U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-------------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number: 000-23673
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GENTLE DENTAL SERVICE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Washington 91-1577891
- ------------------------------------- --------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
No. Sepulveda Blvd., Suite 740, El Segundo, CA 90245
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number (310) 765-2400
------------------------------------------------------
No Change
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of August 13, 1998 8,887,666 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited, in thousands, except share amounts)
- -----------------------------------------------------------------------------------------------------------------------------
December 31, June 30,
Assets 1997 1998
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 302 $ 16,243
Accounts receivable, net 6,331 7,852
Receivables from affiliates 1,731 294
Supplies 1,109 1,825
Prepaid and other current assets 1,726 2,148
---------------- ----------------
Total current assets 11,199 28,362
---------------- ----------------
Property and equipment, net 10,084 14,213
Intangible assets, net 22,843 47,198
Other assets 282 1,063
---------------- ----------------
Total assets $ 44,408 $ 90,836
================ ================
Liabilities, Redeemable common stock and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,452 $ 1,338
Accrued payroll and payroll related costs 2,084 3,681
Acquisition purchase payable - 6,511
Other current liabilities 3,174 5,085
Current portion of long-term debt and capital lease obligations 651 923
---------------- ----------------
Total current liabilities 8,361 17,538
---------------- ----------------
Long-term liabilities:
Obligations under capital leases, net of current portion 581 963
Long-term debt, net of current portion 13,842 34,152
Other long-term liabilities 115 125
---------------- ----------------
Total long-term liabilities 14,538 35,240
---------------- ----------------
Total liabilities 22,899 52,778
---------------- ----------------
Redeemable common stock, no par value, 183,686 shares issued and outstanding
in 1997 and 1998, respectively 2,130 2,142
---------------- ----------------
Shareholders' equity:
Preferred stock, 30,000,000 shares authorized:
Preferred stock - Series A, no par value, 100 shares authorized, zero and 100
shares issued and outstanding in 1997 and 1998, respectively - 1
Convertible Preferred stock - Series B, no par value, 70,000 shares
authorized, zero shares issued and outstanding in 1997 and 1998 - -
Preferred stock - Series C, no par value, 100 shares authorized, zero and 100
shares issued and outstanding in 1997 and 1998, respectively - 1
Convertible Preferred stock - Series D, no par value, 2,000,000 shares
authorized, zero and 1,628,663 shares issued and outstanding in 1997 and 1998,
respectively - 12,332
Common stock, no par value, 50,000,000 shares authorized, 7,530,781 and
8,176,638 shares issued and outstanding in 1997 and 1998, respectively 21,784 25,763
Additional paid-in capital 3,165 3,506
Shareholder notes receivable (304) (313)
Accumulated deficit (5,266) (5,374)
---------------- ----------------
Total shareholders' equity 19,379 35,916
---------------- ----------------
Total liabilities, redeemable common stock and shareholders' equity $ 44,408 $ 90,836
================ ================
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Dental practice net patient service revenue $ 6,117 $ 20,644 $ 11,070 $ 38,503
Net management fees 3,412 451 6,357 935
----------- ----------- ----------- -----------
Net revenues 9,529 21,095 17,427 39,438
Cost and expenses:
Clinical salaries and benefits 2,786 9,450 5,147 17,664
Practice nonclinical salaries and benefits 1,927 3,054 3,443 5,885
Dental supplies and lab expenses 1,484 2,465 2,689 4,549
Practice occupancy expenses 822 1,178 1,482 2,262
Practice selling, general and administrative expenses 1,189 1,952 2,040 3,820
Corporate selling, general and administrative expenses 1,002 1,378 2,233 2,785
Depreciation and amortization 420 859 816 1,584
----------- ----------- ----------- -----------
Operating income (loss) (101) 759 (423) 889
----------- ----------- ----------- -----------
Nonoperating income (expense):
Interest expense, net (71) (620) (193) (1,043)
Other income (expense), net (1) 11 (9) (7)
----------- ----------- ----------- -----------
Nonoperating expense, net (72) (609) (202) (1,050)
----------- ----------- ----------- -----------
Income (loss) before income taxes (173) 150 (625) (161)
Income tax (benefit) expense - 60 - (65)
----------- ----------- ----------- -----------
Net income (loss) (173) 90 (625) (96)
Dividends on redeemable convertible preferred stock - Series B (271) - (541) -
Accretion of redeemable common stock (9) (5) (19) (12)
----------- ----------- ----------- -----------
Net income (loss) attributable to common stock $ (453) $ 85 $ (1,185) $ (108)
=========== =========== =========== ===========
Income (loss) per share attributable to common stock - basic and diluted $ (0.11) $ 0.01 $ (0.32) $ (0.01)
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (625) $ (96)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization 816 1,584
Loss on disposal of assets 24 -
Loss on investment in joint venture 52 4
Stock options granted to nonemployees 28 28
Interest accrued on shareholder notes receivables (8) (9)
Deferred income taxes - (71)
Change in assets and liabilities, net of the effect of acquisitions:
Accounts receivable, net 1,308 1,080
Receivables from affiliates (934) (282)
Supplies (72) (235)
Prepaid expenses and other current assets (538) (738)
Other assets 65 (50)
Accounts payable (331) (1,890)
Accrued payroll and payroll related costs 216 339
Other liabilities (843) (1,505)
------------ ------------
Net cash used in operating activities (842) (1,841)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (1,088) (1,725)
Proceeds from sale of property and equipment 22 -
Cash paid for acquisitions, including direct costs, net of cash acquired (2,026) (13,793)
------------ ------------
Net cash used in investing activities (3,092) (15,518)
------------ ------------
Cash flows from financing activities:
Net payments on short-term borrowings (2,097) -
Proceeds from issuance of long-term debt 554 41,000
Payments on long-term debt and obligations under capital leases (2,638) (21,535)
Payments of deferred financing costs - (13)
Proceeds from issuance of common and preferred stock 7,587 15,075
Payments for common and preferred stock issuance costs (844) (1,250)
Exercise of put rights (103) -
Exercise of stock options - 23
------------ ------------
Net cash provided by financing activities 2,459 33,300
------------ ------------
Increase (decrease) in cash and cash equivalents (1,475) 15,941
Cash and cash equivalents, beginning of period 2,220 302
------------ ------------
Cash and cash equivalents, end of period $ 745 $ 16,243
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
June 30, 1998
Notes to Condensed Consolidated Financial Statements
(Unaudited, in thousands, except per share and share amounts)
(1) Organization
Gentle Dental Service Corporation ("GDS" or the "Company"), incorporated on
December 14, 1992, is a Washington corporation headquartered in El Segundo,
California. The Company is one of the largest providers of dental practice
management services to multi-specialty dental practices in the United States.
Including the Dedicated Dental Affiliation and other affiliations completed
through August 14, 1998, the Company provides management services to dental
practices at 81 dental offices with 321 dentists, including 91 specialists, and
820 operatories in selected markets in California, Washington, Oregon, Idaho and
Hawaii.
As part of a multi-specialty dental care delivery network, the Company provides
management services to dental practices (the "Affiliated Dental Practices" or
"DPs") under long-term management service agreements. Under the terms of the
management service agreements, the Company, among other things, bills and
collects patient receivables and provides all administrative support services to
the DPs. 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.
On February 13, 1997, the Company completed its initial public offering of
1,500,000 shares of no par value common stock (the "Offering"). The price per
share in the Offering was $5.00, resulting in gross offering proceeds of $7,500.
The Company received net proceeds of approximately $6,125 net of underwriters'
discount and offering expenses.
(2) Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of GDS and its
subsidiaries. All significant intercompany transactions and accounts have been
eliminated. On November 4, 1997, GMS Dental Group, Inc. ("GMS") was merged with
and into the Company, with former stockholders of GMS owning 59% of the combined
company upon completion of the merger. These consolidated financial statements
have been prepared following the pooling-of-interests method of accounting and
reflect the combined financial position and operating results of GDS and GMS
(and certain affiliated DPs as discussed below) for all periods presented.
The Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board recently evaluated certain matters relating to the physician practice
management industry (EITF issue number 97-2) and reached a consensus on the
accounting for transactions between physician practice management companies and
physician practices and the financial reporting of such entities. For financial
reporting purposes, EITF 97-2 mandates the consolidation of physician practice
activities with the practice management company when certain conditions have
been met, even though the practice management company does not have an equity
investment in the physician practice. The accompanying financial statements are
prepared in conformity with the consensus reached in EITF 97-2.
Corporate practice of medicine laws in the states in which the Company currently
operates generally prohibit the Company from owning dental practices. In
response to these laws the Company has executed management services agreements
("MSAs") with various DPs. Based upon the terms of MSAs with certain of the DPs,
the Company has met the criteria for consolidation of those DPs with the
Company. In these circumstances, all the accounts of those DPs are included in
the accompanying consolidated financial statements. Accordingly, the
consolidated statements of operations include the net patient revenues and
related expenses of those DPs.
5
<PAGE>
In addition to the MSAs discussed above, the Company has entered into MSAs with
certain DPs where the Company has not met the criteria for consolidation of the
DPs activities. In these circumstances, the Company does not consolidate the
accounts of the DPs. Accordingly, the consolidated statements of operations
exclude the net patient revenues and expenses of these DPs. Rather, the
statements of operations include only the Company's net management fees revenue
generated from those MSAs and the Company's expenses associated with those MSAs.
Effective January 1, 1998, the Company entered into new MSAs with the Oregon and
Washington DPs, thereby meeting the criteria for consolidation of these DPs'
financial statements with the Company. As a result of the new MSAs entered into
with the Oregon and Washington DPs, as of January 1, 1998 all of the DPs within
the Gentle Dental Network except one are accounted for under the consolidation
method of accounting as outlined in EITF 97-2. Prior to January 1, 1998, the
Oregon and Washington DPs were not consolidated. The remaining DP that has not
met the criteria for consolidation has annualized net patient revenues of
approximately $3,700.
The Company has a 50% investment in Celebration Dental Services L.L.C., a
Florida limited liability company, which is accounted for on the equity basis of
accounting and included in other expense, net.
Interim Reporting
The accompanying unaudited interim consolidated financial statements of the
Company have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and note
disclosures normally included in annual consolidated financial statements have
been condensed or omitted pursuant to those rules and regulations. In the
opinion of management, all adjustments, consisting only of normal, recurring
adjustments considered necessary for a fair presentation, have been included.
Although management believes that the disclosures made are adequate to insure
that the information presented is not misleading, it is suggested that these
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-KSB for the fiscal year ended December 31, 1997. The results for the three
and six months ended June 30, 1998 are not necessarily indicative of the results
of operations for the entire year.
Net Revenues
Revenues consist primarily of DP net patient service revenue (net patient
revenue) and Company net management fees. Net patient revenue represents the
consolidated revenue of the DPs reported at the estimated net realizable amounts
from patients, third party payors and others for services rendered, net of
contractual adjustments. Net management fees represent amounts charged under
MSAs to the unconsolidated DPs on an agreed-upon percentage of the DPs net
patient service revenue, net of provisions for contractual adjustments and
doubtful accounts.
Net Income (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") in the fourth quarter of 1997. SFAS 128
simplifies the computation of earnings per share ("EPS") previously required by
Accounting Principles Board (APB) Opinion No.15, "Earnings Per Share" by
replacing primary and fully diluted EPS with basic and diluted EPS. Dilutive
potential common shares represents shares issuable using the treasury stock
method. Dilutive potential common shares have been excluded from the computation
of loss per share as their effect is anti-dilutive. For the three months ended
June 30, 1998 the number of shares that would be issuable upon conversion of the
subordinated notes payable have been excluded from the computation of earnings
per share as their effect is anti-dilutive.
Earnings per share for the three and six month periods ended June 30, 1997 have
been restated in accordance with SFAS 128. The following table summarizes the
computation of EPS:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net income (loss) attributable to common stock - basic
and diluted $ (453) $ 85 $ (1,185) $ (108)
============ ============ ============ =============
Basic Shares Reconciliation:
Weighted average common shares outstanding 4,313,034 7,846,352 3,734,752 7,800,897
Contingently issuable common shares - 140,714 - 131,120
------------ ------------ ------------ -------------
Basic shares 4,313,034 7,987,066 3,734,752 7,932,017
============ ============ ============ =============
Basic earnings (loss) per share $ (0.11) $ 0.01 $ (0.32) $ (0.01)
============ ============ ============ =============
6
<PAGE>
Diluted Shares Reconciliation:
Basic shares 4,313,034 7,987,066 3,734,752 7,932,017
Effects of dilutive potential common shares:
Convertible preferred stock - 810,753 - -
Warrants - 181,879 - -
Stock options - 365,763 - -
Put rights - 44,015 - -
------------ ------------ ------------ -------------
Diluted shares 4,313,034 9,389,476 3,734,752 7,932,017
============ ============ ============ =============
Diluted earnings (loss) per share $ (0.11) $ 0.01 $ (0.32) $ (0.01)
============ ============ ============ =============
</TABLE>
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") in the first quarter of 1998. SFAS
130 establishes standards for reporting and display of comprehensive income. The
adoption of SFAS 130 did not have an effect on the Company's financial position
or results of operations.
Reclassifications
Certain reclassifications have been made to the 1997 financial statements to
conform to the presentations as of June 30, 1998. Such reclassifications had no
effect on the Company's previously reported results of operations or financial
position.
(3) Dental Practice Acquisitions
The Company and its related Washington and Oregon DPs entered into asset
purchase and management service agreements (collectively, the Agreements) on
January 1, 1998. The new management service agreements meet the criteria for
consolidation of the DP accounts with the Company for financial reporting
purposes as outlined in EITF 97-2.
Under the terms of the Agreements, the Company acquired all of the fixed assets
and assumed certain liabilities of the DPs. In exchange, the Company paid
consideration of $1,674 in addition to the assumption of certain liabilities,
which was offset by the Company's $1,674 receivable from the DPs. In addition,
the Company will pay $575 in cash over 18 equal monthly installments and may pay
future consideration, to be determined upon the achievement of certain financial
results, as defined in the Agreements.
During the six months ended June 30, 1998, the Company acquired substantially
all of the assets of 21 dental office locations, including cash, accounts
receivable, supplies and fixed assets, in addition to all of the outstanding the
stock of Managed Dental Care of Oregon, Inc., a dental care entity that
contracts with the Oregon Health Plan. The total price for the fair value of the
assets acquired, including intangible assets was $27,834. Approximately $22,947
of the purchase price has been allocated to intangible assets. The total
purchase consideration included $13,793 in cash, $2,834 in common stock (378,987
shares) and $11,207 in liabilities incurred and assumed (including $6,511 paid
in July). Also, the Company may pay future consideration in cash to be
determined upon the achievement of certain financial results. The Company
accrues for earn-out payments with respect to prior practice acquisitions when
such amounts are probable and reasonably estimable. As of June 30, 1998, the
Company has accrued $1,438 for future earn-out payments, of which $578 is
included in additional paid-in capital for anticipated stock issuances while the
remaining accrual for anticipated cash payments is included in other current
liabilities.
The above acquisitions have been accounted for using the purchase method of
accounting. The excess of the total purchase price over the fair value of the
net tangible and identifiable intangible assets acquired generally represents
the estimated future value of the management services agreements and are being
amortized over the lesser of the term of the related management service
agreements or 25 years using the straight-line method. The results of operations
for the acquired businesses have been included in the consolidated financial
statements of the Company from the dates of their acquisitions.
The following unaudited pro forma information presents the condensed
consolidated results of operations for the six months ended June 30, 1997 and
1998 as if certain affiliations completed during the six months ended June 30,
1998 had occurred as of January 1, 1997. The pro forma results have been
prepared for comparative purposes and include only those significant
affiliations for which a Form 8-K was filed during the six months ended June 30,
1998. These pro forma results have been prepared for comparable purposes only
and are not necessarily indicative of what the actual results of operations
would have been had the practices been affiliated as of that date, nor does it
purport to represent future operations of the Company:
7
<PAGE>
<TABLE>
<CAPTION>
Six Months ended
June 30,
1997 1998
------------ ------------
<S> <C> <C>
Pro forma:
Dental practice net patient service revenue $ 19,129 $ 45,230
Net management fees 6,357 935
Net income attributable to common stock 62 534
Income per share attributable to common
stock - basic and diluted 0.02 0.07
</TABLE>
(4) Debt
On June 3, 1998, in connection with the private placement as discussed in note
5, the Company issued $30,000 of convertible subordinated notes (the
"Subordinated Notes"). The Subordinated Notes bear interest at an annual rate of
7.0% and mature in May 2006. The Company utilized the proceeds for working
capital requirements, to fund the purchase of dental practices assets and to
repay all outstanding amounts due under the Company's current credit facility.
Under certain circumstances, the Subordinated Notes are convertible into common
and preferred stock.
(5) Shareholders' Equity
As of January 1, 1997, GDS had only common stock outstanding and GMS had two
classes of stock outstanding: common stock and preferred stock. GMS preferred
stock outstanding consisted of convertible preferred stock - Series A,
redeemable convertible preferred stock - Series B and convertible preferred
stock - Series C. The redeemable convertible preferred stock - Series B,
including dividends and the convertible preferred stock - Series A and C, were
converted into 7,603,677 shares (3,384,302 shares of GDS common stock) of GMS
common stock on November 4, 1997 prior to the merger. Upon closing of the merger
between GMS and the Company, all 10,218,578 outstanding GMS common shares were
converted into 4,548,161 shares of the Company's common stock.
On June 3, 1998, the Company completed a $45,000 private placement, consisting
of $30,000 of Subordinated Notes and $15,000 of preferred stock of the Company.
The Subordinated Notes have an eight year term and are convertible into shares
of the Company's common stock at $9.21 for each share of common stock issuable
upon conversion of outstanding principal and accrued but unpaid interest on such
Subordinated Notes. If certain events of default occur, the Subordinated Notes
then outstanding will automatically convert into shares of Convertible Preferred
Stock - Series B ("Preferred Stock - Series B") at a rate of one share of
Preferred Stock - Series B for each thousand dollars in outstanding principal
and accrued but unpaid interest on the Subordinated Notes, subject to adjustment
for stock splits, reverse splits, stock dividends, reorganizations and the like.
The Subordinated Notes and all outstanding shares of Preferred Stock shall be
automatically converted into common stock (or, in the case of the Preferred
Stock - Series A and Preferred Stock - Series C, redeemed at nominal cost) if
the rolling 21-day average closing market price of the common stock on 20 out of
any 30 consecutive trading days is more than $15.73 on or prior to May 18, 1999,
more than $16.85 on or prior to May 18, 2000, or more than $17.98 at any time
thereafter.
The Preferred Stock includes the following series: 100 shares of Preferred Stock
- - Series A, all of which is issued and outstanding; 70,000 shares of Preferred
Stock - Series B, none of which is presently outstanding but which will be
issued automatically upon conversion of the then outstanding Subordinated Notes,
as described above; 100 shares of Preferred Stock - C, all of which is issued
and outstanding; and 2,000,000 shares of Convertible Preferred Stock - Series D
("Preferred Stock - Series D"), of which 1,628,663 shares are issued and
outstanding. The shares of Preferred Stock Series B are convertible into shares
of the Company's common stock at the rate of 108.58 shares of common stock for
each share of Preferred Stock - Series B, and the shares of Preferred Stock -
Series D are convertible into shares of the Company's common stock on a share
for share basis, in each case subject to adjustment for stock splits, reverse
splits, stock dividends, reorganizations and the like. The Preferred Stock of
Series A and C are not convertible and have limited voting rights, but the
holders of outstanding shares of Preferred Stock - Series A have, and upon the
occurrence of certain events the holders of outstanding shares of Preferred
Stock - Series C will have, the right to elect one member of Company's Board of
Directors.
(6) Subsequent Events
On July 28, 1998, the Company completed the acquisition of one DP located in
Northern California, representing one clinical office location. The purchase
price for this affiliation totaled $1,500 in cash, plus contingent payments to
be made based on future performance. This affiliation was accounted for using
the purchase method of accounting.
