, subject to the prior written consent of
Imperial Bank, to prepay this Note, in whole or in part at any time or from time
to time without penalty or premium. Any prepayments shall be credited first to
accrued but unpaid interest and then to the latest maturity or maturities of
principal remaining unpaid. In the event of prepayment in part, a new note shall
be issued representing the unpaid amount.
Any portion of the principal amount of this Note which is paid before its
due date (whether by optional prepayment, acceleration or otherwise) shall be
discounted by computing the present value, as of the date of actual payment, and
using a discount rate of 8% per annum, compounded monthly, and based on the
maturity date of the amount prepaid.
If any payment required hereunder is not made when due, and if action is
instituted on this Note, the Company agrees to pay the Holder any and all costs
and expenses incurred in connection with the enforcement or collection of this
Note, including, without limitation, all reasonable attorneys' fees and
disbursements and court costs. Additionally, any portion of the principal amount
hereof not paid on or before the date due (whether at maturity, upon
acceleration or otherwise) shall accrue interest following the date due at the
lesser of (i) the "reference rate" announced from time to time by Bank of
America NT&SA plus four percent (4%) or (ii) the maximum rate permitted by law,
which interest shall be payable on demand.
Any notice required or permitted hereunder shall be given in the manner
provided in the Intercreditor Agreement.
This Note may be assigned by Holder at any time.
5
<PAGE>
This Note may be assigned by the Holder at any time.
GMS DENTAL GROUP MANAGEMENT, FREMONT DENTAL GROUP, a California
INC., a Delaware corporation general partnership
By: /s/ MICHAEL THOMAS FIORE By: /s/ JOHN MAGUIRE as attorney-in-fact
------------------------ ---------------------------------------------
Michael T. Fiore Joseph Checchio, Jr., D.D.S., Partner
President and Chief
Executive Officer By: /s/ ALEXANDER GONZALES
---------------------------------------------
Alexander Gonzales, D.D.S., Partner
By: /s/ JOHN MAGUIRE as attorney-in-fact
---------------------------------------------
Frederick Johnston, D.D.S., Partner
By: /s/ JOHN MAGUIRE
---------------------------------------------
John Maguire, D.D.S., Partner
<PAGE>
EXHIBIT 10.52
EXECUTION COPY
===============================================================================
GUARANTY
by
GMS DENTAL GROUP, INC.
in favor of
FREMONT DENTAL GROUP
July 24, 1997
===============================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I GUARANTY....................................................... 1
1.1 Guaranteed Obligations........................................... 1
1.2 Expenses......................................................... 2
1.3 Guaranty of Payment.............................................. 2
1.4 Obligations Several.............................................. 2
ARTICLE II GUARANTY ABSOLUTE............................................. 2
ARTICLE III WAIVERS...................................................... 3
3.1 Waivers.......................................................... 3
3.2 Waiver of Defense to Deficiency Judgment......................... 4
ARTICLE IV WAIVER OF SUBROGATION AND CONTRIBUTION........................ 4
ARTICLE V MISCELLANEOUS.................................................. 5
5.1 Representation and Covenant as to Ownership of Capital Securities 5
5.2 Amendments, Etc. ................................................ 5
5.3 Addresses for Notices............................................ 5
5.4 No Waiver; Remedies.............................................. 5
5.5 Right of Setoff.................................................. 5
5.6 Continuing Guaranty, Assignments................................. 6
5.7 Governing Law and Consent to Jurisdiction........................ 6
5.8 Counterparts..................................................... 6
5.9 Headings......................................................... 6
5.10 Security Agreement.............................................. 7
5.11 Waiver of Jury Trial............................................ 7
</TABLE>
-i-
<PAGE>
GUARANTY
--------
THIS AGREEMENT IS EXPRESSLY SUBJECT TO AND CONDITIONED UPON THE TERMS,
PROVISIONS AND CONDITIONS SET FORTH IN THAT CERTAIN INTERCREDITOR AGREEMENT
DATED AS OF THE DATE HEREOF. ANY TRANSFEREE OF THIS AGREEMENT SHALL BE BOUND BY
ALL OF THE TERMS OF SUCH INTERCREDITOR AGREEMENT.
