U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 For the
fiscal year ended December 31, 1997
Commission file number 000-23673
GENTLE DENTAL SERVICE CORPORATION
(Exact name of small business issuer as specified in its charter)
Washington 91-1577891
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
22800 Savi Ranch Parkway, Suite 206, Yorba Linda, CA 92887
- ---------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (714) 998-0587
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuers revenues for its most recent fiscal year: $43,403,000
Aggregate market value of Common Stock held by nonaffiliates of the registrant
at February 28, 1998: $39,500,000. For purposes of this calculation, officers
and directors are considered affiliates.
Number of shares of Common Stock outstanding at February 28, 1998: 7,769,925.
Documents Incorporated by Reference
-----------------------------------
Part of Form 10-KSB into
Document which incorporated
-------- ------------------------
Proxy Statement for 1998 Annual
Meeting of Shareholders Part III
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
TABLE OF CONTENTS
Page
----
Part I.........................................................................3
Item 1. Description of Business.............................................3
Item 2. Description of Property............................................12
Item 3. Legal Proceedings..................................................12
Item 4. Submission of Matters to a Vote of Security Holders................12
Part II.......................................................................12
Item 5. Market for Common Equity and Related Stockholder Matters...........12
Item 6. Management's Discussion and Analysis or Plan of Operations.........13
Item 7. Financial Statements...............................................17
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................49
Part III......................................................................49
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act..................49
Item 10. Executive Compensation.............................................49
Item 11. Security Ownership of Certain Beneficial Owners and Management.....51
Item 12. Certain Relationships and Related Transactions.....................51
Part IV.......................................................................51
Item 13. Exhibits and Reports on Form 8-K...................................51
2
<PAGE>
PART I
Item 1. Description of Business
Gentle Dental Service Corporation (the "Company") is one of the largest
providers of dental practice management services to multi-specialty dental
practices in the United States. Following the Dedicated Dental Affiliation
described below and including affiliations completed since December 31, 1997,
the Company will provide management services to dental practices at 69 dental
offices with 256 dentists, including 65 specialists, and 642 operatories in
selected markets in California, Washington, Oregon, Idaho and Hawaii. The
dentists employed through the Company's network of affiliated dental practices
(the "Affiliated Dental Practices" or "DPs") provide comprehensive general
dentistry services and offer specialty dental services, which include
orthodontics, periodontics, endodontics, pedodontics, prosthodontics, oral
surgery and oral pathology. The Company's practice management services
facilitate the delivery of convenient, high quality, comprehensive and
affordable dental care to patients in a comfortable environment. The Company
seeks to build geographically dense dental practice networks in selected markets
through a combination of affiliating with existing dental practices and
selectively developing de novo offices.
The Company is pursuing an aggressive expansion strategy. The Company's
operating strategy is to provide value to Affiliated Dental Practices through
the introduction of a variety of practice enhancements. The Company assists the
Affiliated Dental Practices by providing general administrative services and
implementing established Company procedures designed to optimize staffing ratios
and patient scheduling. The Company also assists the Affiliated Dental Practices
in developing and implementing targeted advertising and marketing programs and
attracting additional dentists and dental practices. To the extent applicable,
the Company provides significant managed care expertise to the Affiliated Dental
Practices. The Company believes the implementation of these enhancements has
resulted in significant revenue growth at the Affiliated Dental Practices.
The Company has recently established a clinical services council (the "Clinical
Services Council") comprised of leading dental practitioners within the
Company's network of Affiliated Dental Practices. The Clinical Services Council
will work with Affiliated Dental Practices to establish and implement "best
practices" procedures and protocols for the purpose of maintaining high quality
dental care. The Company provides educational services and a training program
covering non-clinical aspects of the dental practices. The Company also provides
a management information system that combines commercially available software
with customized, proprietary software of the Company. The Company believes that
its enhanced system provides a competitive advantage by allowing the Company to
effectively manage a large geographically diverse network of dental practices
from a centralized base. As of December 31, 1997, the Company's basic management
information system was in place at approximately 95% of the locations within the
Affiliated Dental Practices network. The Company intends to install its basic
management information system at each dental practice with which it affiliates.
The Company has recently completed a major merger and a major affiliation and is
in the process of completing another significant affiliation. On November 4,
1997, Gentle Dental merged with GMS Dental Group, Inc. ("GMS"), a
California-based dental practice management company, which provided management
services to dental practices at 22 locations consisting of 102 dentists,
including 30 specialists. Upon completion of the merger with GMS, the former
shareholders of GMS received approximately 59% of the then outstanding shares of
the Company. On February 28, 1998, the Company completed the acquisition of
substantially all of the assets of Affordable Dental Care, Inc. ("ADC"), a
provider of dental care in western Oregon. ADC operations include 19 dentists
practicing at 9 locations.
On September 21, 1997, the Company executed a definitive agreement to acquire
all of the stock of Dedicated Dental Systems, Inc. ("Dedicated Dental"), a
Bakersfield, California company which owns and operates 11 staff model dental
offices pursuant to a license issued by the California Department of
Corporations ("DOC") under the California Knox-Keene Health Care Service Plan
Act of 1975 (the "Knox-Keene Act"). The Company also entered into three asset
purchase agreements to acquire the non-professional assets of related dental
practices operating at four locations in southern California. The transactions
contemplated by these asset purchase agreements together with the transactions
contemplated by the agreement to acquire the stock of Dedicated Dental are
collectively referred to in this Annual Report as the "Dedicated Dental
Affiliation." On February 28, 1998, the Company and the other parties to the
Dedicated Dental Affiliation amended the respective agreements to (i) reduce the
aggregate stock consideration to be given by the Company from $12,429,000 to
$5,769,000; (ii) increase the aggregate cash consideration from $9,771,000 to
$16,431,000 (reduced by any outstanding indebtedness of Dedicated Dental at
closing); (iii) add cash earnout consideration in connection with the
acquisition of the stock of Dedicated Dental to the cash earnout consideration
provided for in two of the asset purchase agreements, in each case at a
presently undeterminable amount to be determined based upon future earnings
before interest expense, income taxes, depreciation and amortization of
Dedicated Dental or the related dental practices, as applicable; and (iv) to
eliminate certain registration rights. The aggregate cash and stock
3
<PAGE>
consideration to be paid by the Company at the closing of the Dedicated Dental
Affiliation was not changed by such amendments and continues to be $22,200,000.
The Dedicated Dental Affiliation is subject to the satisfaction of certain other
conditions, some of which are beyond the control of the Company, including
approval of the DOC under the Knox-Keene Act. There can be no assurance that the
conditions to the closing of the Dedicated Dental Affiliation, including receipt
of approval of the DOC, will be satisfied or that the affiliation will
ultimately be completed.
Dental Services Industry
The Health Care Financing Administration ("HCFA") estimates that the annual
aggregate domestic market for dental services was approximately $45.8 billion
for 1995, representing 4.6% of total health care expenditures in the United
States. Dental services expenditures grew at a compound annual growth rate of
approximately 8.6% from 1980 to 1995. According to HCFA, the size of the dental
services industry is projected to reach $79.1 billion by 2005. The Company
believes that the anticipated growth in the dental industry will be driven by
several factors including: (i) an increase in the availability and types of
dental insurance; (ii) an increasing demand for dental services from an aging
population; (iii) the evolution of technology which makes dental care less
traumatic and, therefore, more attractive to patients; (iv) an increased focus
on preventive and cosmetic dentistry; and (v) the growth of managed care
organizations that offer dental coverage to their members.
The market for dental services in the United States consists of both general and
specialty dentistry services. General dentistry services include preventive and
diagnostic procedures such as cleanings, examinations and x-rays and restorative
treatments such as fillings of cavities, gum therapy and crowns. Specialty
dentistry services include orthodontics, periodontics, endodontics, pedodontics,
prosthodontics, oral surgery, and oral pathology.
Dental care services in the United States are generally delivered through a
fragmented system of local providers, primarily individual or small group
practices. According to the American Dental Association 1995 Survey of Dental
Practice there were approximately 150,000 actively practicing dental
professionals in the United States, approximately 70% of whom practiced alone.
The Company estimates that approximately 2% of general and specialty
practitioners are affiliated with practice management companies.
According to industry sources, approximately 30% of the estimated 117 million
people covered by dental benefits in 1995 were enrolled in managed dental care
programs, including preferred provider organizations ("PPO") and dental Health
Maintenance Organizations ("HMOs"). Enrollment in dental HMOs, according to the
National Association of Dental Plans, is estimated to have grown from 7.8
million in 1990 to 23.8 million in 1995.
The Company believes that the trend toward consolidation in the dental services
industry will continue as dentists seek to affiliate with group practice
managers such as the Company due to (i) the desire of dentists to focus on
clinical aspects rather than on administrative and regulatory aspects of their
practices; (ii) the increasing patient demands for more flexible evening and
weekend hours; (iii) the increasing demand for competitively-priced, high
quality dental care at multiple locations; (iv) the increasing desire of recent
dental school graduates to pursue alternatives to the traditional solo practice
of dentistry and (v) the need for certifiable standards of care for patients.
Operating Strategy
The Company's strategic objective is to maintain and expand its leadership
position in the dental practice management industry. To achieve this objective,
the Company seeks to enter selected geographic markets and develop locally
prominent, multi-specialty dental delivery networks that provide gentle, high
quality, cost-effective dental care. The key elements of the Company's strategy
are as follows:
Provide Convenient, Comprehensive Dental Care. The Affiliated Dental Practices
within the Company's network provide patients with customer-friendly,
comprehensive and cost-effective dental care which is made available at
convenient times and locations. Because the Company's Affiliated Dental
Practices generally include both general practitioners and on-staff specialists
who can provide dental services such as orthodontics, periodontics, endodontics,
pedodontics, prosthodontics, oral pathology and oral surgery, patients can rely
on the Company's network of Affiliated Dental Practices to provide comprehensive
dental care needs. By offering extended office hours and conveniently located
offices, patients are offered a dental care environment that makes it easier to
schedule and keep appointments. The Company also provides flexible payment
options in an effort to reduce patient financial burdens.
4
<PAGE>
Focus on Quality of Patient Care. The Company has and continues to refine
procedures, training and systems designed to ensure optimum patient care. The
Company seeks to improve clinical outcomes through its Clinical Services Council
which works directly with the affiliated network dentists to: (i) institute
quality assurance and utilization review programs, (ii) develop and implement
continuing education and training programs for dental professionals, (iii)
design and implement treatment protocols, developed in cooperation with dental
practitioners, (iv) evaluate new techniques and technologies, (v) monitor
treatment outcomes, and (vi) reduce patient fear of dental procedures.
Additionally, the Company seeks to affiliate with dentists and specialists who
are committed to delivering high quality dental care.
Establish a Comprehensive Dental Care Network. The Company's strategy is to
increase the number of Affiliated Dental Practices by entering into management
contracts with, and acquiring the non-professional assets of, dental groups and
practices in selected markets. The Company's objective is to affiliate with
dental groups and practices that have a significant market position or, when
combined with existing Affiliated Dental Practices, would result in a
significant market position. The Company also intends to selectively establish
de novo dental offices in the markets in which the Company operates, in order to
augment its market presence. The Company believes that the establishment of
significant positions in the markets it serves will result in economies of
scale. Following each new affiliation with a dental practice, the Company works
closely with the professionals and staff in order to achieve network integration
and provide patients with convenient dental treatment.
Achieve Operational Efficiencies and Enhance Revenue. The Company believes it
achieves operating efficiencies through the establishment of (i) centralized
management and administrative functions, such as marketing, payroll, accounts
payable, general accounting and human resources services for the Affiliated
Dental Practices; and (ii) on-site functions such as patient scheduling and
billing and collections at each dental office or on a regional basis. The
Company also enhances dental practice revenues by providing services and
establishing procedures designed to optimize staff ratios and patient
scheduling, capture specialty revenue, develop and implement targeted
advertising and marketing programs, attract new dentists to join the affiliated
practices, and utilizing its management information system to more effectively
support the Company's network of Affiliated Dental Practices. The Company
believes that its network configuration provides leverage in negotiating with
third-party payors and dental supply vendors to receive structured payments and
contract terms that are more favorable than those typically available to
individual and small group practitioners. The addition of specialists such as
orthodontists and oral surgeons who serve multiple offices within the Company's
affiliated network generally allows the Company to capture incremental revenue
from the higher fees commanded by specialty services.
Integrate and Leverage Management Information Systems. The Company's management
information system utilizes commercially available software, which has been
enhanced by proprietary software of the Company. This management information
system allows the Company to more effectively enhance the Affiliated Dental
Practices. The system is designed to assist each Affiliated Dental Practice in
optimizing staffing ratios, patient scheduling, identifying and reducing
unfinished patient treatment programs, maximizing billing and collection
efforts, and actively monitoring the performance of managed care and other third
party contracts. The Company believes that its management information system
provides a distinct competitive advantage by allowing the Company to effectively
service a diverse network of dental practices from a centralized base. As of
December 31, 1997, the Company's basic management information system was in
place at approximately 95% of the locations within the Affiliated Dental
Practices network.
Expand Patient Volume through Proactive Marketing. The Company seeks to assist
the Affiliated Dental Practices to increase patient volume by focusing on
patient satisfaction and targeting existing and new patients through radio,
direct mail, print advertising and other retail marketing programs. The Company
tailors its advertising to local markets, based upon demographic characteristics
of each market and the brand name recognition of the Affiliated Dental Practices
in the respective markets. The Affiliated Dental Practices support this
marketing program by offering convenient hours and locations for the dental
practices, providing comprehensive dental care services such as same-day
emergency care, introducing or expanding specialty services at the dental
practices, and utilizing the Company's management information system to identify
and reduce incomplete patient treatments. The Company's objective is to leverage
its existing advertising programs to generate revenue as it expands within its
selected markets.
Capitalize on Managed Care Expertise. The Company assists the Affiliated Dental
Practices by supplementing their fee-for-service business with selected managed
care contracts. The Company believes that selected managed care contracts offer
an attractive and profitable source of incremental revenue for the Affiliated
Dental Practices and the Company. The Company believes that the financial and
clinical data generated by the Company's management information system enables
the Company to negotiate managed care contracts under terms favorable to the
Company and its dental practice network. Additionally, the Company utilizes its
management information system to actively monitor utilization of patient groups
covered by the managed
5
<PAGE>
care plans. The Company believes that its expertise in managed care represents a
competitive advantage, given the increasing market share of managed care payors
in the dental care sector.
Dental Practice Network
Following completion of the Dedicated Dental Affiliation and including
affiliations completed since December 31, 1997, the Company will provide
comprehensive management services to a dental practice network which employs 256
dentists, including 65 specialists, practicing out of 69 dental offices and 642
operatories located in the geographic markets set forth below.
<TABLE>
<CAPTION>
Location Dentists Offices Operatories
-------- -------- ------- -----------
<S> <C> <C> <C>
Northern California 108 15 174
Southern California (1) 40 16 137
Oregon 62 22 163
Washington 13 7 64
Hawaii 20 7 63
Idaho 13 2 41
---------------------------------------
Total 256 69 642
=======================================
(1) Includes 33 dentists, 15 dental offices, and 124 operatories that will be
affiliated upon completion of the Dedicated Dental Affiliation.
</TABLE>
Expansion Strategy
As a part of its strategy, the Company is pursuing an aggressive network
expansion plan. The Company believes that it has significant opportunities to
affiliate with additional dental practices resulting from (i) favorable industry
characteristics, (ii) the professional and business relationships of the
Company's senior management, and (iii) the Company's strong name recognition.
The U.S. general and specialty dentistry industries are highly fragmented. The
American Dental Association estimates that at December 1995, there were
approximately 150,000 dentists in 113,000 general dental practices, with single
dentist practices accounting for approximately 70% of all practices. The Company
estimates that approximately 2% of all dentists are currently affiliated with
practice management companies. Since January 1997, the number of dentists
contracting or otherwise associated with practice management organizations has
grown significantly. The Company believes that the use of dental practice
management companies will continue to grow rapidly, resulting in significant
consolidation opportunities for the Company and other practice management
organizations. In order to capitalize on these consolidation opportunities, the
Company utilizes the extensive dental industry experience of its senior
management and its significant relationships with numerous practitioners and
other industry leaders throughout the United States. The Company believes that
these extensive relationships provide a competitive advantage to the Company as
it seeks additional affiliation opportunities to further the growth of the
Company's network of Affiliated Dental Practices.
The Company intends to continue to offer numerous significant benefits and
value-added services to attract dentists and specialty practitioners to its
affiliated provider network. Specific value-added services provided by the
Company include billing, reimbursement and collections services, payroll and
staffing, patient scheduling, advertising and marketing, product supply
management and equipment maintenance, dentists recruitment and capital
resources. Additional benefits to practitioners include clinical leadership and
excellence, quality of care standards and continuing education, and financial
benefits including equity compensation, earnouts and performance bonuses. The
Company believes that it will continue to be successful in attracting and
recruiting dentists for the Affiliated Dental Practices by providing these
services and benefits. Furthermore, the Company believes that its name
recognition is and will continue to be attractive to practitioners from an
affiliation standpoint. As a result, the Company believes it will have greater
consolidation opportunities.
The Company uses a range of evaluation criteria in selecting affiliation
candidates, including (i) number of practitioners and compensation; (ii) patient
base; (iii) quality of care; (iv) operating statistics, including number of
operatories, patient visits and revenue per chair; (v) historical operating
results and financial condition; (vi) general versus specialty revenue mix;
(vii) payor mix; (viii) location; (ix) market demographics and competition; (x)
advertising expenditures; (xi) reputation within the local community; (xii)
non-professional staffing requirements; and (xiii) condition of facilities and
equipment including information systems. The Company intends to target
individual and group practitioners, as well as local and regional consolidators.
As consideration for future affiliations, the Company may use a combination of
cash, stock, seller financing and earn-outs.
6
<PAGE>
Upon a new affiliation with a dental practice, the Company's integration process
may include (i) centralization of certain management and administrative
functions, (ii) access to the expertise of regional management personnel, (iii)
integration of management information systems, (iv) initiation of quality
assurance and peer review programs, (v) development of advertising and marketing
programs, (vi) managing payroll and staffing, (vii) reviewing quality of care
and staff utilization, and (viii) modification of scheduling procedures. Such
integration is intended to improve the operations of the dental practices and to
position them for increased patient revenue and profit growth. The Company will
also continue its strategy of establishing de novo dental offices in selected
markets to augment existing market presence.
Services and Operations
The Company provides comprehensive management services with respect to all of
the operations of its network of Affiliated Dental Practices, other than the
provision of dental treatment. The Company employs all non-clinical personnel at
the dental practices.
Administrative. The Company provides administrative services to the Affiliated
Dental Practices, including staffing, education and training, billing and
collections, patient scheduling, patient treatment follow-up, financial
reporting and analysis, productivity reporting and analysis, cash management,
group purchasing, inventory management, payroll processing, employee benefits
administration, advertising promotion and other marketing support. The Company
also assists in professional recruiting and provides support for dental practice
operations, new site development and other capital requirements. The Company
believes the dentists at the Affiliated Dental Practices benefit from the
support provided by the Company and that these services substantially reduce the
amount of time they are otherwise required to devote to administrative matters,
thereby enabling network dentists to dedicate more time to the growth of their
professional practices. Through economies of scale, the Company is able to
provide these services at a lower cost than could be obtained by any of the
Affiliated Dental Practices individually. In addition, because of its size and
purchasing power, the Company has been able to negotiate discounts on, among
other things, dental and office supplies, health and malpractice insurance and
equipment.
Staffing and Scheduling. The Company provides management services that are
designed to optimize staffing ratios and patient scheduling at the dental
practices within the Company's network. The Company provides analysis and advice
with respect to the optimal number of general dentists, specialist dentists,
dental assistants and hygienists at each dental practice in an effort to provide
high levels of quality care and patient confidence while practicing at a
heightened level of efficiency. In addition, the Company assists dental
practices with their scheduling in order to maximize efficiency and minimize
delays in treatment. The Company also assists each Affiliated Dental Practice,
to the extent necessary, with respect to expanding office hours, optimizing the
flow of patients through the offices and assisting dentists in the more
efficient use of dental assistants and hygienists.
Advertising and Marketing. The Company assists the Affiliated Dental Practices
in developing and implementing targeted advertising and marketing programs. The
Company's marketing programs, which include patient educational and prevention
programs at selected dental practices, are focused on the retention and
reactivation of existing patients. In addition, the Company also uses external
marketing programs such as direct mail and yellow page advertising that are
designed to identify the convenience of individual locations, payment plans and
service hours, and the high standards of care at the practices in an attempt to
attract new patients.