8
<PAGE>
On July 31, 1998, the Company completed the acquisition of all the stock of
Dedicated Dental Systems, Inc. ("Dedicated Dental"), a Bakersfield, California
company which owns and operates eleven staff model dental offices pursuant to a
license granted under the California Knox-Keene Health Care Service Plan Act of
1975. Also, pursuant to the terms of three asset purchase agreements, the
Company completed the acquisition of the non-professional assets of related
dental practices operating at four locations in southern California. The
aggregate purchase price for this acquisition consisted of $16,431 in cash and
705,101 shares of Company common stock valued at $5,769. In addition to amounts
paid at closing for the above acquisitions, the Company has agreed to make cash
earnout payments in connection with the acquisition of the stock of Dedicated
Dental if certain EBITDA targets are achieved in the first two years following
the closing with an additional potential earnout payment for the third year
following the closing, unless the sum of the prior earnout payments already
exceeds $2,700. The Company also has agreed to make cash earnout payments as set
forth in two of the asset purchase agreements based upon the EBITDA of the
applicable related dental practices for the first two years following the
closing.
On July 29, 1998, the Company restated its consolidated financial statements
included in its previously filed Form 10-KSB for the year ended December 31,
1997 for the correction of an error in the weighted average number of shares of
common stock outstanding. As a result of this correction, the following amounts
were restated for the year ended December 31, 1997.
<TABLE>
<CAPTION>
As
Previously As
Reported Restated
------------- -------------
<S> <C> <C>
Weighted average common shares utilized for the year ended
December 31, 1997 3,544,149 4,559,140
Loss per share attributed to common stock - basic and diluted $ (1.17) $ (.91)
Per share amount of restructuring plan charge recorded in the
fourth quarter $ .32 $ .25
Pro forma net loss per common and common equivalent share:
As reported - basic and diluted $ (1.17) $ (.91)
Pro Forma - basic and diluted $ (1.28) $ (.99)
</TABLE>
Item 2. Management's Discussion and Analysis or Plan of Operations
Overview
Gentle Dental Service Corporation is one of the largest providers of dental
practice management services to multi-specialty dental practices in the United
States. Including the Dedicated Dental Affiliation and other affiliations
completed through August 14, 1998, the Company provides management services to
dental practices at 81 dental offices with 321 dentists, including 91
specialists, and 820 operatories in selected markets in California, Washington,
Oregon, Idaho and Hawaii.
As part of a multi-specialty dental care delivery network, the Company provides
management services to dental practices (the "Affiliated Dental Practices" or
"DPs") under long-term management service agreements. Under the terms of the
management service agreements, the Company, among other things, bills and
collects patient receivables and provides all administrative support services to
the DPs. 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 following discussion of the results of operations and financial condition of
the Company should be read in conjunction with the unaudited consolidated
financial statements and the notes thereto included elsewhere in this Report.
The following discussion contains forward-looking statements. The Company's
results may differ significantly from those projected in the forward-looking
statements. Factors that might cause future results to differ materially from
the Company's recent results or those projected in the forward-looking
statements include, without limitation, the Company's ability to complete
affiliations necessary for its expansion plans, to integrate dental practices
and to attract and retain a sufficient number of qualified dental care
professionals, the availability of financing to fund the Company's growth and
operations, the enforceability of the provisions of the Company's Management
Agreements and the legality of its business and relationships with Affiliated
Dental Practices.
9
<PAGE>
Results of Operations
The Company reports dental practice net patient revenue and associated clinical
salaries and benefits in those instances where the Company meets certain
specific consolidation requirements established by the Emerging Issues Task
Force ("EITF"), an advisory committee of the Financial Accounting Standards
Board. 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. Through December 31, 1997, the Oregon
and Washington DPs (representing a significant portion of overall net patient
revenues) were not included within the Company's consolidated financial
statements, as the criteria for their consolidation were not met. Following the
new MSAs entered into on January 1, 1998 with the Oregon and Washington DPs, all
of the DPs affiliated with the Company except one are accounted for under the
consolidation method of accounting as outlined in EITF 97-2. The remaining DP
that has not met the criteria for consolidation has annualized patient revenues
of approximately $3.7 million. This DP's operation was acquired effective April
1, 1997.
To provide a more meaningful comparison, the following discussion generally
highlights changes in historical expense levels followed by comparison of
expenses to the total dental practice net patient service revenue of
consolidated and unconsolidated Affiliated Dental Practices for the three and
six months ended June 30, 1997 and 1998.
Three Months Ended June 30, 1997 Statement of Operations Compared to Three
Months Ended June 30, 1998 Statement of Operations
Dental Practice Net Patient Service Revenue. If all the affiliated dental
practices were accounted for on the consolidated basis for financial reporting
purposes, total dental practice net patient revenue reported would have been
$12.9 million for the three months ended June 30, 1997 and $21.5 million for the
three months ended June 30, 1998, representing a 67% increase. This growth in
patient level revenues is directly attributed to nine affiliations completed
during the year ended December 31, 1997 and four affiliations completed during
the six months ended June 30, 1998, representing twenty-seven clinical
locations.
Clinical Salaries and Benefits. Clinical salaries and benefits costs include all
patient service provider staff compensation and related payroll costs at the
consolidated DPs, including dentists, hygienists and dental assistants. If all
the DPs were accounted for on the consolidated basis for financial reporting
purposes, clinical salaries and benefits would have been $6.1 million for the
three months ended June 30, 1997 and $9.9 million for the three months ended
June 30, 1998. Practice clinical salaries and benefits as a percentage of dental
practice net patient revenue for the three months ended June 30, 1997 and 1998
were 47.2% and 45.9%, respectively. This decrease as a percentage of revenues is
the result of the new MSAs entered into with the Oregon and Washington DPs as of
January 1, 1998. Also, the addition of Affiliated Dental Practices with the
Company during the year ended December 31, 1997 and the six months ended June
30, 1998 contributed to the overall percentage decrease.
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, hygienists and dental assistants. Total
nonclinical salary costs increased 58.4% from $1.9 million for the three months
ended June 30, 1997 to $3.1 million for the three months ended June 30, 1998.
This increase was primarily attributable to the addition of costs from
affiliations completed during the year ended December 31, 1997 and the six
months ended June 30, 1998. If all Company revenue had been reported at the
dental practice net patient revenue level, practice nonclinical salaries and
benefits as a percentage of total revenue for the three months ended June 30,
1997 and 1998 would have been 14.9% and 14.2%, respectively.
Dental Supplies and Lab Costs. Total dental supplies and lab costs increased
66.0% from $1.5 million for the three months ended June 30, 1997 to $2.5 million
for the three months ended June 30, 1998. The addition of Affiliated Dental
Practices with the Company in 1997 and 1998 contributed to the increase. 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 three months ended June 30, 1997 and 1998 would have been 11.5% for both
periods ended.
Practice Occupancy. Practice occupancy expenses increased 43.3% from $822,000
for the three months ended June 30, 1997 to $1.2 million for the three months
ended June 30, 1998. This increase in occupancy expenses is primarily
attributable to the addition of costs from affiliations completed during the
year ended December 31, 1997 and the six months ended June 30, 1998. If all
Company revenue had been recorded at the dental practice net patient service
revenue level, practice occupancy cost as a percentage of total revenue for the
three months ended June 30, 1997 and 1998 would have been 6.4% and 5.5%,
respectively. The expense mix of Affiliated Dental Practices affiliating with
the Company in 1997 and 1998 contributed to the decrease in this percentage.
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 65.0% from $1.2 million for the three months ended June 30, 1997 to
$2.0 million for the three months ended June 30, 1998. If all Company revenue
had been recorded at the dental group
10
<PAGE>
net patient service revenue level, practice selling, general and administrative
expenses as a percentage of total revenue for the three months ended June 30,
1997 and 1998 would have been 12.2% and 9.2%, respectively. The expense mix of
Affiliated Dental Practices affiliating with the Company in 1997 and 1998
contributed to the decrease in this percentage.
Corporate Selling, General and Administrative Expenses. Total corporate selling,
general and administrative expenses increased 36.5% from $1.0 million for the
three months ended June 30, 1997 to $1.4 million for the three months ended June
30, 1998. If all Company revenue had been recorded at the dental practice net
patient service revenue level, corporate selling, general and administrative
expenses as a percentage of total revenue for the three months ended June 30,
1997 and 1998 would have been 7.8% and 6.4%, respectively. The increase in total
expense is a result the Company implementing infrastructure required to
accommodate expected future growth. This decrease in expense as a percentage of
revenue is consistent with the Company's strategy to increase the growth rate of
revenue at an overall rate higher than the overall rate of expense growth.
Depreciation and Amortization. Total depreciation and amortization expense for
the three months ended June 30, 1997 and 1998 was $420,000 and $859,000,
respectively. The increase was primarily due to the addition of Affiliated
Dental Practices with the Company in 1997 and 1998.
Interest Expense. Total interest expense increased from $71,000 for the three
months ended June 30, 1997 to $620,000 for the three months ended June 30, 1998.
This increase in interest expense was due to additional debt incurred to
complete certain dental practice affiliations in 1997 and 1998.
Income Tax (Benefit) expense. For the three months ended June 30, 1997 the
Company recognized no tax benefit resulting from its taxable loss as the
probable utilization of any loss carryforwards was uncertain. For the three
months ended June 30, 1998, the Company recognized a tax expense resulting from
its taxable income. The effective tax rate for the tax expense recorded in 1998
was slightly higher than the statutory rate due to the Company's use of a
tax-free merger structure for certain dental practice affiliations, resulting in
amortization of certain intangible assets which are not deductible for tax
purposes.
Six Months Ended June 30, 1997 Statement of Operations Compared to Six Months
Ended June 30, 1998 Statement of Operations
Dental Practice Net Patient Service Revenue. If all the affiliated dental
practices were accounted for on the consolidated basis for financial reporting
purposes, total dental practice net patient revenue reported would have been
$23.6 million for the six months ended June 30, 1997 and $40.3 million for the
six months ended June 30, 1998, representing a 70.7% increase. This growth in
patient level revenues is directly attributed to nine affiliations completed
during the year ended December 31, 1997 and four affiliations completed during
the six months ended June 30, 1998, representing twenty-seven clinical
locations.
Clinical Salaries and Benefits. Clinical salaries and benefits costs include all
patient service provider staff compensation and related payroll costs at the
consolidated DPs, including dentists, hygienists and dental assistants. If all
the DPs were accounted for on the consolidated basis for financial reporting
purposes, clinical salaries and benefits would have been $11.3 million for the
six months ended June 30, 1997 and $18.5 million for the six months ended June
30, 1998. Practice clinical salaries and benefits as a percentage of dental
practice net patient revenue for the six months ended June 30, 1997 and 1998
were 47.9% and 46.0%, respectively. This decrease as a percentage of revenues is
the result of the new MSAs entered into with the Oregon and Washington DPs as of
January 1, 1998. Also, the addition of Affiliated Dental Practices with the
Company during the year ended December 31, 1997 and the six months ended June
30, 1998 contributed to the overall percentage decrease.
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, hygienists and dental assistants. Total
nonclinical salary costs increased 70.9% from $3.4 million for the six months
ended June 30, 1997 to $5.9 million for the six months ended June 30, 1998. This
increase was primarily attributable to the addition of costs from affiliations
completed during the year ended December 31, 1997 and the six months ended June
30, 1998. If all Company revenue had been reported at the dental practice net
patient revenue level, practice nonclinical salaries and benefits as a
percentage of total revenue for the six months ended June 30, 1997 and 1998
would have been 14.6% for both periods ended.
Dental Supplies and Lab Costs. Total dental supplies and lab costs increased
69.2% from $2.7 million for the six months ended June 30, 1997 to $4.5 million
for the six months ended June 30, 1998. The addition of Affiliated Dental
Practices with the Company in 1997 and 1998 contributed to the increase. 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 six months ended June 30, 1997 and 1998 would have been 11.4% and 11.3%,
respectively.
Practice Occupancy. Practice occupancy expenses increased 52.6% from $1.5
million for the six months ended June 30, 1997 to $2.3 million for the six
months ended June 30, 1998. This increase in occupancy expenses is primarily
attributable to the
11
<PAGE>
addition of costs from affiliations completed during the year ended December 31,
1997 and the six months ended June 30, 1998. If all Company revenue had been
recorded at the dental practice net patient service revenue level, practice
occupancy cost as a percentage of total revenue for the six months ended June
30, 1997 and 1998 would have been 6.3% and 5.6%, respectively. The expense mix
of Affiliated Dental Practices affiliating with the Company in 1997 and 1998
contributed to the decrease in this percentage.
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 87.7% from $2.0 million for the six months ended June 30, 1997 to $3.8
million for the six months ended June 30, 1998. If all 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 six months ended June 30, 1997 and 1998 would have been 11.5% and 9.7%,
respectively. The expense mix of Affiliated Dental Practices affiliating with
the Company in the later 1997 and 1998 contributed to the decrease in this
percentage.
Corporate Selling, General and Administrative Expenses. Total corporate selling,
general and administrative expenses increased 24.2% from $2.2 million for the
six months ended June 30, 1997 to $2.8 million for the six months ended June 30,
1998. If all Company revenue had been recorded at the dental practice net
patient service revenue level, corporate selling, general and administrative
expenses as a percentage of total revenue for the six months ended June 30, 1997
and 1998 would have been 9.4% and 6.9%, respectively. The increase in total
expense is a result the Company implementing infrastructure required to
accommodate expected future growth. This decrease in expense as a percentage of
revenue is consistent with the Company's strategy to increase the growth rate of
revenue at an overall rate higher than the overall rate of expense growth.
Depreciation and Amortization. Total depreciation and amortization expense for
the six months ended June 30, 1997 and 1998 was $816,000 and $1.6 million,
respectively. The increase was primarily due to the addition of Affiliated
Dental Practices with the Company in 1997 and 1998.
Interest Expense. Total interest expense increased from $193,000 for the six
months ended June 30, 1997 to $1.0 million for the six months ended June 30,
1998. This increase in interest expense was due to additional debt incurred to
complete certain dental practice affiliations in 1997 and 1998.
Income Tax (Benefit) expense. For the six months ended June 30, 1997 the Company
recognized no tax benefit resulting from its taxable loss as the probable
utilization of any loss carryforwards was uncertain. For the six months ended
June 30, 1998, the Company recognized a tax benefit resulting from its taxable
loss as management believes that the Company will be able to utilize available
tax loss carryforwards. The effective tax rate for the tax benefit was lower
than the statutory rate due to the Company's use of a tax-free merger structure
for certain dental practice affiliations, resulting in amortization of certain
intangible assets which are not deductible for tax purposes.
Liquidity and Capital Resources
At June 30, 1998, the Company's cash and cash equivalents were $16.2 million and
working capital was $10.8 million. The increase in cash equivalents and working
capital from December 31, 1997 is the result of a $45 million private placement
of debt and preferred stock during the six months ended June 30, 1998, as
discussed below.
Net cash used in operations was $842,000 and $1.8 million for the six-month
periods ending June 30, 1997 and 1998, respectively. Net cash used in investing
activities, principally dental practice affiliations, was $3.1 million and $15.5
million for the six-month periods ending June 30, 1997 and 1998, respectively.
Net cash provided from financing activities was $2.5 million and $33.3 million
for the six-month periods ending June 30, 1997 and 1998, respectively.
On January 1, 1998, the Company and its Washington and Oregon Affiliated Dental
Practices entered into asset purchase and management service agreements
(collectively, the "Agreements"). Under the terms of the Agreements, the Company
acquired all of the fixed assets and assumed certain liabilities of these
Affiliated Dental Practices. In exchange, the Company gave consideration of $1.7
million in addition to the assumption of certain liabilities, which was offset
by the Company's $1.7 million receivable from these Affiliated Dental Practices.
In addition, the Company will pay $575,000 in cash over 18 monthly installments.
The new management services agreements meet the criteria for consolidation of
the Affiliated Dental Practice accounts with the Company for financial reporting
purposes.
During the six months ended June 30, 1998, the Company completed six dental
practice affiliation transactions. These affiliations represent the purchased
assets of twenty-one clinical locations for $13.8 million in cash, 378,987
shares of common stock valued at $2.8 million, liabilities incurred or assumed
of $11.2 million (of which $6.5 million was paid in
12
<PAGE>
July) and additional future consideration based upon financial performance
targets. The affiliations were accounted for using the purchase method of
accounting.
On July 28, 1998, the Company completed the acquisition of one DP located in
Northern California, representing one clinical office location. The purchase
price for this affiliation totaled $1.5 million in cash. This affiliation was
accounted for using the purchase method of accounting.
On July 31, 1998, the Company completed the acquisition of all the stock of
Dedicated Dental Systems, Inc. ("Dedicated Dental"), a Bakersfield, California
company which owns and operates eleven staff model dental offices pursuant to a
license granted under the California Knox-Keene Health Care Service Plan Act of
1975. Also, pursuant to the terms of three asset purchase agreements, the
Company completed the acquisition of the non-professional assets of related
dental practices operating at four locations in southern California. The
aggregate purchase price for these affiliations consisted of $16.4 million in
cash and 705,101 shares of Company common stock valued at $5.8 million.
In connection with certain completed affiliation transactions, the Company has
agreed to pay to the sellers possible 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
accrues for earn-out payments with respect to prior practice acquisitions when
such amounts are probable and reasonably estimable. As of June 30, 1998, the
Company has accrued $1.4 million for future earn-out payments, of which $578,000
is included in additional paid-in capital for anticipated stock issuances while
the remaining accrual for anticipated cash payments is included in other current
liabilities. For those acquisitions with earn-out provisions, the Company
estimates the total maximum earn-out to be paid, including amounts already
accrued, is between $15 and $20 million over the next four years, of which up to
$15 million is expected to be paid in cash.
A total of 254,901 outstanding shares of common stock issued at a price of $.45
per share and 339,246 outstanding shares of common stock issued at a price of
$.225 per share are subject to, under certain events, repurchase by the Company
at cost. One half of these shares are currently subject to repurchase as a
result of the Company's failure to achieve certain specified performance targets
during 1997 and are expected to be repurchased during 1998.
The Company's credit facility ("Credit Facility") provides for a maximum credit
line of $25 million, which will be increased 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 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 are dependent upon the
Company's leverage ratio, of (i) up to 1.0% over prime or (ii) up to 3.25% above
LIBOR. The Company is currently in negotiations to increase its senior Credit
Facility to $45 million. There can be no assurance as to the credit terms and
the amount that the Company will ultimately be able to secure.
On June 3, 1998, the Company completed a $45 million private placement,
consisting of $30 million of subordinated notes ("Subordinated Notes") and $15
million of preferred stock of the Company. The Subordinated Notes have an eight
year term and are convertible into shares of the Company's common stock at $9.21
for each share of common stock issuable upon conversion of outstanding principal
and accrued but unpaid interest on such Subordinated Notes. If certain events of
default occur, the Subordinated Notes then outstanding will automatically
convert into shares of Convertible Preferred Stock - Series B ("Preferred Stock
- - Series B") at a rate of one share of Preferred Stock - Series B for each
thousand dollars in outstanding principal and accrued but unpaid interest on the
Subordinated Notes, subject to adjustment for stock splits, reverse splits,
stock dividends, reorganizations and the like. The Subordinated Notes and all
outstanding shares of Preferred Stock shall be automatically converted into
common stock (or, in the case of the Preferred Stock Series A and Preferred
Stock - Series C, redeemed at nominal cost) if the rolling 21-day average
closing market price of the common stock on 20 out of any 30 consecutive trading
days is more than $15.73 on or prior to May 18, 1999, more than $16.85 on or
prior to May 18, 2000, or more than $17.98 at any time thereafter.
The Preferred Stock includes the following series: 100 shares of Preferred Stock
- - Series A, all of which is issued and outstanding; 70,000 shares of Preferred
Stock - Series B, none of which is presently outstanding but which will be
issued automatically upon conversion of the then outstanding Subordinated Notes,
as described above; 100 shares of Preferred Stock - C, all of which is issued
and outstanding; and 2,000,000 shares of Convertible Preferred Stock - Series D
("Preferred Stock - Series D"), of which 1,628,663 shares are issued and
outstanding. The shares of Preferred Stock Series B are convertible
13
<PAGE>
into shares of the Company's common stock at the rate of 108.58 shares of common
stock for each share of Preferred Stock - Series B, and the shares of Preferred
Stock - Series D are convertible into shares of the Company's common stock on a
share for share basis, in each case subject to adjustment for stock splits,
reverse splits, stock dividends, reorganizations and the like. The Preferred
Stock of Series A and C are not convertible.
The Company believes that proceeds from the expected expansion of the existing
Credit Facility and cash flow from operations, if any, will be sufficient to
fund its operations for the near future. The Company also believes that such
funds will be sufficient to complete a number of other future practice
affiliations and any possible future consideration from existing affiliations.