This Guaranty, dated as of July 24, 1997, is made by GMS DENTAL GROUP, INC.,
a Delaware corporation ("GMS Holding" or the "Guarantor") in favor of FREMONT
----------- ---------
DENTAL GROUP, a California general partnership ("Fremont"), in its capacity
-------
as beneficiary of this Guaranty (together with its successors and permitted
assigns, including, without limitation, the successors and assigns referred to
in Section 5.6 hereof, individually and collectively, the "Beneficiary").
-----------
RECITALS
A. GMS Dental Group Management, Inc., a Delaware corporation (the "Debtor"),
------
is a wholly-owned subsidiary of GMS Holding.
B. The Debtor and GMS Holding are entering into that certain Asset Purchase
Agreement, dated as of the date hereof (the "Asset Purchase Agreement"), with
------------------------
Fremont pursuant to which Debtor is purchasing from Fremont, and Fremont is
selling, transferring, assigning, conveying and delivering to Debtor, all of
Fremont's right, title and interest in and to the Purchased Assets. Capitalized
terms defined in the Asset Purchase Agreement and not otherwise defined herein
have the same respective meanings when used herein.
C. In order to induce Fremont to enter into, and as conditions precedent to
the consummation of, the Asset Purchase Agreement and the transactions
contemplated thereunder, the Guarantor is executing and delivering this Guaranty
to the Beneficiary. The Guarantor acknowledges that it and the Debtor constitute
a common enterprise and that the Guarantor will benefit, directly and
indirectly, from the consummation of the transactions contemplated under the
Asset Purchase Agreement, the Note, the Earn-Out Agreement, the Security
Agreement and this Guaranty (collectively, the "Operative Documents").
-------------------
Accordingly, the Guarantor hereby agrees with the Beneficiary for its benefit as
set forth below.
ARTICLE I
GUARANTY
1.1 Guaranteed Obligations. The Guarantor hereby absolutely, irrevocably and
----------------------
unconditionally guarantees the punctual payment when due, whether at stated
maturity, by acceleration or otherwise, of all obligations of the Debtor now or
hereafter existing under, in respect of or in connection with each Operative
Document, including, without limitation, any
<PAGE>
extensions, modifications, substitutions, amendments and renewals thereof,
whether for principal, interest, fees, expenses, indemnification or otherwise
(all of such obligations hereby guaranteed by any Guarantor herein collectively
called the "Guaranteed Obligations").
----------------------
1.2 Expenses. The Guarantor agrees to pay, in addition, any and all
--------
expenses (including, without limitation, reasonable counsel fees and expenses)
incurred by the Beneficiary in enforcing any rights under this Guaranty with
respect to the Guarantor.
1.3 Guaranty of Payment. Without limiting the generality of the foregoing,
-------------------
this Guaranty guarantees, to the extent provided herein, the payment of all
amounts that constitute part of the Guaranteed Obligations and would be owed by
the Debtor to the Beneficiary under any Operative Document but for the fact that
they are unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Debtor. This is a guaranty of
payment and not of collection.
1.4 Obligations Several. The obligations of the Guarantor under this
-------------------
Guaranty are several and independent of the Guaranteed Obligations, and a
separate action or actions may be brought and prosecuted against the Guarantor
to enforce this Guaranty, irrespective of whether any action is brought against
the Debtor or whether the Debtor is joined in any such action or actions.