Dentist Affiliation. In order to continue the Company's growth, the Company
seeks to enter into Management Agreements with dental practices that employ
dentists who become affiliated with the Company. The Company believes that its
affiliation structure allows many dentists to reduce the financial constraints
associated with having a significant portion of their net worth invested in
their practices. Further, the Company believes that the practice of dentistry
within its network allows dentists to focus almost exclusively on practicing
dentistry by avoiding the burden of non-clinical administrative and management
responsibilities. An affiliation with the Company offers dentists the additional
advantages of employee benefits such as health insurance and continuing
education.
Quality Assurance. The clinical management procedures and treatment protocols
for the Affiliated Dental Practices within the Company's network vary from
region to region. Under the guidance of the Company's recently formed Clinical
Services Council, key dentists in each region will review and determine these
procedures and treatment protocols. The Company intends to work closely with the
dentists and hygienists at the Affiliated Dental Practices to develop and
implement these procedures and protocols, as well as business and administrative
standards under which dental services are provided in order to create a
heightened clinical environment for the Affiliated Dental Practices to enhance
patient care and clinical outcomes. Areas included
7
<PAGE>
among the procedures and protocols to be determined by the Clinical Services
Council are treatment planning, diagnostic screening, radiographic records,
record keeping, specialty referrals and dental hygiene protocols. As part of the
Affiliated Dental Practices' clinical enhancement program, the Company intends
to assist in providing quality assurance, peer review and utilization review
programs.
Training and Education. Staff and practice development programs are an integral
part of the Company's operating strategy. The Company's programs are designed to
(i) motivate the staff to achieve optimum performance goals, (ii) improve the
level of patient satisfaction, and (iii) improve the Company's ability to
attract and retain qualified personnel. The Company believes that its programs
collectively have increased referrals from patients, and have increased
treatment acceptance rates. The Company provides the Affiliated Dental Practices
with consulting and educational services. These services include a training
program covering non-clinical aspects of the practice, together with specific
training designed for the efficient and effective use of the Company's
management information system. Specifically, the Company's training programs
provide professionals and Company employees at the dental practices with access
to guidelines for addressing questions and concerns of prospective and existing
patients, techniques for explaining treatment procedures and length of
treatment, parameters for establishing appropriate financial arrangements with
patients, and a systematic approach to monitoring the success of each area of
training.
Management Information System. Management believes that access to accurate,
relevant and timely financial and operating information is a key element of its
practice management services. The Company's management information system is a
combination of commercially available software with proprietary enhancements,
and is designed to increase the efficiency and productivity of dental practices
by enabling the Company and the dental practices to cost-effectively monitor the
key business and professional operating aspects. The Company's basic management
system is in place at approximately 95% of the locations within the Affiliated
Dental Practice network. The Company intends to implement its basic management
system at Dedicated Dental and at each dental practice with which it affiliates.
The system allows the dental practices to identify, track and schedule the
patient treatment process, thereby reducing unfinished patient treatment
programs which correspondingly increases practice revenues. The system also
contains features designed to maximize billing and collection efforts, and to
actively monitor the performance of managed care contracts. The management
information system functions to optimize the practitioner's time through
computerized scheduling. The Company believes that its enhanced management
information system provides a critical competitive advantage, in that it allows
the Company to more effectively manage a geographically diverse network of
dental practices from a centralized base. The current proprietary software
enhancements, together with its capacity to develop future enhancements,
uniquely positions the Company for future expansion of its Affiliated Dental
Practice management network. The Company believes this system has increased the
productivity of the existing Affiliated Dental Practices that have implemented
it.
Management Agreements
The Company has entered into long-term management agreements ("Management
Agreements") with the Affiliated Dental Practices under which the Company is the
exclusive administrator of all non-clinical aspects of the dental practices
conducted by the Affiliated Dental Practices, providing facilities, equipment,
staffing, management support and other ancillary services. Under the Management
Agreements the Company (i) provide all facilities and equipment used by the
Affiliated Dental Practices; (ii) bills and collects all receivables on behalf
of the Affiliated Dental Practices; (iii) purchases and provides all supplies;
(iv) provides all clerical, accounting, payroll, human resources, computer and
other non-dental support services and personnel; (v) supervises and maintains
custody of all business records; (vi) provides management information reports;
(vii) provides market research and plans and implements marketing and
advertising programs; (viii) negotiates contracts on behalf of the Affiliated
Dental Practices with managed care payors or other third parties; and (ix)
assists in the recruitment of dentists.
Under the Management Agreements, although the Company establishes guidelines for
hiring and compensating dentist and clinical personnel, the Affiliated Dental
Practices retain the responsibility for, among other things, (i) hiring and
compensating dentists and other dental professionals, (ii) purchasing and
maintaining malpractice insurance, (iii) maintaining patient records, and (iv)
ensuring that dentists have the required licenses and other certifications
needed to perform their duties. In addition, the Affiliated Dental Practices are
exclusively in control of all aspects of the practice of dentistry and the
delivery of dental services.
As compensation for all services provided under the Management Agreements, the
Company receives service fees from the Affiliated Dental Practices. Under a
typical Management Agreement, the Company will receive a service fee equal to
reimbursement of expenses incurred by the Company in the performance of its
obligations under the Management Agreement, plus an additional fee equal to a
percentage ranging from 15% to 30% of the net revenues of each Affiliated Dental
Practice, after allowances for contractual adjustments and bad debts. Under
certain of the Management Agreements, the Company is also entitled to receive a
bonus based upon achieving certain performance objectives. Additionally, one
Management Agreement
8
<PAGE>
provides for a flat fee of 53% of the net revenues of the Affiliated Dental
Practice. The fees under this Management Agreement increase annually at the rate
of 1% to a maximum of 55%. In addition, Management Agreements to be entered into
with dental practices related to Dedicated Dental provide for flat fees ranging
from 57% to 71% of the net revenues of the practices. The service fees are
collected by the Company on an ongoing basis out of the cash collections of the
Affiliated Dental Practices, or under certain Management Agreements, out of
receivables assigned to the Company by the Affiliated Dental Practices.
The Management Agreements each have an initial term of 40 years with automatic
extensions ranging from five years to ten years thereafter, unless either party
gives notice before the end of the term. The Management Agreements are not
subject to early termination by the Affiliated Dental Practices unless (i) the
Company is the subject of bankruptcy proceedings, or (ii) the Company materially
breaches the Management Agreement and does not cure the breach following notice.
Certain of the Management Agreements have additional termination events,
including: (i) refusal to comply with the decisions of the joint operating
committee, (ii) failure to pay the management fee, and (iii) a material change
in the law.
Government Regulation
General. The practice of dentistry is regulated extensively at both the state
and federal level. Regulatory oversight includes, but is not limited to,
considerations of fee-splitting, corporate practice of dentistry, anti-kickback
and anti-referral legislation and state insurance regulation.
Every state imposes licensing and other requirements on individual dentists and
dental facilities and services. In addition, federal and state laws regulate
HMOs and other managed care organizations for which dentists may be providers.
In connection with its operations in existing markets and expansion into new
markets, the Company may become subject to compliance with additional laws,
regulations and interpretations or enforcements thereof. The ability of the
Company to operate profitably will depend in part upon the Company and its
Affiliated Dental Practices obtaining and maintaining all necessary licenses,
certifications and other approvals and operating in compliance with applicable
health care regulations.
Dental practices must meet federal, state and local regulatory standards in the
areas of safety and health. Historically, these standards have not had any
material adverse effect on the operations of the Affiliated Dental Practices.
The Company believes that the Company and the Affiliated Dental Practices are in
compliance in all material respects with all applicable federal, state and local
laws and regulations relating to safety and health.
Corporate Practice of Dentistry; Fee Splitting. The laws of many states prohibit
by statute or under common law dentists from splitting fees with non-dentists
and prohibit non-dental entities such as the Company from engaging in the
practice of dentistry or employing dentists to practice dentistry. The specific
restrictions against the corporate practice of dentistry as well as the
interpretation of those restrictions by state regulatory authorities vary from
state to state. The restrictions are generally designed to prohibit a non-dental
entity from controlling the professional practice of a dentist, employing
dentists to practice dentistry (or, in certain states, employing dental
hygienists or dental assistants), controlling the content of a dentist's
advertising or sharing professional fees. A number of states limit the ability
of a person other than a licensed dentist to own equipment or offices used in a
dental practice, however, the states in which the Company conducts its business
do not currently impose such limitations. Some of these states allow leasing of
equipment and office space to a dental practice under a bona fide lease. Some
states also prohibit a dentist from operating more than two dental offices. The
laws of many states also prohibit dental practitioners from paying any portion
of fees received for dental services in consideration for the referral of a
patient. In addition, many states impose limits on the tasks that may be
delegated by dentists to dental assistants.
The Company provides management and administration services to dental practices,
and believes that the fees the Company charges for those services are consistent
with the laws and regulations of the jurisdictions in which it operates. The
Company does not control the clinical aspects of the practice of dentistry or,
employ dentists to practice dentistry, except as permitted by law. Moreover, in
states in which it is prohibited, the Company does not employ dental hygienists
or dental assistants. Although the Company believes that its operations comply
in all material respects with the above-described laws to which it is subject,
there can be no assurance that a review of the Company's business relationships
by courts or other regulatory authorities would not result in determinations
that could prohibit or otherwise adversely affect the operations of the Company
or that the regulatory environment will not change, requiring the Company to
reorganize or restrict its existing or future operations.
The laws regarding fee-splitting and the corporate practice of dentistry and
their interpretation vary from state to state and are enforced by regulatory
authorities with broad discretion. There can be no assurance that the legality
of the Company's business or its relationships with dentists or Affiliated
Dental Practices will not be successfully challenged or that the enforceability
of the
9
<PAGE>
provisions of any Management Agreement will not be limited. The laws and
regulations of certain states in which the Company may seek to expand may
require the Company to change the form of the Company's relationships with
Affiliated Dental Practices in such states in a manner which may restrict the
Company's operations or the way in which providers may be paid or may prevent
the Company from acquiring the non-dental assets of such practices or managing
dental practices in such states. Similarly, there can be no assurance that the
laws and regulations of the states in which the Company presently maintains
operations will not change or be interpreted in the future either to restrict or
adversely affect the Company's existing or future relationships with the
Company's Affiliated Dental Practices. Any change in the Company's relationships
with its Affiliated Dental Practices resulting from the interpretation of
corporate practice of dentistry and fee-splitting statutes and regulations could
have a material adverse effect on the Company's business and results of
operations.
Anti-Kickback and Anti-Referral Legislation. Federal and many states laws
prohibit the offer, payment, solicitation or receipt of any form of remuneration
in return for, or in order to induce (i) the referral of a person for services;
(ii) the furnishing or arranging for the furnishing of items or services; or
(iii) the purchase, lease, order, arranging or recommending purchasing, leasing
or ordering of any item, in each case, reimbursable under Medicare, Medicaid or
other federal and state health care programs. These provisions apply to dental
services covered under the Medicaid program in which the Company participates.
The federal government has increased scrutiny of joint ventures and other
transactions among health care providers in an effort to reduce potential fraud
and abuse related to Medicare and Medicaid costs. Many states have similar
anti-kickback laws, and in many cases these laws apply to all types of patients,
not just Medicare and Medicaid beneficiaries.
The applicability of these federal and state laws to transactions in the health
care industry such as those to which the Company is or may be a party has not
been the subject of judicial interpretation. There can be no assurance that
judicial or administrative authorities will not find these provisions applicable
to the Company's operations, which could have a material adverse effect on the
Company's business. Under current federal law, a physician or dentist or member
of his or her immediate family is prohibited from referring Medicare or Medicaid
patients to any entity providing "designated health services" in which the
physician or dentist has an ownership or investment interest, including the
physician's or dentist's own group practice, unless such an applicable exception
is available. The designated health services include the provision of clinical
laboratory services, radiology and other diagnostic services (including
ultrasound services), radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
certain equipment and supplies, prosthesis, orthotics, outpatient prescription
drugs, home health services and inpatient and outpatient hospital services. A
number of states also have laws that prohibit referrals for certain services
such as x-rays by dentists if the dentist has certain enumerated financial
relationships with the entity receiving the referral, unless an exception
applies. Any future expansion of these prohibitions to other health services
could restrict the Company's ability to integrate dental practices and carry out
the development of the Company's network of Affiliated Dental Practices.
Noncompliance with, or violation of, either the anti-kickback provisions or
restrictions on referrals can result in exclusion from the Medicare and Medicaid
programs as well as civil and criminal penalties. Similar penalties apply for
violations of state law. While the Company makes every effort to comply with the
anti-kickback and anti-referral laws a determination of violation of these laws
by the Company or its Affiliated Dental Practices could have a material adverse
effect on the Company's business, financial condition and results of operations.
State Insurance Regulation. In addition, there are certain regulatory risks
associated with the Company's role in negotiating and administering managed care
and capitation contracts, where the dental care provider typically is paid a
pre-determined amount per-patient per-month from the payor in exchange for
providing all necessary covered dental care services to patients covered under
the contracts. The application of state insurance laws to reimbursement
arrangements other than various types of fee-for-service arrangements is an
unsettled area of law and is subject to interpretation by regulators with broad
discretion. As the Company or its Affiliated Dental Practices contract with
third-party payors, including self-insured plans, for certain
non-fee-for-service arrangements, the Company or the Affiliated Dental Practice
may become subject to state insurance laws. In the event that the Company or the
Affiliated Dental Practices are determined to be engaged in the business of
insurance, such parties could be required either to seek licensure as an
insurance company or to change the form of their relationships with third-party
payors and may become subject to regulatory enforcement actions. In such event,
the Company's revenues may be adversely affected.
Dedicated Dental operates under a license issued by the DOC under the Knox-Keene
Act, which is expected to be maintained by Dedicated Dental after it becomes a
wholly-owned subsidiary of the Company. The Knox-Keene Act and the regulations
promulgated thereunder subject entities which are licensed as healthcare service
plans in California to substantial regulation by the DOC. In addition, licensees
under the Knox-Keene Act are required to file periodic financial data and other
information (which generally become available to the public), maintain
substantial tangible net equity on their balance sheets and maintain
10
<PAGE>
adequate levels of medical, financial and operating personnel dedicated to
fulfilling the licensee's statutory and regulatory requirements. The DOC is
empowered by law to take enforcement actions against licensees that fail to
comply with such requirements. Any material non-compliance with the Knox-Keene
Act and the regulations promulgated thereunder could have a material adverse
effect on the Company's business, financial condition and results of operations.
Health Care Reform Proposals. The United States Congress and state legislatures
have considered various types of health care reform, including comprehensive
revisions to the current health care system. It is uncertain what legislative
proposals will be adopted in the future, if any, or what actions federal or
state legislatures or third-party payors may take in anticipation of or in
response to any health care reform proposals or legislation. Health care reform
legislation adopted by Congress or the legislatures of states in which the
Company does business, as well as changes in federal and state regulations could
have a material adverse effect on the operations of the Company, and changes in
the health care industry, such as the growth of managed care organizations and
provider networks, may result in lower payment levels for the services of
dentists within the Company's network of Affiliated Dental Practices and lower
profitability of such affiliated practices.
Regulatory Compliance. The Company regularly monitors developments in laws and
regulations relating to dentistry. The Company may be required to modify its
agreements, operations or marketing from time to time in response to changes in
the business, statutory and regulatory environments. The Company plans to
structure all of its agreements, operations and marketing in accordance with
applicable law, although there can be no assurance that its arrangements will
not be successfully challenged or that the required changes may not have a
material adverse effect on operations or profitability.
Competition
The Company competes with other dental practice management companies seeking to
affiliate with dental practices in the highly competitive dental practice
management industry. The Company believes that the industry will become more
competitive as it continues to develop. Key factors of competition between
dental practice management companies currently include acquisition methods and
models, the reputations of the dental practices within dental care networks, the
scope of services provided by dental care networks, management experience and
expertise, the sophistication of management information, accounting, finance and
other systems, and network operating methods. The Company believes that it has a
competitive advantage to effectively compete in each of these areas.
Insurance
The Company carries comprehensive liability, fire, and extended coverage
insurance. The Affiliated Dental Practices carry professional liability and
general liability insurance. Such insurance coverage's are expanded to include
all additional practices that the Company develops or affiliates, with policy
specifications, insured limits, and deductibles customarily carried for similar
dental practices.
Service Mark
The Company's network of Affiliated Dental Practices in Oregon and Washington is
operated and marketed under the name Gentle Dental. Other affiliated practices
may or may not use the Gentle Dental name depending upon each affiliated
practice's name recognition and other local market conditions. Gentle Dental is
a federally registered service mark owned by the Company. On April 19, 1989, the
Company's predecessor acquired title to the federal registration of this service
mark as originally issued on October 26, 1982. As part of the purchase, the
seller was granted an exclusive personal license ("License") to use the mark for
the sale of dental services in practices owned or controlled by the seller in
the Boston, Massachusetts, Baltimore, Maryland, and Washington, D.C.
metropolitan areas for a period equal to the lesser of the seller's "natural
life" or the 10 year period ending April 19, 1999. As a result, the Company
cannot use the mark in those markets until expiration of the License. The
Company also recognizes that there are numerous other practices across the
country using the name Gentle Dental. Any entity that commenced use of the
Gentle Dental mark before October 26, 1982, may have rights to the mark in its
geographic market superior to the Company's rights. Given the costs and inherent
uncertainties of service mark litigation, there can be no assurance that the
Company can successfully enforce its service mark rights in any particular
market.
Employees
At December 31, 1997, the Company and Affiliated Dental Practices had 1,132
employees, representing 841 full-time and 291 part-time employees. Of the total
employees, there was a total of 143 general dentistry practitioners, 60
specialists, 121 dental hygienists, and 360 dental assistants. Also,
approximately 36 clerical personnel and dental assistants employed by one of the
11
<PAGE>
Affiliated Dental Practices with the Company are subject to a collective
bargaining agreement that expires in January 1999. Management believes it
maintains good relationships with its employees.
Item 2. Description of Property
The dental practice and business offices in the Company's network are generally
leased from various parties pursuant to leases with remaining terms ranging from
one to 17 years. One dental office, in Everett, Washington, is leased on a
month-to-month basis; however, the Company believes that alternative space is
readily available in this area at comparable rates and on comparable terms.
Several of the leases have options to renew, and the Company expects to renew or
replace leases as they expire. The Company's corporate headquarters are
currently located in leased office space in Yorba Linda, California. The Company
has entered into a new lease agreement effective May 1998 and will be relocating
its corporate headquarters to El Segundo, California and intends to sublease its
existing headquarters location to an independent third-party. The Company also
maintains executive offices in leased office space in Vancouver, Washington. In
connection with the amendment of the Management Agreements with Oregon and
Washington professional corporations, the Company acquired an office building
located in Hazel Dell, Washington which is occupied by one of the Company's
clinical office locations.
Item 3. Legal Proceedings
Neither the Company nor the Affiliated Dental Practices are currently subject to
any material litigation nor, to the Company's knowledge, is any material
litigation threatened against the Company or the Affiliated Dental Practices
other than routine litigation arising in the ordinary course of business, some
of which are expected to be covered by liability insurance and all of which
collectively are not expected to have a material adverse effect on the Company's
business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the Nasdaq SmallCap Market under the
symbol GNTL. The following table sets forth, for the periods indicated, the
highest and lowest closing sales price for the Common Stock, as reported by the
Nasdaq SmallCap Market.
High Low
---- ---
1997
First Quarter (beginning February 13, 1997) $ 5.25 $ 4.00
Second Quarter 5.50 3.63
Third Quarter 16.50 5.13
Fourth Quarter 16.00 8.00
As of February 28, 1998 there were approximately 109 holders of record of the
Company's Common Stock.
The payment of dividends is within the discretion of the Company's Board of
Directors; however, the Company intends to retain earnings from operations for
use in the operation and expansion of its business and does not expect to pay
cash dividends in the foreseeable future. Any future decision with respect to
dividends will depend on future earnings, operations, capital requirements and
availability, restrictions in future financing agreements and other business and
financial considerations. In addition, the Company's Credit Facility currently
prohibits the payment of cash dividends.
On November 4, 1997, in connection with the merger with GMS, the Company issued
4,548,161 shares of Common Stock in exchange for all outstanding shares of the
common stock of GMS. The issuance of the shares was exempt from registration
12
<PAGE>
under Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D
thereunder because all purchasers were accredited investors within the meaning
of Rule 501.