However, to execute its long term business strategy, the Company will require
substantial additional funding through additional long-term or short-term
borrowing arrangements or through the public or private issuance of additional
debt or equity securities to acquire new practices and to expand and maintain
existing affiliated practices. 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.
Year 2000 Compliance
The Company has purchased software that runs on its computer network which it
believes is Year 2000 compliant. The Company is currently evaluating its key
suppliers to determine whether they are Year 2000 compliant and to determine the
impact, if any, on the financial position and results of operations. Currently,
the Year 2000 issues are not expected to materially impact the financial
position and results of operations of the Company.
14
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On April 1, 1998, the Company issued 28,535 shares of common stock as part of
the purchase price for the acquisition of assets of a dental practice. The
issuance of the shares was exempt from registration under Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D thereunder because the
purchaser was an accredited investor within the meaning of Rule 501.
On May 31, 1998, the Company issued 24,834 shares of common stock as part of the
purchase price for the stock of Managed Dental Care of Oregon, Inc. The issuance
of the shares was exempt from registration under Section 4(2) of the Securities
Act of 1933 and Rule 506 of Regulation D thereunder because the purchaser was an
accredited investor within the meaning of Rule 501.
On June 3, 1998, the Company completed a $45 million private placement (the
"Private Placement"), consisting of $30 million of 7% convertible subordinated
notes (the "Subordinated Notes") and $15 million of preferred stock (the
"Preferred Stock") of the Company. The Private Placement was consummated in a
two-step transaction involving a small group of institutional investors (the
"Investors"), including Chase Capital Partners, The Sprout Group, Accel
Partners, Bessemer Venture Partners and St. Paul Venture Capital. The Investors
purchased $13,500,204 of Preferred Stock and $25,500,000 of Subordinated Notes
on May 18, 1998 and the remaining $1,499,796 of Preferred Stock and $4,500,000
of Subordinated Notes on June 3, 1998.
The Subordinated Notes have an eight year term and are convertible into shares
of the Company's common at $9.21 for each share of common stock issuable upon
conversion of outstanding principal and accrued but unpaid interest on such
Subordinated Notes. If certain events of default occur, the Subordinated Notes
then outstanding will automatically convert into shares of Convertible Preferred
Stock - Series B ("Preferred Stock - Series B") at a rate of one share of
Preferred Stock - Series B for each thousand dollars in outstanding principal
and accrued but unpaid interest on the Subordinated Notes, subject to adjustment
for stock splits, reverse splits, stock dividends, reorganizations and the like.
The Subordinated Notes and all outstanding shares of Preferred Stock shall be
automatically converted into common stock (or, in the case of the Preferred
Stock - Series A and Preferred Stock - Series C, redeemed at nominal cost) if
the rolling 21-day average closing market price of the common stock on 20 out of
any 30 consecutive trading days is more than $15.73 on or prior to May 18, 1999,
more than $16.85 on or prior to May 18, 2000, or more than $17.98 at any time
thereafter.
The Preferred Stock includes the following series: 100 shares of Preferred Stock
- - Series A, all of which is issued and outstanding; 70,000 shares of Preferred
Stock - Series B, none of which is presently outstanding but which will be
issued automatically upon conversion of the then outstanding Subordinated Notes,
as described above; 100 shares of Preferred Stock - C, all of which is issued
and outstanding; and 2,000,000 shares of Convertible Preferred Stock - Series D
("Preferred Stock - Series D"), of which 1,628,663 shares are issued and
outstanding. The shares of Preferred Stock Series B are convertible into shares
of the Company's common stock at the rate of 108.58 shares of common stock for
each share of Preferred Stock - Series B, and the shares of Preferred Stock -
Series D are convertible into shares of the Company's common stock on a share
for share basis, in each case subject to adjustment for stock splits, reverse
splits, stock dividends, reorganizations and the like. The Preferred Stock of
Series A and C are not convertible and have limited voting rights, but the
holders of outstanding shares of Preferred Stock - Series A have, and upon the
occurrence of certain events the holders of outstanding shares of Series C
Preferred Stock will have, the right to elect one member of Company's Board of
Directors.
Bear, Stearns & Co. Inc. acted as the placement agent for the Private Placement
and received a commission for its services of $1.5 million and a warrant to
purchase 40,000 shares of the Company's common stock at $9.21 per share.
Investors received a closing fee equal to 1% of the principal amount of
Convertible Notes purchased. The issuance of the Subordinated Notes and the
Preferred Stock was exempt from registration under Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D thereunder because all of
the Investors are accredited investors within the meaning of Rule 501.
On June 9, 1998, the Company issued 21,667 shares of common stock as part of the
purchase price for the acquisition of assets of a dental practice. The issuance
of the shares was exempt from registration under Section 4(2) of the Securities
Act of 1933 and Rule 506 of Regulation D thereunder because the purchaser was an
accredited investor within the meaning of Rule 501.
On June 30, 1998, the Company issued 182,425 shares of common stock as part of
the purchase price for the acquisition of assets of Pacific Dental Services,
Inc. and a related entity. The sale of the stock was exempt from registration
under Section 4(2) of the Securities Act of 1933 because the two purchasers and
each of the nine shareholders of the two purchasers, either alone or together
with their legal and other advisors, had the knowledge and experience in
business and financial matters
15
<PAGE>
to evaluate an investment in the Company, received information about the Company
and made appropriate investment representations.
Item 4. Submission of Matters to a Vote of Security Holders
The 1998 Annual Meeting of Shareholders of the Company was held on June 4, 1998.
Michael T. Fiore, Robert Finzi and H. Wayne Posey were re-elected as directors
for a three-year term. Kathleen D. La Porte was re-elected as a director for a
two-year term. Grant M. Sadler and L. Theodore Van Eerden were re-elected as
directors for a one-year term. The terms of office of directors Gerald R. Aaron,
Kenneth D. Hooten, Paul H. Keckley, Dany Y. Tse and Craig W. Wong continued
after the meeting. The directors elected at the meeting were elected by the
following votes:
Name of Director Votes For Votes Withheld
---------------- --------- --------------
Michael T. Fiore 5,933,363 1,079
Robert Finzi 5,933,363 1,079
H. Wayne Posey 5,930,363 4,079
Kathleen D. La Porte 5,930,263 4,179
Grant M. Sadler 5,930,363 4,079
L. Theodore Van Eerden 5,930,663 3,779
The shareholders also approved proposals to (a) amend the 1993 Stock Incentive
Plan to increase the number of shares authorized for issuance under the plan
from 1,000,000 to 2,000,000 shares, and (b) to ratify the selection of KPMG Peat
Marwick LLP as the Company's independent auditors for 1998. These proposals were
approved by the following votes:
<TABLE>
<CAPTION>
Broker
Proposal Votes For Votes Against Abstentions Non-votes
-------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Amendment of 1993 Stock 5,015,193 217,377 2,200 958,765
Incentive Plan
Ratification of Auditors 5,931,365 1,506 1,571 259,093
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3.1 Restated Articles of Incorporation of the Company.
3.2 Articles of Amendment of the Company dated May 14, 1998.
4.1 Securities Purchase Agreement dated May 12, 1998 by and between
the Company and the purchasers named therein. Incorporated by
reference to Exhibit 4.1 of the Company's Current Report on Form
8-K dated June 3, 1998 and filed on July 2, 1998.
10.1 Employment Agreement dated June 1, 1998 between Michael T. Fiore
and the Company.
10.2 Employment Agreement dated July 1, 1998 between Dany Y. Tse and
the Company.
10.3 Employment Agreement dated June 1, 1998 between L. Theodore Van
Eerden and the Company.
27 Financial Data Schedule
(b) Reports on Form 8-K.
On May 15, 1998, the Company filed a Current Report on Form 8-K/A
Amendment No. 1 to amend its previously filed Form 8-K relating to the
acquisition on February 28, 1998 of substantially all of the assets of
Affordable Dental Care, Inc. The amendment includes under Item 7 the
combined financial statements of Affordable Dental Care, Inc. and
Managed Dental Care of Oregon, Inc. as of and for the years ended
December 31, 1996 and 1997, and pro forma financial information as of
and for the year ended December 31, 1997.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GENTLE DENTAL SERVICE CORPORATION
---------------------------------
(Registrant)
Date: August 14, 1998 By: NORMAN R. HUFFAKER
-------------------------------------
Norman R. Huffaker
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
3.1 Restated Articles of Incorporation of the Company.
3.2 Articles of Amendment of the Company dated May 14, 1998.
4.1 Securities Purchase Agreement dated May 12, 1998 by and between the
Company and the purchasers named therein. Incorporated by reference
to Exhibit 4.1 of the Company's Current Report on Form 8-K dated June
3, 1998 and filed on July 2, 1998.
10.1 Employment Agreement dated June 1, 1998 between Michael T. Fiore and
the Company.
10.2 Employment Agreement dated July 1, 1998 between Dany Y. Tse and the
Company.
10.3 Employment Agreement dated June 1, 1998 between L. Theodore Van
Eerden and the Company.
27 Financial Data Schedule
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
MUTUAL HEALTH SYSTEMS, INC.
(changing its name to Gentle Dental Service Corporation)
Pursuant to RCW 23B.10.070, Mutual Health Systems, Inc. adopts the
following Restated Articles of Incorporation, which shall supersede its
heretofore existing Articles of Incorporation and all amendments thereto.
ARTICLE I
Name
----
The name of this Corporation is Gentle Dental Service Corporation.
ARTICLE II
Capital Stock
-------------
A. The Corporation is authorized to issue a total of Eighty Million
(80,000,000) shares, without par value, consisting of Fifty Million
(50,000,000) shares of Common Stock and Thirty Million (30,000,000) shares
of Preferred Stock.
B. Holders of Common Stock are entitled to one vote per share. On
dissolution of the Corporation, after any preferential amount with respect
to the Preferred Stock has been paid or set aside, the holders of Common
Stock and the holders of any series of Preferred Stock entitled to
participate in the distribution of assets are entitled to receive the net
assets of the Corporation.
C. The Board of Directors is authorized, subject to limitations
prescribed by the Washington Business Corporation Act, as amended from time
to time (the "Act"), and by the provisions of this Article, to provide for
the issuance of shares of Preferred Stock in series, to establish from time
to time the number of shares to be included in each series and to determine
the designations, relative rights, preferences and limitations of the
shares of each series. The authority of the Board of Directors with respect
to each series includes determination of the following:
(1) The number of shares in and the distinguishing designation of
that series;
(2) Whether shares of that series shall have full, special,
conditional, limited or no voting rights, except to the extent otherwise
provided by the Act;
<PAGE>
(3) Whether shares of that series shall be convertible and the
terms and conditions of the conversion, including provision for adjustment
of the conversion rate in circumstances determined by the Board of
Directors;
(4) Whether shares of that series shall be redeemable and the
terms and conditions of redemption, including the date or dates upon or
after which they shall be redeemable and the amount per share payable in
case of redemption, which amount may vary under different conditions or at
different redemption dates;
(5) The dividend rate, if any, on shares of that series, the
manner of calculating any dividends and the preferences of any dividends;
(6) The rights of shares of that series in the event of voluntary
or involuntary dissolution of the Corporation and the rights of priority of
that series relative to the Common Stock and any other series of Preferred
Stock on the distribution of assets on dissolution; and
(7) Any other rights, preferences and limitations of that series
that are permitted by law to vary.
D. When these Restated Articles of Incorporation become effective,
each of the shares of Class A Voting Common Stock issued and outstanding of
the Corporation immediately prior thereto shall be reclassified and changed
into and shall constitute one-half of a fully paid and nonassessable share
of Common Stock of the Corporation, without further action of any kind.
After such time, each holder of shares of Class A Voting Common Stock shall
present the certificate representing such shares to the Corporation and
receive promptly in exchange therefore a new certificate representing the
number of shares Common Stock into which such shares have been
reclassified. Until so surrendered, each certificate which prior to the
reclassification represented shares of Class A Voting Common Stock shall be
deemed, for all purposes, to evidence ownership of the number of shares of
Common Stock into which such shares shall have been reclassified. No
fractional shares of Common Stock shall be issued pursuant to this
reclassification; any fractional amount resulting from the reclassification
as described above shall be rounded up to the nearest full share.
ARTICLE III
No Preemptive Rights
--------------------
Except as may otherwise be provided by the Board of Directors, no
holder of any shares of this Corporation shall have any preemptive right to
purchase, subscribe for or otherwise acquire any securities of this
Corporation of any class or kind now or hereafter authorized.
2
<PAGE>
ARTICLE IV
Number and Tenure of Directors
------------------------------
This Corporation shall have at least three directors, the actual
number to be fixed in accordance with the Bylaws. The directors shall be
divided into three classes, as nearly equal in number as possible, with the
term of office of the first class ("Class I") to expire at the 1997 annual
meeting of shareholders, the term of office of the second class ("Class
II") to expire at the 1998 annual meeting of shareholders and the term of
office of the third class ("Class III") to expire at the 1999 annual
meeting of shareholders. At each annual meeting of shareholders following
such initial classification and election, directors elected to succeed
those directors whose terms expire shall be elected to serve three-year
terms and until their successors are elected and qualified, so that the
term of one class of directors will expire each year. If the number of
directors is changed pursuant to the Bylaws, any newly created
directorships, or any decrease in directorships, shall be so apportioned
among the classes so as to make all classes as nearly equal as possible.
ARTICLE V
Cumulative Voting
-----------------
There shall be no cumulative voting of shares in this Corporation.
ARTICLE VI
Shareholder Voting on Significant Corporate Action
--------------------------------------------------
Any corporate action for which the Washington Business Corporation
Act, as then in effect, would otherwise require approval by either a
two-thirds vote of the shareholders of the Corporation or by a two-thirds
vote of one or more voting groups shall be deemed approved by the
shareholders or the voting group(s) if it is approved by the affirmative
vote of the holders of a majority of shares entitled to vote or, if
approval by voting groups is required, by the holders of a majority of
shares within each voting group entitled to vote separately.
Notwithstanding this Article, effect shall be given to any other provision
of these Articles that specifically requires a greater vote for approval of
any particular corporate action.
3
<PAGE>
ARTICLE VII
Limitation on Director Liability
--------------------------------
To the fullest extent permitted by Washington law and subject to the
Bylaws of this Corporation, a director of this Corporation shall not be
liable to the Corporation or its shareholders for monetary damages for his
or her conduct as a director. Any amendment to or repeal of this Article
shall not adversely affect any right of a director of this Corporation
hereunder with respect to any acts or omissions of the director occurring
prior to amendment or repeal.
ARTICLE VIII
Indemnification of Directors
----------------------------
To the fullest extent permitted by its Bylaws and Washington law, this
Corporation is authorized to indemnify any of its directors. The Board of
Directors shall be entitled to determine the terms of indemnification,
including advance of expenses, and to give effect thereto through the
adoption of Bylaws, approval of agreements, or by any other manner approved
by the Board of Directors. Any amendment to or repeal of this Article shall
not adversely affect any right of an individual with respect to any right
to indemnification arising prior to such amendment or repeal.
MUTUAL HEALTH SYSTEMS, INC.
By: DANY Y. TSE
-------------------------------------
Dany Y. Tse
President and Chief Executive Officer
4
STATE OF WASHINGTON ARTICLES OF AMENDMENT
SECRETARY OF STATE WASHINGTON
Ralph Munro, Secretary of State PROFIT CORPORATION
(Per Chapter 238.10 RCW)
- - Please PRINT or TYPE in black ink
- - Sign, date and return original FEE: $30
AND ONE COPY to:
EXPEDITED (24-HOUR) SERVICE
CORPORATIONS DIVISION AVAILABLE - $20 PER ENTITY
505 E. UNION - PO BOX 40234 INCLUDE FEE AND WRITE
OLYMPIA, WA 98504-0234 "EXPEDITE" IN BOLD LETTERS
ON OUTSIDE OF ENVELOPE
- - BE SURE TO INCLUDE FILING FEE.
Checks should be made payable FOR OFFICE USE ONLY
to "Secretary of State" ----------------------------
FILED: / /
----------------------------
- --------------------------------------------------------------------------------
IMPORTANT! Person to contact | Daytime Phone Number
about this filing | (with area code)
|
Jonathan F. Atzen - McDermott, Will & Emery | 949-757-7170
- --------------------------------------------------------------------------------
AMENDMENT TO ARTICLES OF INCORPORATION
- --------------------------------------------------------------------------------
NAME OF CORPORATION (As currently recorded with the
Office of the Secretary of State)
Gentle Dental Service Corporation
- --------------------------------------------------------------------------------
UBI NUMBER | CORPORATION NUMBER | AMENDMENTS TO ARTICLES OF INCORPORATION
| (if known) | WERE ADOPTED ON
| |
601 429 911 | 2005603 | Date: May 12, 1998
- --------------------------------------------------------------------------------
EFFECTIVE DATE (Specified effective date may be up to 30 days AFTER
OF ARTICLES OF receipt of the document by the Secretary of State)
AMENDMENT
[ ] Specific Date: _______________ [X] Upon filing by the
Secretary of State
- --------------------------------------------------------------------------------
ARTICLES OF AMENDMENT WERE ADOPTED BY (Please check ONE of the following)
[ ] Incorporators. Shareholders action was not required
[X] Board of Directors. Shareholders action was not required
[ ] Duly approved shareholder action in accordance with Chapter 23B.10 RCW
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMENDMENTS TO THE ARTICLES OF INCORPORATION ARE AS FOLLOWS
If amendment provides for an exchange, reclassification, or cancellation
of issued shares, provisions for implementing the amendment must be
included. If necessary, attach additional amendments or information.
See attached Amendment to Restated Articles of Incorporation regarding new
Articles IX , X, XI, and XII creating Series A, Series B, Series C and Series D
Preferred Stock.
- --------------------------------------------------------------------------------
SIGNATURE OF OFFICER
This document is hereby executed under penalties of perjury, and is,
to the best of my knowledge, true and correct.
L. THEODORE VAN EERDEN L. Theodore Van Eerden May 14, 1998
- --------------------------------------------------------------------------------
Signature of Officer Printed Name Date
Secretary and Executive
Vice President
- --------------------------------------------------------------------------------
INFORMATION AND ASSISTANCE - 360/753-7115 (TDD - 360/753-1485)
<PAGE>
ARTICLE IX
SERIES A PREFERRED STOCK
1. Designation of Amount; Ranking.
The issuance of One Hundred (100) shares of the Series A Preferred
Stock is hereby authorized. The Series A Preferred Stock shall rank senior to
the Common Stock (as hereinafter defined), pari passu with the Series C
Preferred Stock and junior to all other classes and series of equity securities
of the Corporation now existing or hereafter created with respect to rights of
redemption and rights of Liquidation (as hereinafter defined).
2. Definitions.
As used in this Article IX, the following capitalized terms have the
following meanings:
"Affiliate" has the meaning given to such term in the Purchase
Agreement.
"Applicable Law" has the meaning given to such term in the Purchase
Agreement.
"By-laws" means the By-laws of the Corporation, as amended and in
effect from time to time.
"Board" means the Board of Directors of the Corporation.
"Business Day" has the meaning given to such term in the Purchase
Agreement.
"Certificate of Incorporation" means the Restated Articles of
Incorporation of the Corporation as amended and restated and in effect at the
time in question.
"Closing Date" has the meaning given to such term in the Purchase
Agreement.
"Common Stock" means, collectively, all of the Common Stock, no par
value, of the Corporation of any class, and any other class of capital stock of
the Corporation hereafter authorized that is not limited to a fixed sum or
percentage of par or stated value in respect to the rights of the holders
thereof to participate in dividends or in the distribution of assets upon any
liquidation, dissolution or winding up of the Corporation.
<PAGE>
"Corporation" means Gentle Dental Service Corporation, a Washington
corporation.
"Default Director" has the meaning given to such term in Section 3(b)
of this Article IX.
"Document" has the meaning given to such term in the Purchase
Agreement.
"Event of Default" has the meaning given to such term in the Purchase
Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any similar federal law then in force.
"Governmental Authority" shall mean any Federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, or any court, in each case whether of the United States of
America or any political subdivision thereof, or of any other country.
"Liquidation" means any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation.
"Mandatory Conversion Event" has the meaning given to such term in the
Purchase Agreement.
"Maturity Date" has the meaning given to such term in the Purchase
Agreement.
"Notes" has the meaning given to such term in the Purchase Agreement.