ARTICLE II
GUARANTY ABSOLUTE
The Guarantor guarantees that the Guaranteed Obligations will be paid
strictly in accordance with the terms of the Operative Documents, regardless of
any requirement of law now or hereafter in effect in any jurisdiction affecting
any of such terms or the rights of the Beneficiary with respect thereto. The
liability of the Guarantor under this Guaranty shall be absolute, irrevocable,
and unconditional, irrespective of the following:
(a) any lack of validity or enforceability of, or any release or
discharge of the Debtor from liability under any Operative Document;
(b) any change in the time, manner or place of payment of, or in any
other term of, any or all of the Guaranteed Obligations or any other amendment
or waiver of, or any consent to departure from, any Operative Document;
(c) any taking, subordination, compromise, exchange, release,
nonperfection or liquidation of any collateral, or any release, amendment or
waiver of, or consent to departure from, any other guaranty, for any or all of
the Guaranteed Obligations;
(d) any manner of application of collateral, or proceeds thereof, to
any or all of the Guaranteed Obligations; or any manner of sale or other
disposition of any collateral or any other assets of the Debtor or the
Guarantor;
-2-
<PAGE>
(e) any change, restructuring or termination of the corporate structure or
existence of the Debtor, or any corresponding restructure of the Guaranteed
Obligations, or any other restructure of the Guaranteed Obligations or any
portion thereof;
(f) any exercise or nonexercise by the Beneficiary of any right or
privilege under this Guaranty or any of the other Operative Documents;
(g) any bankruptcy, insolvency, reorganization, composition, adjustment,
dissolution, liquidation or other like proceeding relating to the Guarantor,
the Debtor or any other guarantor of the Guaranteed Obligations, or any action
taken with respect to this Guaranty by any trustee, receiver or court in any
such proceeding, whether or not the Guarantor has had notice or knowledge of any
of the foregoing;
(h) any assignment or other transfer, in whole or in part, of this
Guaranty or any of the other Operative Documents (including, without limitation,
as referred to in Section 5.6 hereof);
(i) any acceptance of partial performance of the Guaranteed Obligations;
or
(j) any other circumstance (including, without limitation, any statute of
limitations) that might otherwise constitute a defense available to, or a
discharge of, the Debtor or any guarantor of the Guaranteed Obligations.
This Guaranty shall continue to be effective or be reinstated, as the case may
be, if at any time any payment of any of the Guaranteed Obligations is rescinded
or must otherwise be returned by the Beneficiary or other Person (as hereinafter
defined) upon the insolvency, bankruptcy or reorganization of the Debtor, the
Guarantor or otherwise, all as though such payment had not been made. The term
"Person" shall mean any individual, partnership, corporation, trust,
------
unincorporated association, limited liability company or other entity; and,
collectively, "Persons".
-------
ARTICLE III
WAIVERS
3.1 Waivers. The Guarantor irrevocably waives the following, to the
extent permitted by applicable law:
(a) promptness, diligence, notice of acceptance and any other notice
with respect to any of the Guaranteed Obligations or this Guaranty;
(b) any requirement that the Beneficiary or any other Person protect,
secure, perfect or insure any Lien (as hereinafter defined) or any property
subject thereto or exhaust any right or take any action against the Debtor, any
other Person or any collateral;
(c) any defense based upon an election of remedies by the Beneficiary
that in any manner impairs, reduces, releases or otherwise adversely affects
the Guarantor's subrogation,
-3-
<PAGE>
contribution or reimbursement rights or other rights to proceed against the
Debtor, any other Person or any collateral, including, without limitation, any
election to proceed by judicial or nonjudicial foreclosure of any Lien, whether
on real property or personal property, or by deed in lieu thereof, whether or
not every aspect of any foreclosure sale is commercially reasonable (including,
without limitation, any defense, right or benefit based on or arising out of any
of California Code of Civil Procedure Sections 580a, 580b, 580d and 726);
(d) any duty on the part of the Beneficiary to disclose to the
Guarantor any matter, fact or thing relating to the business, operation or
condition (including, without limitation, the financial condition) of the Debtor
or its assets now known or hereafter known by the Beneficiary; and
(e) without limiting the generality of the foregoing or any other
provision hereof, any rights and benefits that might otherwise be available to
the Guarantor under California Civil Code Section 2809, 2810, 2815, 2819, 2839,
2845, 2848, 2849, 2850, 2899 or 3433.