Item 6. Management's Discussion and Analysis or Plan of Operations
The following discussion of the results of operations and financial condition of
the Company should be read in conjunction with the Audited Consolidated
Financial Statements and the notes thereof included elsewhere in this Annual
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.
Results of Operations
Year Ended December 31, 1997 Statement of Operations Compared to Year Ended
December 31, 1996 Statement of Operations
To provide a more meaningful comparison, the following discussion generally
compares expenses to the total of dental practice net patient service revenue of
consolidated and unconsolidated Affiliated Dental Practices. 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.
Dental Practice Net Patient Service Revenue and Net Management Fees. Dental
practice net patient revenue increased from $3.7 million for the year ended
December 31, 1996 to $29.3 million for the year ended December 31, 1997. This
692% growth is directly attributable to five affiliations completed during the
three months ended December 31, 1996 and six affiliations completed during the
year ended December 31, 1997, representing twenty-three clinical locations.
These affiliations have Management Agreements that meet the EITF requirements
for consolidation of the related Affiliated Dental Practices' with the
Company's.
Net management fees revenue represents management services to certain
unconsolidated Affiliated Dental Practices, covering twenty clinical locations
as of December 31, 1997. Net management fees revenue increased 31.4% from $10.7
million for the year ended December 31, 1996 to $14.1 million for the year ended
December 31, 1997. This growth was primarily a result of three affiliations
completed in 1997. Also, approximately 15.0% of the increase in net management
fees revenue is attributable to increases in the percentages of patient revenue
payable under the Management Agreements with the Washington and Oregon
affiliated dental practices from 50.0% to 51.0% and 50.0% to 53.0%,
respectively.
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 $25.1 million for the year ended December 31,
1996 and $56.0 million for the year ended December 31, 1997, representing a 123%
increase.
Clinical Salaries and Benefits. Clinical salaries and benefits costs include all
patient service provider staff compensation and related payroll costs at the
consolidated affiliated dental practices, including dentists, hygienists and
dental assistants. Clinical salaries and benefits increased from $1.5 million
for the year ended December 31, 1996 to $13.7 million for the year ended
December 31, 1997. Practice clinical salaries and benefits as a percentage of
dental practice net patient revenue for the years ended December 31, 1996 and
1997 were 40.3% and 46.7%, respectively. The addition of Affiliated Dental
Practices with the Company in late 1996 and 1997 contributed to the increase.
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 91.1% from $4.3 million for the year ended
December 31, 1996 to $8.2 million for the year ended December 31, 1997. This
increase was primarily attributable to the addition of costs from affiliations
completed during the three months ended
13
<PAGE>
December 31, 1996 and the year ended December 31, 1997. 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 years
ended December 31, 1996 and 1997 would have been 17.0% and 14.6%, respectively.
Dental Supplies and Lab Costs. Total dental supplies and lab costs increased
122% from $2.8 million for the year ended December 31, 1996 to $6.3 million for
the year ended December 31, 1997. The addition of Affiliated Dental Practices
with the Company in late 1996 and 1997 contributed to the increase. If all
Company revenue had been recorded at the dental group net patient service
revenue, dental supplies and lab costs as a percentage of total revenue for the
years ended December 31, 1996 and 1997 would have been 11.3% and 11.2%,
respectively.
Practice Occupancy. Practice occupancy expenses increased 126% from $1.6 million
for the year ended December 31, 1996 to $3.5 million for the year ended December
31, 1997. This increase in occupancy expenses is primarily attributable to the
addition of costs from affiliations completed during the three months ended
December 31, 1996 and the year ended December 31, 1997. 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 years ended
December 31, 1996 and 1997 would have been 6.2% and 6.3%, respectively. The
slight increase in comparable costs was due to higher rent at new Affiliated
Dental Practices as a percentage of revenue.
Practice Selling, General and Administrative Expenses. These costs include
general office, advertising, professional services (excluding dentistry), travel
and entertainment, local taxes, insurance, and other miscellaneous costs at the
clinical office level. Practice selling, general and administrative expenses
increased 172% from $1.8 million for the year ended December 31, 1996 to $4.9
million for the year ended December 31, 1997. If all Company revenue had been
recorded at the dental group net patient service revenue level, practice
selling, general and administrative expenses as a percentage of total revenue
for the years ended December 31, 1996 and 1997 would have been 7.2% and 8.8%,
respectively. The expense mix of Affiliated Dental Practices which affiliated
with the Company in late 1996 and 1997 contributed to the increase in this
percentage.
Corporate Selling, General and Administrative Expenses. Total corporate selling,
general and administrative expenses increased 90.1% from $3.0 million for the
year ended December 31, 1996 to $5.7 million for the year ended December 31,
1997. 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 years ended December 31, 1996
and 1997 would have been 11.9% and 10.2%, respectively. In addition to corporate
selling, general and administrative expenses incurred during the year ended
December 31, 1997 as discussed above, the Company's 1997 Statement of Operations
includes $1.8 million in expenses associated with the merger of the Company with
GMS and the Company's related restructuring plan.
Depreciation and Amortization. Total depreciation and amortization expense for
the years ended December 31, 1996 and 1997 were $1.0 million and $1.8 million,
respectively. The increase was primarily due to the addition of Affiliated
Dental Practices with the Company in late 1996 and 1997.
Interest Expense. Total interest expense decreased 12.8% from $749,000 for the
year ended December 31, 1996 to $653,000 for the year ended December 31, 1997.
This decrease in interest expense resulted from the repayment by the Company of
$4.4 million under its various bank loan arrangements with the proceeds from the
initial public offering partly offset by additional debt incurred to complete
additional dental practice affiliations in 1997.
Provision (Benefit) for Income Taxes. For the years ended December 31, 1996 and
1997, the Company recognized a tax benefit resulting from its taxable losses for
those years. The effective tax rate for the tax benefit was lower than the
statutory rate due to the Company's use a tax-free merger structure for certain
dental practice affiliations. As a result, the amortization of certain
intangible assets reduced earnings but was not deductible for tax purposes.
Furthermore, a valuation allowance was increased to reduce deferred tax assets
to their estimated net realizable value.
Liquidity and Capital Resources
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 paid consideration of $1.7
million, which was offset by the Company's $1.7 million receivable from these
Affiliated Dental Practices. In addition, the Company issued options to purchase
110,000 shares of Company Common Stock, subject to a five year vesting period
and will pay $575,000 in cash over 18 monthly installments. The new management
services agreements
14
<PAGE>
meet the criteria for consolidation of the Affiliated Dental Practice accounts
with the Company for financial reporting purposes.
During 1998, the Company has completed two affiliations in which the Company
purchased the assets of two dental practices for $7.9 million in cash and 43,077
shares of Common Stock. The aggregate purchase price in these affiliations of
approximately $8.4 million plus potential future consideration based upon
performance will be allocated to the fair value of the assets acquired,
including intangible assets. These affiliations will be accounted for using the
purchase method of accounting.
On February 28, 1998, the Company entered into an agreement to purchase the
assets of a dental care organization for $950,000 in cash. The affiliation is
subject to Oregon state regulatory approval. The affiliation is expected to
close in 1998 and will be accounted for using the purchase method of accounting.
On September 21, 1997, the Company entered into an agreement to acquire
Dedicated Dental and to affiliate with certain related dental practices. On
February 28, 1998, the Company and the other parties to the Dedicated Dental
Affiliation amended the respective agreements to (i) reduce the aggregate stock
consideration to be given by the Company from $12,429,000 to $5,769,000; (ii)
increase the aggregate cash consideration from $9,771,000 to $16,431,000
(reduced by any outstanding indebtedness of Dedicated Dental at closing); (iii)
add cash earnout consideration in connection with the acquisition of the stock
of Dedicated Dental to the cash earnout consideration provided in two of the
asset purchase agreements, in each case at a presently undeterminable amount to
be determined based upon future earnings before interest expense, income taxes,
depreciation and amortization of Dedicated Dental or the related dental
practices, as applicable; and (iv) to eliminate certain registration rights. The
aggregate cash and stock consideration to be paid by the Company at the closing
of the Dedicated Dental Affiliation was not changed by such amendments and
continues to be $22,200,000. The closing of the Dedicated Dental Affiliation is
subject to satisfaction of certain conditions, including receipt of the approval
of the DOC. There can be no assurance that these conditions will be satisfied or
that the Dedicated Dental Affiliation will be completed.
The Company believes that proceeds from future offerings of Common Stock,
expansion of the existing credit facility with a bank ("Credit Facility") and
other financing alternatives currently being evaluated will be sufficient to
fund the Dedicated Dental Affiliation and other future practice affiliations.
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.
The Company's 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 Credit
Facility requires the Company to pay an unused commitment fee in the amount of
0.50% per annum or 0.375% per annum, depending on the Company's leverage ratio,
on the average daily amount by which the bank commitment under the Credit
Facility exceeds the aggregate amount of all loans then outstanding. The Credit
Facility contains several covenants including (i) restrictions on the ability of
the Company to incur indebtedness and repurchase, or make dividends with respect
to, its capital stock; and (ii) requirements relating to maintenance of a
specified net worth and specified ratios of current assets to current
liabilities, debt to cash flow and EBITDAR to fixed charges. In addition, the
Credit Facility requires the Company to notify the lenders prior to making any
acquisition and to obtain the consent of the lenders prior to making (i) certain
acquisitions with purchase prices exceeding $3 million, (ii) all acquisitions
with purchase prices exceeding $5 million and (iii) capital expenditures
exceeding $5 million in any fiscal year. The Credit Facility also requires the
Company to convert to a holding company that owns no assets other than the stock
of its operating subsidiaries on or before May 31, 1998. If the Company does not
attain holding company status on or before May 31, 1998, the interest rate
applicable to amounts borrowed under the Credit Facility would be increased by
0.5% and if holding company status is not attained on or before July 31, 1998 an
event of default would exist under the terms of the Credit Facility. The
Company's obligations under the Credit Facility are guaranteed by each of the
subsidiaries of the Company. The obligations of the Company under the Credit
Facility and the subsidiaries under the guarantees are secured by a
15
<PAGE>
security interest in the equipment, fixtures, inventory, receivables, subsidiary
stock, certain debt instruments, accounts and general intangibles of each of
such entities.
On June 21, 1996, ServiceMaster purchased 100,000 shares of the Common Stock and
a warrant to purchase an additional 100,000 shares at $7.50 per share for total
consideration of $1 million. ServiceMaster has the right to require the Company
to repurchase any or all of the 100,000 shares initially purchased and any or
all shares acquired upon exercise of the warrant if by June 21, 2001, the
Company has not made a public offering of its Common Stock with a per share
price of at least $22 with net proceeds to Company of at least $10 million. The
purchase price under the put right is equal to 20 times the Company's average
adjusted net income per share for the two most recent fiscal years preceding
ServiceMaster's exercise of the put.
The holders of certain put rights issued by the Company in connection with
affiliations with dental practices have the right to require the Company to
repurchase an aggregate of 83,686 shares of Common Stock for an aggregate of
$1.2 million. Such rights are exercisable by the holders thereof at various
dates between 1998 and 2003. The rights as to all but 20,000 of the shares of
Common Stock will terminate if the Company completes a public offering of Common
Stock with a price that is greater than $20 per share.
The Company funded capital expenditures of $873,000 and $2.8 million for the
years ended December 31, 1996 and 1997, respectively. Such expenditures were
primarily related to the purchase of furniture and equipment, certain
information systems and tenant improvements. Cash paid for acquisitions was $7.3
million and $9.7 million for the years ended December 31, 1996 and 1997,
respectively. Such expenditures consisted primarily of cash paid in connection
with affiliation transactions, when completed, as well as cash paid pursuant to
related earn outs. In connection with certain completed affiliation transactions
the Company has agreed to pay to the sellers certain future consideration in the
form of cash and stock. The amount of future consideration payable by the
Company under earn outs is generally computed based upon financial performance
of the Affiliated Dental Practices during certain specified periods.
A total of 594,147 outstanding shares of Common Stock issued at a price of $.45
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 has in the past, and may in the future, issue promissory notes to
sellers of dental practice assets in connection with the dental practice
affiliation transactions. At December 31, 1997, the Company had approximately
$3.9 million in aggregate principal amount of such promissory notes outstanding.
Such notes generally require the Company to make quarterly or monthly
installments of principal. Certain of such notes require the Company to make
periodic balloon payments of principal amounts thereof. One such note requires
the Company to make a $500,000 lump sum payment in July 1999, a $2.1 million
lump sum payment in July 2002, and, in the event that specified performance
targets are attained by certain dental practices, a payment of up to $2.8
million in October 2002 (or such earlier date on which the performance targets
are achieved).
The Company plans to fund working capital requirements, acquisition of the
assets of additional Affiliated Dental Practices the Company may seek to
affiliate with, and the purchase of additional operating assets for existing
practices with a combination of borrowings under the Credit Facility, the
issuance of Common Stock and notes, cash flow from operations, proceeds, if any,
from future offerings of Common Stock, and financing alternatives. 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.
16
<PAGE>
Item 7. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Reports 18-19
Consolidated Balance Sheets at December 31, 1996 and 1997 20-21
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1997 22
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996 and 1997 23-24
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1997 25-27
Notes to Consolidated Financial Statements 28-48
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Gentle Dental Service Corporation:
We have audited the accompanying consolidated balance sheet of Gentle Dental
Service Corporation and subsidiaries as of December 31, 1997 and the related
consolidated statements of operations and shareholders' equity and cash flows
for the year ended December 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gentle Dental
Service Corporation and subsidiaries as of December 31, 1997 and the results of
their operations and their cash flows for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated balance sheet of GMS
Dental Group, Inc. and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations and shareholders' equity and cash flows
for the year ended December 31, 1996, prior to their restatement for the 1997
pooling of interests between Gentle Dental Service Corporation and GMS Dental
Group, Inc. and subsidiaries. The contribution of GMS Dental Group, Inc. and
subsidiaries to total assets, revenues and net loss represented 50 percent, 26
percent and 42 percent of the respective restated totals. Separate financial
statements of Gentle Dental Service Corporation included in the 1996 restated
consolidated balance sheet and statements of operations and cash flows were
audited and reported on separately by other auditors. We also audited the
combination of the accompanying consolidated balance sheet as of December 31,
1996 and the related consolidated statements of operations and cash flows for
the year ended December 31, 1996, after restatement for the pooling of
interests; in our opinion, such consolidated statements have been properly
combined on the basis described in note 3 of the notes to the consolidated
financial statements.
KPMG PEAT MARWICK LLP
Orange County, California
February 20, 1998, except as to
note 14 which is as of
March 16, 1998
18
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of
Gentle Dental Service Corporation
In our opinion, the balance sheet and the related statements of operations, of
redeemable common stock and nonredeemable shareholders' equity and of cash
flows, not presented separately herein, present fairly, in all material
respects, the financial position of Gentle Dental Service Corporation at
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As disclosed in Note 10 to the financial statements, the Company has certain
related party transactions.