"Original Cost" means, with respect to any share of Series A Preferred
Stock, $1.00. In the event of any change (by way of any recapitalization,
subdivision or recombination) in the number or kind of shares of Series A
Preferred Stock, the Original Cost of the shares of Series A Preferred Stock
immediately prior to such change shall be ratably adjusted among such shares of
Series A Preferred Stock immediately after such change.
"Person" shall be construed broadly and shall include without
limitation an individual, a partnership, a corporation, an association, a joint
stock company, a limited liability company, a trust, a joint venture, an
unincorporated organization and a Governmental Authority.
"Preferred Director" shall mean any individual elected to the Board,
to serve as a director, pursuant to Section 3(b)(i) of this Article IX.
-2-
<PAGE>
"Preferred Holders" means holders of Series A Preferred Stock.
"Preferred Liquidation Preference" has the meaning ascribed to it in
Section 4 of this Article IX.
"Preferred Stock" means the preferred stock, no par value, of the
Corporation.
"Purchase Agreement" means the Securities Purchase Agreement dated as
of May 12, 1998, between the Corporation and the Purchasers (as defined
therein), as amended from time to time.
"Redemption Event" has the meaning ascribed to it in Section 5(a) of
this Article IX.
"Redemption Price" has the meaning ascribed to it in Section 5(a) of
this Article IX.
"Requisite Preferred Holders" means the holders of a majority of the
outstanding shares of Series A Preferred Stock.
"Securities" means "securities" as defined in Section 2(1) of the
Securities Act.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Series A Preferred Redemption Event" has the meaning given to such
term in the Purchase Agreement.
"Series C Preferred Stock" means the Series C Preferred Stock, no par
value, of the Corporation.
"Warrant" has the meaning given to such term in the Note.
3. Voting Rights.
(a) Non-Voting.
Except as required by law and pursuant to paragraphs (b) and (c)
below, the Preferred Holders shall not be entitled to vote.
(b) Board Representation.
(i) So long as any Series A Preferred Stock remains outstanding,
the Requisite Preferred Holders shall be entitled to elect one individual to the
Board to serve as a director, which individual initially shall be Eric Green;
provided, however, that upon the occurrence or the continuance of any Event of
Default,
-3-
<PAGE>
the Requisite Preferred Holders shall be entitled to elect one additional
individual to the Board to serve as a director (a "Default Director").
(ii) Notwithstanding any other sections of the Certificate of
Incorporation, so long as any Series A Preferred Stock remains outstanding, the
Requisite Preferred Holders shall be entitled to (A) remove from the Board any
Preferred Director elected under the foregoing subsection (i), (B) elect each
successor to any such Preferred Director removed in accordance with subparagraph
(ii)(A) above or who otherwise vacates such office, and (C) take all necessary
action, including amending the By-Laws, to increase the number of directors on
the Board to create a vacancy on the Board to permit the Requisite Preferred
Holders to elect an additional individual to the Board upon an occurrence or
continuance of an Event of Default pursuant to the foregoing clause (i) above.
(iii) The right of the Preferred Holders to elect directors may
be exercised at the special meeting called pursuant to this Section, at any
annual or other special meeting of shareholders and, to the extent and in the
manner permitted by Applicable Law, pursuant to a written consent in lieu of a
shareholders meeting. A proper officer of the Corporation shall, upon the
written request of the Requisite Preferred Holders, addressed to any officer of
the Corporation, call a special meeting of the holders of Preferred Stock for
the purpose of electing directors pursuant to this Section. Such meeting shall
be held at the earliest legally permissible date at the principal office of the
Corporation, or at such other place designated by the Requisite Preferred
Holders. If such meeting has not been called by a proper officer of the
Corporation within 2 days after personal delivery, by hand or by a nationally
recognized, overnight courier guaranteeing next business day delivery, of such
written request upon any officer of the Corporation or within 5 days after
mailing the same to the secretary of the Corporation at its principal office,
then the Requisite Preferred Holders may call such meeting at the expense of the
Corporation, and such meeting may be called upon the notice required for annual
meetings of shareholders and shall be held at the Corporation's principal
office, or at such other place designated by the Requisite Preferred Holders.
The Preferred Holders shall be given access to the stock record books of the
Corporation for the purpose of causing a meeting of stockholders to be called
pursuant to this Section.
(iv) At any meeting or at any adjournment thereof at which the
Preferred Holders have the right to elect directors, the presence, in person or
by proxy, of the Preferred Holders shall be required to constitute a quorum for
the election or removal of any director by the Requisite Preferred Holders. The
affirmative vote of the Requisite Preferred Holders shall be required to elect
or remove any Preferred Director.
-4-
<PAGE>
(v) If any Event of Default shall occur and be continuing, the
Preferred Holders shall also have any other rights which such holder is entitled
to under any Document at any time and any other rights which such holder may
have pursuant to Applicable Law.
(vi) The Corporation shall pay or reimburse each Preferred
Director for the reasonable out-of-pocket expenses incurred by such Person in
connection with attending formal meetings of the Board and any committee
thereof. The Corporation shall use its best efforts to maintain video
teleconferencing capabilities for all formal meetings of the Board and any
committee thereof.
(c) Covenants.
The Corporation shall not, without the affirmative consent or approval
of the Requisite Preferred Holders:
(i) in any manner authorize, issue or sell any shares of Series A
Preferred Stock other than as contemplated by the Purchase Agreement or
this Article IX;
(ii) reclassify, cancel or in any manner alter or change the
terms, designations, powers, preferences or relative, optional or other
special rights, or the qualifications, limitations or restrictions thereof,
of the Series A Preferred Stock;
(iii) amend, repeal or modify any provision of this Article IX;
or
(iv) amend, repeal or modify any provision of the Certificate of
Incorporation or By-laws in a manner that would adversely affect the
powers, preferences or rights of the Series A Preferred Stock.
(d) Observer Rights.
(i) The Corporation hereby covenants that the Preferred Holders
shall have the right to have that number of representatives (each such
representative, an "Observer") determined as hereinafter provided present at all
meetings of the Board. Such right shall from time to time be exercisable by
delivery to the Corporation of written notice from the Requisite Preferred
Holders specifying the names of such Observers. The number of Observers shall at
all times and from time to time be equal to that number of members of the Board
that the Preferred Holders are then entitled to designate but whose seats on the
Board are at the time vacant.
-5-
<PAGE>
(ii) The Corporation will give each Observer reasonable prior
notice (it being agreed that the same prior notice given to the Board shall be
deemed reasonable prior notice) in any manner permitted in the Corporation's
By-laws for notices to directors of the time and place of any proposed meeting
of the Board, such notice in all cases to include true and complete copies of
all documents furnished to any director in connection with such meeting. Each
such Observer will be entitled to be present in person as an observer at any
such meeting or, if a meeting is held by telephone conference, to participate
therein for the purpose of listening thereto.
(iii) The Corporation will deliver to each Observer copies of all
papers which may be distributed from time to time to the directors of the
Corporation at such time as such papers are so distributed to them, including
copies of any written consent.
4. Liquidation.
In the event of any Liquidation, the Preferred Holders shall be
entitled to receive, out of the assets of the Corporation legally available for
distribution to its stockholders, before any payment shall be made to the
holders of any stock ranking on Liquidation junior to the Series A Preferred
Stock (with respect to rights on Liquidation, the Series A Preferred Stock shall
rank senior to the Common Stock, pari passu with the Series C Preferred Stock
but junior to all other series of Preferred Stock), an amount per share equal to
(the "Preferred Liquidation Preference") the Original Cost of such share. If,
upon any Liquidation, the assets of the Corporation available for distribution
to its stockholders shall be insufficient to pay the Preferred Holders the full
amount to which it shall be entitled, then the Corporation shall pay the
Preferred Holders the aggregate unpaid Preferred Liquidation Preference as soon
as practicable after the Corporation has funds legally available therefor. In
the event of any Liquidation, after payment shall have been made to the
Preferred Holders in the full amount to which it is entitled, the holders of
shares of Common Stock shall be entitled, to the exclusion of the Preferred
Holders, to share, according to their respective rights and preferences, in all
remaining assets of the Corporation available for distribution to its
stockholders.
5. Redemption.
Subject to the Corporation having funds legally available for such
purpose, the Corporation shall redeem all of the shares of the Series A
Preferred Stock then outstanding, on the first to occur of (A) on the Maturity
Date, so long as all of the outstanding Notes, the outstanding shares of the
Series B Preferred Stock and the outstanding shares of the Series D
-6-
<PAGE>
Preferred Stock shall have been redeemed or converted prior thereto, (B) upon
the occurrence of the Mandatory Conversion Event, or (C) in the event a Series A
Preferred Redemption Event shall have occurred (each of clauses (A), (B) and (C)
above, a "Redemption Event"). The per share redemption price at which shares of
Series A Preferred Stock are to be redeemed pursuant to this Section 5(a) shall
be equal to the Liquidation Preference Amount (the "Redemption Price").
(b) On and after any redemption date (the "Redemption Date") pursuant
to this Section 5 (unless default shall be made by the Corporation in the
payment of the Redemption Price, in which event such rights shall be exercisable
until such default is cured), all rights in respect of the shares of the Series
A Preferred Stock to be redeemed, except the right to receive the Redemption
Price, shall cease and terminate, and such shares shall no longer be deemed to
be outstanding, whether or not the certificates representing such shares have
been received by the Corporation.
(c) Any communication or notice relating to redemption given pursuant
to this Section 5 shall be sent by first-class certified mail, return receipt
requested, postage prepaid, to the Preferred Holders, at their respective
addresses as the same shall appear on the books of the Corporation, or to the
Corporation at the address of its principal, or registered office, as the case
may be.
(d) At any time on or after the Redemption Date, the Preferred Holders
shall be entitled to receive the Redemption Price upon actual delivery to the
Corporation or its agents of the certificates representing the shares of the
Series A Preferred Stock to be redeemed.
(e) Any redemption payments by the Corporation pursuant to this
Section 5 shall be paid in cash.
(f) Any shares of Series A Preferred Stock which are redeemed,
converted or otherwise acquired by the Corporation shall be canceled and shall
not be reissued (as treasury shares), sold or transferred as Series A Preferred
but such shares shall become unclassified Preferred Stock of the Corporation.
ARTICLE X
SERIES B PREFERRED STOCK
1. Designation of Amount; Ranking.
The issuance of Seventy Thousand (70,000) shares of the Series B
Preferred Stock is hereby authorized. The Series B
-7-
<PAGE>
Preferred Stock shall rank senior to all other classes and series of equity
securities of the Corporation now existing or hereafter created including the
Series A Preferred Stock, no par value, Series C Preferred Stock, no par value
and the Series D Preferred Stock (collectively, the "Junior Stock"), with
respect to dividend rights, rights of redemption, rights of conversion and
rights of Liquidation (as hereinafter defined).
2. Definitions.
Except as set forth below, capitalized terms used herein have the
meanings given to such terms in the Purchase Agreement. The following
capitalized terms used in this Article X have the following meanings:
"Adjusted Market Price" shall be an amount equal to 95% of the Market
Price in effect at such time.
"Applicable Dividend Rate" means, for each Dividend Period (i) for
dividends paid in cash on the last day of such period where an Event of Default
shall not have occurred, a rate equal to the Applicable Interest Rate at the
time of the Series B Preferred Conversion Event, and (ii) in all other
circumstances, a rate equal to the Applicable Interest Rate at the time of the
Series B Conversion Event plus 1.25% per annum; and the Corporation and the
holders of Series A Preferred Stock acknowledge that the difference of 1.25%
between the aforementioned rate represents additional dividend payable upon the
occurrence and continuation of an Event of Default after the Series B Preferred
Conversion Event.
"Converted Shares" has the meaning ascribed to it in Section 6(d) of
this Article X.
"Converting Shares" has the meaning ascribed to it in Section 6(d) of
this Article X.
"Corporation" means Gentle Dental Service Corporation, a Washington
corporation.
"Conversion Premium" shall mean $0.2247.
"Conversion Price" shall initially be the Conversion Price of the
Notes on the date of the Series B Conversion Event, and shall be subject to
adjustment from time to time as set forth in Section 4(c) of this Article X.
"Documents" shall have the meaning ascribed to it in the Purchase
Agreement.
"Excluded Stock" means (i) all Common Stock issued upon conversion of
Preferred Stock, Notes and Warrants, (ii) shares of Common Stock (as such number
is equitably adjusted for stock
-8-
<PAGE>
splits, stock dividends, share combinations and similar pro-rata
recapitalizations) issued upon the exercise of stock options issued pursuant to
the Equity Incentive Plans and (iii) Securities issued by the Corporation in an
underwritten Public Offering.
"Junior Stock" has the meaning given to such term in Section 1 of this
Article X.
"Liquidation" means any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation.
"Mandatory Redemption Date" shall mean the eighth anniversary of the
First Closing Date.
"Measurement Period" means 30 consecutive Business Days.
"Original Cost" means, with respect to any share of Series B Preferred
Stock, $1,000.00. In the event of any change (by way of any recapitalization,
subdivision or recombination) in the number or kind of shares of Series B
Preferred Stock, the Original Cost of the shares of Series B Preferred Stock
immediately prior to such change shall be ratably adjusted among such shares of
Series B Preferred Stock immediately after such change.
"Original Issuance Date" means the date on which the Notes are
converted pursuant to a Series B Conversion Event.
"Preferred Liquidation Preference" has the meaning ascribed to it in
Section 4(b) of this Article X.
"Preferred Dividend Payment Date" shall have the meaning ascribed to
it in Section 4(a) of this Article X.
"Public Offering" means the closing of a public offering of Securities
pursuant to a registration statement declared effective under the Securities
Act, except that a Public Offering shall not include an offering made in
connection with a business acquisition or an employee benefit plan.
"Purchase Agreement" means the Securities Purchase Agreement dated as
of May 12, 1998, among the Corporation and the Purchasers (as defined therein),
as amended from time to time.
"Qualified Holder" means (i) each Person who initially acquires Series
B Preferred Stock from the Corporation and (ii) any other holder of Series B
Preferred Stock who, together with its Affiliates, owns Series B Preferred Stock
with an aggregate Original Cost of $1,000,000 or more.
-9-
<PAGE>
"Qualified Securities" means the Common Stock issued to the
stockholders of the Corporation as consideration in any conversion, provided (i)
such Common Stock is then listed on a national securities exchange or reported
on the Nasdaq National Market and (ii) such Common Stock is registered under the
Securities Act or is freely tradable under Rule 144 of the Securities Act within
6 months of the date of issuance.
"Redemption Price" has the meaning ascribed to it in Section 5(a) of
this Article X.
"Requisite Preferred Holders" means the holders of a majority of the
outstanding shares of Series B Preferred Stock at the time in question.
"Securities and Exchange Commission" means the Securities and Exchange
Commission or any Governmental Authority succeeding to the functions thereof.
"Sale of the Corporation" means (i)<0- 95>the sale (in one or a series
of related transactions) of all or substantially all of the Corporation's assets
to a Person or a group of Persons acting in concert, (ii)<0- 95>the sale or
transfer (in one or a series of related transactions) of the outstanding capital
stock of the Corporation to one Person or a group of Persons acting in concert,
or (iii) the merger or consolidation of the Corporation with or into another
Person who is not an Affiliate of the Corporation, in each case in clauses (ii)
and (iii) above under circumstances in which the holders of a majority in voting
power of the outstanding capital stock of the Corporation, immediately prior to
such transaction, own less than a majority in voting power of the outstanding
capital stock of the Corporation or the surviving or resulting company or
acquirer, as the case may be, immediately following such transaction. A sale (or
multiple related sales) of one or more Subsidiaries of the Corporation (whether
by way of merger, consolidation, reorganization or sale of all or substantially
all assets or Securities) which constitutes all or substantially all of the
consolidated assets of the Corporation shall be deemed a Sale of the
Corporation.
"Stockholders" means holders of Common Stock or Preferred Stock.
3. Voting Rights.
(a) General.
In addition to the rights provided by law and by paragraph (b) below,
the holders of Series B Preferred Stock shall be entitled to vote on all matters
as to which holders of Common Stock shall be entitled to vote, in the same
manner and with the same effect as the holders of Common Stock, voting together
with the holders of Common Stock, and any other capital
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stock of the Corporation entitled to vote together with the Common Stock, all as
one class. Each share of Series B Preferred Stock shall entitle the holder
thereof to such number of votes as shall equal the number of shares of Common
Stock into which such share of Series B Preferred Stock is then convertible
pursuant to Section 6 below.
(b) Covenants.
The Corporation shall not, without the affirmative consent or approval
of the Requisite Preferred Holders:
(i) in any manner authorize, create, designate, issue or sell any
class or series of capital stock of the Corporation (including any shares
of treasury stock) or rights, options, warrants or other Securities
convertible into or exercisable or exchangeable for capital stock or any
debt security which by its terms is convertible into or exchangeable for
any equity security or has any other equity participation feature or any
security that is a combination of debt and equity, which, in each case as
to the equity or convertible component thereof, as to the payment of
dividends, distribution of assets or redemptions, including, without
limitation, distributions to be made upon the liquidation, dissolution or
winding up of the Corporation or a merger, consolidation or sale of the
assets thereof, is senior to or pari passu with the Series B Preferred
Stock;
(ii) reclassify any Securities of the Corporation into shares of
any class or series of capital stock of the Corporation (A) ranking, either
as to payment of dividends, distributions of assets or redemptions,
including, without limitation, distributions to be made upon the
liquidation, dissolution or winding up of the Corporation or a merger,
consolidation or sale of the assets thereof, senior to or pari passu with
the Series B Preferred Stock or (B) which in any manner adversely affects
the rights of the holders of Series B Preferred Stock in their capacity as
such;
(iii) in any manner authorize, issue or sell any shares of Series
B Preferred Stock other than as contemplated by the Purchase Agreement or
this Article X;
(iv) reclassify, cancel or in any manner alter or change the
terms, designations, powers, preferences or relative, optional or other
special rights, or the qualifications, limitations or restrictions thereof,
of the Series B Preferred Stock;
(v) amend, repeal or modify any provision of the Certificate of
Incorporation or Bylaws that adversely affects the powers, preferences or
rights of the Series B Preferred Stock; or
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(vi) fail to comply with any of the covenants of the Corporation
as set forth in the Purchase Agreement.
4. Dividends, Distributions and Liquidations.
(a) Dividends.
(i) When, as, and if declared by the Board, out of funds legally
available for that purpose, the holders of Series B Preferred Stock shall be
entitled to receive before any dividends shall be declared and paid or set aside
for Common Stock, dividends, which shall accrue on a daily basis at the
Applicable Dividend Rate on the sum of the Original Cost of a share of Series B
Preferred Stock, plus all accumulated and unpaid dividends thereon, payable on
each September 30 and March 31 (each, a "Preferred Dividend Payment Date"), the
first such Preferred Dividend Payment Date being the first Preferred Dividend
Payment Date following the Series B Conversion Event. Dividends shall accrue at
the Applicable Dividend Rate regardless of whether the Board has declared a
dividend payment or whether there are any profits, surplus or other funds of the
Corporation legally available for dividends. Any dividends which accrue pursuant
to this Section 4(a) and which are not paid prior to the next succeeding
Preferred Dividend Payment Date shall be classified as "accumulated dividends"
and shall remain "accumulated and unpaid dividends" until paid or otherwise
satisfied pursuant to this Article X. Dividends on each share of Preferred Stock
shall accrue pursuant to this Section 4(a) from and including the Original
Issuance Date to and including the date such share is converted or redeemed in
full and all accrued but unpaid dividends thereon are also converted or paid in
full. All payments in cash due in cash under this Section 4(a) to any holder of
shares of Series B Preferred Stock shall be made to the nearest cent.
(ii) The dividends payable with respect to the Series B Preferred
Stock on each Preferred Dividend Payment Date shall be paid to the holders of
shares of the Preferred Stock as they appear on the stock records of the
Corporation on such date (the "Preferred Record Date") as shall be fixed by the
Board, which Preferred Record Date shall not be more than 60 days prior to the
applicable Preferred Dividend Payment Date and shall not precede the date upon
which the resolution fixing such Preferred Record Date is adopted, and if the
Board shall not fix a Preferred Record Date, the Preferred Record Date shall be
deemed to be the same date as the applicable Preferred Dividend Payment Date.
(iii) Except as otherwise provided herein, if at any time the
Corporation pays less than the total amount of dividends then accrued with
respect to the Series B Preferred Stock, such payment shall be distributed
ratably among the holders of the Series B Preferred Stock based upon the number
of shares of Series B Preferred Stock then held by each holder.