The term "Lien" on any asset shall mean any mortgage, deed of trust, lien,
----
pledge, charge, assignment, judgment, security interest, restrictive covenant or
easement or encumbrance of any kind in respect of such asset, whether or not
filed, recorded or otherwise perfected or effective under applicable law, as
well as the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement relating to such asset.
3.2 Waiver of Defense to Deficiency Judgment. Without limiting the
----------------------------------------
generality of any other provision of this Guaranty, the Guarantor understands
that, if the Beneficiary conducts a nonjudicial foreclosure sale under any deed
of trust or mortgage encumbering any real property owned by the Debtor and which
secures the Guaranteed Obligations, the Guarantor would (but for the waivers set
forth herein) have a defense to a deficiency judgment under this Guaranty
because the nonjudicial foreclosure would eliminate the Guarantor's right of
subrogation. This defense arises, in part, because California Code of Civil
Procedure Section 580d provides that a nonjudicial foreclosure sale under a deed
of trust eliminates the right of the secured party to seek a deficiency judgment
on the obligation secured by that deed of trust. In addition to the other
waivers set forth in this Guaranty, the Guarantor specifically waives this
defense and agrees that the Guarantor will be liable for any deficiency
remaining after a nonjudicial foreclosure even though such nonjudicial
foreclosure would eliminate the Guarantor's right of subrogation.
ARTICLE IV
WAIVER OF SUBROGATION AND CONTRIBUTION
The Guarantor hereby irrevocably waives any claims and other rights that it
now has or may hereafter acquire against the Debtor or any guarantor that arise
from the existence, payment, performance or enforcement of the Guarantor's
obligations under this Guaranty or any other Operative Document, including any
right of subrogation, reimbursement, exoneration, contribution or
indemnification and any right to participate in any claim or remedy of the
Beneficiary against the Debtor, any guarantor or any collateral that the
Beneficiary now or
-4-
<PAGE>
hereafter acquires, whether or not such claim, remedy or right arises in equity
or under contract, statute or common law, including the right to take or receive
from the Debtor, directly or indirectly, in cash or other property, by setoff or
in any other manner, payment or security on account of any such claim or other
right. If any amount is paid to the Guarantor in violation of the preceding
sentence and the Guaranteed Obligations have not been paid in full, such amount
shall be deemed to have been paid to the Guarantor for the benefit of, and held
in trust for the benefit of, the Beneficiary and shall be forthwith paid to the
Beneficiary to be credited and applied upon the Guaranteed Obligations, whether
matured or unmatured, in accordance with the terms of the other Operative
Documents. The Guarantor acknowledges that it will receive direct and indirect
benefits from the transactions and arrangements contemplated by the Asset
Purchase Agreement, the Note, the Earn-Out Agreement and the other Operative
Documents and that the waiver set forth in this ARTICLE IV is knowingly made in
contemplation of such benefits.
ARTICLE V
MISCELLANEOUS
5.1 Representation and Covenant as to Ownership of Capital Securities. The
-----------------------------------------------------------------
Guarantor represents, warrants and covenants that all of the capital stock of
the Debtor (including, without limitation, any security convertible into, or any
option, warrant or other right to acquire, any share of such capital stock) is,
and shall remain, owned by the Guarantor.
5.2 Amendments, Etc. No amendment or waiver of any provision of this
---------------
Guaranty or consent to any departure by any Guarantor therefrom shall in any
event be effective unless the same is in writing and signed by the Beneficiary,
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
5.3 Addresses for Notices. All notices and other communications provided
---------------------
for hereunder shall be given in accordance with, and with the effectiveness
specified in, Section 9.3 of the Asset Purchase Agreement.
5.4 No Waiver; Remedies. No failure on the part of the Beneficiary to
-------------------
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof, and no single or partial exercise of any right hereunder shall
preclude any other or further exercise thereof or the exercise of any other
right. The remedies provided herein are cumulative and not exclusive of any
remedies provided by law.