PRICE WATERHOUSE LLP
Portland, Oregon
February 28, 1997
19
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1997
(in thousands, except share and per share amounts)
Assets 1996 1997
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,220 $ 302
Accounts receivable, net of allowances of
approximately $1,706 and $4,159
in 1996 and 1997, respectively 4,826 6,331
Receivables from affiliates 1,197 1,731
Income taxes receivable 169 115
Supplies 554 1,109
Prepaid and other current assets 877 1,611
---------------- ----------------
Total current assets 9,843 11,199
---------------- ----------------
Property and equipment, net (notes 4 and 6) 5,766 10,084
Intangible assets, net of accumulated
amortization (note 5) 10,330 22,843
Other assets 457 282
---------------- ----------------
Total assets $ 26,396 $ 44,408
================ ================
Liabilities, Redeemable Convertible Preferred
and Common Stock and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,650 $ 2,452
Accrued payroll and payroll related costs 1,033 2,084
Other current liabilities 1,667 3,174
Current portion of long-term debt and
capital lease obligations (notes 6 and 10) 1,124 651
Short-term borrowings (note 6) 2,097 -
---------------- ----------------
Total current liabilities 7,571 8,361
---------------- ----------------
Long-term liabilities:
Obligations under capital leases, net
of current portion (note 13) 572 581
Long-term debt, net of current portion (note 6) 1,822 13,842
Other long-term liabilities 91 115
---------------- ----------------
Total long-term liabilities 2,485 14,538
---------------- ----------------
Total liabilities $ 10,056 $ 22,899
---------------- ----------------
(Continued)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 31, 1996 and 1997
(in thousands, except share and per share amounts)
1996 1997
---------------- ----------------
<S> <C> <C>
Redeemable convertible preferred stock - Series B, $.001 par value,
9,270,000 shares authorized; 6,180,000 and zero shares
issued and outstanding in 1996 and 1997, respectively
(note 8) $ 11,055 $ -
---------------- ----------------
Redeemable common stock, no par value, 190,302 and 183,686 shares
issued and outstanding in 1996 and 1997, respectively (note 8) 2,199 2,130
---------------- ----------------
Shareholders' equity (notes 7 and 9):
Preferred stock, 30,000,000 shares authorized, no shares
issued and outstanding - -
Convertible preferred stock - Series A, $.001 par value;
395,000 shares authorized; 395,000 and zero shares
issued and outstanding in 1996 and 1997, respectively 1 -
Convertible preferred stock - Series C, $.001 par value;
5,000 shares authorized; 1,777 and zero shares issued
and outstanding in 1996 and 1997, respectively 1 -
Common stock, no par value, 50,000,000 shares authorized,
2,181,622 and 7,530,781 shares issued and outstanding
in 1996 and 1997, respectively 2,890 21,784
Additional paid-in capital 1,443 3,165
Shareholder notes receivable (136) (304)
Accumulated deficit (1,113) (5,266)
---------------- ----------------
Total shareholders' equity 3,086 19,379
---------------- ----------------
Commitments and contingencies (notes 13 and 14)
Total liabilities, redeemable convertible preferred
and common stock and shareholders' equity $ 26,396 $ 44,408
================ ================
See accompanying notes to consolidated financial statements.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996 and 1997
(in thousands, except per share amounts)
1996 1997
---------------- ----------------
<S> <C> <C>
Dental practice net patient service revenue - consolidated (note 2) $ 3,701 $ 29,327
Net management fees (notes 2 and 10) 10,712 14,076
---------------- ----------------
Net revenues 14,413 43,403
Cost and expenses:
Clinical salaries and benefits 1,493 13,701
Practice nonclinical salaries and benefits 4,279 8,177
Dental supplies and lab expenses 2,830 6,271
Practice occupancy expenses 1,563 3,527
Practice selling, general and administrative expenses 1,805 4,912
Corporate selling, general and administrative expenses 2,998 5,700
Corporate restructure and merger costs (note 3) - 1,809
Depreciation and amortization 990 1,847
---------------- ----------------
Operating loss (1,545) (2,541)
---------------- ----------------
Nonoperating income (expense):
Interest expense, net (749) (653)
Other expense, net (48) (74)
---------------- ----------------
(797) (727)
---------------- ----------------
Loss before income taxes (2,342) (3,268)
Income tax benefit (note 11) (655) (81)
---------------- ----------------
Net loss (1,687) (3,187)
Dividends on redeemable convertible preferred stock - Series B (note 8) (240) (932)
Accretion of redeemable common stock (note 8) (91) (34)
---------------- ----------------
Net loss attributable to common stock $ (2,018) $ (4,153)
================ ================
Loss per share attributable to common stock - basic and diluted $ (1.18) $ (1.17)
================ ================
See accompanying notes to consolidated financial statements.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1996 and 1997
(in thousands, except share amounts)
Convertible Convertible
preferred preferred
stock - Series A stock - Series C Common stock Additional Shareholder
---------------- ----------------- --------------------- paid-in notes Accumulated
Shares Amount Shares Amount Shares Amount capital receivable deficit
------ ------- ------ -------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 -- $ -- -- $ -- 1,366,145 $ 2,795 $ 152 $ (40) $ 905
Redeemable convertible preferred
stock - Series B initial
issuance and issuance costs -- -- -- -- -- -- (1,266) -- --
Convertible preferred stock -
Series A issued for acquisitons 395 1 -- -- -- -- 295 -- --
Convertible preferred stock -
Series C issued for acquisitions -- -- 1,777 1 -- -- 1,733 -- --
Issuance of common stock in
connection with:
Exchange for shareholder
notes receivable -- -- -- -- 608,524 1 136 (136) --
Acquisitions -- -- -- -- 226,453 68 99 -- --
Private placement, net of
offering costs -- -- -- -- -- -- -- -- --
Stock warrants issued related
to debt financing -- -- -- -- -- -- 9 -- --
Exercise of stock options -- -- -- -- 2,000 2 -- -- --
Stock options granted to
nonemployees -- -- -- -- -- -- 52 -- --
Stock warrants issued related
to line of credit guarantees -- -- -- -- -- -- 233 -- --
Accretion of put rights -- -- -- -- -- -- -- -- (91)
Repurchase of common stock -- -- -- -- (24,000) (1) -- -- --
Common stock granted to nonemployees -- -- -- -- 2,500 25 -- -- --
Payments on shareholder
notes receivable -- -- -- -- -- -- -- 40 --
Dividends on redeemable convertible
preferred stock - Series B -- -- -- -- -- -- -- -- (240)
Exercise of put rights -- -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- -- (1,687)
------ ------- ------ -------- --------- --------- --------- ---------- -----------
Balance, December 31, 1996 395 1 1,777 1 2,181,622 2,890 1,443 (136) (1,113)
------ ------- ------ -------- --------- --------- --------- ---------- -----------
(Continued)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity, Continued
Years ended December 31, 1996 and 1997
(in thousands, except share amounts)
Convertible Convertible
preferred preferred
stock - Series A stock - Series C Common stock Additional Shareholder
---------------- ----------------- --------------------- paid-in notes Accumulated
Shares Amount Shares Amount Shares Amount capital receivable deficit
------ ------- ------ -------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 395 1 1,777 1 2,181,622 2,890 1,443 (136) (1,113)
Redeemable convertible preferred
stock - Series B issued -- -- -- -- -- -- -- -- --
Convertible preferred stock -
Series C issued for acquisitions -- -- 1,156 -- -- -- 1,156 -- --
Common stock issued in connection
with:
Acquisitions -- -- -- -- 109,039 475 -- -- --
Initial public offering,
net of issuance costs -- -- -- -- 1,500,000 6,125 -- -- --
Employee purchase plan -- -- -- -- 1,902 17 -- -- --
Pursuant to options for share-
holder notes receivable -- -- -- -- 333,816 1 150 (150) --
Exercise of stock options -- -- -- -- 20,100 100 -- -- --
Stock options granted to
nonemployees -- -- -- -- -- -- 56 -- --
Accretion of put rights -- -- -- -- -- -- -- -- (34)
Interest accrued on shareholder
notes receivable -- -- -- -- -- -- -- (18) --
Dividends on redeemable convertible
preferred stock - Series B -- -- -- -- -- -- -- -- (932)
Issuance of common stock warrants
for acquisitions -- -- -- -- -- -- 4 -- --
Exercise of put rights -- -- -- -- -- -- -- -- --
Shares reserved for earnout -- -- -- -- -- -- 356 -- --
Conversion of convertible
preferred stock - Series A,
B, and C into common stock (395) (1) (2,933) (1) 3,384,302 12,176 -- -- --
Net loss -- -- -- -- -- -- -- -- (3,187)
------ ------- ------ -------- --------- --------- --------- ---------- ----------
Balance, December 31, 1997 -- $ -- -- $ -- 7,530,781 $ 21,784 $ 3,165 $ (304) $ (5,266)
====== ======= ====== ======== ========= ========= ========= ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996 and 1997
(in thousands, except share amounts)
1996 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,687) $ (3,187)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 990 1,847
Loss on disposal of assets 63 31
Loss on investment in joint venture 87 135
Stock options granted to nonemployees 52 56
Stock issued for fees and compensation 25 -
Interest accrued on shareholder notes receivables - (18)
Amortization of warrants 242 -
Deferred income taxes (146) 14
Change in assets and liabilities, net of the effect
of acquisitions:
Accounts receivable, net (997) 47
Receivables from affiliates (562) (621)
Income taxes receivable 5 54
Supplies (48) (269)
Prepaid expenses and other current assets 52 (1,209)
Other assets 46 65
Accounts payable 346 268
Accrued payroll and payroll related costs 1,145 1,956
Other liabilities 5 (144)
------------- -------------
Net cash used in operating activities (382) (975)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (873) (2,822)
Proceeds from sale of property and equipment - 22
Cash paid for investment in joint venture (75) -
Cash paid for organizations costs (5) -
Cash paid for acquisitions, including other direct costs, net of cash
acquired (7,268) (9,706)
------------- -------------
Net cash used in investing activities $ (8,221) $ (12,506)
------------- -------------
(Continued)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1996 and 1997
(in thousands, except share amounts)
1996 1997
------------- -------------
<S> <C> <C>
Cash flows from financing activities:
Net proceeds (payments) on short-term borrowings $ 1,048 $ (2,097)
Proceeds from issuance of long-term debt 466 10,000
Payments on long-term debt and obligations under capital leases (1,231) (3,122)
Payments of deferred financing costs (150) -
Proceeds from issuance of common stock and preferred stock 10,551 7,703
Common stock issuance costs (500) (918)
Payments of shareholder notes receivable 40 -
Exercise of put rights (90) (103)
Exercise of stock options - 100
------------- -------------
Net cash provided by financing activities 10,134 11,563
------------- -------------
Increase (decrease) in cash and cash equivalents 1,531 (1,918)
Cash and cash equivalents, beginning of year 689 2,220
------------- -------------
Cash and cash equivalents, end of year 2,220 302
============= =============
Supplemental disclosure of cash flow information: Cash paid during period:
Interest paid 489 601
Income taxes paid (received) $ (159) $ 1
============= =============
Supplemental schedule of noncash investing and financing activities:
Purchases of property and equipment under capital lease agreements
$ 825 $ 278
Issuance of shareholder notes receivable for purchase of common stock 136 150
Interest accrued on shareholder notes receivable - 18
Accretion of put rights 91 34
Issuance of common stock to founders and to purchase the predecessor
companies 530 -
Issuance of redeemable convertible preferred stock - Series B to
investment bankers for services 314 -
Conversion of convertible preferred stock series A, B and C into 7,603,677
shares of GMS common stock - 12,176
Conversion of 10,218,578 shares of GMS common stock into 4,548,161 shares
of the Company's common stock - -
(Continued)
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1996 and 1997
(in thousands, except share and per share amounts)
1996 1997
------------- -------------
<S> <C> <C>
Acquisition of clinics:
Intangible assets acquired $ 8,501 $ 13,213
Liabilities assumed or issued 2,921 5,762
Common and convertible preferred stock and warrants issued 2,725 1,635
Tangible assets acquired 4,413 4,246
Shares reserved for earnout agreements - 356
Dental clinic prepayments $ 309 $ -
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
27
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1996 and 1997
(in thousands, except share and per share amounts)
(1) Organization
Gentle Dental Service Corporation ("GDS" or the "Company"), incorporated on
December 14, 1992, is a Washington corporation headquartered in Yorba
Linda, California. The Company, as part of a multi-specialty dental care
delivery network, provides management services to dental practices ("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.
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. Concurrent with the receipt
of the net proceeds, the company utilized $4,426 to repay certain
outstanding principal under the Company's various bank loan arrangements
(see note 6).
(2) Basis of Presentation and Significant Accounting Policies
The consolidated financial statements include the accounts of GDS and its
subsidiaries. All significant intercompany transactions and accounts have
been eliminated. As described more fully in Note 3, on November 4, 1997,
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. GMS commenced operations on October 11, 1996. Accordingly, its
results of operations for 1996 included only approximately 2-2/3 months.
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 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,
28
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
the Company has met the criteria for consolidation of those DPs with the
Company. In these circumstances, all the accounts of the DPs are included
in the accompanying consolidated financial statements. Accordingly, the
consolidated statements of operations include the net patient revenues and
related expenses of the DPs.
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
the 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. Subsequent to December 31, 1997, the
Company entered into new MSAs with the Oregon and Washington DPs. Effective
January 1, 1998 the criteria has been met for consolidation of these DPs
financial statements with the Company (see note 14).
The Company has a 50% equity investment in Celebration Dental Services
L.L.C., a Florida limited liability company, which is accounted for on the
equity basis of accounting and included in other expense, net.
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 to the unconsolidated DPs on an agreed-upon
percentage of the DPs net patient service revenue under MSAs, net of
provisions for contractual adjustments and doubtful accounts. The
components of net revenues are as follow:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
DP net patient service revenue - unconsolidated $ 21,424 $ 26,289
Less amounts retained by the DPs (10,712) (12,583)
Retail sales and other - 370
----------- -----------
Net management fees 10,712 14,076
DP net patient service revenue - consolidated 3,701 29,327
----------- -----------
Net revenues $ 14,413 $ 43,403
=========== ===========
</TABLE>
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
29
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
Accounts Receivable
Accounts receivable principally represent receivables from patients and
insurance carriers for dental services provided by the related DPs and are
recorded net of contractual adjustments and allowance for doubtful
accounts. Contractual allowances represent an estimate of the difference
between the amount billed by the Company and the amount which the patient,
third party payor or other is contractually obligated to pay the Company.
An allowance for doubtful accounts is provided based upon historical
collection experience.
Receivables from Affiliates
Receivables from affiliates consist primarily of amounts owed to the
Company from unconsolidated DPs to reimburse the Company for payment of the
DPs payroll and other direct costs, net of amounts due to the DPs related
to the acquisitions and the DPs share of revenues (see notes 10 and 14).
Supplies
Supplies consist primarily of disposable dental supplies and instruments
stored at the clinics. Supplies are stated at the lower of cost (first-in,
first-out basis) or market (net realizable value).
Property and Equipment
Property and equipment are stated at cost net of accumulated depreciation
and amortization. Expenditures for maintenance and repairs are charged to
expense as incurred and expenditures for additions and betterments are
capitalized. Equipment held under capital leases is stated at the present
value of minimum lease payments at the inception of the lease. Depreciation
of property and equipment is recorded using the straight-line method over
the shorter of the related lease term or the estimated useful lives which
generally range from 3 to 15 years.
Intangible Assets
Intangible assets result primarily from the excess of cost over the fair
value of net tangible assets purchased. Such intangibles relate primarily
to noncompetition covenants and management services agreements. Intangibles
relating to management service agreements consist of the costs of
purchasing the rights to provide management support services to DPs over
the initial noncancelable 40-year terms of the related agreements. Under
these agreements, the DPs have agreed to provide dental services on an
exclusive basis only through facilities provided by the Company. Pursuant
to the terms of the agreements, the Company is the exclusive administrator
of all non-dental aspects of the acquired DPs, providing facilities,
equipment, support staffing, management and other ancillary services. The
agreements are noncancelable except for performance defaults.
Intangible assets are amortized on the straight-line method over their
estimated useful lives, 5 years for organizational costs, 25 years for
management services agreements and other acquired intangibles, and 40 years
for trademarks.
30
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
Long-Lived Assets
The Company reviews its asset balances for impairment at the end of each
quarter or more frequently when events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. To perform that
review, the Company estimates the sum of expected future undiscounted net
cash flows from assets. If the estimated net cash flows are less than the
carrying amount of the asset, the Company recognizes an impairment loss in
an amount necessary to write-down the asset to a fair value as determined
from expected future discounted cash flows. No write-down of assets was
recorded for the years ended December 31, 1996 and 1997.
Fair Value of Financial Assets, Liabilities, and Redeemable Common Stock
The Company estimates the fair value of its monetary assets, liabilities,
and redeemable common stock based upon the existing interest rates related
to such assets, liabilities, and redeemable common stock compared to
current market rates of interest for instruments with a similar nature and
degree of risk. The Company estimates that the carrying value of all of its
monetary assets, liabilities, and redeemable common stock approximates fair
value as of December 31, 1996 and 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Net Loss Per Share
Net loss per share is computed based on the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding
during the periods. Common stock equivalents consist of the number of
shares issuable upon exercise of the outstanding common stock warrants and
common stock options (using the treasury stock method). Common stock
equivalents have been excluded from the computation of loss per share as
their effect is anti-dilutive. The weighted average common shares utilized
for the years ended December 31, 1996 and 1997 were 1,707,095 and
3,544,149, respectively.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 Earnings Per Share. In accordance with this pronouncement, the Company
adopted the new standard for the years ended December 31, 1996 and 1997.
The adoption of this pronouncement did not have an effect on reported loss
per share information.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation. Under SFAS 123, the Company may elect to
recognize stock-based compensation expense based on the fair value of the
awards or continue to account to stock-based compensation under Accounting
Principles Board Opinion No. 25,
31
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
Accounting for Stock Issued to Employees' and disclose in the financial
statements the effects of SFAS 123 as if the recognition provisions were
adopted. The Company has elected to account for stock-based compensation
under Accounting Principles Board Opinion No. 25 ("APB 25").
(3) Business Combinations and Dental Practice Acquisitions
Business Combinations
On November 4, 1997, GMS merged into GDS. In connection with the merger
transaction, all of the issued and outstanding shares of GMS common stock
were converted into 4,548,161 shares of common stock of the Company.
The merger has been accounted for using the pooling-of-interests method of
accounting. Accordingly, the historical financial statements for the
periods prior to the completion of the combination have been restated as
though the companies had been combined. The restated financial statements
have been adjusted to conform the lives in computing depreciation of
equipment and amortization of intangible assets. Such adjustments resulted
in no change in amortization expense in 1996 and in a decrease in
depreciation expense of $24 in 1996. Additionally, such adjustments
resulted in a decrease in the 1996 income tax benefit of $10.
The results of operations of GMS and GDS for 1997 through the date of the
merger are as follows:
GMS GDS
-------------- --------------
DP net patient service revenue $ 22,683 $ -
Net management fees - 11,841
Net income (loss) (1,087) 308
As a result of the merger, the Company recorded direct merger expenses of
$677. These expenses consist primarily of accounting, legal and other
advisory fees. Also, the Company recorded a restructuring charge of
$1,132, or $.32 per share, in the fourth quarter of 1997. The charge
included $289 for employee related costs, $311 for facility consolidation
and related leasehold and fixed asset write-offs and $532 for the
redirection of certain duplicative operations and programs and other costs.
These charges are scheduled to be substantially completed in 1998. At
December 31, 1997, the Company's remaining obligation related to the
restructuring charges was $853 and included in other current liabilities in
the accompanying financial statements.
Dental Practice Acquisitions
In 1996, the Company acquired substantially all of the assets of 15 dental
office locations, including cash, accounts receivable, supplies and fixed
assets. The total price for the fair value of the assets acquired,
including intangible assets was $12,914. Approximately $8,501 of the
purchase price has been allocated to intangible assets. The total purchase
consideration included $7,268 in cash, $2,725 in redeemable and
nonredeemable preferred and common stock and $2,921 in liabilities issued
or assumed.
32
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
In 1997, the Company acquired substantially all of the assets of 15 dental
office locations, including cash, accounts receivable, supplies and fixed
assets. The total price for the fair value of the assets acquired,
including intangible assets was $17,459. Approximately $13,213 of the
purchase price has been allocated to intangible assets. The total purchase
consideration included $9,706 in cash, $1,991 in nonredeemable preferred
and common stock and warrants and $5,762 in liabilities issued or assumed.
In connection with the affiliation of certain dental practices, the Company
is obligated to pay additional consideration, depending upon the
achievement of certain financial results, as defined by the purchase
agreements. During 1997, the Company accrued $356 for the portion of 1997
earnouts which the Company expects to pay in common stock. Additional
consideration may be payable in cash or stock depending upon the
performance of certain affiliated practices. The additional consideration
to be paid under these agreements is not presently determinable. However,
such additional consideration, if any, is not expected to have a material
impact on the financial condition or on the results of operations of the
Company.
The above asset purchases in 1996 and 1997 have been accounted for using
the purchase method of accounting. The excess of the total purchase price
over the fair value of the net tangible and identifiable intangible assets
acquired representing the estimated future value of the management services
agreements are being amortized over the lesser of the term of the related
management service agreements or 25 years using the straight-line method.
The results of operations for these practices have been included in the
consolidated financial statements of the Company since the dates of their
affiliation.
The following unaudited pro forma information presents the condensed
consolidated results of operations as if the 1996 and 1997 affiliations
discussed above had occurred as of January 1, 1996. The pro forma results
have been prepared for comparative purposes only and are not necessarily
indicative of what the actual results of operations would have been had the
practices been affiliated as of that date, nor does it purport to represent
future operations of the Company:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Pro forma:
DP net patient service revenue - consolidated $ 31,006 $ 14,076
Net management fees 13,182 35,242
Net loss (1,084) (1,918)
-------------- --------------
Net loss per share $ (.40) $ (.41)
============== ==============
</TABLE>
(4) Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Dental equipment $ 3,328 $ 5,697
Computer equipment 1,098 1,941
Furniture, fixtures and equipment 728 1,053
33
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
Leasehold improvements 1,681 3,576
Vehicles 22 32
Buildings 48 48
Land 10 10
------------ ------------
Total property and equipment 6,915 12,357
Less accumulated depreciation and amortization (1,149) (2,273)
------------ ------------
Property and equipment, net $ 5,766 $ 10,084
============ ============
</TABLE>
At December 31, 1996 and 1997, property and equipment include assets
under capital leases with an original cost of $1,262 and $1,524,
respectively and accumulated amortization of $235 and $456, respectively.
(5) Intangible Assets
Intangible assets consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Management services agreements $ 10,430 $ 23,338
Trademarks 50 44
Organizational costs 75 5
Other 56 -
-------------- --------------
10,611 23,387
Less accumulated amortization (281) (544)
-------------- --------------
$ 10,330 $ 22,843
============== ==============
</TABLE>
(6) Debt
Short-Term Borrowings
At December 31, 1996, the Company had a total of $2,097 outstanding under
two bank operating lines of credit with a bank secured by substantially all
assets of the Company. In February 1997, the entire outstanding amount was
fully repaid from the net proceeds from the Offering (see note 1).
Long-term debt
At December 31, 1997, the Company had a credit facility from a bank in the
amount of $10,000 (which was increased to a $25,000 credit facility on
January 7, 1998, see note 14). The credit facility is available for
working capital needs and to finance dental practice asset acquisitions.
Principal amounts owed under the credit facility through December 31, 1997
bear interest up to 1% above the prime rate or up to 3.25% above LIBOR, at
the Company's option, dependent on the Company's leverage ratio. The
outstanding
34
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
balance on this facility as of December 31, 1997 was $10,000. The
obligations under this credit agreement are secured by substantially all
assets of the Company and its subsidiaries.
35
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
Long term debt is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
---------------- ----------------
<S> <C> <C>
Note payable to bank due in monthly installments of principal and interest at
prime plus 1.25%, paid during 1997 $ 667 $ -
Notes payable to bank with interest-only payments for the first 12 months at
prime plus 1.5%, paid during 1997 1,699 -
Secured notes payable, bearing interest at rates ranging from 9.75% to 9.99%;
monthly principal and interest payments of $5; maturing at various dates
through June 2000; secured by mortgage 70 -
Credit facility, bearing interest at 3.25% in excess of LIBOR rate (9.1% at
December 31, 1997), unpaid balance due in equal quarterly installments of
principal and interest commencing October, 1998 through October 2001 48 10,000
Subordinated note payable, bearing interest at 8%, interest payable annually
beginning December 31, 1997 through January 2002; principal due 2002 - 742
Senior subordinated note payable, bearing interest at 8%; due in 60 monthly
installments of principal and interest of $14, beginning August 1, 1997
through July 2002 - 637
Subordinated note payable bearing interest at 8%; payable in 36 monthly
installments of $5, beginning December 1, 1997 through December 2001 - 155
Senior subordinated note payable, face value of $500 discounted at 8%; due in
July 1999 - 441
Senior subordinated note payable, face value of $2,083 discounted at 8%; due
in July 2002 - 1,448
Various unsecured notes payable, due in monthly installments of principal and
interest at rates ranging from 8.25% to 10.75%, maturing through November
2003 210 702
---------------- ----------------
2,694 14,125
Less current portion (872) (283)
---------------- ----------------
$ 1,822 $ 13,842
================ ================
</TABLE>
36
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
At December 31, 1997, the aggregate maturities of long-term debt for each
of the next five years are as follows:
1998 $ 283
1999 1,381
2000 3,061
2001 3,815
2002 5,564
Thereafter 21
--------
$ 14,125
========
(7) Shareholders' Equity
As of December 31, 1996, the Company 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 GMS 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.
Common Stock
An aggregate of 608,524 shares of common stock were issued in 1996 at a
purchase price of $.225 per share to the founders of GMS. 269,278 of these
shares are subject to a four-year vesting schedule whereby one-quarter of
the shares vested upon issuance and one-quarter of the shares vested in
October 1997. The remaining shares vest on a monthly basis during the
remaining thirty-six months.