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(b) Liquidation.
In the event of any Liquidation, the holders of shares of Series B
Preferred Stock then outstanding shall be entitled to receive, out of the assets
of the Corporation legally available for distribution to its stockholders,
before any payment shall be made to the holders of any stock ranking on
Liquidation junior to the Series B Preferred Stock (with respect to rights on
Liquidation, the Series B Preferred Stock shall rank senior to the Common Stock
and any other class of Junior Stock), an amount per share equal to (the
"Preferred Liquidation Preference") the greater of (X) the Original Cost of such
share plus an amount equal to any accumulated and unpaid dividends on each share
to the date of payment or (Y) the amount that would otherwise be distributed to
such holder in such Liquidation if nothing was paid pursuant to clause (X) and
such holder converted such shares into shares of Common Stock in accordance with
the provisions of this Article X. If, upon any Liquidation, the assets of the
Corporation available for distribution to its stockholders shall be insufficient
to pay the holders of shares of the Series B Preferred Stock the full amounts to
which they respectively shall be entitled, the holders of shares of Series B
Preferred Stock shall share ratably in any distribution of assets according to
the respective amounts which would be payable with respect to the shares held by
them upon such distribution if all amounts payable on or with respect to said
shares were paid in full. In the event of any Liquidation, after payment shall
have been made to the holders of shares of Series B Preferred Stock in the full
amount to which they are entitled, the holders of shares of capital stock
ranking junior to the Series B Preferred Stock on Liquidation shall be entitled,
to the exclusion of the holders of the Series B Preferred Stock, to share,
according to their respective rights and preferences, in all remaining assets of
the Corporation available for distribution to its stockholders.
5. Redemption.
(a) Mandatory Redemption.
Subject to the Corporation having funds legally available for such
purpose, the Corporation shall redeem all of the shares of the Series B
Preferred Stock then outstanding on the Mandatory Redemption Date. The per share
redemption price (the "Mandatory Redemption Price") at which shares of the
Series B Preferred Stock are to be redeemed pursuant to this Section 5(a) shall
be equal to the greater of (x) the Original Cost of such share plus an amount
equal to any accumulated and unpaid dividends on each share, if any, to the date
of payment or (y) the Fair Value of such share. If the funds of the Corporation
legally available for redemption of shares of Series B Preferred Stock shall be
insufficient to permit the payment of the Mandatory Redemption Price required to
be paid pursuant to this Section 5(a), then the holders of Series B Preferred
Stock shall
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share in any legally available funds ratably in any such redemption based on the
respective number of Series B Preferred Stock that each holder thereof holds and
the Corporation shall redeem the remaining shares to have been redeemed as soon
as practicable after the Corporation has funds legally available therefor.
(b) Redemption at the Option of the Holders.
(i) At any time on or after the occurrence or continuation of an Event of
Default, the Requisite Preferred Holders may elect to have the Corporation
redeem all (but not less than all) of the outstanding shares of Series B
Preferred Stock at a price per share (i) in the case of a redemption option
caused by an Event of Default, other than a Change of Control, equal to the
Original Cost of such share plus an amount equal to all accrued and unpaid
dividends on each share, if any, to the date of payment and (ii) in the case of
a Change of Control (the "Change of Control Price"), equal to 101% of the
Original Cost thereof plus, without duplication, an amount in cash equal to
accrued and unpaid dividends thereof (in either case, the "Redemption Price"),
by giving written notice to the Corporation of such election (the "Investor
Notice of Election"), whereupon the Corporation shall be obligated to repurchase
such shares of Series B Preferred Stock on such date (the "Investor Optional
Redemption Date") as shall be determined by the Corporation, but in any event
not earlier than 10 days and not later than 30 days after the date on which the
Investor Notice of Election is delivered to the Corporation. Promptly (but in no
event later than five days) after the delivery of the Investor Notice of
Election to the Corporation, the Corporation shall send written notice (the
"Optional Redemption Notice") to each of the holders of the Series B Preferred
Stock. The Optional Redemption Notice shall specify the Investor Optional
Redemption Date and the location of the Corporation's principal executive office
or place of business where the closing will occur.
(ii) Closing.
(A) The closing of the Corporation's redemption of the Series B
Preferred Stock pursuant to Section 5(c) above shall take place at 11:00
a.m. New York City time on the Investor Optional Redemption Date at the
Corporation's principal executive office or place of business. At the
closing, the Corporation shall pay to each of the holders of the Series B
Preferred Stock, against the Corporation's receipt from such holder of the
certificate or certificates representing the shares of such series of
Series B Preferred Stock then held by such holder, an amount equal to the
Redemption Price. All such payments shall be made by wire transfer of
immediately available funds, or if such holder shall not have
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specified wire transfer instructions to the Corporation prior to the
closing, by certified or official bank check made payable to the order of
such holder.
(B) If the funds of the Corporation (without rendering the Corporation
insolvent) available for redemption of shares of Series B Preferred Stock
on any Investor Redemption Date are insufficient to redeem the total number
of such shares to be redeemed on such date, those funds which are legally
available (without rendering the Corporation insolvent) shall be used to
redeem the maximum possible number of shares ratably among the holders of
such shares based upon the aggregate number of such shares held by each
such holder. At any time thereafter when additional funds of the
Corporation are legally available which will not make the Corporation
insolvent for the redemption of shares such funds shall immediately be used
to redeem the balance of the shares which the Corporation has become
obligated to redeem on any Investor Redemption Date but which it had not
redeemed.
(c) Redemption at the Option of the Corporation.
The Series B Preferred Stock is redeemable at the option of the
Corporation, in whole or in part at a per share price equal to the Original Cost
of such share plus any accrued but unpaid dividends on each share, if any, to
the date of payment; provided however, that in the event the Corporation shall
redeem all or any portion of the shares of the outstanding Series B Preferred
Shares, then the Holder shall be entitled to receive a warrant (the "Warrant")
that is initially exercisable for that number of shares of Common Stock equal to
the number of shares of Common Stock, including the accrued but unpaid dividends
thereon, into which such redeemed shares would have been convertible in the
event of an optional conversion at such time pursuant to Section 6(a) hereof, of
the shares redeemed hereunder immediately prior to such redemption; provided,
further, however, that in the event the Series B Preferred Shares shall be
redeemed by the Corporation in connection with a Change of Control the amount
paid by the Corporation to the holder in connection with such prepayment shall
equal the Change of Control Price. The initial exercise price for each share of
Common Stock issuable upon exercise of the Warrant shall be equal to the
Conversion Price in effect immediately prior to the prepayment. The Warrant
shall have customary cashless conversion and exercise provisions, customary
anti-dilution protections economically identical to the Series B Preferred Stock
and shall otherwise be in form and substance reasonably acceptable to the holder
of such shares.
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(d) General
(i) No shares of Series B Preferred Stock are entitled to any
dividends accumulating after the date on which the full redemption price for
such share is paid to the holder thereof. On such date all rights of the holder
of such share shall cease, and such share shall not be deemed to be outstanding.
(ii) Any shares of Series B Preferred Stock which are redeemed or
otherwise acquired by the Corporation shall be canceled and shall not be
reissued (as treasury shares), sold or transferred.
(iii) Neither the Corporation nor any Subsidiaries shall offer to
purchase, redeem or acquire any shares of Series B Preferred Stock other than
pursuant to the terms of this Article X or pursuant to a purchase offer made to
all holders of Series B Preferred Stock pro rata based upon the number of such
shares owned by such holders.
6. Conversion.
(a) Optional Conversion of Series B Preferred Stock into Common Stock.
Subject to and in compliance with the applicable provisions of this
Article X, each holder of shares of Series B Preferred Stock shall have the
right, at such holder's option, at any time and from time to time, to convert
any such share, or the accumulated and unpaid dividends accrued thereon, into
that number of fully paid and nonassessable shares of Common Stock (provided
that in such event the holder shall have the option to require that such shares
be Qualified Securities) equal to the quotient obtained by dividing (x) the sum
of the Original Cost of such shares of Series B Preferred Stock, plus all
accumulated and unpaid dividends thereon, by (y) the Conversion Price, as last
adjusted and then in effect, by surrender of the certificates representing such
share to be converted; provided however, that the Preferred Holder shall have
the right to convert all or a portion of the accumulated and unpaid dividends on
any share of Series B Preferred Stock without the need to convert the share of
Series B Preferred Stock on which such dividends accrued. The Corporation shall
give the Preferred Holders reasonable prior notice of a Sale of the Corporation,
including the price and material terms and conditions thereof, in order to
provide the Preferred Holders reasonable opportunity to consider whether to
redeem or convert the Series B Preferred Stock, or the accumulated and unpaid
dividends accrued thereon, into Common Stock at or prior to such Sale of the
Corporation. If the price or material terms or conditions of such transaction
thereafter change, the Corporation shall promptly deliver written notice to
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the Preferred Holders specifying such changes. The Corporation will not issue
fractional shares of its Common Stock, as applicable, and shall distribute cash
in lieu of such fractional shares.
(b) Mandatory Conversion of Series B Preferred Stock into Common
Stock.
Upon the occurrence of a Mandatory Conversion Event, all shares of
Series B Preferred Stock then outstanding shall, at the option of the
Corporation by virtue of the delivery of a notice by the Corporation to the
holder notifying the holder of the occurrence of such Mandatory Conversion
Event, which notice shall state the date upon which such conversion shall become
effective (the "Effective Date") (which date shall be no earlier than 15
Business Days after the date of delivery), and without any action on the part of
the holders thereof, shall on the Effective Date be deemed automatically
converted in accordance with and subject to prior compliance with Section
6(c)(ii) into that number of fully paid and nonassessable shares of Qualified
Securities into which such shares, including the accumulated and unpaid
dividends accrued thereon, would have been convertible in the event of optional
conversion at such time pursuant to subsection (a) above. Upon conversion, the
Corporation will not issue fractional shares of its Qualified Securities, as
applicable, and shall distribute cash in lieu of such fractional shares.
(c) Conversion Price Adjustment.
(i) The Conversion Price shall also be subject to adjustment from
time to time as follows:
(A) If the Corporation shall, at any time or from time to time
after the Original Issuance Date, issue any shares of Common Stock
(other than Excluded Stock) without consideration or for a
consideration per share less than the Adjusted Market Price in effect
immediately prior to the issuance of such Common Stock, then the
Conversion Price in effect immediately prior to each such issuance
shall forthwith be lowered (but never increased) to a price equal to
the sum of (x) the Conversion Premium plus (y) the quotient obtained
by dividing:
(1) an amount equal to the sum of (x) the total number
of shares of Common Stock outstanding immediately prior to such
issuance, multiplied by the Market Price in effect immediately
prior to such issuance, and (y) the consideration received by the
Corporation upon such issuance; by
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(2) the total number of shares of Common Stock
outstanding (including any shares of Common Stock deemed to have
been issued pursuant to subdivision (3) of clause (B) below)
immediately after the issuance of such Common Stock.
(B) For the purposes of any adjustment of the Conversion Price
pursuant to clause (A) above, the following provisions shall be
applicable:
(1) In the case of the issuance of Common Stock for
cash in a public offering or private placement, the consideration
shall be deemed to be the amount of cash paid therefor prior to
deducting therefrom any usual and customary discounts,
commissions or placement fees paid by the Corporation to any
underwriter or placement agent in connection with the issuance
and sale thereof.
(2) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the Fair
Value thereof.
(3) In the case of the issuance of options to purchase
or rights to subscribe for Common Stock, Securities by their
terms convertible into or exchangeable for Common Stock, or
options to purchase or rights to subscribe for such convertible
or exchangeable Securities:
(a) the aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or
rights to subscribe for Common Stock shall be deemed to have
been issued at the time such options or rights were issued
and for a consideration equal to the consideration
(determined in the manner provided in subdivisions (1) and
(2) above), if any, received by the Corporation upon the
issuance of such options or rights plus the minimum purchase
price provided in such options or rights for the Common Stock
covered thereby;
(b) the aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such
convertible or exchangeable Securities or upon the exercise
of options to purchase or rights to subscribe for
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such convertible or exchangeable Securities and subsequent
conversion or exchange thereof shall be deemed to have been
issued at the time such Securities, options, or rights were
issued and for a consideration equal to the consideration
received by the Corporation for any such Securities and
related options or rights (excluding any cash received on
account of accrued interest or accrued dividends), plus the
additional consideration, if any, to be received by the
Corporation upon the conversion or exchange of such
Securities or the exercise of any related options or rights
(the consideration in each case to be determined in the
manner provided in subdivisions (1) and (2) above);
(c) on any change in the number of shares or exercise price of
Common Stock deliverable upon exercise of any such options or
rights or conversions of or exchange for such Securities, the
Conversion Price shall forthwith be readjusted to such
Conversion Price as would have been obtained had the
adjustment made upon the issuance of such options, rights or
Securities not converted prior to such change or options or
rights related to such Securities not converted prior to such
change been made upon the basis of such change; and
(d) on the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the
expiration of any options or rights related to such
convertible or exchangeable Securities, the Conversion Price
shall forthwith be readjusted to such Conversion Price as
would have obtained had the adjustment made upon the issuance
of such options, rights, Securities or options or rights
related to such Securities been made upon the basis of the
issuance of only the number of shares of Common Stock
actually issued upon the exercise of such options or rights,
upon the conversion or exchange of such Securities, or upon
the exercise of the options or rights related to such
Securities and subsequent conversion or exchange thereof.
(ii) If, at any time after the Original Issuance Date, the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision
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or split-up of shares of Common Stock, then, following the record date for the
determination of holders of Common Stock entitled to receive such stock
dividend, subdivision or split-up (or if no record date is set, the date such
stock dividend, subdivision or stock split is consummated), the Conversion Price
shall be appropriately decreased so that the number of shares of Common Stock
issuable on conversion of each share of Series B Preferred Stock shall be
increased in proportion to such increase in outstanding shares.
(iii) If, at any time after the Original Issuance Date, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Conversion Price shall be appropriately increased so that the
number of shares of Common Stock issuable on conversion of each share of Series
B Preferred Stock shall be decreased in proportion to such decrease in
outstanding shares.
(iv) In the event of any capital reorganization of the Corporation,
any reclassification of the stock of the Corporation (other than a change in par
value or from no par value to par value or from par value to no par value or as
a result of a stock dividend or subdivision, split-up or combination of shares),
or any consolidation or merger of the Corporation, each share of Series B
Preferred Stock shall after such reorganization, reclassification,
consolidation, or merger be convertible into the kind and number of shares of
stock or other Securities or property of the Corporation or of the corporation
resulting from such consolidation or surviving such merger to which the holder
of the number of shares of Common Stock deliverable (immediately prior to the
time of such reorganization, reclassification, consolidation or merger) upon
conversion of such share of Series B Preferred Stock would have been entitled
upon such reorganization, reclassification, consolidation or merger. The
provisions of this clause shall similarly apply to successive reorganizations,
reclassifications, consolidations or mergers.
(v) If any event occurs of the type contemplated by the provisions of
this Section 6 but not expressly provided for by such provisions (including,
without limitation, the granting of stock appreciation rights, phantom stock
rights or other rights with equity features), then the Corporation's Board of
Directors shall make an appropriate reduction in the Conversion Price so as to
protect the rights of the holders of the Series B Preferred Stock.
(vi) All calculations under this paragraph shall be made to the
nearest one hundredth (1/100) of a cent.
(vii) In any case in which the provisions of this Section 6(c) shall
require that an adjustment shall become effective immediately after a record
date of an event, the Corporation may defer until the occurrence of such event
(i) issuing to the holder of any share of Series B Preferred Stock converted
after such record date and before the occurrence
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of such event the shares of capital stock issuable upon such conversion by
reason of the adjustment required by such event in addition to the shares of
capital stock issuable upon such conversion before giving effect to such
adjustments, and (ii) paying to such holder any amount in cash in lieu of a
fractional share of capital stock pursuant to paragraph (iii) above; provided,
however, that the Corporation shall deliver to such holder an appropriate
instrument evidencing such holder's right to receive such additional shares and
such cash.
(viii) Whenever the Conversion Price shall be adjusted as provided in
this paragraph (c), the Corporation shall make available for inspection during
regular business hours, at its principal executive offices or at such other
place as may be designated by the Corporation, a statement, signed by its chief
executive officer, showing in detail the facts requiring such adjustment and the
Conversion Price that shall be in effect after such adjustment. The Corporation
shall also cause a copy of such statement to be sent by first class certified
mail, return receipt requested and postage prepaid, to each holder of Series B
Preferred Stock at such holder's address appearing on the Corporation's records.
Where appropriate, such copy may be given in advance and may be included as part
of any notice required to be mailed under the provisions of paragraph (x) below.
(ix) If the Corporation shall propose to take any action of the types
described in clauses (ii), (iii) or (iv) of this paragraph (c) above, the
Corporation shall give notice to each holder of shares of Series B Preferred
Stock, in the manner set forth in paragraph (viii) above, which notice shall
specify the record date, if any, with respect to any such action and the date on
which such action is to take place. Such notice shall also set forth such facts
with respect thereto as shall be reasonably necessary to indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Conversion Price and the number, kind or class of shares or other
Securities or property which shall be deliverable or purchasable upon the
occurrence of such action or deliverable upon conversion of shares of Series B
Preferred Stock. In the case of any action which would require the fixing of a
record date, such notice shall be given at least 10 days prior to the date so
fixed, and in case of all other action, such notice shall be given at least 10
days prior to the taking of such proposed action. Failure to give such notice,
or any defect therein, shall not affect the legality or validity of any such
action.
(x) In the event that the Requisite Preferred Holders consent in
writing to limit, or waive in its entirety, any anti-dilution adjustment to
which the holders of the Series B Preferred Stock would otherwise be entitled
hereunder, the Corporation shall not be required to make any adjustment
whatsoever with respect to any Series B Preferred Stock in excess
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of such limit or at all, as the terms of such consent may dictate.
(xi) The Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation, but will at all times in
good faith assist in the carrying out of all the provisions of this Section 6
and in the taking of all such action as may be necessary or appropriate in order
to protect the exercise rights of the holders of Preferred Stock against
impairment.
(xii) The computations of all amounts under this Section 6 shall be
made assuming all other anti-dilution or similar adjustments to be made to the
terms of all other securities resulting from the transaction causing an
adjustment pursuant to this Section 6 have previously been made so as to
maintain the relative economic interest of the Preferred Stock vis a vis all
other securities issued by the Corporation.
(xiii) The Corporation shall take or cause to be taken such steps as
shall be necessary to ensure that the par value per share of Common Stock is at
all time less than or equal to the Conversion Price.
(xiv) In the event the Corporation grants, issues or sells any
options, convertible securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then the Preferred Holder shall be
entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate number or amount of such stock, warrants, securities or other property
which such Holder could have acquired if such Holder had held the Common Stock
acquirable upon complete conversion of this Series B Preferred Stock immediately
before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of the grant,
issue or sale of such Purchase Rights.
(xv) In the event the Corporation shall, at any time or from time to
time after the date hereof, distribute pro rata to the record holders of Common
Stock cash, evidences of its indebtedness, other Securities or other properties
or assets, or any options, warrants or other rights to subscribe for or purchase
any of the foregoing, then (unless the holder of the share of Series B Preferred
Stock shares in such distribution on a ratable basis based upon the shares of
Common Stock issuable upon conversion of such share) the Conversion Price shall
be decreased to a price determined by multiplying the Conversion Price then in
effect by a fraction, the numerator of which shall
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be the Market Price less the sum of (X) the cash portion, if any, of such
distribution per share of Common Stock deemed outstanding (exclusive of any
treasury shares) on the record date for such distribution plus (Y) the Fair
Value of such distribution consisting of evidences of indebtedness, other
Securities, properties, assets, options, warrants or subscription or purchase
rights, per share of Common Stock deemed outstanding (exclusive of any treasury
shares) on the record date for such distribution of that portion, if any, and
the denominator of which shall be such Market Price of Common Stock. The
adjustments required by this paragraph (xv) shall be made whenever any such
distribution occurs retroactive to the record date for the determination of
stockholders entitled to receive such distribution.
(d) Conversion Procedures.