5.5 Right of Setoff. Upon the occurrence and during the continuance of any
---------------
Default (as hereinafter defined) or Event of Default (as defined in the Note),
the Beneficiary is hereby authorized at any time and from time to time, to the
fullest extent permitted by law, to set off and apply any and all amounts at any
time held and other indebtedness at any time owing by the Beneficiary to or for
the credit or the account of the Guarantor against any and all of the
obligations of the Guarantor now or hereafter existing under this Guaranty,
irrespective of whether the Beneficiary has made any demand under this Guaranty
and although such obligations may be contingent and unmatured. The Beneficiary
agrees to notify the Guarantor promptly after
-5-
<PAGE>
any such setoff and application made by the Beneficiary; provided, however, that
-------- -------
the failure to give such notice shall not affect the validity of such setoff and
application. The rights of the Beneficiary under this Section 5.5 are in
addition to other rights and remedies (including, without limitation, other
rights of setoff) that the Beneficiary may have. The term "Default" shall mean
-------
any event which with the passing of time or the giving of notice or both would
become an Event of Default.
5.6 Continuing Guaranty; Assignments.
--------------------------------
(a) This Guaranty is a continuing guaranty and shall (i) remain in
full force and effect until the payment in full of the Guaranteed Obligations
and all other amounts payable under this Guaranty, (ii) be binding upon the
Guarantor and its successors and assigns and (iii) inure to the benefit of and
be enforceable by the Beneficiary and their respective successors, transferees
and assigns. Without limiting the generality of the foregoing clause (iii), the
Beneficiary may assign or otherwise transfer any or all of its rights and
obligations under the Operative Documents to any other Person, and such other
Person shall thereupon become vested with all of the benefits in respect thereof
granted to the Beneficiary herein or otherwise.
(b) Without limiting the generality of the foregoing clause (a), the
Guarantor acknowledges and agrees that (i) after the execution and delivery of
the Operative Documents, Fremont shall transfer and assign all of its rights and
obligations in, to and under certain of the Operative Documents, including,
without limitation, the Note, the Earn-Out Agreement, the Security Agreement and
this Guaranty (the "Operative Document Rights"), to the partners of Fremont (the
-------------------------
"Partners"), who will, in turn, transfer and assign the Operative Document
--------
Rights to a liquidation trust (the "Trust") created for the benefit of the
-----
Partners and certain other individuals and (ii) the Trust shall, as a result of
such transfers and assignments, thereupon become vested with all of the benefits
in respect thereof granted to the Beneficiary herein or otherwise.
5.7 Governing Law and Consent to Jurisdiction. The validity, construction
-----------------------------------------
and effect of this Guaranty shall be governed by laws of the State of
California, without regard to its laws regarding choice of applicable law. Any
judicial proceedings brought against the Guarantor with respect to this Guaranty
may be brought in any state or federal court of competent jurisdiction in the
State of California, and the Guarantor accepts for itself and its assets and
properties, generally and unconditionally, the nonexclusive jurisdiction of the
aforesaid courts. The Guarantor waives, to the fullest extent permitted by
applicable law, any objection (including, without limitation, any objection to
the laying of venue or based on the grounds of forum non conveniences) that it
may now or hereafter have to the bringing of any such action or proceeding in
any such jurisdiction. Nothing herein shall limit the right of the Beneficiary
to bring proceedings against the Guarantor in the court of any other
jurisdiction.
5.8 Counterparts. This Guaranty may be executed in any number of
------------
counterparts, each of which shall be an original with the same effect as if the
signatures thereto and hereto were upon the same instrument.
5.9 Headings. Captions, headings and the table of contents in this
--------
Guaranty are for convenience only and are not to be deemed part of this
Guaranty.
-6-
<PAGE>
5.10 Security Agreement. The obligations of the Guarantor under this
------------------
Guaranty are secured by the Security Agreement executed by the Guarantor and the
Debtor in favor of the Secured Party (as defined therein).
5.11 Waiver of Jury Trial. The Guarantor waives any right to trial by
--------------------
jury with regard to any action of any type or nature whatsoever under or
concerning this Guaranty or any of the other Operative Documents or in any way
related to the administration or enforcement thereof.
GMS DENTAL GROUP, INC.