An aggregate of 254,901 shares issued to certain other shareholders, which
were issued at a price of $.45 per share, and 339,246 shares out of the
608,524 shares issued to GMS founders, are subject to, in certain events, a
right of repurchase by the Company, at cost. One half of the shares are
currently subject to repurchase because the Company's EBITDA (excluding CEO
salary and related expenses) for 1997 did not exceed $4,724. The second
half of the shares will be subject to repurchase if, among other things,
the Company's EBITDA (excluding CEO salary and related expenses) for 1998
does not exceed $12,683, and a portion of the second half will be subject
to repurchase if such EBITDA does not exceed $16,911.
Preferred Stock
Preferred stock may be issued by the Board of Directors with preferences to
be determined at the time of issuance. Through December 31, 1997, none of
the 30,000,000 authorized shares of the Company's preferred stock has been
issued or is outstanding.
37
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
Stock Warrants Issued in Conjunction with Debt Issuance and Acquisitions
In May 1996 the Company issued warrants to purchase 4,333 shares of the
Company's common stock at $7.50 per share to a lender in connection with a
line of credit agreement. The stock warrants were valued at $9 and have
been recorded as debt issuance costs and additional paid-in capital. The
estimated fair value of the stock warrants was amortized over the six-month
term of the line of credit. Such amortization expense has been included in
interest expense in the statement of operations. The stock warrants expire
on May 31, 2001 and carry certain piggyback registration rights. The stock
warrants have not been exercised to date.
In addition, in May 1996, the Company issued to certain directors, officers
and shareholders of the Company warrants to purchase 115,000 shares of the
Company's common stock at $7.50 per share in consideration for guaranteeing
a total of $1,000 of a line-of-credit which is no longer available and has
been fully repaid. The fair value of the stock warrants of $233 was
amortized over the six-month term of the line of credit. Such amortization
expense has been included in interest expense in the statement of
operations. All stock warrants expire in May 2001 and no such stock
warrants have been exercised to date.
In connection with the Company's $10 million credit facility, warrants were
issued in 1996 entitling the bank to purchase up to 81,942 shares of the
Company's common stock at a price of $3.93 per share. The warrants were
recorded at their estimated fair market value of $1 which is included in
interest expense in the accompanying financial statements. These warrants
expire in October 2001.
In connection with the Company's initial public offering, warrants were
issued in 1997 entitling representatives of the underwriters to purchase up
to 150,000 shares of the Company's common stock at a price of $6.00 per
share. These warrants were recorded at their estimated fair value of $1.
In connection with the acquisition of the net assets of dental practices in
1997, the Company issued warrants to purchase approximately 189,160 shares
of common stock at $7.86 per share. The warrants expire in 2004; no such
stock warrants have been exercised to date. Warrants for 22,254 shares
become exercisable only if certain performance conditions are met by the
acquired dental practices. The estimated fair value of $4 was recorded as
part of the consideration for the acquisition.
38
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
8) Redeemable Convertible Preferred and Common Stock
The following summary presents the changes in the redeemable convertible
preferred stock - Series B and redeemable common stock:
<TABLE>
<CAPTION>
Shares of
Redeemable Redeemable
Convertible Convertible Shares of
Preferred Stock - Preferred Stock - Redeemable Common Redeemable Common
Series B Series B Stock Stock
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 - $ - 57,551 $ 711
Issued in connection with private
placement 6,180,000 10,815 100,000 957
Issued in connection with
acquisitions - - 38,994 530
Accretion of put rights - - - 91
Exercise of put rights - - (6,243) (90)
Dividends on redeemable
convertible preferred stock -
Series B - 240 - -
------------------ ----------------- ------------------ -----------------
Balance, December 31, 1996 6,180,000 11,055 190,302 2,199
------------------ ----------------- ------------------ -----------------
Issued in connection with private
placement 107,142 188 - -
Dividends on redeemable
convertible preferred stock -
Series B - 932 - -
Accretion of put rights - - - 34
Exercise of put rights - - (6,616) (103)
Conversion into common stock (6,287,142) (12,175) - -
------------------ ----------------- ------------------ -----------------
Balance, December 31, 1997 - $ - 183,686 $ 2,130
================== ================= ================== =================
</TABLE>
Redeemable Common Stock
In connection with certain acquisitions, the Company granted put rights to
certain shareholders that may require the Company to redeem up to 96,545
shares of its common stock, at a redemption price ranging from $13.38 to
$19.62 per share. If all shareholders with such put rights exercise their
options, the Company would be required to repurchase the above shares of
common stock for $1,409. The redemption periods began April 1, 1996 and
continue through January 4, 2003. If the shareholder does not place a
redemption request during the redemption period, the put right will expire
on the stated expiration date. Put rights for all but 20,000 shares
terminate in the event of the Company successfully completing a public
offering at a price of at least $20.00 per share. The Company redeemed
6,243 shares of redeemable common stock for $90 during 1996 and 6,616
shares for $103 during 1997.
39
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
The shares of common stock subject to the put rights are reported on the
balance sheet as redeemable common stock. Such shares have been recorded at
their fair value as of date of acquisition, inclusive of accretion during
each of the two years in the period ended December 31, 1997. The Company
records accretion on a ratable basis over the redemption period of the
respective stock. Such accretion for the years ended December 31, 1996 and
1997 was $91 and $34, respectively.
Such common stock at December 31, 1997 is redeemable as follows:
<TABLE>
<CAPTION>
Shares Amount Price range
-------------- -------------- --------------
<S> <C> <C> <C>
1998 2,974 $ 50 $16.82
1999 2,754 50 13.38 - 18.16
2000 40,849 576 13.60 - 19.62
2001 29,681 438 13.60 - 18.80
2002 3,714 51 13.60
Thereafter 3,714 51 13.60
-------------- --------------
83,686 $ 1,216
============== ==============
</TABLE>
Private Placement of Redeemable Common Stock and Warrants
In June 1996, the Company completed a private placement offering (the
"Placement Offering ") of 100,000 shares Company's redeemable common stock
which include warrants to purchase 100,000 additional shares of the
Company's common stock at an exercise price of $7.50 per share. Total
proceeds from the Placement Offering (net of Placement Offering costs of
$43) were $957. The net proceeds allocated to common stock aggregated $732.
The stock warrants were recorded at their estimated fair value of $225 and
are entitled to certain piggyback registration rights. The stock warrants
expire on December 14, 2001; no stock warrants have been exercised to date.
In connection with the private placement, the shareholder received certain
put rights which are exercisable after June 21, 2001 but not later than
June 21, 2003 if the Company has not completed a public offering of its
common stock by June 21, 2001 at a price of at least $22.00 per share and
with net proceeds to the Company of at least $10,000. The per share price
applicable to the put rights is 20 times the Company's average adjusted net
income per share for the two most recent fiscal years preceding the
exercise of the rights. As of December 31, 1997, the Company has not
recorded any accretion related to the above put rights.
(9) Stock Options
The Company has adopted a Stock Incentive Plan (the "Plan"). The Plan
provides for issuance of up to 1,000,000 shares of common stock in
connection with various stock grants, awards and sales granted under such
plan to employees and non-employees (primarily key dental group personnel).
The Plan authorizes the grant of incentive stock options, non-statutory
stock options, stock appreciation rights or bonus rights; award of stock
bonuses; and/or sale of restricted stock. The exercise price for incentive
stock options may
40
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
not be less than fair market value of the underlying shares on the date of
grant. The Plan is administered by the Company's Board of Directors. The
Board has the authority to determine the persons to whom awards will be
made, the amounts, and other terms and conditions of the awards. Shares
issued under the Plan are generally subject to a five-year vesting schedule
from the date of grant and expire ten years from the original grant date.
On February 13, 1997 (the offering date), the Company repriced all employee
stock options than outstanding to the offering price of $5.00 per share
(except for certain stock options held by a principal shareholder, which
were repriced at 110% of the offering price). All other terms with respect
to such options were maintained. The Company did not recognize compensation
expense related to the repricing of the employee stock options as the
adjusted exercise price was not below the fair value of the common stock as
of the repricing date.
Prior to the merger, GMS had two stock-based option plans ("Former Plans")
which offered essentially the same awards and stock option terms as the
Plan. Upon consummation of the merger of GMS with the Company, the Former
Plans were frozen to allow no additional option grants under those plans.
The number of options and option price for the options granted under the
Former Plans were converted to the Company share and share price equivalent
utilizing the same conversion ratio of GMS common stock to Company common
stock.
Stock options issued to non-employees have been recorded at their estimated
fair market value and are being expensed over their respective vesting
lives of up to five years. Total compensation expense recorded for the
years ended December 31, 1996 and 1997 was $52 and $56, respectively.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
The Financial Accounting Standards Board has issued SFAS 123, Accounting
for Stock Based Compensation, which defines a fair value based method of
accounting for employee stock option or similar compensation plans.
However, it also allows an entity to continue to measure compensation cost
related to stock options issued to employees under these plans using the
method of accounting prescribed by the Accounting Principles Board Opinion
No. 25 ("APB 25"), Accounting for Stock Issued to Employees. Entities
electing to remain with the accounting in APB 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value
based method of accounting defined in this Statement had been applied.
41
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during the years ended December
31, 1996 and 1997. The 1996 options were valued using the minimum value
pricing model as prescribed by SFAS 123 for nonpublic companies. The
options issued subsequent to the Company's 1997 initial public offering
have been valued using the Black-Scholes pricing model as prescribed by
SFAS 123. The following weighted average assumptions have been used for
grants of stock options:
1996 997
----------- -----------
Risk free interest rate 6.5% 6.4%
Expected dividend yield - -
Expected lives 5 years 5 years
Expected volatility - 60%
Options were assumed to be exercised over the five-year expected life for
the purpose of this valuation. Adjustments are made for options forfeited
prior to vesting. The total value of options granted was computed as the
following approximate amounts, which would be amortized on the
straight-line basis over the vesting period of the options:
Year ended December 31, 1996 $ 705
Year ended December 31, 1997 1,175
If the Company had accounted for stock options issued to employees in
accordance with SFAS 123, the Company's net loss attributable to common
stock and pro forma net loss per share would have been reported as follows:
Net loss attributable to common stock:
1996 1997
----------- -----------
As reported $ (2,018) $ (4,153)
Pro forma (2,133) (4,523)
Pro forma net loss per common and common equivalent share:
1996 1997
------------ ------------
As reported - basic $ (1.18) $ (1.17)
Pro forma - basic (1.25) (1.28)
As reported - diluted (1.18) (1.17)
Pro forma - diluted (1.25) (1.28)
The effects of applying SFAS 123 for providing pro forma disclosures for
1996 and 1997 are not likely to be representative of the effects on
reported net loss and net loss per common equivalent share for future
years, because options vest over several years and additional awards
generally are made each year.
42
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
The following summary presents the options granted and outstanding under
the Plan and Former Plans as of December 31, 1997:
<TABLE>
<CAPTION>
Number of shares Weighted
------------------------------ average
Employee Non-employee Total Exercise price
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1995 215,000 67,750 282,750 $ 5.47
Granted 192,112 38,705 230,817 3.43
Exercised (2,000) - (2,000) -
Canceled (96,549) (5,833) (102,382) 8.19
-------------- ------------- -------------- --------------
Outstanding, December 31, 1996 308,563 100,622 409,185 3.66
Granted 746,306 1,200 747,506 3.03
Exercised (353,918) - (353,918) .71
Canceled (142,100) (1,200) (143,300) 4.78
-------------- ------------- ------------- --------------
Outstanding, December 31, 1997 558,851 100,622 659,473 $ 4.85
============== ============= ============= ==============
</TABLE>
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options granted under the Plan and Former Plans at December
31, 1997:
<TABLE>
<CAPTION>
Weighted average
Number of options contractual
Exercise -------------------------------- life
price Outstanding Exercisable remaining
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
$ .20 15,250 15,250 7.57 years
.45 84,118 19,195 8.90
.67 15,355 - 9.63
4.13 45,500 - 6.76
5.00 305,250 48,170 8.45
5.50 81,000 81,000 5.83
8.02 68,000 1,000 9.64
10.00 45,000 27,672 7.35
-------------- -------------- -------------- ----------------
$ 4.85 659,473 192,287 8.02
============== ============== ============== ================
</TABLE>
As of December 31, 1997, there are 354,538 shares available for future
grants under the Plan.
43
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
(10) Transactions with and Receivables from Related DPs
The Company currently derives a portion of its management fees from three
DPs with which it is related through common ownership of certain
shareholders.
The Company provides management support services to these related DPs under
management agreements with forty-year terms. In 1996 and 1997, the Company
earned management fees based on specified percentages of net dental
practice patient revenues as defined in the agreements. Such percentages
ranged from 51% to 53% and were negotiated with the DPs and have been
developed and revised as necessary based on the Company's services and
operating needs. Subsequent to December 31, 1997, the Company and the DPs
have entered into new management services agreements (see note 14).
Affiliate receivables consist primarily of amounts owed to the Company by
the unconsolidated DPs to reimburse the Company for payment of the
unconsolidated DPs payroll and other direct costs, net of amounts due to
the unconsolidated DPs related to the asset acquisitions and the
unconsolidated DPs share of revenues. The Company also transacts various
other business with the related DPs, including short-term operating
advances.
(11) Income Taxes
Income tax benefit consists of the following:
<TABLE>
<CAPTION>
1996
------------------------------------------
Current Deferred Total
------------ ------------ ------------
<S> <C> <C> <C>
U.S. Federal $ (175) (420) (595)
State and local (6) (54) (60)
------------ ------------ ------------
$ (181) (474) (655)
============ ============ ============
1996
------------------------------------------
Current Deferred Total
------------ ------------ ------------
<S> <C> <C> <C>
U.S. Federal $ (123) $ 34 $ (89)
State and local 8 - 8
------------ ------------ ------------
$ (115) $ 34 $ (81)
============ ============ ============
</TABLE>
44
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
The effective tax rate differed from the U.S. statutory Federal rate due to
the following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Statutory federal rate $ (796) $ (1,111)
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal income tax benefit (90) 3
Amortization of nondeductible goodwill and other nondeductible items 163 80
Valuation allowance for deferred tax assets allocated to income tax
expense 75 691
Prior year reconciliation - 189
Other (7) 67
----------- -----------
Effective tax rate $ (655) $ (81)
========== ===========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following
components:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 647 $ 645
Accrued payroll/bonus related - 85
Allowance for doubtful accounts 618 1,663
Compensated absences, principally due to accrual for financial reporting
purposes 114 146
Intangible assets, principally due to differences in amortization and
capitalized cost - 164
Other 12 38
----------- ---------
Total gross deferred tax assets 1,391 2,741
Less valuation allowance (75) (766)
----------- ---------
Deferred tax assets, net of valuation allowance 1,316 1,975
----------- ---------
Deferred tax liabilities:
Accounts receivable (759) (1,410)
Plant and equipment, principally due to differences in depreciation and
capitalized cost (444) (525)
Intangible assets, principally due to accrual for financial reporting
purposes (11) -
Cash versus accrual reporting for tax purposes (68) (38)
Other - (2)
----------- ---------
Deferred tax liabilities (1,282) (1,975)
----------- ---------
Net deferred tax asset $ 34 $ -
=========== =========
</TABLE>
45
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
(12) Malpractice Insurance
The dental group's dentists are insured with respect to dentistry
malpractice risks on a claims-made basis. There are known claims and
incidents that may result in the assertion of additional claims, as well as
claims from unknown incidents that may be asserted arising from services
provided to patients. Management is not aware of any claims against the
Company or its affiliated groups which might have a material impact on the
Company's financial position or results of operations.
(13) Commitments and Contingencies
Lease Commitments
The Company has primarily entered into operating leases of commercial
property. Commercial properties under operating leases mostly include space
required to perform dental services and space for administrative
facilities. Lease expense, including month-to-month rentals, for the years
ended December 31, 1996 and 1997 was $1,432 and $3,012, respectively.
The future minimum lease payments under capital leases and noncancelable
operating leases with remaining terms of one or more years consist of the
following at December 31, 1997:
<TABLE>
<CAPTION>
Capital Operating
------------ ------------
<S> <C> <C>
1998 $ 465 $ 3,246
1999 312 3,169
2000 232 2,838
2001 103 2,506
2002 36 2,029
Thereafter - 8,284
------------ ------------
Total minimum lease obligation 1,148 $ 22,072
============
Less portion attributable to interest 199
-----------
Obligations under capital leases 949
Less current portion 368
-----------
$ 581
===========
</TABLE>
46
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
Litigation
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
(14) Subsequent Events
On January 7, 1998, the Company amended its $10 million credit facility
(the "Credit Facility") to provide for a maximum credit line of $25
million, which may be increased at the option of the Company to $30 million
following completion of an equity offering by the Company in which the
Company receives at least $20 million in net cash proceeds. The Company
intends to use the Credit Facility for working capital requirements, to
purchase non-professional dental practice assets of additional dental
practices that the Company may seek to affiliate with, and to purchase
operating assets for existing affiliated dental practices. The Credit
Facility provides that the aggregate amount borrowed under the Credit
Facility for working capital purposes and letter of credit obligations may
not exceed $4 million, and that remaining amounts available under the
Credit Facility may be used by the Company for permitted acquisitions and
capital expenditures. The revolving feature of the Credit Facility expires
on September 30, 1999, at which time it will convert into a three year term
loan to be repaid in 12 equal quarterly installments. Principal amounts
owed under the Credit Facility bear interest, at the Company's option and
dependent upon the Company's leverage ratio, of (i) up to 1.0% over prime
or (ii) up to 3.25% above LIBOR. The Credit Facility requires the Company
to pay an unused commitment fee based upon a range from .375 - .50% of the
amount by which the bank commitment under the Credit Facility exceeds the
aggregate amount of all loans then outstanding. The Credit Facility
contains several covenants including (i) restrictions on the ability of the
Company to incur indebtedness and repurchase, or pay dividends with respect
to, its capital stock; and (ii) requirements relating to maintenance of a
specific net worth and specified ratios of current assets to current
liabilities, debt to cash flow and EBITDAR (earnings before interest
expense, taxes, depreciation, amortization and operating lease rental
expense) to fixed charges. In addition, the Credit Facility requires the
Company to notify the lenders prior to making any acquisition and to obtain
the consent of the lenders prior to making (i) certain acquisitions with
purchase price exceeding $3 million, (ii) all acquisitions with purchase
prices exceeding $5 million and (iii) capital expenditures exceeding $5
million in any fiscal year. The Credit Facility also requires the Company
to convert to a holding company that owns no assets other than the stock of
its operating subsidiaries on or before May 31, 1998. If the Company does
not attain holding company status on or before May 31, 1998, the interest
rate applicable to amounts borrowed under the Credit Facility will be
increased by 0.5% and if holding company status is not obtained on or
before July 31, 1998 an event of default will exist under the terms of the
Credit Facility. The Company's obligations under the Credit Facility are
guaranteed by each of the subsidiaries of the Company. The obligations of
the Company under the Credit Facility and the subsidiaries under the
guarantees are secured by a security interest in the equipment, fixtures,
inventory, receivables, subsidiary stock, certain debt instruments,
accounts and general intangibles of each of such entities.
47
<PAGE>
GENTLE DENTAL SERVICE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(in thousands, except share and per share amounts)
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, which was offset by the Company's $1,674
receivable from the DPs. In addition, the Company issued options to
purchase 110,000 shares of Company common stock at an exercise price of
$8.38 per share, subject to a five-year vesting schedule and will pay $575
in cash over 18 equal monthly installments. Also, the Company may pay
possible minimal future consideration in cash or options to be determined
upon the achievement of certain financial results, as defined in the
Agreements.
In 1998 the Company completed the acquisitions of two DPs located in
northern California and western Oregon, representing ten clinical office
locations. The purchase price for these affiliations totalled $8,410 and
included cash and 43,077 shares of common stock. These affiliations will be
accounted for using the purchase method of accounting.
On February 28, 1998 the Company signed a definitive agreement to acquire
Managed Dental Care of Oregon, Inc. (MDC). MDC is a dental care
organization that contracts with the state of Oregon to provide care under
the Oregon Health Plan. MDC in turn contracts with dental care providers
to provide dental care to Oregon Health Plan participants. The cash
purchase price is $950 and the acquisition is subject to Oregon state
regulatory approval. The acquisition is expected to close during 1998 and
will be accounted for using the purchase method of accounting.
During September 1997, the Company entered into definitive agreements to
acquire Dedicated Dental Systems, Inc. (DDS) and the assets of certain
related practices. The acquisition includes 15 dental offices located in
and around Bakersfield, CA. On February 28, 1998 the definitive agreements
were amended and now provide for a purchase price of $16,431 in cash and
705,101 shares of common stock valued at $5,769 plus potential future
amounts based on performance. The acquisition of DDS is expected to close
during 1998 and is subject to California state regulatory approval. The
acquisition will be accounted for using the purchase method of accounting.