(i) Each conversion of shares of any class of capital stock of
the Corporation into shares of another class of capital stock of the Corporation
shall be effected by the surrender of the certificate or certificates
representing the shares to be converted (the "Converting Shares") at the
principal office of the Corporation (or such other office or agency of the
Corporation as the Corporation may designate by written notice to the holders of
such class of capital stock) at any time during its usual business hours,
together with written notice by the holder of such Converting Shares, stating
that such holder desires to convert the Converting Shares, or a stated number of
the shares represented by such certificate or certificates, into an equal number
of shares of the class into which such shares may be converted (the "Converted
Shares"). Such notice shall also state the name or names (with addresses) and
denominations in which the certificate or certificates for Converted Shares are
to be issued and shall include instructions for the delivery thereof. A holder
of Converting Shares may make any such notice of conversion, whether such
conversion is in connection with a Sale of the Corporation or otherwise,
conditional upon the happening of any event or the passage of such time as is
specified by such holder in such conversion notice, and may rescind any notice
of conversion prior to the effective time thereof specified in any such notice.
Promptly after such surrender and the receipt of such written notice of
conversion, the Corporation will issue and deliver in accordance with the
surrendering holder's instructions the certificate or certificates evidencing
the Converted Shares issuable upon such conversion, and the Corporation will
deliver to the converting holder a certificate (which shall contain such legends
as were set forth on the surrendered certificate or certificates) representing
any shares which were represented by the certificate or certificates that were
delivered to the Corporation in connection with such conversion, but which were
not converted. Such conversion, to the extent permitted by law, shall be deemed
to have been effected as of the close of business on the date on which such
certificate or certificates shall have been
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surrendered and such notice shall have been received by the Corporation, and at
such time the rights of the holder of the Converting Shares as such holder shall
cease and the person or persons in whose name or names the certificate or
certificates for the Converted Shares are to be issued upon such conversion
shall be deemed to have become the holder or holders of record of the Converted
Shares.
(ii) Upon issuance of shares in accordance with this Section,
such Converted Shares shall be deemed to be duly authorized, validly issued,
fully paid and non-assessable, with no personal liability attaching to the
ownership thereof and free from all taxes, liens or charges with respect thereto
due to any action of the Corporation. The Corporation shall take all such
actions as may be necessary to assure that all such shares may be so issued
without violation of any Applicable Law or governmental regulation or any
requirements of any domestic securities exchange upon which such shares may be
listed (except for official notice of issuance which will be immediately
transmitted by the Corporation upon issuance). The Corporation shall not close
its books against the transfer of shares in any manner which would interfere
with the timely conversion of any shares. The issuance of certificates for
shares of any class of capital stock (upon conversion of shares of any other
class of capital stock or otherwise) shall be made without charge to the holders
of such shares for any issuance tax in respect thereof or other cost incurred by
the Corporation in connection with such conversion and/or the issuance of such
shares; provided, however, that the Corporation shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the holder of the
shares converted. In the event the holder of the shares converted hereunder, in
connection with the conversion of shares hereunder, shall be required to file a
notification pursuant to the Hart-Scott-Rodino Anti-Trust Improvements Act of
1976 (the "HSR Act"), the Corporation and the holder shall take all actions
necessary to comply with such notification requirement and the conversion
hereunder of the shares, or the accumulated and unpaid dividends on such shares,
shall become effective upon the expiration of the applicable waiting period. The
Corporation will pay and save the holders of Series B Preferred Shares harmless
against all liability for the payment of all actual and reasonable costs and
expenses incurred by such holder in connection with any requirements to file a
notification pursuant to the HSR Act. No fractional shares of Common Stock or
scrip shall be issued upon conversion of any shares. The number of full shares
issuable upon conversion shall be computed on the basis of the aggregate number
of shares to be converted by a holder. Instead of any fractional shares which
would otherwise be issuable upon conversion of the shares, the Corporation shall
pay a cash adjustment in respect of such fractional interest in an amount equal
to the product of (i) the Fair Value of one share of such Common Stock and (ii)
such
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fractional interest. The holders of fractional interests shall not be entitled
to any rights as stockholders of the Corporation in respect of such fractional
interests.
7. Reservation of Shares.
The Corporation shall at all times reserve and keep available out of
its authorized but unissued shares of Common Stock, solely for the purpose of
issuance upon the conversion of shares of Series B Preferred Stock hereunder,
such number of shares of such class as are then issuable upon the conversion of
all outstanding shares of such other class which may be converted.
8. Shares Acquired by the Corporation.
Any shares of Series B Preferred Stock which are redeemed, converted
or otherwise acquired by the Corporation shall be canceled and shall not be
reissued (as treasury shares), sold or transferred as Series B Preferred Stock
but such shares shall become unclassified Preferred Stock of the Corporation.
ARTICLE XI
SERIES C PREFERRED STOCK
1. Designation of Amount; Ranking.
The issuance of One Hundred (100) shares of the Series C
Preferred Stock is hereby authorized. The Series C Preferred Stock shall rank
senior to the Common Stock (as hereinafter defined), pari passu with the Series
A Preferred Stock (as hereinafter defined) and junior to all other classes and
series of equity securities of the Corporation now existing or hereafter created
with respect to rights of redemption and rights of Liquidation (as hereinafter
defined).
2. Definitions.
As used in this Article XI, the following capitalized terms have the
following meanings:
"Affiliate" has the meaning given to such term in the Purchase
Agreement.
"Applicable Law" has the meaning given to such term in the Purchase
Agreement.
"By-laws" means the By-laws of the Corporation, as amended and in
effect from time to time.
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"Board" means the Board of Directors of the Corporation.
"Business Day" has the meaning given to such term in the Purchase
Agreement.
"Certificate of Incorporation" means the Restated Articles of
Incorporation of the Corporation as amended and restated and in effect at the
time in question.
"Closing Date" has the meaning given to such term in the Purchase
Agreement.
"Common Stock" means, collectively, all of the Common Stock, no par
value, of the Corporation of any class, and any other class of capital stock of
the Corporation hereafter authorized that is not limited to a fixed sum or
percentage of par or stated value in respect to the rights of the holders
thereof to participate in dividends or in the distribution of assets upon any
liquidation, dissolution or winding up of the Corporation.
"Corporation" means Gentle Dental Service Corporation, a Washington
corporation.
"Document" has the meaning given to such term in the Purchase
Agreement.
"Event of Option" has the meaning given to such term in the Purchase
Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any similar federal law then in force.
"Governmental Authority" shall mean any Federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, or any court, in each case whether of the United States of
America or any political subdivision thereof, or of any other country.
"Liquidation" means any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation.
"Mandatory Conversion Event" has the meaning given to such term in the
Purchase Agreement.
"Maturity Date" has the meaning given to such term in the Purchase
Agreement.
"Notes" has the meaning given to such term in the Purchase Agreement.
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"Option Director" has the meaning given to such term in Section 3(b)
of this Article XI.
"Original Cost" means, with respect to any share of Series C Preferred
Stock, $1.00. In the event of any change (by way of any recapitalization,
subdivision or recombination) in the number or kind of shares of Series C
Preferred Stock, the Original Cost of the shares of Series C Preferred Stock
immediately prior to such change shall be ratably adjusted among such shares of
Series C Preferred Stock immediately after such change.
"Person" shall be construed broadly and shall include without
limitation an individual, a partnership, a corporation, an association, a joint
stock company, a limited liability company, a trust, a joint venture, an
unincorporated organization and a Governmental Authority.
"Preferred Director" shall mean any individual elected to the Board,
to serve as a director, pursuant to Section 3(b)(i) of this Article XI.
"Preferred Holders" means holders of Series C Preferred Stock.
"Preferred Liquidation Preference" has the meaning ascribed to it in
Section 4 of this Article XI.
"Preferred Stock" means the preferred stock, no par value, of the
Corporation.
"Purchase Agreement" means the Securities Purchase Agreement dated as
of May 12, 1998, between the Corporation and the Purchasers (as defined
therein), as amended from time to time.
"Redemption Event" has the meaning ascribed to it in Section 5(a) of
this Article XI.
"Redemption Price" has the meaning ascribed to it in Section 5(a).
"Requisite Preferred Holders" means the holders of a majority of the
outstanding shares of Series C Preferred Stock.
"Securities" means "securities" as defined in Section 2(1) of the
Securities Act.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Series A Preferred Stock" means the Series A Preferred Stock, no par
value, of the Corporation.
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"Series C Redemption Event" has the meaning given to such term in the
Purchase Agreement.
"Warrant" has the meaning given to such term in the Note.
3. Voting Rights.
(a) Non-Voting.
Except as required by law and pursuant to paragraphs (b) and (c)
below, the Preferred Holders shall not be entitled to vote.
(b) Board Representation.
(i) So long as any Series C Preferred Stock remains outstanding,
the Requisite Preferred Holders shall be entitled to elect one individual to the
Board to serve as a director (an "Option Director") upon the occurrence or
continuation of an Event of Option.
(ii) Notwithstanding any other sections of the Certificate of
Incorporation, so long as any Series C Preferred Stock remains outstanding, the
Requisite Preferred Holders shall be entitled to (A) remove from the Board any
Preferred Director elected under the foregoing subsection (i), (B) elect each
successor to any such Preferred Director removed in accordance with subparagraph
(ii)(A) above or who otherwise vacates such office, and (C) take all necessary
action, including amending the By-Laws, to increase the number of directors on
the Board to create a vacancy on the Board to permit the Requisite Preferred
Holders to elect an individual to the Board upon an occurrence or continuance of
an Event of Option pursuant to the foregoing clause (i) above.
(iii) The right of the Preferred Holders to elect directors may
be exercised at the special meeting called pursuant to this Section, at any
annual or other special meeting of shareholders and, to the extent and in the
manner permitted by Applicable Law, pursuant to a written consent in lieu of a
shareholders meeting. A proper officer of the Corporation shall, upon the
written request of the Requisite Preferred Holders, addressed to any officer of
the Corporation, call a special meeting of the holders of Preferred Stock for
the purpose of electing directors pursuant to this Section. Such meeting shall
be held at the earliest legally permissible date at the principal office of the
Corporation, or at such other place designated by the Requisite Preferred
Holders. If such meeting has not been called by a proper officer of the
Corporation within 2 days after personal delivery, by hand or by a nationally
recognized, overnight courier guaranteeing next business day delivery, of such
written request upon any officer of the Corporation or within 5 days after
mailing the same to the secretary of the
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Corporation at its principal office, then the Requisite Preferred Holders may
call such meeting at the expense of the Corporation, and such meeting may be
called upon the notice required for annual meetings of shareholders and shall be
held at the Corporation's principal office, or at such other place designated by
the Requisite Preferred Holders. The Preferred Holders shall be given access to
the stock record books of the Corporation for the purpose of causing a meeting
of stockholders to be called pursuant to this Section.
(iv) At any meeting or at any adjournment thereof at which the
Preferred Holders have the right to elect directors, the presence, in person or
by proxy, of the Preferred Holders shall be required to constitute a quorum for
the election or removal of any director by the Requisite Preferred Holders. The
affirmative vote of the Requisite Preferred Holders shall be required to elect
or remove any Preferred Director.
(v) The Corporation shall pay or reimburse each Preferred
Director for the reasonable out-of-pocket expenses incurred by such Person in
connection with attending formal meetings of the Board and any committee
thereof. The Corporation shall use its best efforts to maintain video
teleconferencing capabilities for all formal meetings of the Board and any
committee thereof.
(c) Covenants.
The Corporation shall not, without the affirmative consent or approval
of the Requisite Preferred Holders:
(i) in any manner authorize, issue or sell any shares of Series C
Preferred Stock other than as contemplated by the Purchase Agreement or
this Article XI;
(ii) reclassify, cancel or in any manner alter or change the
terms, designations, powers, preferences or relative, optional or other
special rights, or the qualifications, limitations or restrictions thereof,
of the Series C Preferred Stock;
(iii) amend, repeal or modify any provision of this Article XI;
or
(iv) amend, repeal or modify any provision of the Certificate of
Incorporation or By-laws in a manner that would adversely affect the
powers, preferences or rights of the Series C Preferred Stock.
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(d) Observer Rights.
(i) The Corporation hereby covenants that the Preferred Holders
shall have the right to have that number of representatives (each such
representative, an "Observer") determined as hereinafter provided present at all
meetings of the Board. Such right shall from time to time be exercisable by
delivery to the Corporation of written notice from the Requisite Preferred
Holders specifying the names of such Observers. The number of Observers shall at
all times and from time to time be equal to that number of members of the Board
that the Preferred Holders are then entitled to designate but whose seats on the
Board are at the time vacant.
(ii) The Corporation will give each Observer reasonable prior
notice (it being agreed that the same prior notice given to the Board shall be
deemed reasonable prior notice) in any manner permitted in the Corporation's
By-laws for notices to directors of the time and place of any proposed meeting
of the Board, such notice in all cases to include true and complete copies of
all documents furnished to any director in connection with such meeting. Each
such Observer will be entitled to be present in person as an observer at any
such meeting or, if a meeting is held by telephone conference, to participate
therein for the purpose of listening thereto.
(iii) The Corporation will deliver to each Observer copies of all
papers which may be distributed from time to time to the directors of the
Corporation at such time as such papers are so distributed to them, including
copies of any written consent.
4. Liquidation.
In the event of any Liquidation, the Preferred Holders shall be
entitled to receive, out of the assets of the Corporation legally available for
distribution to its stockholders, before any payment shall be made to the
holders of any stock ranking on Liquidation junior to the Series C Preferred
Stock (with respect to rights on Liquidation, the Series C Preferred Stock shall
rank senior to the Common Stock, pari passu with the Series A Preferred Stock
but junior to all other series of Preferred Stock), an amount per share equal to
(the "Preferred Liquidation Preference") the Original Cost of such share. If,
upon any Liquidation, the assets of the Corporation available for distribution
to its stockholders shall be insufficient to pay the Preferred Holders the full
amount to which it shall be entitled, then the Corporation shall pay the
Preferred Holders the aggregate unpaid Preferred Liquidation Preference as soon
as practicable after the Corporation has funds legally available therefor. In
the event of any Liquidation, after payment shall have been made to the
Preferred Holders in the full amount to which it is entitled, the holders of
shares of Common Stock shall
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be entitled, to the exclusion of the Preferred Holders, to share, according to
their respective rights and preferences, in all remaining assets of the
Corporation available for distribution to its stockholders.
5. Redemption.
(a) Subject to the Corporation having funds legally available for such
purpose, the Corporation shall redeem all of the shares of the Series C
Preferred Stock then outstanding, on the first to occur of (A) on the Maturity
Date, so long as all of the outstanding Notes, the outstanding shares of the
Series B Preferred Stock and the outstanding shares of the Series D Preferred
Stock shall have been redeemed or converted prior thereto, (B) upon the
occurrence of the Mandatory Conversion Event, or (C) in the event a Series C
Redemption Event shall have occurred (each of clauses (A), (B) and (C) above, a
"Redemption Event"). The per share redemption price at which shares of Series C
Preferred Stock are to be redeemed pursuant to this Section 5(a) shall be equal
to the Liquidation Preference Amount (the "Redemption Price").
(b) On and after any redemption date (the "Redemption Date") pursuant
to this Section 5 (unless default shall be made by the Corporation in the
payment of the Redemption Price, in which event such rights shall be exercisable
until such default is cured), all rights in respect of the shares of the Series
C Preferred Stock to be redeemed, except the right to receive the Redemption
Price, shall cease and terminate, and such shares shall no longer be deemed to
be outstanding, whether or not the certificates representing such shares have
been received by the Corporation.
(c) Any communication or notice relating to redemption given pursuant
to this Section 5 shall be sent by first-class certified mail, return receipt
requested, postage prepaid, to the Preferred Holders, at their respective
addresses as the same shall appear on the books of the Corporation, or to the
Corporation at the address of its principal, or registered office, as the case
may be.
(d) At any time on or after the Redemption Date, the Preferred Holders
shall be entitled to receive the Redemption Price upon actual delivery to the
Corporation or its agents of the certificates representing the shares of the
Series C Preferred Stock to be redeemed.
(e) Any redemption payments by the Corporation pursuant to this
Section 5 shall be paid in cash.
(f) Any shares of Series C Preferred Stock which are redeemed,
converted or otherwise acquired by the Corporation shall be canceled and shall
not be reissued (as treasury shares),
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sold or transferred as Series C Preferred but such shares shall become
unclassified Preferred Stock of the Corporation.
ARTICLE XII
SERIES D PREFERRED STOCK
1. Designation of Amount; Ranking.
The issuance of Two Million (2,000,000) shares of the Series D
Preferred Stock is hereby authorized. The Series D Preferred Stock shall rank
senior to all other classes and series of equity securities of the Corporation
now existing or hereafter created including the Series A Preferred Stock, no par
value, and the Series C Preferred Stock, no par value (collectively, the "Junior
Stock"), but junior to the Series B Preferred Stock, with respect to dividend
rights, rights of redemption, rights of conversion and rights of Liquidation (as
hereinafter defined).
2. Definitions.
Except as set forth below, capitalized terms used herein have the
meanings given to such terms in the Purchase Agreement. The following
capitalized terms used in this Article XII have the following meanings:
"Adjusted Market Price" shall be an amount equal to 95% of the Market
Price in effect at such time.
"Applicable Dividend Rate" means for each Dividend Period (i) during
the period commencing on the First Closing Date and ending prior to the ninth
anniversary of the First Closing Date, 0% (zero percent), and (ii) any time
after the ninth anniversary of the First Closing Date, 7% (seven percent).
"Conversion Premium" shall mean $0.2247.
"Conversion Price" shall initially be $9.21, and shall be subject to
adjustment from time to time as set forth in Section 6(c) of this Article XII.
"Converted Shares" has the meaning ascribed to it in Section 6(d) of
this Article XII.
"Converting Shares" has the meaning ascribed to it in Section 6(d).
"Corporation" means Gentle Dental Service Corporation, a Washington
corporation.
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"Documents" shall have the meaning ascribed to it in the Purchase
Agreement.
"Excluded Stock" means (i) all Common Stock issued upon conversion of
Preferred Stock, Notes or Warrants, (ii) shares of Common Stock (as such number
is equitably adjusted for stock splits, stock dividends, share combinations and
similar pro-rata recapitalizations) issued upon the exercise of stock options
issued pursuant to the Equity Incentive Plans and (iii) Securities issued by the
Corporation in an underwritten Public Offering.
"Junior Stock" has the meaning given to such term in Section 1 of this
Article XII.
"Liquidation" means any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation.
"Original Cost" means, with respect to any share of Series D Preferred
Stock, $9.21. In the event of any change (by way of any recapitalization,
subdivision or recombination) in the number or kind of shares of Series D
Preferred Stock, the Original Cost of the shares of Series D Preferred Stock
immediately prior to such change shall be ratably adjusted among such shares of
Series D Preferred Stock immediately after such change.
"Original Issuance Date" means the Second Closing Date.
"Preferred Liquidation Preference" has the meaning ascribed to it in
Section 4(b) of this Article XII.
"Public Offering" means the closing of a public offering of Securities
pursuant to a registration statement declared effective under the Securities
Act, except that a Public Offering shall not include an offering made in
connection with a business acquisition or an employee benefit plan.
"Purchase Agreement" means the Securities Purchase Agreement dated as
of May 12, 1998, among the Corporation and the urchasers (as defined therein),
as amended from time to time.
"Qualified Holder" means (i) each Person who initially acquires Series
D Preferred Stock from the Corporation and (ii) any other holder of Series D
Preferred Stock who, together with its Affiliates, owns Series D Preferred Stock
with an aggregate Original Cost of $1,000,000 or more.
"Qualified Securities" means the Common Stock issued to the
stockholders of the Corporation as consideration in any conversion, provided (i)
such Common Stock is then listed on a national securities exchange or reported
on the Nasdaq National
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Market and (ii) such Common Stock is registered under the Securities Act or is
freely tradable under Rule 144 of the Securities Act within 6 months of the date
of issuance.
"Redemption Price" has the meaning ascribed to it in Section 5(a) of
this Article XII.
"Requisite Preferred Holders" means the holders of a majority of the
outstanding shares of Series D Preferred Stock at the time in question.
"Securities and Exchange Commission" means the Securities and Exchange
Commission or any Governmental Authority succeeding to the functions thereof.