By: /s/ Michael Thomas Fiore
________________________________
Title
Address: 22800 Savi Ranch
Parkway, Suite 206
Yorba Linda, CA 92887
-7-
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in the Gentle Dental Service Corporation
Prospectus and Registration Statement on Form SB-2 of our report dated October
21, 1997, except for the first paragraph of Note 12 which is as of November 6,
1997 and the last paragraph of Note 12 which is as of December 8, 1997,
relating to the financial statements of Gentle Dental Service Corporation, our
report dated November 17, 1997 relating to the financial statements of
Dedicated Dental Systems, Inc., and our report dated November 17, 1997
relating to the financial statements of California Dental Practice Management
Company and Related Dental Offices, which reports appear in such Prospectus
and Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Prospectus and Registration Statement.
PRICE WATERHOUSE LLP
Portland, Oregon
January 8, 1998
<PAGE>
EXHIBIT 23.3
The Board of Directors
Gentle Dental Service Corporation:
We consent to the use of our report on the financial statements of GMS
Dental Group, Inc. dated November 14, 1997 included herein and to the
reference to our firm under the heading "Experts" in the Registration
Statement on Form SB-2 and the related Prospectus of Gentle Dental Service
Corporation for the registration of 4,125,000 shares of common stock.
KPMG Peat Marwick LLP
Orange County, California
January 8, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 25, 1997, with respect to the financial
statements of Dedicated Dental Systems, Inc. for the year ended December 31,
1996, included in the Registration Statement on Form SB-2 and related
Prospectus of Gentle Dental Service Corporation for the registration of
4,125,000 shares of its common stock.
Ernst & Young LLP
Los Angeles, California
January 8, 1998
<PAGE>
EXHIBIT 23.5
The Board of Directors
Gentle Dental Service Corporation:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the Registration Statement on Form SB-
2 and the related Prospectus of Gentle Dental Service Corporation for the
registration of 4,125,000 shares of common stock. Our report dated November
14, 1997, contains an explanatory paragraph that states that the supplemental
consolidated financial statements give retroactive effect to the merger of
Gentle Dental Service Corporation and GMS Dental Group, Inc. on November 4,
1997, which has been accounted for as a pooling of interests.
KPMG Peat Marwick LLP
Orange County, California
January 8, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GENTLE
DENTAL SERVICE CORPORATION SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 2,220 147
<SECURITIES> 0 0
<RECEIVABLES> 6,532 8,965
<ALLOWANCES> (1,706) (2,979)
<INVENTORY> 554 835
<CURRENT-ASSETS> 9,843 9,862
<PP&E> 6,915 10,375
<DEPRECIATION> (1,149) (1,951)
<TOTAL-ASSETS> 29,396 38,634
<CURRENT-LIABILITIES> 7,571 5,839
<BONDS> 2,394 8,612
11,055 12,072
2 2
<COMMON> 2,890 9,546
<OTHER-SE> 194 (90)
<TOTAL-LIABILITY-AND-EQUITY> 26,396 38,634
<SALES> 0 0
<TOTAL-REVENUES> 14,413 29,617
<CGS> 0 0
<TOTAL-COSTS> 15,958 29,906
<OTHER-EXPENSES> 48 16
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 749 362
<INCOME-PRETAX> (2,342) (667)
<INCOME-TAX> (655) 80
<INCOME-CONTINUING> (1,687) (747)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,687) (747)
<EPS-PRIMARY> (.86) (.40)
<EPS-DILUTED> (.86) (.40)
</TABLE>
<PAGE>
EXHIBIT 99.1
DIRECTOR DESIGNEE CONSENT
-------------------------
I, Arthur G. Kaiser, D.D.S., hereby consent to being named as a director
designee in Gentle Dental Service Corporation's Form SB-2 Registration
Statement, and any amendment or amendments thereto, including any references in
the Prospectus which is a part thereof.
Executed this 5th day of January, 1998.
/s/ ARTHUR G. KAISER, D.D.S.
-----------------------------
Arthur G. Kaiser, D.D.S.