During March 1998, the Company entered into an agreement to lease office
space for a period of sixty months commencing May 1998 at a monthly base
rent of $15.
48
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On November 14, 1997, the Company dismissed Price Waterhouse LLP as it principal
accountants and engaged KPMG Peat Marwick LLP as its new principal accountants.
The decision to change accounting firms was approved by the Company's Board of
Directors. There were no adverse opinions, disclaimers of opinion or
qualifications as to uncertainty, audit scope or accounting principles in the
reports of Price Waterhouse LLP on the Company's financial statements for the
two most recent years preceding their dismissal. Through the date of the change
in accountants, there were no disagreements with Price Waterhouse LLP on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of such accountants, would have caused them to make reference to
the subject matter of the disagreements in connection with their reports.
Prior to the merger, KPMG Peat Marwick LLP served as principal accountants to
GMS. Other than in connection with the merger, before engaging KPMG Peat Marwick
LLP as its new independent accountants, the Company did not previously consult
with them regarding matters related to the application of accounting principles
or type of audit opinion that might be rendered on the Company's financial
statements.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act
Information with respect to directors of the Company will be included under
"Election of Directors" in the Company's definitive proxy statement for its 1998
Annual Meeting of Shareholders to be filed not later than 120 days after the end
of the fiscal year covered by this Report and is incorporated herein by
reference. Information with respect to compliance with Section 16(a) of the
Securities Exchange Act is included under "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement for its 1998
Annual Meeting of Shareholders to be filed no later than 120 days after the end
of the fiscal year covered by this Report and is incorporated herein by
reference.
The following table sets forth certain information with respect to the executive
officers of the Company.
Name Age Position
- ----------------------------- --- ------------------------------------------
Michael T. Fiore............. 43 Co-Chairman of the Board, Chief Executive
Officer and President
Dany Y. Tse, DMD............. 47 Co-Chairman of the Board and President of
Clinical Services Council
Grant M. Sadler.............. 51 Vice Chairman of the Board
L. Theodore Van Eerden....... 42 Executive Vice President, Chief
Development Officer and Director
Norman R. Huffaker........... 51 Chief Financial Officer
49
<PAGE>
Michael T. Fiore. Mr. Fiore has served as Co-Chairman of the Board, Chief
Executive Officer and President of the Company since November 1997. Before
joining the Company in November 1997, Mr. Fiore was the Chief Executive Officer,
President and a director of GMS from April 1997 to October 1997. From 1986 to
March 1996, Mr. Fiore served in various management positions at Salick Health
Care, Inc., a provider of diagnostic and therapeutic services to patients with
catastrophic illness, principally in the areas of cancer and kidney failure,
including serving as a director, Executive Vice President and Chief Operating
Officer, and as President of its principal subsidiary, Comprehensive Cancer
Centers, Inc.
Dany Y. Tse, DMD. Dr. Tse has served as Co-Chairman of the Board and President
of Clinical Services Council since November 1997. Dr. Tse served as Chairman of
the Board since December 1996 and, as President and Chief Executive Officer of
the Company from March 1996 until November 1997. He previously served as
Chairman of the Board from inception in December 1992 to March 1996. Dr. Tse is
a licensed dentist in Oregon and Washington.
Grant M. Sadler. Mr. Sadler has been Vice-Chairman of the Board since November
1997. Prior to joining the Company in November 1997, Mr. Sadler founded and
served as the Chief Executive Officer, President and Secretary of GMS from its
inception in October 1996 to April 1997, at which time he vacated those
positions and assumed the position of Chairman of the Board and served in that
capacity until November 1997. Prior to GMS, Mr. Sadler served as President of
Group Management Services, Inc., a dental group consulting practice formed by
Mr. Sadler in 1991.
L. Theodore Van Eerden. Mr. Van Eerden has served as Executive Vice President,
Chief Development Officer and as a director since November 1997. He served as
Chief Financial Officer from March 1996 until November 1997. Before joining the
Company as Chief Financial Officer in March 1996, Mr. Van Eerden was Vice
President--Administration for HOSTS Corporation, a Vancouver, Washington company
that provides proprietary educational software products and instructional
delivery systems to schools throughout the United States. From April 1993 to
April 1994, Mr. Van Eerden was Director of Development for The ServiceMaster
Company where he focused on mergers and acquisitions and new business
development. Before that, Mr. Van Eerden was Vice President and Chief Financial
Officer of Medical SafeTec, Inc., a manufacturer of medical waste destruction
equipment. Prior to Medical SafeTec, Inc., Mr. Van Eerden served in various
positions with ServiceMaster focusing on mergers and acquisitions.
Norman R. Huffaker. Mr. Huffaker has served as Chief Financial Officer of the
Company since November 1997. Prior to joining the Company in November 1997, Mr.
Huffaker served as Chief Financial Officer of GMS from December 1996 to November
1997. Mr. Huffaker previously served as Vice President of Finance for Community
Dental Services, Inc. (SmileCare Dental Group), an Irvine, California based
dental HMO and staff model practice company.
Item 10. Executive Compensation
Information with respect to executive compensation will be included under
"Executive Compensation" in the Company's definitive proxy statement for its
1998 Annual Meeting of Shareholders to be filed not later than 120 days after
the end of the fiscal year covered by this Report and is incorporated herein by
reference.
50
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial owners and
management will be included under "Voting Securities and Principal Shareholders"
in the Company's definitive proxy statement for its 1998 Annual Meeting of
Shareholders to be filed not later than 120 days after the end of the fiscal
year covered by this Report and is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information with respect to certain relationships and related transactions with
management will be included under "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders to be filed not later than 120 days after the end of the
fiscal year covered by this Report and is incorporated herein by reference.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger of Gentle Dental Service Corporation and
GMS Dental Group, Inc. dated October 30, 1997, incorporated by
reference to the Company's Report on Form 8-K, Accession No. 97-000678.
3.1 Restated Articles of Incorporation, incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
33-13529.
3.2 Bylaws, as amended, incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 33-13529.
4.1 Restated Articles of Incorporation (filed as Exhibit 3.1).
4.2 Bylaws, as amended (filed as Exhibit 3.2).
10.1 1993 Stock Incentive Plan.
10.2 Stock Acquisition Agreement dated as of June 21, 1996 between the
Company and The ServiceMaster Company Limited Partnership, incorporated
by reference to the Company's Registration Statement on Form SB-2,
Registration No. 33-13529.
10.3 Form of Warrant Subscription and Guarantor Agreement dated as of May
31, 1996 between the Company and various officers, directors, and
shareholders of the Company, incorporated by reference to the Company's
Registration Statement on From SB-2, Registration No. 33-13529.
51
<PAGE>
10.4 Employment Agreement dated November 3, 1997, by and between Dany Y.
Tse, DMD and the Company, incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
10.5 Employment Agreement dated November 3, 1997, by and between Michael T.
Fiore and the Company, incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
10.6 Employment Agreement dated November 3, 1997, by and between L. Theodore
Van Eerden and the Company incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
10.7 Employment Agreement dated August 31, 1996, by and between Grant M.
Sadler and GMS Dental Group, Inc., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.8 Employment Agreement dated November 7, 1996, by and between Norman
Huffaker and GMS Dental Group, Inc., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.9 1996 Stock Option Plan of GMS Dental Group, Inc., incorporated by
reference to the Company's Registration Statement on Form SB-2,
Registration No. 333-44037, filed on January 9, 1998, Accession No.
98-000030.
10.10 1996 Performance Stock Option Plan of GMS Dental Group, Inc.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No.
98-000030.
10.11 Incentive Stock Option Agreement dated April 1, 1997, by and between
Michael T. Fiore and GMS Dental Group, Inc., incorporated by reference
to the Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.12 Stock Option Agreement dated April 1, 1997, by and between Michael T.
Fiore and GMS Dental Group, Inc., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.13 Promissory Note dated April 1, 1997, executed by Michael T. Fiore in
favor of GMS Dental Group, Inc.
10.14 Security Agreement dated April 1, 1997, by and between Michael T. Fiore
and GMS Dental Group, Inc., incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
10.15 Acknowledgement and Clarification of Repurchase Rights Agreement dated
October 31, 1997, by and between Michael T. Fiore and GMS Dental Group,
Inc., incorporated by reference to the Company's Registration Statement
on Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
52
<PAGE>
10.16 Founder Stock Purchase Agreement dated August 31, 1996, by and between
Grant M. Sadler and GMS Dental Group, Inc., incorporated by reference
to the Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.17 Promissory Note dated August 31, 1996, executed by Grant M. Sadler in
favor of GMS Dental Group, Inc., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.18 Security Agreement dated August 31, 1996, by and between Grant M.
Sadler and GMS Dental Group, Inc., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.19 Common Stock Escrow Agreement dated October 11, 1996, by and among
Grant M. Sadler, Kenneth J. Davis and GMS Dental Group, Inc.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
10.20 Acknowledgement and Clarification of Repurchase Rights Agreement, dated
October 31, 1997, by and among Grant M. Sadler, Kenneth J. Davis and
GMS Dental Group, Inc., incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No.
98-000030.
10.21 Incentive Stock Option Agreement dated December 4, 1996, by and between
Norman Huffaker and GMS Dental Group, Inc., incorporated by reference
to the Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.22 Stock Option Agreement dated December 4, 1996, by and between Norman
Huffaker and GMS Dental Group, Inc., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.23 Acknowledgement and Clarification of Repurchase Rights Agreement dated
October 31, 1996, by and between Norman R. Huffaker and GMS Dental
Group, Inc., incorporated by reference to the Company's Registration
Statement on Form SB-2, Registration No. 333-44037, filed on January 9,
1998, Accession No. 98-000030.
10.24 Dental Group Management Agreement dated October 11, 1996, by and
between Alan M. Slutsky, DMD, a Professional Corporation, and Slutsky
Dental Corporation., incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No.
98-000030.
+10.25 Dental Group Management Agreement dated October 11, 1996, by and
between GMS Dental Group Management of Hawaii, Inc. and Dental Care
Centers of Hawaii, Inc., incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No.
98-000030.
53
<PAGE>
+10.26 Dental Group Management Agreement dated October 11, 1996, by and
between Henry J. Lerian, Trustee of the Henry J. Lerian and Jeanette P.
Lerian Irrevocable Marital Trust U/D/T 03/23/94, Henry J. Lerian,
Trustee of the Henry J. Lerian and Jeanette P. Lerian Revocable
Survivor's Trust U/D/T 03/23/04, Henry J. Lerian, DDS and Lerian Dental
Corporation, incorporated by reference to the Company's Registration
Statement on Form SB-2, Registration No. 333-44037, filed on January 9,
1998, Accession No. 98-000030.
+10.27 Dental Group Management Agreement dated June 30, 1997, by and between
Warren M. Francis, Jr. D.D.S., Inc. and Francis Dental Corporation.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
+10.28 Dental Group Management Agreement dated June 30, 1997, by and between
Warren M. Francis, Jr. D.D.S., Inc. and Burrell Dental Corporation.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
+10.29 Dental Group Management Agreement dated June 30, 1997, by and between
Warren M. Francis, Jr. D.D.S., Inc. and Ashrafi Dental Corporation.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
+10.30 Dental Group Management Agreement dated October 11, 1996, by and
between GMS Dental Group Management of Hawaii, Inc. and Hualalai Dental
Services, Inc., incorporated by reference to the Company's Registration
Statement on Form SB-2, Registration No. 333-44037, filed on January 9,
1998, Accession No. 98-000030.
+10.31 Dental Group Management Agreement dated February 24, 1997, by and
between Naismith Dental Corporation and Yep Dental Corporation.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
10.32 Dental Group Management Agreement dated October 11, 1996, by and
between GMS Dental Group Management, Inc. and Idaho Dental Group, P.A.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
10.33 Dental Group Management Agreement dated July 24, 1997, by and between
GMS Dental Group Management, Inc. and Fremont Dental Group.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
10.34 Dental Group Management Agreement dated July 24, 1997, by and between
GMS Dental Group Management, Inc. and Mark Armstrong, D.D.S. d/b/a
Concord Dental Care., incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No.
98-000030.
54
<PAGE>
10.35 Dental Group Management Agreement dated October 31, 1997, by and
between GMS Dental Group Management, Inc. and Charles Murillo, D.D.S.
d/b/a Community Dental Group., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.36 Dental Group Management Agreement dated July 24, 1997, by and between
GMS Dental Group Management, Inc. and Sam Samudio, D.D.S. d/b/a
Pleasanton Dental Care., incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No.
98-000030.
10.37 Dental Group Management Agreement dated October 31, 1997, by and
between Premier Dental Care, Inc. and SJL, P.A., incorporated by
reference to the Company's Registration Statement on Form SB-2,
Registration No. 333-44037, filed on January 9, 1998, Accession No.
98-000030.
+10.38 Dental Group Management Agreement dated February 24, 1997, by and
between Naismith Dental Corporation and Burns Dental Corporation.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
10.39 Credit Agreement dated October 10, 1996, as amended, by and among GMS
Dental Group Management, Inc., GMS California Acquisition Company, GMS
Hawaii Acquisition Company and Imperial Bank., incorporated by
reference to the Company's Registration Statement on Form SB-2,
Registration No. 333-44037, filed on January 9, 1998, Accession No.
98-000030.
+10.40 Support Services Agreement dated March 31, 1997, between the Company
and Arena Dental Corporation., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.41 Promissory Note dated July 24, 1997, executed by GMS Dental Group
Management in favor of Fremont Dental Group., incorporated by reference
to the Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.42 Guaranty dated July 24, 1997, by GMS Dental Group, Inc. in favor of
Fremont Dental Group., incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
10.43 Merger Agreement, dated as of September 21, 1997, between the Company,
Gentle Dental Merger Corporation, a wholly-owned subsidiary of the
Company, Dedicated Dental Systems, Inc., a California corporation,
Arthur G. Kaiser, D.D.S. and Robert J. Newman, incorporated by
reference to Company's Report on Form 10-QSB, Accession No. 97-000656.
10.44 Asset Purchase Agreement, dated as of September 21, 1997, between the
Company, California Dental Practice Management Company, a California
general partnership, Arthur G. Kaiser, D.D.S., Robert J. Newman and
Mark Thomas, D.D.S., incorporated by reference to the Company's Report
on Form 10-QSB, Accession No. 97-000656.
55
<PAGE>
10.45 Asset Purchase Agreement, dated as of September 21, 1997, between the
Company, California Dental Practice Management Company, a California
general partnership, Arthur G. Kaiser, D.D.S., Robert J. Newman and
Clarence Au, D.D.S., incorporated by reference to the Company's Report
on form 10-QSB, Accession No. 97-000656.
10.46 Asset Purchase Agreement, dated as of September 21, 1997, between the
Company and Arthur G. Kaiser, D.D.S., incorporated by reference to the
Company's Report on Form 10-QSB, Accession No. 97-000656.
10.47 Dental Group Management Agreement dated as of January 1, 1998 between
the Company and Tse, Saiget, Watanabe & McClure, Inc., P.S.
10.48 Dental Group Management Agreement dated as of January 1, 1998, between
the Company and Gentle Dental of Oregon, P.C.
10.49 Dental Group Management Agreement dated as of January 1, 1998 between
the Company and Dany Tse, P.C.
10.50 Asset Purchase Agreement dated February 28, 1998 by and between the
Company and Affordable Dental Care, Inc., an Oregon corporation,
incorporated by reference to the Company's Report on Form 8-K, filed on
March 16, 1998, Accession No. 98-000196.
10.51 Stock Purchase Agreement dated February 28, 1998 between and among the
Company, Managed Dental Care of Oregon, Inc., an Oregon corporation,
and Gerald M. Bieze, D.D.S, incorporated by reference to the Company's
Report on Form 8-K, filed on March 16, 1998, Accession No. 98-000196.
10.52 Dental Group Management Agreement by and between the Company and
Affordable Dental Care, P.C., an Oregon corporation.
10.53 Amendment dated February 28, 1998, to that certain Merger Agreement,
dated September 21, 1997, between and among the Company, Gentle Dental
Merger Corporation, a California corporation, Dedicated Dental Systems,
Inc., a California corporation, Arthur G. Kaiser and Robert J. Newman.
10.54 Amendment dated February 28, 1998, to that certain Asset Purchase
Agreement, dated September 21, 1997, between and among the Company,
California Dental Practice Management Company, a California general
partnership, Arthur G. Kaiser, D.D.S., Robert J. Newman and Mark
Thomas, D. D. S.
10.55 Amendment dated February 28, 1998, to that certain Asset Purchase
Agreement, dated September 21, 1997, between and among the Company,
California Dental Practice Management Company, a California general
partnership, Arthur G. Kaiser, D.D.S., Robert J.. Newman and Clarence
Au, D.D.S.
10.56 Amendment dated February 28, 1998, to that certain Asset Purchase
Agreement, dated September 21, 1997, by and between the Company and
Arthur G. Kaiser, D.D.S.
56
<PAGE>
10.57 Amended and Restated Credit Agreement, dated as of January 7, 1998,
between and among the Company, Imperial Bank and certain other credit
parties.
21.1 Subsidiaries of the Company.
23.1 Independent Auditors' Consent of KPMG Peat Marwick LLP.
23.2 Independent Auditors' Consent of Price Waterhouse LLP.
27.1 Financial Data Schedule.
- -----------------
+ Confidential Treatment Requested as indicated in the exhibit list to the
Company's Registration Statement on Form SB-2, Registration No. 333-44037,
filed on January 9, 1998.
(b) Reports on Form 8-K
On November 19, 1997, the Company filed a Current Report on Form 8-K to report
under Item 2 the merger of GMS Dental Group, Inc. with and into the Company on
November 4, 1997. On November 21, 1997, the Company filed a Current Report on
Form 8-K to report under Item 4 a change in the Company's principal accountants
that occurred on November 14, 1997. No financial statements were included in
either report.
57
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 27, 1998.
GENTLE DENTAL SERVICE CORPORATION
By: MICHAEL T. FIORE
-------------------------------------
Michael T. Fiore
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities indicated on March 27, 1998.
Signature Title
- --------- -----
Principal Executive Officer:
MICHAEL T. FIORE President, Chief Executive
- ---------------------------------- Officer, and Director
Michael T. Fiore
Principal Financial and
Accounting Officer:
NORMAN R. HUFFAKER Chief Financial Officer
- ----------------------------------
Norman R. Huffaker
Directors:
GERALD R. AARON Director
- ----------------------------------
Gerald R. Aaron
STEVEN R. BULL Director
- ----------------------------------
Steven R. Bull, DDS
ROBERT FINZI Director
- ----------------------------------
Robert Finzi
KENNETH D. HOOTEN Director
- ----------------------------------
Kenneth D. Hooten
PAUL H. KECKLEY Director
- ----------------------------------
Paul H. Keckley
KATHLEEN D. LA PORTE Director
- ----------------------------------
Kathleen D. La Porte
WAYNE POSEY Director
- ----------------------------------
Wayne Posey
GRANT SADLER Director
- ----------------------------------
Grant Sadler
DANY Y. TSE Director
- ----------------------------------
Dany Y. Tse, DMD
L. THEODORE VAN EERDEN Director
- ----------------------------------
L. Theodore Van Eerden
CRAIG W. WONG Director
- ----------------------------------
Craig W. Wong, DMD
58
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document Description
- ------ --------------------
2.1 Agreement and Plan of Merger of Gentle Dental Service Corporation and
GMS Dental Group, Inc. dated October 30, 1997, incorporated by
reference to the Company's Report on Form 8-K, Accession No. 97-000678.
3.1 Restated Articles of Incorporation, incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
33-13529.
3.2 Bylaws, as amended, incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 33-13529.
4.1 Restated Articles of Incorporation (filed as Exhibit 3.1).
4.2 Bylaws, as amended (filed as Exhibit 3.2).
10.1 1993 Stock Incentive Plan.
10.2 Stock Acquisition Agreement dated as of June 21, 1996 between the
Company and The ServiceMaster Company Limited Partnership, incorporated
by reference to the Company's Registration Statement on Form SB-2,
Registration No. 33-13529.
10.3 Form of Warrant Subscription and Guarantor Agreement dated as of May
31, 1996 between the Company and various officers, directors, and
shareholders of the Company, incorporated by reference to the Company's
Registration Statement on From SB-2, Registration No. 33-13529.