"Sale of the Corporation" means (i) the sale (in one or a series of
related transactions) of all or substantially all of the Corporation's assets to
a Person or a group of Persons acting in concert, (ii) the sale or transfer (in
one or a series of related transactions) of the outstanding capital stock of the
Corporation to one Person or a group of Persons acting in concert, or (iii) the
merger or consolidation of the Corporation with or into another Person who is
not an Affiliate of the Corporation, in each case in clauses (ii) and (iii)
above under circumstances in which the holders of a majority in voting power of
the outstanding capital stock of the Corporation, immediately prior to such
transaction, own less than a majority in voting power of the outstanding capital
stock of the Corporation or the surviving or resulting company or acquirer, as
the case may be, immediately following such transaction. A sale (or multiple
related sales) of one or more Subsidiaries of the Corporation (whether by way of
merger, consolidation, reorganization or sale of all or substantially all assets
or Securities) which constitutes all or substantially all of the consolidated
assets of the Corporation shall be deemed a Sale of the Corporation.
"Stockholders" means holders of Common Stock or Preferred Stock.
3. Voting Rights.
(a) General.
In addition to the rights provided by law and by paragraph (b) below,
the holders of Series D Preferred Stock shall be entitled to vote on all matters
as to which holders of Common Stock shall be entitled to vote, in the same
manner and with the same effect as the holders of Common Stock, voting together
with the holders of Common Stock, and any other capital stock of the Corporation
entitled to vote together with the Common Stock, all as one class. Each share of
Series D Preferred Stock shall entitle the holder thereof to such number of
votes as shall equal the number of shares of Common Stock into which such
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share of Series D Preferred Stock is then convertible pursuant to Section 6
below.
(b) Covenants.
The Corporation shall not, without the affirmative consent or approval
of the Requisite Preferred Holders:
(i) in any manner authorize, create, designate, issue or sell any
class or series of capital stock of the Corporation (including any shares
of treasury stock) or rights, options, warrants or other Securities
convertible into or exercisable or exchangeable for capital stock or any
debt security which by its terms is convertible into or exchangeable for
any equity security or has any other equity participation feature or any
security that is a combination of debt and equity, which, in each case as
to the equity or convertible component thereof, as to the payment of
dividends, distribution of assets or redemptions, including, without
limitation, distributions to be made upon the liquidation, dissolution or
winding up of the Corporation or a merger, consolidation or sale of the
assets thereof, is senior to or pari passu with the Series D Preferred
Stock;
(ii) reclassify any Securities of the Corporation into shares of
any class or series of capital stock of the Corporation (A) ranking, either
as to payment of dividends, distributions of assets or redemptions,
including, without limitation, distributions to be made upon the
liquidation, dissolution or winding up of the Corporation or a merger,
consolidation or sale of the assets thereof, senior to or pari passu with
the Series D Preferred Stock or (B) which in any manner adversely affects
the rights of the holders of Series D Preferred Stock in their capacity as
such;
(iii) in any manner authorize, issue or sell any shares of Series
D Preferred Stock other than as contemplated by the Purchase Agreement or
this Article XII;
(iv) reclassify, cancel or in any manner alter or change the
terms, designations, powers, preferences or relative, optional or other
special rights, or the qualifications, limitations or restrictions thereof,
of the Series D Preferred Stock; or
(v) amend, repeal or modify any provision of the Certificate of
Incorporation or Bylaws that adversely affects the powers, preferences or
rights of the Series D Preferred Stock.
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4. Dividends, Distributions and Liquidations.
(a) Dividends.
(i) When, as, and if declared by the Board, out of funds legally
available for that purpose, the holders of Series D Preferred Stock shall be
entitled to receive before any dividends shall be declared and paid or set aside
for Common Stock, dividends, which shall accrue on a daily basis at the
Applicable Dividend Rate on the sum of the Original Cost of a share of Series D
Preferred Stock, plus all accumulated and unpaid dividends thereon, payable on
each September 30 and March 31 (each, a "Preferred Dividend Payment Date"), the
first such Preferred Dividend Payment Date being the first Preferred Dividend
Payment Date following the ninth anniversary of the First Closing Date.
Dividends shall accrue at the Applicable Dividend Rate regardless of whether the
Board has declared a dividend payment or whether there are any profits, surplus
or other funds of the Corporation legally available for dividends. Any dividends
which accrue pursuant to this Section 4(a)(i) and which are not paid prior to
the next succeeding Preferred Dividend Payment Date shall be classified as
"accumulated dividends" and shall remain "accumulated and unpaid dividends"
until paid or otherwise satisfied pursuant to this Article XII. Dividends on
each share of Series D Preferred Stock shall accrue pursuant to this Section
4(a)(i) from and including the ninth anniversary of the First Closing Date to
and including the date such share is converted or redeemed in full and all
accrued but unpaid dividends thereon are also converted or paid in full. All
payments in cash due in cash under this Section 4(a) to any holder of shares of
Series D Preferred Stock shall be made to the nearest cent.
(ii) In addition to the rights to receive dividends pursuant to
clause (i) above, when, as and if declared by the Board, out of funds legally
available for the purpose, the holders of Series D Preferred Stock shall be
entitled to share in any dividends declared and paid upon or set aside for the
Common Stock on a ratable basis based upon the Common Stock Equivalents
represented by such Series D Preferred Stock.
(iii) The dividends payable with respect to the Series D
Preferred Stock on each Preferred Dividend Payment Date shall be paid to the
holders of shares of the Preferred Stock as they appear on the stock records of
the Corporation on such date (the "Preferred Record Date") as shall be fixed by
the Board, which Preferred Record Date shall not be more than 60 days prior to
the applicable Preferred Dividend Payment Date and shall not precede the date
upon which the resolution fixing such Preferred Record Date is adopted, and if
the Board shall not fix a Preferred Record Date, the Preferred Record Date shall
be deemed to be the same date as the applicable Preferred Dividend Payment Date.
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(iv) Except as otherwise provided herein, if at any time the
Corporation pays less than the total amount of dividends then accrued with
respect to the Series D Preferred Stock, such payment shall be distributed
ratably among the holders of the Series D Preferred Stock based upon the number
of shares of Series D Preferred Stock then held by each holder.
(b) Liquidation.
In the event of any Liquidation, the holders of shares of Series D
Preferred Stock then outstanding shall be entitled to receive, out of the assets
of the Corporation legally available for distribution to its stockholders,
before any payment shall be made to the holders of any stock ranking on
Liquidation junior to the Series D Preferred Stock (with respect to rights on
Liquidation, the Series D Preferred Stock shall rank senior to the Common Stock
and any other class of Junior Stock, but junior to the Series B Preferred
Stock), an amount per share equal to (the "Preferred Liquidation Preference")
the greater of (X) the Original Cost of such share plus an amount equal to any
accrued but unpaid dividends on each share to the date of payment or (Y) the
amount that would otherwise be distributed to such holder in such Liquidation if
nothing was paid pursuant to clause (X) and such holder converted such shares
into shares of Common Stock in accordance with the provisions of this Article
XII. If, upon any Liquidation, the assets of the Corporation available for
distribution to its stockholders shall be insufficient to pay the holders of
shares of the Series D Preferred Stock the full amounts to which they
respectively shall be entitled, the holders of shares of Series D Preferred
Stock shall share ratably in any distribution of assets according to the
respective amounts which would be payable with respect to the shares held by
them upon such distribution if all amounts payable on or with respect to said
shares were paid in full. In the event of any Liquidation, after payment shall
have been made to the holders of shares of Series D Preferred Stock in the full
amount to which they are entitled, the holders of shares of capital stock
ranking junior to the Series D Preferred Stock on Liquidation shall be entitled,
to the exclusion of the holders of the Series D Preferred Stock, to share,
according to their respective rights and preferences, in all remaining assets of
the Corporation available for distribution to its stockholders.
5. Redemption.
(a) Redemption at the Option of the Holders.
(i) At any time on or after the occurrence or continuation of an Event of
Default the Requisite Preferred Holders may elect to have the Corporation redeem
all (but not less than all) of the outstanding shares of Series D Preferred
Stock at a price per share equal to (i) in the case of a redemption option
caused by a Change of Control (the "Change of Control Price"), equal to 101%
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of the Original Cost thereof plus without duplication, an amount in cash accrued
and unpaid dividends thereon, and (ii) in the case of a redemption option caused
by an Event of Default, other than a Change of Control, the greater of the
Original Cost of such share plus an amount equal to all accrued and unpaid
dividends on each share, if any, to the date of payment (in either case, the
"Redemption Price"), by giving written notice to the Corporation of such
election (the "Investor Notice of Election"), whereupon the Corporation shall be
obligated to repurchase such shares of Series D Preferred Stock on such date
(the "Investor Optional Redemption Date") as shall be determined by the
Corporation, but in any event not earlier than 10 days and not later than 30
days after the date on which the Investor Notice of Election is delivered to the
Corporation. Promptly (but in no event later than five days) after the delivery
of the Investor Notice of Election to the Corporation, the Corporation shall
send written notice (the "Optional Redemption Notice") to each of the holders of
the Series D Preferred Stock. The Optional Redemption Notice shall specify the
Investor Optional Redemption Date and the location of the Corporation's
principal executive office or place of business where the closing will occur.
(ii) Closing.
(A) The closing of the Corporation's redemption of the Series D
Preferred Stock pursuant to this Section 5(c) above shall take place at
11:00 a.m. New York City time on the Investor Optional Redemption Date at
the Corporation's principal executive office or place of business. At the
closing, the Corporation shall pay to each of the holders of the Series D
Preferred Stock, against the Corporation's receipt from such holder of the
certificate or certificates representing the shares of such series of
Series D Preferred Stock then held by such holder, an amount equal to the
Redemption Price. All such payments shall be made by wire transfer of
immediately available funds, or if such holder shall not have specified
wire transfer instructions to the Corporation prior to the closing, by
certified or official bank check made payable to the order of such holder.
(B) If the funds of the Corporation (without rendering the Corporation
insolvent) available for redemption of shares of Series D Preferred Stock
on any Investor Redemption Date are insufficient to redeem the total number
of such shares to be redeemed on such date, those funds which are legally
available (without rendering the Corporation insolvent) shall be used to
redeem the maximum possible number of shares ratably among the holders of
such shares based
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upon the aggregate number of such shares held by each such holder. At any
time thereafter when additional funds of the Corporation are legally
available which will not make the Corporation insolvent for the redemption
of shares such funds shall immediately be used to redeem the balance of the
shares which the Corporation has become obligated to redeem on any Investor
Redemption Date but which it had not redeemed.
(b) Redemption at the Option of the Corporation.
The Series D Preferred Stock is redeemable at the option of the
Corporation, in whole or in part at a per share price equal to the Original Cost
of such share plus any accrued but unpaid dividends on each share, if any, to
the date of payment; provided however, that in the event the Corporation shall
redeem all or any portion of the shares of the outstanding Series D Preferred
Shares, then the holder of Series D Preferred Shares shall be entitled to
receive a warrant (the "Warrant") that is initially exercisable for that number
of shares of Common Stock equal to the number of shares of Common Stock,
including the accrued but unpaid dividends thereon, into which such redeemed
shares would have been convertible in the event of an optional conversion at
such time pursuant to Section 6(a) hereof, of the shares redeemed hereunder
immediately prior to such redemption; provided, further, however, that in the
event the Series D Preferred Shares shall be redeemed by the Corporation in
connection with a Change of Control the amount paid by the Corporation to the
holder in connection with such prepayment shall equal the Change of Control
Price. The initial exercise price for each share of Common Stock issuable upon
exercise of the Warrant shall be equal to the Conversion Price in effect
immediately prior to the prepayment. The Warrant shall have customary cashless
conversion and exercise provisions, customary anti-dilution protections
economically identical to the Series D Preferred Stock and shall otherwise be in
form and substance reasonably acceptable to the holder of such shares.
(c) General
(i) No shares of Series D Preferred Stock are entitled to any
dividends accumulating after the date on which the full redemption price for
such share is paid to the holder thereof. On such date all rights of the holder
of such share shall cease, and such share shall not be deemed to be outstanding.
(ii) Any shares of Series D Preferred Stock which are redeemed or
otherwise acquired by the Corporation shall be canceled and shall not be
reissued (as treasury shares), sold or transferred.
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<PAGE>
(iii) Neither the Corporation nor any Subsidiaries shall offer to
purchase, redeem or acquire any shares of Series D Preferred Stock other than
pursuant to the terms of this Article XII or pursuant to a purchase offer made
to all holders of Series D Preferred Stock pro rata based upon the number of
such shares owned by such holders.
6. Conversion.
(a) Optional Conversion of Series D Preferred Stock into Common Stock.
Subject to and in compliance with the applicable provisions of this
Article XII, each holder of shares of Series D Preferred Stock shall have the
right, at such holder's option, at any time and from time to time, to convert
any such share, or the accrued but unpaid dividends accrued thereon, into that
number of fully paid and nonassessable shares of Common Stock (provided that in
such event the holder shall have the option to require that such shares be
Qualified Securities) equal to the quotient obtained by dividing (x) the sum of
the Original Cost of such shares of Series D Preferred Stock, plus all accrued
but unpaid dividends thereon, by (y) the Conversion Price, as last adjusted and
then in effect, by surrender of the certificates representing such share to be
converted; provided however, that the Preferred Holder shall have the right to
convert all or a portion of the accrued but unpaid dividends on any share of
Series D Preferred Stock without the need to convert the share of Series D
Preferred Stock on which such dividends accrued. The Corporation shall give the
Preferred Holders reasonable prior notice of a Sale of the Corporation,
including the price and material terms and conditions thereof, in order to
provide the Preferred Holders reasonable opportunity to consider whether to
redeem or convert the Series D Preferred Stock, or the accrued but unpaid
dividends accrued thereon, into Common Stock at or prior to such Sale of the
Corporation. If the price or material terms or conditions of such transaction
thereafter change, the Corporation shall promptly deliver written notice to the
Preferred Holders specifying such changes. Upon conversion, the Corporation will
issue fractional shares of its Common Stock, as applicable, and shall not
distribute cash in lieu of such fractional shares unless such cash distribution
is approved by the Requisite Preferred Holders.
(b) Mandatory Conversion of Series D Preferred Stock into Common
Stock.
Upon the occurrence of a Mandatory Conversion Event, all shares of
Series D Preferred Stock then outstanding shall, at the option of the
Corporation by virtue of the delivery of a notice by the Corporation to the
holder notifying the holder of the occurrence of such Mandatory Conversion
Event, which notice shall state the date upon which such conversion shall become
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effective (the "Effective Date") (which date shall be no earlier than 15
Business Days after the date of delivery), and without any action on the part of
the holders thereof, shall on the Effective Date be deemed automatically
converted, in accordance with Section 6(d)(ii), into that number of fully paid
and nonassessable shares of Qualified Securities into which such shares,
including the accrued but unpaid dividends accrued thereon, would have been
convertible in the event of optional conversion at such time pursuant to
subsection (a) above. Upon conversion, the Corporation will issue fractional
shares of its Qualified Securities, as applicable, and shall not distribute cash
in lieu of such fractional shares unless such cash distribution is approved by
the Requisite Preferred Holders.
(c) Adjustment of Conversion Price.
(i) The initial Conversion Price was established based upon the
Corporation's representation and warranty in the Securities Purchase Agreement
that 1,628,664 shares of Common Stock represented (the "Target Percentage") no
less than 10.68% of the 15,240,908 Common Stock Equivalents outstanding as of
the date of the Securities Purchase Agreement (inclusive of the 1,042,150 Common
Stock Equivalents reserved but not necessarily issued under the Equity Incentive
Plans and the 4,885,993 shares issuable upon conversion of the Securities to be
issued pursuant to the Purchase Agreement). In the event such representation and
warranty is untrue, the Conversion Price shall be reduced (but not increased) to
such Conversion Price as would have been
obtained had the initial Conversion Price been properly set to
meet the Target Percentage.
(ii) The Conversion Price shall also be subject to adjustment
from time to time as follows:
(A) If the Corporation shall, at any time or from time to time
after the First Closing Date, issue any shares of Common Stock (other than
Excluded Stock) without consideration or for a consideration per share less
than the Adjusted Market Price in effect immediately prior to the issuance
of such Common Stock, then the Conversion Price in effect immediately prior
to each such issuance shall forthwith be lowered (but never increased) to a
price equal to the sum of (x) the Conversion Premium and (y) the quotient
obtained by dividing:
(1) an amount equal to the sum of (x) the total number
of shares of Common Stock outstanding immediately prior to such
issuance, multiplied by the Market Price in effect immediately prior
to such issuance, and (y) the consideration received by the
Corporation upon such issuance; by
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<PAGE>
(2) the total number of shares of Common Stock
outstanding (including any shares of Common Stock deemed to have been
issued pursuant to subdivision (3) of clause (B) below) immediately
after the issuance of such Common Stock.
(B) For the purposes of any adjustment of the Conversion Price
pursuant to clause (A) above, the following provisions shall be applicable:
(1) In the case of the issuance of Common Stock for
cash in a public offering or private placement, the consideration
shall be deemed to be the amount of cash paid therefor prior to
deducting therefrom any usual and customary discounts, commissions or
placement fees paid by the Corporation to any underwriter or placement
agent in connection with the issuance and sale thereof.
(2) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the Fair Value thereof.
(3) In the case of the issuance of options to purchase
or rights to subscribe for Common Stock, Securities by their terms
convertible into or exchangeable for Common Stock, or options to
purchase or rights to subscribe for such convertible or exchangeable
Securities:
(a) the aggregate maximum number of shares of Common Stock deliverable
upon exercise of such options to purchase or rights to subscribe
for Common Stock shall be deemed to have been issued at the time
such options or rights were issued and for a consideration equal
to the consideration (determined in the manner provided in
subdivisions (1) and (2) above), if any, received by the
Corporation upon the issuance of such options or rights plus the
minimum purchase price provided in such options or rights for the
Common Stock covered thereby;
(b) the aggregate maximum number of shares of Common Stock deliverable
upon conversion of or in exchange for any such convertible or
exchangeable Securities or upon the exercise of options to
purchase or rights to subscribe for
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<PAGE>
such convertible or exchangeable Securities and subsequent
conversion or exchange thereof shall be deemed to have been issued
at the time such Securities, options, or rights were issued and
for a consideration equal to the consideration received by the
Corporation for any such Securities and related options or rights
(excluding any cash received on account of accrued interest or
accrued dividends), plus the additional consideration, if any, to
be received by the Corporation upon the conversion or exchange of
such Securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner
provided in subdivisions (1) and (2) above);
(c) on any change in the number of shares or exercise price of Common
Stock deliverable upon exercise of any such options or rights or
conversions of or exchange for such Securities, the Conversion
Price shall forthwith be readjusted to such Conversion Price as
would have been obtained had the adjustment made upon the issuance
of such options, rights or Securities not converted prior to such
change or options or rights related to such Securities not
converted prior to such change been made upon the basis of such
change; and
(d) on the expiration of any such options or rights, the termination
of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable
Securities, the Conversion Price shall forthwith be readjusted to
such Conversion Price as would have obtained had the adjustment
made upon the issuance of such options, rights, Securities or
options or rights related to such Securities been made upon the
basis of the issuance of only the number of shares of Common Stock
actually issued upon the exercise of such options or rights, upon
the conversion or exchange of such Securities, or upon the
exercise of the options or rights related to such Securities and
subsequent conversion or exchange thereof.
(iii) If, at any time after the Original Issuance Date, the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date for the determination of holders of
Common Stock entitled to receive such stock dividend, subdivision
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<PAGE>
or split-up (or if no record date is set, the date such stock dividend,
subdivision or stock split is consummated), the Conversion Price shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of Series D Preferred Stock shall be increased in
proportion to such increase in outstanding shares.
(iv) If, at any time after the Original Issuance Date, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Conversion Price shall be appropriately increased so that the
number of shares of Common Stock issuable on conversion of each share of Series
D Preferred Stock shall be decreased in proportion to such decrease in
outstanding shares.
(v) In the event of any capital reorganization of the Corporation, any
reclassification of the stock of the Corporation (other than a change in par
value or from no par value to par value or from par value to no par value or as
a result of a stock dividend or subdivision, split-up or combination of shares),
or any consolidation or merger of the Corporation, each share of Series D
Preferred Stock shall after such reorganization, reclassification,
consolidation, or merger be convertible into the kind and number of shares of
stock or other Securities or property of the Corporation or of the corporation
resulting from such consolidation or surviving such merger to which the holder
of the number of shares of Common Stock deliverable (immediately prior to the
time of such reorganization, reclassification, consolidation or merger) upon
conversion of such share of Series D Preferred Stock would have been entitled
upon such reorganization, reclassification, consolidation or merger. The
provisions of this clause shall similarly apply to successive reorganizations,
reclassifications, consolidations or mergers.