10.4 Employment Agreement dated November 3, 1997, by and between Dany Y.
Tse, DMD and the Company, incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
10.5 Employment Agreement dated November 3, 1997, by and between Michael T.
Fiore and the Company, incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
10.6 Employment Agreement dated November 3, 1997, by and between L. Theodore
Van Eerden and the Company incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
10.7 Employment Agreement dated August 31, 1996, by and between Grant M.
Sadler and GMS Dental Group, Inc., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.8 Employment Agreement dated November 7, 1996, by and between Norman
Huffaker and GMS Dental Group, Inc., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
<PAGE>
10.9 1996 Stock Option Plan of GMS Dental Group, Inc., incorporated by
reference to the Company's Registration Statement on Form SB-2,
Registration No. 333-44037, filed on January 9, 1998, Accession No.
98-000030.
10.10 1996 Performance Stock Option Plan of GMS Dental Group, Inc.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
10.11 Incentive Stock Option Agreement dated April 1, 1997, by and between
Michael T. Fiore and GMS Dental Group, Inc., incorporated by reference
to the Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.12 Stock Option Agreement dated April 1, 1997, by and between Michael T.
Fiore and GMS Dental Group, Inc., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.13 Promissory Note dated April 1, 1997, executed by Michael T. Fiore in
favor of GMS Dental Group, Inc.
10.14 Security Agreement dated April 1, 1997, by and between Michael T. Fiore
and GMS Dental Group, Inc., incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
10.15 Acknowledgement and Clarification of Repurchase Rights Agreement dated
October 31, 1997, by and between Michael T. Fiore and GMS Dental Group,
Inc., incorporated by reference to the Company's Registration Statement
on Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
10.16 Founder Stock Purchase Agreement dated August 31, 1996, by and between
Grant M. Sadler and GMS Dental Group, Inc., incorporated by reference
to the Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.17 Promissory Note dated August 31, 1996, executed by Grant M. Sadler in
favor of GMS Dental Group, Inc., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.18 Security Agreement dated August 31, 1996, by and between Grant M.
Sadler and GMS Dental Group, Inc., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.19 Common Stock Escrow Agreement dated October 11, 1996, by and among
Grant M. Sadler, Kenneth J. Davis and GMS Dental Group, Inc.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
10.20 Acknowledgement and Clarification of Repurchase Rights Agreement, dated
October 31, 1997, by and among Grant M. Sadler, Kenneth J. Davis and
GMS Dental Group, Inc., incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
10.21 Incentive Stock Option Agreement dated December 4, 1996, by and between
Norman Huffaker and GMS Dental Group, Inc., incorporated by reference
to the Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
<PAGE>
10.22 Stock Option Agreement dated December 4, 1996, by and between Norman
Huffaker and GMS Dental Group, Inc., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.23 Acknowledgement and Clarification of Repurchase Rights Agreement dated
October 31, 1996, by and between Norman R. Huffaker and GMS Dental
Group, Inc., incorporated by reference to the Company's Registration
Statement on Form SB-2, Registration No. 333-44037, filed on January 9,
1998, Accession No. 98-000030.
10.24 Dental Group Management Agreement dated October 11, 1996, by and
between Alan M. Slutsky, DMD, a Professional Corporation, and Slutsky
Dental Corporation., incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
+10.25 Dental Group Management Agreement dated October 11, 1996, by and
between GMS Dental Group Management of Hawaii, Inc. and Dental Care
Centers of Hawaii, Inc., incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
+10.26 Dental Group Management Agreement dated October 11, 1996, by and
between Henry J. Lerian, Trustee of the Henry J. Lerian and Jeanette P.
Lerian Irrevocable Marital Trust U/D/T 03/23/94, Henry J. Lerian,
Trustee of the Henry J. Lerian and Jeanette P. Lerian Revocable
Survivor's Trust U/D/T 03/23/04, Henry J. Lerian, DDS and Lerian Dental
Corporation, incorporated by reference to the Company's Registration
Statement on Form SB-2, Registration No. 333-44037, filed on January 9,
1998, Accession No. 98-000030.
+10.27 Dental Group Management Agreement dated June 30, 1997, by and between
Warren M. Francis, Jr. D.D.S., Inc. and Francis Dental Corporation.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
+10.28 Dental Group Management Agreement dated June 30, 1997, by and between
Warren M. Francis, Jr. D.D.S., Inc. and Burrell Dental Corporation.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
+10.29 Dental Group Management Agreement dated June 30, 1997, by and between
Warren M. Francis, Jr. D.D.S., Inc. and Ashrafi Dental Corporation.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
+10.30 Dental Group Management Agreement dated October 11, 1996, by and
between GMS Dental Group Management of Hawaii, Inc. and Hualalai Dental
Services, Inc., incorporated by reference to the Company's Registration
Statement on Form SB-2, Registration No. 333-44037, filed on January 9,
1998, Accession No. 98-000030.
+10.31 Dental Group Management Agreement dated February 24, 1997, by and
between Naismith Dental Corporation and Yep Dental Corporation.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
10.32 Dental Group Management Agreement dated October 11, 1996, by and
between GMS Dental Group Management, Inc. and Idaho Dental Group, P.A.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
10.33 Dental Group Management Agreement dated July 24, 1997, by and between
GMS Dental Group Management, Inc. and Fremont Dental Group.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
<PAGE>
10.34 Dental Group Management Agreement dated July 24, 1997, by and between
GMS Dental Group Management, Inc. and Mark Armstrong, D.D.S. d/b/a
Concord Dental Care., incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
10.35 Dental Group Management Agreement dated October 31, 1997, by and
between GMS Dental Group Management, Inc. and Charles Murillo, D.D.S.
d/b/a Community Dental Group., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.36 Dental Group Management Agreement dated July 24, 1997, by and between
GMS Dental Group Management, Inc. and Sam Samudio, D.D.S. d/b/a
Pleasanton Dental Care., incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
10.37 Dental Group Management Agreement dated October 31, 1997, by and
between Premier Dental Care, Inc. and SJL, P.A., incorporated by
reference to the Company's Registration Statement on Form SB-2,
Registration No. 333-44037, filed on January 9, 1998, Accession No.
98-000030.
+10.38 Dental Group Management Agreement dated February 24, 1997, by and
between Naismith Dental Corporation and Burns Dental Corporation.,
incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-44037, filed on January 9, 1998,
Accession No. 98-000030.
10.39 Credit Agreement dated October 10, 1996, as amended, by and among GMS
Dental Group Management, Inc., GMS California Acquisition Company, GMS
Hawaii Acquisition Company and Imperial Bank., incorporated by
reference to the Company's Registration Statement on Form SB-2,
Registration No. 333-44037, filed on January 9, 1998, Accession No.
98-000030.
+10.40 Support Services Agreement dated March 31, 1997, between the Company
and Arena Dental Corporation., incorporated by reference to the
Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.41 Promissory Note dated July 24, 1997, executed by GMS Dental Group
Management in favor of Fremont Dental Group., incorporated by reference
to the Company's Registration Statement on Form SB-2, Registration No.
333-44037, filed on January 9, 1998, Accession No. 98-000030.
10.42 Guaranty dated July 24, 1997, by GMS Dental Group, Inc. in favor of
Fremont Dental Group., incorporated by reference to the Company's
Registration Statement on Form SB-2, Registration No. 333-44037, filed
on January 9, 1998, Accession No. 98-000030.
10.43 Merger Agreement, dated as of September 21, 1997, between the Company,
Gentle Dental Merger Corporation, a wholly-owned subsidiary of the
Company, Dedicated Dental Systems, Inc., a California corporation,
Arthur G. Kaiser, D.D.S. and Robert J. Newman, incorporated by
reference to Company's Report on Form 10-QSB, Accession No. 97-000656.
10.44 Asset Purchase Agreement, dated as of September 21, 1997, between the
Company, California Dental Practice Management Company, a California
general partnership, Arthur G. Kaiser, D.D.S., Robert J. Newman and
Mark Thomas, D.D.S., incorporated by reference to the Company's Report
on Form 10-QSB, Accession No. 97-000656.
<PAGE>
10.45 Asset Purchase Agreement, dated as of September 21, 1997, between the
Company, California Dental Practice Management Company, a California
general partnership, Arthur G. Kaiser, D.D.S., Robert J. Newman and
Clarence Au, D.D.S., incorporated by reference to the Company's Report
on form 10-QSB, Accession No. 97-000656.
10.46 Asset Purchase Agreement, dated as of September 21, 1997, between the
Company and Arthur G. Kaiser, D.D.S., incorporated by reference to the
Company's Report on Form 10-QSB, Accession No. 97-000656.
10.47 Dental Group Management Agreement dated as of January 1, 1998 between
the Company and Tse, Saiget, Watanabe & McClure, Inc., P.S.
10.48 Dental Group Management Agreement dated as of January 1, 1998, between
the Company and Gentle Dental of Oregon, P.C.
10.49 Dental Group Management Agreement dated as of January 1, 1998 between
the Company and Dany Tse, P.C.
10.50 Asset Purchase Agreement dated February 28, 1998 by and between the
Company and Affordable Dental Care, Inc., an Oregon corporation,
incorporated by reference to the Company's Report on Form 8-K, filed on
March 16, 1998, Accession No. 98-000196.
10.51 Stock Purchase Agreement dated February 28, 1998 between and among the
Company, Managed Dental Care of Oregon, Inc., an Oregon corporation,
and Gerald M. Bieze, D.D.S., incorporated by reference to the Company's
Report on Form 8-K, filed on March 16, 1998, Accession No. 98-000196.
10.52 Dental Group Management Agreement by and between the Company and
Affordable Dental Care, P.C., an Oregon corporation.
10.53 Amendment dated February 28, 1998, to that certain Merger Agreement,
dated September 21, 1997, between and among the Company, Gentle Dental
Merger Corporation, a California corporation, Dedicated Dental Systems,
Inc., a California corporation, Arthur G. Kaiser and Robert J. Newman.
10.54 Amendment dated February 28, 1998, to that certain Asset Purchase
Agreement, dated September 21, 1997, between and among the Company,
California Dental Practice Management Company, a California general
partnership, Arthur G. Kaiser, D.D.S., Robert J. Newman and Mark
Thomas, D. D. S.
10.55 Amendment dated February 28, 1998, to that certain Asset Purchase
Agreement, dated September 21, 1997, between and among the Company,
California Dental Practice Management Company, a California general
partnership, Arthur G. Kaiser, D.D.S., Robert J.. Newman and Clarence
Au, D.D.S.
10.56 Amendment dated February 28, 1998, to that certain Asset Purchase
Agreement, dated September 21, 1997, by and between the Company and
Arthur G. Kaiser, D.D.S.
10.57 Amended and Restated Credit Agreement, dated as of January 7, 1998,
between and among the Company, Imperial Bank and certain other credit
parties
21.1 Subsidiaries of the Company.
23.1 Independent Auditors' Consent of KPMG Peat Marwick LLP.
23.2 Independent Auditors' Consent of Price Waterhouse LLP.
27.1 Financial Data Schedule.
- -----------------
+ Confidential Treatment Requested as indicated in the exhibit list to the
Company's Registration Statement on Form SB-2, Registration No. 333-44037,
filed on January 9, 1998.
GENTLE DENTAL SERVICE CORPORATION
1993 STOCK INCENTIVE PLAN
1. Purpose. The purpose of this 1993 Stock Incentive Plan (the "Plan") is
to enable Gentle Dental Service Corporation (the "Company") to attract and
retain experienced and able directors, officers, employees and other key
contributors and to provide an additional incentive to these individuals to
exert their best efforts for the Company and its shareholders.
2. Administration.
2.1 Board of Directors. The Plan shall be administered by the board of
directors of the Company (the "Board of Directors"), which shall determine and
designate from time to time the persons to whom grants and awards shall be made
and the amounts, terms and conditions of those grants and awards. Subject to the
provisions of the Plan, the Board of Directors may from time to time adopt or
amend rules and regulations relating to administration of the Plan, and the
interpretation and construction of the provisions of the Plan by the Board of
Directors shall be final and conclusive. Whenever the operation of the Plan
requires that the fair market value of the Company's Common Stock be determined,
the fair market value shall be determined by, or in a manner approved by, the
Board of Directors.
2.2 Committee. The Board of Directors may delegate to a committee of
the Board of Directors or a senior executive officer of the Company, or both
(the "Committee") any or all authority for administration of the Plan. If
authority is delegated to a Committee, all references to the Board of Directors
in the Plan shall mean and relate to the Committee except (i) as otherwise
provided by the Board of Directors, and (ii) that only the Board of Directors
may amend or terminate the Plan as provided in paragraphs 5 and 11.
3. Eligibility. Grants and awards may be made under the Plan to directors,
officers, and key employees of the Company or any parent or subsidiary of the
Company, and other key individuals such as consultants to the Company who the
Board of Directors believes have made or will make an essential contribution to
the Company; provided, however, that only employees of the Company shall be
eligible to receive Incentive Stock Options under the Plan.
4. Shares Subject to the Plan. Subject to paragraph 9, an aggregate of
1,000,000 shares of Common Stock of the Company may be issued under the Plan (i)
upon exercise of options and stock appreciation rights granted under the Plan,
(ii) as bonuses under the Plan and (iii) pursuant to sales under the Plan. If
any option under the Plan or stock appreciation right granted without a related
option expires or is cancelled or terminated and is unexercised in whole or in
part, the shares allocable to the unexercised portion shall again become
available for awards under the Plan, except that shares that are issued on
exercise of a stock appreciation right that were allocable to an option, or
portion thereof, surrendered in connection with the exercise of the stock
appreciation right shall not again become available for awards under the Plan.
If
<PAGE>
Common Stock sold or awarded as a bonus under the Plan is forfeited to the
Company or repurchased by the Company pursuant to applicable restrictions, the
number of shares forfeited or repurchased shall again be available under the
Plan. Common Stock issued under the Plan may be subject to such restrictions on
transfer, repurchase rights or other restrictions as are determined by the Board
of Directors. The certificates representing such Common Stock shall bear such
legends as are determined by the Board of Directors.
5. Effective Date and Duration of Plan.
5.1 Effective Date. The Plan shall become effective when adopted by
the Board of Directors (the "Effective Date"), but no option shall become
exercisable until the Plan is approved by a vote of the shareholders of the
Company entitled to vote thereon. Subject to this limitation, options and stock
appreciation rights may be granted and Common Stock may be awarded as bonuses or
sold under the Plan at any time after the Effective Date and before termination
of the Plan.
5.2 Duration of the Plan. The Plan shall continue until, in the
aggregate, options and stock appreciation rights have been granted and exercised
and Common Stock has been awarded as bonuses or sold and the restrictions on any
such Common Stock have lapsed with respect to all shares subject to the Plan
under paragraph 4 (subject to any adjustments under paragraph 9), provided,
however, that unless sooner terminated by the Board of Directors, the Plan shall
terminate on, and no option or stock appreciation right or bonus right shall be
granted and no Common Stock shall be awarded as a bonus or sold under the Plan
on or after, the tenth anniversary of the Effective Date. The Board of Directors
may suspend or terminate the Plan at any time except with respect to options,
stock appreciation rights and bonus rights, and Common Stock subject to
restrictions then outstanding under the Plan. Termination shall not affect any
right of the Company to repurchase shares or the forfeitability of shares issued
under the Plan.
6. Grants, Awards and Sales.
6.1 Type of Security. The Board of Directors may, from time to time,
take the following actions, separately or in combination, under the Plan: (i)
grant Incentive Stock Options, as defined in Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"); (ii) grant options other than Incentive
Stock Options (hereinafter "Non-Statutory Stock Options"); (iii) grant stock
appreciation rights or bonus rights; (iv) award bonuses of Common Stock; and (v)
sell Common Stock subject to restrictions. The Board of Directors shall specify
the action taken with respect to each person granted, awarded or sold any option
or Common Stock under the Plan and shall specifically designate each option
granted under the Plan as an Incentive Stock Option or a Non-Statutory Stock
Option. At the discretion of the Board of Directors, an individual may be given
an election to surrender an award in exchange for the grant of a new award. No
employee may be granted options or stock appreciation rights under the Plan for
more than an aggregate of 150,000 shares of Common Stock in connection with the
hiring of the employee or 75,000 shares of Common Stock in any calendar year
otherwise.
2
<PAGE>
6.2 General Rules Relating to Options.
6.2.1 Time of Exercise. Except as provided in paragraph 8,
options granted under the Plan may be exercised over the period stated in each
option in amounts and at times prescribed by the Board of Directors and stated
in the option, provided that (i) no option granted under the Plan may become
exercisable at a rate of less than 20 percent per year over the first five years
of the option, and (ii) options shall not be exercised for fractional shares. If
the optionee does not exercise an option in any period with respect to the full
number of shares to which the optionee is entitled in that period, the
optionee's rights shall be cumulative and the optionee may purchase those shares
in any subsequent period during the term of the option.
6.2.2 Option Price. The option price per share of each option
granted under the Plan shall be determined by the Board of Directors, but shall
not be less than 85 percent of the fair market value of the shares covered by
the option on the date the option is granted. With respect to options granted to
optionees possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or of any parent or subsidiary of
the Company (a "Ten Percent Owner"), the option price per share shall not be
less than one hundred ten percent (110%) of the fair market value on the date
the option is granted.
6.2.3 Duration of Options. Subject to paragraph 8, each option
granted under the Plan shall continue in effect for the period fixed by the
Board of Directors, except that no option granted under the Plan shall be
exercisable after the expiration of 10 years from the date it is granted. No
option granted to a Ten Percent Owner shall be exercisable after the expiration
of five (5) years from the date such option is granted.
6.2.4 Purchase of Shares. Shares may be purchased or acquired
pursuant to an option granted under the Plan only on receipt by the Company of
notice in writing from the optionee of the optionee's intention to exercise,
specifying the number of shares the optionee desires to purchase and the date on
which the optionee desires to complete the transaction, which may not be more
than 30 days after receipt of the notice, and, unless in the opinion of counsel
for the Company such a representation is not required to comply with the
Securities Act of 1933, as amended, containing a representation that it is the
optionee's intention to acquire the shares for investment and not with a view to
distribution. Unless otherwise determined by the Board of Directors, on or
before the date specified for completion of the purchase, the optionee must have
paid the Company the full purchase price in cash, including cash that may be the
proceeds of a loan from the Company, in shares of Common Stock previously
acquired by the optionee valued at fair market value, or in any combination of
cash and shares of Common Stock. No shares shall be issued until full payment
therefor has been made. Each optionee who has exercised an option shall, on
notification of the amount due, if any, and prior to or concurrently with
delivery of the certificates representing the shares for which the option was
exercised, pay to the Company amounts necessary to satisfy any applicable
federal, state and local withholding tax requirements. If additional withholding
becomes required beyond any amount deposited before delivery of the
certificates, the optionee shall pay such amount to the Company on
3
<PAGE>
demand. If the employee fails to pay the amount demanded, the Company shall have
the right to withhold that amount from other amounts payable by the Company to
the optionee, including salary, subject to applicable law.
6.3 Incentive Stock Options. Incentive Stock Options shall be subject
to the following additional terms and conditions:
6.3.1 Limitation on Amount of Grants. No employee may be granted
Incentive Stock Options under the Plan such that the aggregate fair market
value, on the date of grant, of the Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by that employee during any
calendar year, under the Plan and under any other incentive stock option plan
(within the meaning of section 422 of the Code) of the Company or any parent or
subsidiary of the Company, exceeds $100,000.
6.3.2 Option Price. The option price per share under each option
granted under the Plan shall be determined by the Board of Directors in
accordance with paragraph 6.2.2, but the option price with respect to an
Incentive Stock Option shall be not less than 100 percent of the fair market
value of the shares covered by the option on the date the option is granted.
6.4 Stock Bonuses. Common Stock awarded as a bonus shall be subject to
the terms, conditions and restrictions determined by the Board of Directors at
the time the Common Stock is awarded as a bonus. The Board of Directors may
require the recipient to sign an agreement as a condition of the award, but may
not require the recipient to pay any money consideration except as provided in
the last sentence of this paragraph. The agreement may contain such terms,
conditions, representations and warranties as the Board of Directors may
require. The Company may require any recipient of a Common Stock bonus to pay to
the Company amounts necessary to satisfy any applicable federal, state or local
tax withholding requirements prior to delivery of certificates. If the recipient
fails to pay the amount demanded, the Company may withhold that amount from
other amounts payable by the Company to the recipient, including salary or fees
for services, subject to applicable law. With the consent of the Board of
Directors, a recipient may deliver Common Stock to the Company to satisfy this
withholding obligation.