(vi) If any event occurs of the type contemplated by the provisions of
this Section 6 but not expressly provided for by such provisions (including,
without limitation, the granting of stock appreciation rights, phantom stock
rights or other rights with equity features), then the Corporation's Board of
Directors shall make an appropriate reduction in the Conversion Price so as to
protect the rights of the holders of the Series D Preferred Stock.
(vii) All calculations under this paragraph shall be made to the
nearest one hundredth (1/100) of a cent.
(viii) In any case in which the provisions of this Section 6(c) shall
require that an adjustment shall become effective immediately after a record
date of an event, theCorporation may defer until the occurrence of such event
(i) issuing to the holder of any share of Series D Preferred Stock converted
after such record date and before the occurrence
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<PAGE>
of such event the shares of capital stock issuable upon such conversion by
reason of the adjustment required by such event in addition to the shares of
capital stock issuable upon such conversion before giving effect to such
adjustments, and (ii) paying to such holder any amount in cash in lieu of a
fractional share of capital stock pursuant to paragraph (iii) above; provided,
however, that the Corporation shall deliver to such holder an appropriate
instrument evidencing such holder's right to receive such additional shares and
such cash.
(ix) Whenever the Conversion Price shall be adjusted as provided in
this paragraph (c), the Corporation shall make available for inspection during
regular business hours, at its principal executive offices or at such other
place as may be designated by the Corporation, a statement, signed by its chief
executive officer, showing in detail the facts requiring such adjustment and the
Conversion Price that shall be in effect after such adjustment. The Corporation
shall also cause a copy of such statement to be sent by first class certified
mail, return receipt requested and postage prepaid, to each holder of Series D
Preferred Stock at such holder's address appearing on the Corporation's records.
Where appropriate, such copy may be given in advance and may be included as part
of any notice required to be mailed under the provisions of paragraph (x) below.
(x) If the Corporation shall propose to take any action of the types
described in clauses (iii), (iv) or (v) of this paragraph (c) above, the
Corporation shall give notice to each holder of shares of Series D Preferred
Stock, in the manner set forth in paragraph (ix) above, which notice shall
specify the record date, if any, with respect to any such action and the date on
which such action is to take place. Such notice shall also set forth such facts
with respect thereto as shall be reasonably necessary to indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Conversion Price and the number, kind or class of shares or other
Securities or property which shall be deliverable or purchasable upon the
occurrence of such action or deliverable upon conversion of shares of Series D
Preferred Stock. In the case of any action which would require the fixing of a
record date, such notice shall be given at least 10 days prior to the date so
fixed, and in case of all other action, such notice shall be given at least 10
days prior to the taking of such proposed action. Failure to give such notice,
or any defect therein, shall not affect the legality or validity of any such
action.
(xi) In the event that the Requisite Preferred Holders consent in
writing to limit, or waive in its entirety, any anti-dilution adjustment to
which the holders of the Series D Preferred Stock would otherwise be entitled
hereunder, the Corporation shall not be required to make any adjustment
whatsoever with respect to any Series D Preferred Stock in excess
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<PAGE>
of such limit or at all, as the terms of such consent may dictate.
(xii) The Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation, but will at all times in
good faith assist in the carrying out of all the provisions of this Section 6
and in the taking of all such action as may be necessary or appropriate in order
to protect the exercise rights of the holders of Preferred Stock against
impairment.
(xiii) The computations of all amounts under this Section 6 shall be
made assuming all other anti-dilution or similar adjustments to be made to the
terms of all other securities resulting from the transaction causing an
adjustment pursuant to this Section 6 have previously been made so as to
maintain the relative economic interest of the Preferred Stock vis a vis all
other securities issued by the Corporation.
(xiv) The Corporation shall take or cause to be taken such steps as
shall be necessary to ensure that the par value per share of Common Stock is at
all time less than or equal to the Conversion Price.
(xv) In the event the Corporation grants, issues or sells any options,
convertible securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
"Purchase Rights"), then the Preferred Holder shall be entitled to acquire, upon
the terms applicable to such Purchase Rights, the aggregate number or amount of
such stock, warrants, securities or other property which such Holder could have
acquired if such Holder had held the Common Stock acquirable upon complete
conversion of this Series D Preferred Stock immediately before the date on which
a record is taken for the grant, issuance or sale of such Purchase Rights, or,
if no such record is taken, the date as of the grant, issue or sale of such
Purchase Rights.
(d) Conversion Procedures.
(i) Each conversion of shares of any class of capital stock of
the Corporation into shares of another class of capital stock of the
Corporation shall be effected by the surrender of the certificate or
certificates representing the shares to be converted (the "Converting
Shares") at the principal office of the Corporation (or such other office
or agency of the Corporation as the Corporation may designate by written
notice to the holders of such class
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<PAGE>
of capital stock) at any time during its usual business hours, together
with written notice by the holder of such Converting Shares, stating that
such holder desires to convert the Converting Shares, or a stated number of
the shares represented by such certificate or certificates, into an equal
number of shares of the class into which such shares may be converted (the
"Converted Shares"). Such notice shall also state the name or names (with
addresses) and denominations in which the certificate or certificates for
Converted Shares are to be issued and shall include instructions for the
delivery thereof. A holder of Converting Shares may make any such notice of
conversion, whether such conversion is in connection with a Sale of the
Corporation or otherwise, conditional upon the happening of any event or
the passage of such time as is specified by such holder in such conversion
notice, and may rescind any notice of conversion prior to the effective
time thereof specified in any such notice. Promptly after such surrender
and the receipt of such written notice of conversion, the Corporation will
issue and deliver in accordance with the surrendering holder's instructions
the certificate or certificates evidencing the Converted Shares issuable
upon such conversion, and the Corporation will deliver to the converting
holder a certificate (which shall contain such legends as were set forth on
the surrendered certificate or certificates) representing any shares which
were represented by the certificate or certificates that were delivered to
the Corporation in connection with such conversion, but which were not
converted. Such conversion, to the extent permitted by law, shall be deemed
to have been effected as of the close of business on the date on which such
certificate or certificates shall have been surrendered and such notice
shall have been received by the Corporation, and at such time the rights of
the holder of the Converting Shares as such holder shall cease and the
person or persons in whose name or names the certificate or certificates
for the Converted Shares are to be issued upon such conversion shall be
deemed to have become the holder or holders of record of the Converted
Shares.
(ii) Upon issuance of shares in accordance with this Section, such
Converted Shares shall be deemed to be duly authorized, validly issued,
fully paid and non-assessable, with no personal liability attaching to the
ownership thereof and free from all taxes, liens or charges with respect
thereto due to any action of the Corporation. The Corporation shall take
all such actions as may be necessary to assure that all such shares may be
so issued without violation of any Applicable Law or governmental
regulation or any requirements of any domestic securities exchange upon
which such shares may be listed (except for official notice of issuance
which will be immediately transmitted by the Corporation upon issuance).
The Corporation shall not close
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its books against the transfer of shares in any manner which would
interfere with the timely conversion of any shares. The issuance of
certificates for shares of any class of capital stock (upon conversion of
shares of any other class of capital stock or otherwise) shall be made
without charge to the holders of such shares for any issuance tax in
respect thereof or other cost incurred by the Corporation in connection
with such conversion and/or the issuance of such shares; provided, however,
that the Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of
any certificate in a name other than that of the holder of the shares
converted. In the event the holder of the shares converted hereunder, in
connection with the conversion of shares hereunder, shall be required to
file a notification pursuant to the Hart-Scott-Rodino Anti-Trust
Improvements Act of 1976 (the "HSR Act"), the Corporation and the holder
shall take all actions necessary to comply with such notification
requirement and the conversion hereunder of the shares, or the accrued but
unpaid dividends on such shares, shall become effective upon the expiration
of the applicable waiting period. Subject to Sections 6(a) and (b), no
fractional shares of Common Stock or scrip shall be issued upon conversion
of any shares. The Corporation will pay and save the holder of Series D
Preferred Shares harmless against all liability for the payment of all
actual and reasonable costs and expenses incurred by the holder in
connection with any requirements to file a notification pursuant to the HSR
Act. The number of full shares issuable upon conversion shall be computed
on the basis of the aggregate number of shares to be converted by a holder.
Instead of any fractional shares which would otherwise be issuable upon
conversion of the shares, the Corporation shall pay a cash adjustment in
respect of such fractional interest in an amount equal to the product of
(i) the Fair Value of one share of such Common Stock and (ii) such
fractional interest. The holders of fractional interests shall not be
entitled to any rights as stockholders of the Corporation in respect of
such fractional interests.
7. Reservation of Shares.
The Corporation shall at all times reserve and keep available out of
its authorized but unissued shares of Common Stock, solely for the purpose of
issuance upon the conversion of shares of Series D Preferred Stock hereunder,
such number of shares of such class as are then issuable upon the conversion of
all outstanding shares of such other class which may be converted.
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8. Shares Acquired by the Corporation.
Any shares of Series D Preferred Stock which are redeemed, converted
or otherwise acquired by the Corporation shall be canceled and shall not be
reissued (as treasury shares), sold or transferred as Series D Preferred Stock
but such shares shall become unclassified Preferred Stock of the Corporation.
* * * *
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EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made effective as of June 1,
1998 (the "Effective Date") by and between GENTLE DENTAL SERVICE CORPORATION, a
Washington corporation (the "Company"), and MICHAEL T. FIORE ("Employee").
RECITALS
Pursuant to the Employment Agreement (the "Prior Agreement") dated November
4, 1997 between the Company and Employee, the Company has employed Employee as
its Co-Chairman, Chief Executive Officer and President. The parties desire to
amend and restate the Prior Agreement in the form of this Agreement.
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 $250,000 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 "at-will"
and, therefore, either Employee or the Company can 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
<PAGE>
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 has signed and will abide by
the terms of the Proprietary Information Agreement, the form of which was
attached as Exhibit A to the Prior Agreement.
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.
(a) In the event Employee's employment is terminated by Employee for
"good reason" (as defined below) or by the Company for any reason other than
"cause" (as defined below), and provided that Employee complies with the
provisions of Section 10 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.
(b) 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 10 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
2
<PAGE>
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.
(c) 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.
(d) 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. Accelerated Vesting of Stock Options and Restricted Stock. In the event
that (i) Employee's employment with the Company is terminated by the Company for
any reason other than "cause", (ii) Employee's employment with the Company is
terminated by Employee for "good reason", (iii) Employee's employment with the
Company is terminated because of death or physical disability within the meaning
of Section 22(e)(3) of the Internal Revenue Code of 1986, or (iv) a "change in
control" (as defined below) of the Company occurs, all shares of the Company's
Common Stock subject to outstanding options or shares subject to restrictions
held by Employee at the time of the event shall be fully vested as of the date
of such event.
For purposes of this Agreement, a "change in control" of the Company shall
mean the approval by the shareholders of the Company of:
(a) any consolidation, merger or plan of share exchange involving the
Company (a "Merger") in which the Company is not the continuing or surviving
corporation or pursuant to which shares of Common Stock of the Company would be
converted into cash, securities or other property, other than a Merger in which
the holders of shares of Common Stock of the Company immediately prior to the
Merger have the same proportionate ownership of common stock of the surviving
corporation immediately after the
3
<PAGE>
Merger or a Merger in which Employee's rights under stock options or restricted
stock awards held by Employee are assumed or remain in effect;
(b) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all, or substantially all, the assets of
the Company other than a transaction in which Employee's rights under stock
options or restricted stock awards held by Employee are assumed or remain in
effect; or
(c) the adoption of any plan or proposal for the liquidation or
dissolution of the Company.
10. Restrictive Covenants and Confidentiality.
(a) 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.
(b) 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.
4
<PAGE>
11. Survival. The provisions of this Agreement shall survive the
termination of Employee's employment with the Company, irrespective of the
reason therefor.
12. 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.
13. Miscellaneous.
(a) 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.
(b) 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.
(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 Agreement.
(d) 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
<PAGE>
(e) 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.
(f) Prior Agreement Superseded. This Agreement supersedes and replaces
in its entirety the Prior Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
GENTLE DENTAL SERVICE CORPORATION
By: L.T. VAN EERDEN
------------------------------------
Title: Executive Vice President
---------------------------------
MICHAEL THOMAS FIORE
----------------------------------------
Michael Thomas Fiore
6
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made effective as of July 1,
1998 (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 Employment Agreement (the "Prior Agreement") dated November
3, 1997 (the "Prior Effective Date") between the Company and Employee, the
Company has employed Employee as its Co-Chairman, Founder and President of
Clinical Services Council. The parties desire to amend and restate the Prior
Agreement in the form of this Agreement.
AGREEMENT
In consideration of the promises, covenants, and representations below, the
parties agree as follows:
1. Compensation. The Company will pay Employee as compensation for
Employee's services a base salary ("Base Salary") at an annual rate of $243,000.
Employee's Base Salary shall be increased annually during the first quarter of
each year at the same time as other senior executives by an amount not less than
6%. With respect to bonus, stock options and all other items considered as
compensation for SEC disclosure purposes (excluding unusual bonuses, option
grants or other such compensation awarded outside of the normal annual
compensation review process), the Company will provide Employee with amounts
determined on a basis that is substantially consistent with the basis on which
such compensation is determined for other comparable senior executives
(currently the Chief Operating Officer, Chief Financial Officer and Chief
Development Officer, but excluding the Chief Executive Officer and President).
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 Employee's responsibilities
to the Company. Employee shall principally
<PAGE>
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 five years on June 30, 2003. Unless one party gives notice of
termination one year prior to the end of the Initial Term, Employee's employment
with the Company shall be automatically renewed for an additional five year term
commencing on July 1, 2003 and ending on June 30, 2008 ("Renewal Term"). Until
April 30, 2002, the Company may not terminate Employee's employment other than
for "cause" (as defined in Section 8(b) below). After April 30, 2002, 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 has signed and will abide by
the terms of the Proprietary Information Agreement, the form of which was
attached as Exhibit A to the Prior Agreement.
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.
(a) 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 Prior Effective Date, 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
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<PAGE>
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 after the Prior Effective Date, 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 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. In the event Employee's employment with the Company is
terminated by the Company for any reason other than "cause" (as defined below)
after April 30, 2002, and provided Employee complies with the provisions of
Section 9 hereof, Employee will receive severance payments from the Company for
the period through June 30, 2003, at Employee's Base Salary as of the
Termination Date, payable in equal monthly installments. Upon any termination of
Employee's employment covered by this Section 8(a), all options to purchase
Company stock granted to Employee after the Effective Date shall continue to
vest until the later of June 30, 2003 or the end of any consulting or severance
periods. Upon any termination of Employee's employment covered by this Section
8(a), all options to purchase Company stock granted to Employee prior to the
Effective Date shall be immediately vested.
(b) 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.
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<PAGE>
(c) 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.
(d) 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.
(a) 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.
(b) 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,
4
<PAGE>
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.
12. Miscellaneous.
(a) 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.
(b) 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.
(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 Agreement.
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<PAGE>
(d) 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.
(e) 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.
(f) Arbitration. Any controversy or claim arising out of or relating
to this Agreement and the Proprietary Information Agreement, or the beach
thereof, shall be settled by arbitration administered by the American
Arbitration Association in accordance with its Commercial Arbitration Rules, and
judgment on the award rendered by the arbitrators may be entered in any court
having jurisdiction thereof. The arbitration panel shall be composed of three
persons with corporate business experience in management or legal positions. The
arbitration proceedings shall be conducted in El Segundo, California, Vancouver,
Washington, or Portland, Oregon. The arbitrators shall have the authority to
award such remedies or relief that a court of the state where the arbitration
takes place could order or grant in an action governed by California law.
(g) Prior Agreement Superseded. This Agreement supersedes and replaces
in its entirety the Prior Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
GENTLE DENTAL SERVICE CORPORATION
By: MICHAEL THOMAS FIORE
------------------------------------
Title: CEO
---------------------------------
DANY Y. TSE, DMD
----------------------------------------
Dany Y. Tse, DMD
6
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made effective as of June 1,
1998 (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 Employment Agreement (the "Prior Agreement") dated November
3, 1997 between the Company and Employee, the Company has employed Employee as
its Executive Vice President and Chief Development Officer. The parties desire
to amend and restate the Prior Agreement in the form of this Agreement.
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 $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.
2. 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.
3. Term of Employment. Employee's employment with the Company is "at-will"
and, therefore, either Employee or the Company can 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
<PAGE>
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 has signed and will abide by
the terms of the Proprietary Information Agreement, the form of which was
attached as Exhibit A to the Prior Agreement.
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.
(a) In the event Employee's employment is terminated by Employee for
"good reason" (as defined below) or by the Company for any reason other than
"cause" (as defined below), and provided that Employee complies with the
provisions of Section 10 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.
(b) 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 10 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
2
<PAGE>
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.
(c) 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.
(d) 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. Accelerated Vesting of Stock Options and Restricted Stock. In the event
that (i) Employee's employment with the Company is terminated by the Company for
any reason other than "cause", (ii) Employee's employment with the Company is
terminated by Employee for "good reason", (iii) Employee's employment with the
Company is terminated because of death or physical disability within the meaning
of Section 22(e)(3) of the Internal Revenue Code of 1986, or (iv) a "change in
control" (as defined below) of the Company occurs, all shares of the Company's
Common Stock subject to outstanding options or shares subject to restrictions
held by Employee at the time of the event shall be fully vested as of the date
of such event.
For purposes of this Agreement, a "change in control" of the Company shall
mean the approval by the shareholders of the Company of:
(a) any consolidation, merger or plan of share exchange involving the
Company (a "Merger") in which the Company is not the continuing or surviving
corporation or pursuant to which shares of Common Stock of the Company would be
converted into cash, securities or other property, other than a Merger in which
the holders of shares of Common Stock of the Company immediately prior to the
Merger have the same proportionate ownership of common stock of the surviving
corporation immediately after the
3
<PAGE>
Merger or a Merger in which Employee's rights under stock options or restricted
stock awards held by Employee are assumed or remain in effect;
(b) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all, or substantially all, the assets of
the Company other than a transaction in which Employee's rights under stock
options or restricted stock awards held by Employee are assumed or remain in
effect; or
(c) the adoption of any plan or proposal for the liquidation or
dissolution of the Company.
10. Restrictive Covenants and Confidentiality.
(a) 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.
(b) 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.
4
<PAGE>
11. Survival. The provisions of this Agreement shall survive the
termination of Employee's employment with the Company, irrespective of the
reason therefor.
12. 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.
13. Miscellaneous.
(a) 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.
(b) 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.
(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 Agreement.
(d) 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
<PAGE>
(e) 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.
(f) Prior Agreement Superseded. This Agreement supersedes and replaces
in its entirety the Prior Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
GENTLE DENTAL SERVICE CORPORATION
By: MICHAEL THOMAS FIORE
------------------------------------
Title: CEO
---------------------------------
L.T. VAN EERDEN
----------------------------------------
L.T. Van Eerden
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GENTLE
DENTAL SERVICE CORPORATION'S FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> JUN-30-1997 JUN-30-1998
<CASH> 0<F1> 16,243
<SECURITIES> 0<F1> 0
<RECEIVABLES> 0<F1> 7,852
<ALLOWANCES> 0<F1> 0
<INVENTORY> 0<F1> 0
<CURRENT-ASSETS> 0<F1> 28,362
<PP&E> 0<F1> 14,213
<DEPRECIATION> 0<F1> 0
<TOTAL-ASSETS> 0<F1> 90,836
<CURRENT-LIABILITIES> 0<F1> 17,538
<BONDS> 0<F1> 0
0<F1> 2,142
0<F1> 12,334
<COMMON> 0<F1> 25,763
<OTHER-SE> 0<F1> (2,181)
<TOTAL-LIABILITY-AND-EQUITY> 0<F1> 90,836
<SALES> 17,427 39,438
<TOTAL-REVENUES> 17,427 39,438
<CGS> 0 0
<TOTAL-COSTS> 17,850 38,549
<OTHER-EXPENSES> 9 7
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 193 1,043
<INCOME-PRETAX> (625) (161)
<INCOME-TAX> 0 (65)
<INCOME-CONTINUING> (625) (96)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (625) (96)
<EPS-PRIMARY> (.32) (.01)
<EPS-DILUTED> (.32) (.01)
<FN>
<F1> The restated balance sheet as of June 30, 1997 is not included in this
report.
</FN>
</TABLE>