6.5 Restricted Stock. The Board of Directors may issue shares of
Common Stock under the Plan for such consideration (including promissory notes
and services) as determined by the Board of Directors in accordance with the law
and with such restrictions concerning transferability, repurchase by the
Company, or forfeiture as determined by the Board of Directors. If shares of
Common Stock are subject to repurchase by the Company at the original purchase
price upon termination of employment of the recipient, such right of repurchase
shall lapse at a rate of no less than twenty percent (20%) per year over five
years from the date the shares are granted. All shares of Common Stock issued
pursuant to this paragraph 6.5 shall be subject to a purchase agreement, which
shall be executed by the Company and the prospective recipient of the Common
Stock prior to the delivery of certificates
4
<PAGE>
representing such shares to the recipient. Subject to the terms of the Plan, the
purchase agreement shall contain such terms and conditions and representations
and warranties as the Board of Directors shall require. The Company may require
any purchaser of restricted stock to pay to the Company in cash upon demand
amounts necessary to satisfy any applicable federal, state or local tax
withholding requirements. If the purchaser fails to pay the amount demanded, the
Company may withhold that amount from other amounts payable by the Company to
the purchaser, including salary, subject to applicable law. With the consent of
the Board of Directors, a purchaser may deliver Common Stock to the Company to
satisfy this withholding obligation.
6.6 Stock Appreciation Rights.
6.6.1 Description. Each stock appreciation right shall entitle
the holder, on exercise, to receive from the Company in exchange therefor an
amount equal in value to the excess of the fair market value on the date of
exercise of one share of Common Stock over its fair market value on the date of
grant (or, in the case of a stock appreciation right granted in connection with
an option, the option price per share under the option to which the stock
appreciation right relates), multiplied by the number of shares covered by the
stock appreciation right or the option, or portion thereof, that is surrendered.
6.6.2 Exercise. A stock appreciation right shall be exercisable
only at the time or times established by the Board of Directors. If a stock
appreciation right is granted in connection with an option, then it shall be
exercisable only to the extent and on the same conditions that the related
option is exercisable. Upon exercise of a stock appreciation right, any option
or portion thereof to which the stock appreciation right relates must be
surrendered unexercised.
6.6.3 Payment. Payment by the Company upon exercise of a stock
appreciation right may be made in shares of Common Stock valued at fair market
value, or in cash, or partly in Common Stock and partly in cash, as determined
by the Board of Directors. No fractional shares shall be issued upon exercise of
a stock appreciation right. In lieu thereof, cash may be paid in an amount equal
to the value of the fraction or, in the discretion of the Board of Directors,
the number of shares may be rounded to the next whole share.
6.6.4 Adjustment. In the event of any adjustment pursuant to
paragraph 9 in the number of shares of Common Stock subject to an option granted
under the Plan, any stock appreciation right granted hereunder in connection
with such option shall be proportionately adjusted.
6.6.5 Withholding. Each participant who has exercised a stock
appreciation right shall, upon notification of the amount due, pay to the
Company in cash amounts necessary to satisfy any applicable federal, state and
local tax withholding requirements. If the participant fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable by the
Company to the participant including salary, subject to
5
<PAGE>
applicable law. With the consent of the Board of Directors a participant may
satisfy this obligation, in whole or in part, by having the Company withhold
from any shares to be issued upon the exercise that number of shares that would
satisfy the withholding amount due or by delivering Common Stock to the Company
to satisfy the withholding amount.
6.7 Cash Bonus Rights.
6.7.1 Grant. The Board of Directors may grant bonus rights under
the Plan in connection with (i) an option or stock appreciation right granted or
previously granted, (ii) Common Stock awarded, or previously awarded, as a bonus
and (iii) Common Stock sold, or previously sold, under the Plan. Bonus rights
will be subject to rules, terms and conditions as the Board of Directors may
prescribe.
6.7.2 Bonus Rights in Connection with Options and Stock
Appreciation Rights. A bonus right granted in connection with an option will
entitle an optionee to a cash bonus when the related option is exercised (or is
surrendered in connection with the exercise of a stock appreciation right
related to the option) in whole or in part. A bonus right granted in connection
with a stock appreciation right will entitle the holder to a cash bonus when the
stock appreciation right is exercised. Upon exercise of an option, the amount of
the bonus shall be determined by multiplying the excess of the total fair market
value of the shares to be acquired upon the exercise over the total option price
for the shares by the applicable bonus percentage. Upon exercise of a stock
appreciation right, the bonus shall be determined by multiplying the total fair
market value of the shares or cash received pursuant to the exercise of the
stock appreciation right by the applicable bonus percentage. The bonus
percentage applicable to a bonus right shall be determined from time to time by
the Board of Directors but shall in no event exceed 100 percent.
6.7.3 Bonus Rights in Connection with Stock Bonus. A bonus right
granted in connection with Common Stock awarded as a bonus will entitle the
person awarded such Common Stock to a cash bonus either at the time the Common
Stock is awarded or at such time as restrictions, if any, to which the Common
Stock is subject lapse. If Common Stock awarded is subject to restrictions and
is repurchased by the Company or forfeited by the holder, the bonus right
granted in connection with such Common Stock shall terminate and may not be
exercised. The amount of cash bonus to be awarded and the time such cash bonus
is to be paid shall be determined from time to time by the Board of Directors.
6.7.4 Bonus Rights in Connection with Stock Purchase. A bonus
right granted in connection with Common Stock purchased hereunder (excluding
Common Stock purchased pursuant to an option) shall terminate and may not be
exercised in the event the Common Stock is repurchased by the Company or
forfeited by the holder pursuant to restrictions applicable to the Common Stock.
The amount of cash bonus to be awarded and the time such cash bonus is to be
paid shall be determined from time to time by the Board of Directors.
6
<PAGE>
7. Nontransferability. Each option, stock appreciation right, or cash bonus
right granted under the Plan by its terms shall be nonassignable and
nontransferable by the holder except by will or by the laws of descent and
distribution of the state or country of the holder's domicile at the time of
death, and each option, stock appreciation right or cash bonus right by its
terms shall be exercisable during the holder's lifetime only by the holder.
8. Termination of Employment.
8.1 Retirement or General Termination. Unless otherwise determined by
the Board of Directors, if an employee's employment by the Company or any parent
or subsidiary of the Company is terminated by retirement or for any reason other
than in the circumstances specified in 8.2 below, any option, stock appreciation
right or cash bonus right held by the employee may be exercised at any time
prior to its expiration date or the expiration of three months after the date of
the termination, whichever is the shorter period, but only if and to the extent
the employee was entitled to exercise the option, stock appreciation right or
cash bonus right on the date of termination. Transfer of an employee by the
Company or any parent or subsidiary of the Company to the Company or any parent
or subsidiary of the Company shall not be considered a termination for purposes
of the Plan.
8.2 Death or Disability. Unless otherwise determined by the Board of
Directors, if an employee's employment by the Company or any parent or
subsidiary of the Company is terminated because of death or physical disability
(within the meaning of section 22(e)(3) of the Code), any option, stock
appreciation right or cash bonus right held by the employee may be exercised at
any time prior to its expiration date or the expiration of one year after the
date of termination, whichever is the shorter period, for the greater of (a) the
number of remaining shares for which the employee was entitled to exercise the
option, stock appreciation right or cash bonus right on the date of termination
or (b) the number of remaining shares for which the employee would have been
entitled to exercise the option, stock appreciation right or cash bonus right if
such option or right had been 50 percent exercisable on the date of termination.
If an employee's employment is terminated by death, any option, stock
appreciation right or cash bonus right held by the employee shall be exercisable
only by the person or persons to whom the employee's rights under the option,
stock appreciation right or cash bonus right pass by the employee's will or by
the laws of descent and distribution of the state or country of the employee's
domicile at the time of death.
8.3 Termination of Unexercised Rights. To the extent an option, stock
appreciation right or cash bonus right held by any deceased employee or by any
employee whose employment is terminated is not exercised within the limited
periods provided above or otherwise provided by the Board of Directors, all
further rights to exercise the option, stock appreciation right or cash bonus
right shall terminate at the expiration of such periods.
8.4 Termination of Non-Employees. With respect to options, stock
appreciation rights and cash bonus rights granted to persons who are not
employees of the
7
<PAGE>
Company, the Board of Directors may establish provisions relating to the
termination of those persons' status with the Company.
9. Changes in Capital Structure. If the outstanding shares of Common Stock
are increased or decreased or changed into or exchanged for a different number
or kind of shares or other securities of the Company or of another corporation,
by reason of any reorganization, merger, consolidation, plan of exchange,
recapitalization, reclassification, stock split-up, combination of shares, or
dividend payable in shares, appropriate adjustment shall be made by the Board of
Directors in the number and kind of shares for the purchase of which options or
stock appreciation rights may be granted and for which Common Stock may be
awarded as bonuses or sold subject to restrictions under the Plan. In addition,
the Board of Directors shall make appropriate adjustments in the number and kind
of shares as to which outstanding options, or portions thereof then unexercised,
shall be exercisable, and the number and kind of shares covered by outstanding
stock appreciation rights to the end that each optionee's proportionate interest
shall be maintained as before the occurrence of such event. Adjustments in
outstanding options shall be made without change in the total price applicable
to the unexercised portion of any option and with a corresponding adjustment in
the option price per share. Adjustments in outstanding stock appreciation rights
shall be made without change in their total value. Any such adjustment made by
the Board of Directors shall be conclusive. In the event of dissolution or
liquidation of the Company or a merger, consolidation, or plan of exchange
affecting the Company, in lieu of making adjustments as provided for above in
this paragraph 9, the Board of Directors may, in its sole discretion, provide a
30-day period immediately preceding the event during which optionees shall have
the right to exercise options or stock appreciation rights to the extent options
are exercisable at such time. Upon the expiration of such 30-day period all
unexercised options shall be terminated and optionees shall have no further
rights to acquire shares.
10. Corporate Mergers, Acquisitions, Etc. The Board of Directors may also
grant options and stock appreciation rights having terms and provisions which
vary from those specified in this Plan, provided that any options and stock
appreciation rights granted pursuant to this section are granted in substitution
for, or in connection with the assumption of, existing options and stock
appreciation rights granted by another corporation and assumed or otherwise
agreed to be provided for by the Company pursuant to or by reason of a
transaction involving a corporate merger, consolidation, acquisition of property
or stock, separation, reorganization or liquidation to which the Company or a
subsidiary is a party.
11. Amendment of Plan. The Board of Directors may at any time and from time
to time modify or amend the Plan in such respects as it deems advisable because
of changes in the law while the Plan is in effect or for any other reason. After
the Plan has been approved by the shareholders and except as provided in
paragraph 9, however, no change in an option or stock appreciation right already
granted to any person shall be made without the written consent of such person.
Furthermore, unless approved by the shareholders of the Company entitled to vote
thereon, no amendment or change shall be made in the Plan (a) increasing the
total number of
8
<PAGE>
shares that may be issued under the Plan, or (b) changing the class of persons
eligible to receive options under the Plan.
12. Approvals. The obligations of the Company under the Plan are subject to
the approval of state and federal authorities or agencies with jurisdiction in
the matter. The Company will use its best efforts to take steps required by
state or federal law or applicable regulations, including rules and regulations
of the Securities and Exchange Commission in connection with the granting of any
option or the issuance or sale of any shares under the Plan. The foregoing
notwithstanding, the Company shall not be obligated to issue or deliver shares
of Common Stock under the Plan if the Company is advised by its legal counsel
that such issuance or delivery would violate applicable state or federal laws.
13. Employment Rights. Nothing in the Plan or any grant pursuant to the
Plan shall confer on any employee any right to be continued in the employment of
the Company or any parent or subsidiary of the Company or shall interfere in any
way with the right of the Company or any parent or subsidiary of the Company by
whom such employee is employed to terminate such employee's employment at any
time, with or without cause.
14. Rights as a Shareholder. A holder of an option or a stock appreciation
right, a recipient of Common Stock awarded as a bonus, or a purchaser of Common
Stock shall have no rights as a shareholder with respect to any shares covered
by any option, stock appreciation right, bonus award, or stock purchase
agreement until the date of issue of a stock certificate to him or her for such
shares. Except as otherwise provided in the Plan, no adjustment shall be made
for dividends or other rights for which the record date is prior to the date
such stock certificate is issued.
15. Information. The Company will provide all recipients of grants or
awards under Plan with financial statements of the Company on at least an annual
basis.
9
PROMISSORY NOTE
$150,000 Yorba Linda, California
Dated as of April 1, 1997
FOR VALUE RECEIVED, the undersigned, MICHAEL T. FIORE, promises to pay to
the order of GMS DENTAL GROUP, INC., a Delaware corporation (the "Company"), the
principal sum of One Hundred Fifty Thousand Dollars ($150,000), with interest
from the date hereof on the unpaid principal at the rate of 6.84%, compounded
annually. The entire unpaid balance of principal and interest shall be payable
on March 31, 2001.
If payment is not made when due, and if action is instituted on this note,
the undersigned agrees to pay the Company reasonable attorney's fees and costs
of suit, as fixed by court.
The undersigned shall have the right to prepare all or any part of the
unpaid principal amount of this note, without premium, at any time prior to the
maturity hereof on ten (10) days' prior written notice.
This Promissory Note is a full-recourse note originally secured by a pledge of
750,000 shares of Common Stock on the Company pursuant to a Security Agreement
of even date herewith, which is on file with the Secretary of the Company.
This Promissory Note shall be governed by and construed in accordance with
the laws of the State of California.
IN WITNESS WHEREOF, the undersigned has signed, dated and delivered
thisnote as of the date and year first above written.
MICHAEL T. FIORE
----------------------------------------
Michael T. Fiore
===============================================================================
DENTAL GROUP MANAGEMENT AGREEMENT
by and between
Gentle Dental Service Corporation
(a Washington corporation)
and
Tse, Saiget, Wantanabe & McClure, Inc., P.S.
(a Washington professional corporation)
- -------------------------------------------------------------------------------
January 1, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS................................................. 1.
ARTICLE II SCOPE OF AGREEMENT.......................................... 2.
Section 2.1 General Scope of Agreement....................... 2.
Section 2.2 (Intentionally Omitted].......................... 2.
Section 2.3 [Intentionally omitted.]
Section 2.4 Revenues......................................... 2.
Section 2.5 Deposit Accounts................................. 2.
ARTICLE III OPERATION OF PRACTICE....................................... 2.
Section 3.1 Appointment...................................... 2.
Section 3.2 Professional Matters............................. 3.
Section 3.3 Relationship of Parties.......................... 3.
Section 3.4 Authority and Control............................ 3.
Section 3.5 Joint Operations Committee....................... 4.
Section 3.6 Budgets.......................................... 6.
Section 3.7 Budget Process................................... 6.
ARTICLE IV MANAGEMENT SERVICES......................................... 7.
Section 4.1 General Description of Services.................. 7.
Section 4.2 Practice Site Facilities......................... 7.
Section 4.3 Purchased Items and Services..................... 8.
Section 4.4 Manager Personnel................................ 8.
Section 4.5 Day-to-Day Management and Supervision............ 8.
Section 4.6 Billing and Collection Payment of Expenses....... 8.
Section 4.7 Bookkeeping and Accounting....................... 9.
Section 4.8 Marketing and Public Relations Services.......... 9.
Section 4.9 Group Agreements................................. 10.
Section 4.10 Utilization Review Quality Improvement and
Outcomes Monitoring.............................. 10.
Section 4.11 Patient Referrals................................ 10.
Section 4.12 Applicable Law................................... 10.
ARTICLE V GROUP RESPONSIBILITIES...................................... 10.
Section 5.1 Diagnosis, Treatment Planning, Specific
Patient Education and Consultation............... 10.
Section 5.2 Dental Services.................................. 11.
Section 5.3 Provision of Dental Services by Group............ 11.
Section 5.4 Providers........................................ 11.
Section 5.5 Peer Review...................................... 12.
Section 5.6 Fees, Charges and Payor Agreements............... 12.
Section 5.7 Hours of Clinical Operation...................... 12.
Section 5.8 Billing Information and Assignments.............. 12.
(i)
<PAGE>
Section 5.9 Third Party Contracts............................12.
Section 5.10 Use of Manager's Goods and Services..............12.
Section 5.11 Negative Covenants...............................12.
Section 5.12 Group Maintains Full Professional Authority......13.
ARTICLE VI TERM........................................................13.
Section 6.1 Term.............................................13.
Section 6.2 Termination and Extension........................13.
ARTICLE VII FINANCIAL AND SECURITY ARRANGEMENTS.........................15.
Section 7.1 Management Fee...................................15.
Section 7.2 Payments.........................................15.
Section 7.3 Advances.........................................15.
Section 7.4 Security Agreement...............................15.
Section 7.5 Priority of Payments.............................16.
Section 7.6 Accounts Receivable..............................16.
ARTICLE VIII INDEMNITY AND INSURANCE.....................................16.
Section 8.1 Indemnity........................................16.
Section 8.2 Manager's Insurance..............................17.
Section 8.3 Group's Insurance................................17.
ARTICLE IX BOOKS AND RECORDS...........................................18.
Section 9.1 Ownership of Records.............................18.
ARTICLE X RESTRICTIVE COVENANTS.......................................18.
Section 10.1 Covenant Regarding Proprietary Information.......18.
Section 10.2 Covenants Not to Compete During the Term.........19.
Section 10.3 Covenant Not to Solicit..........................19.
ARTICLE XI MISCELLANEOUS PROVISIONS....................................20.
Section 11.1 Assignment.......................................20.
Section 11.2 Headings.........................................20.
Section 11.3 Waiver...........................................20.
Section 11.4 Notices..........................................20.
Section 11.5 Attorneys' Fees..................................20.
Section 11.6 Successors.......................................21.
Section 11.7 Entire Agreement.................................21.
Section 11.8 Governing Law....................................21.
Section 11.9 Severability, Contract Modifications for
Prospective Legal Events.........................21.
Section 11.10 Time Is of the Essence...........................21.
Section 11.11 Authority........................................21.
Section 11.12 Counterparts.....................................21.
EXHIBITS
(ii)
<PAGE>
Addendum 1
Schedule A -- Stockholder
Schedule B -- Professional Liability Insurance Coverage
Exhibit 3.4 -- Practice Sites
Exhibit 7.1 -- Service Fee
Exhibit 7.4 -- Security Agreement
(iii)
<PAGE>
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
This Dental Group Management Agreement (this "Agreement") is dated and
effective as of January 1, 1998 ("Effective Date"), by and between Gentle Dental
Service Corporation, a Washington corporation ("Manager"), and Tse, Saiget,
Wantanabe & McClure, Inc., P.S., a Washington professional corporation
("Group").
RECITALS
--------
A. Group engages in the practice of dentistry by providing dental
services to patients of Group ("Group Patients") and to enrollees
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
between Group and Plans or between Beneficiaries and Plans.
B. Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
arrangements may include contracts ("Employment Agreements") with dentist
employees (collectively "Employee Providers") and agreements ("Provider
Subcontracts") with independent contractor dentists and non-dentist providers of
various dental care services (collectively "Subcontract Providers").
C. All activities of Group subject to this Agreement are referenced as
the "Practice." All references to "dental" care and services include general and
specialist dental services. All references to "dentists" include generalists and
specialists.
D. Manager is a dental management company that has been organized to
provide certain support services for the Practice and for other dental groups.
Manager is in the business of providing or arranging for management and
administrative services, facilities, equipment and certain personnel necessary
for the operation of the Practice and other dental groups.
E. Group desires to retain Manager on an independent contractor basis
to provide management and administrative services that are more particularly
described below, and Manager desires to provide such management services under
the terms and conditions set forth in this Agreement.
F. This Agreement supersedes that certain Support Services Agreement
dated ---------- by and between Manager and Group (the "Prior Agreement").
AGREEMENTS
----------
Now, Therefore, in consideration of the covenants and conditions
contained herein, Manager and Group agree as follows:
ARTICLE I
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
1.
<PAGE>
ARTICLE II
SCOPE OF AGREEMENT
------------------
Section 2.1 General Scope of Agreement. This Agreement shall apply to
the Practice being conducted by Group, including, without limitation, all
professional, administrative and technical services, marketing, contracting,
case management, ancillary dental services, outpatient services and dental care
facilities, equipment, supplies and items, except as otherwise specifically
provided in this Agreement. Group's Employment Agreements shall encompass
substantially all such activities of Employee Providers and shall provide that
all revenues derived from such activities (and not excluded below) shall be
included in Revenues as such term is defined in Section 2.4 hereof. Nothing in
this Agreement shall be construed to alter or in any way affect the legal,
ethical and professional relationship between and among Provider and Provider's
patients, nor shall anything contained in this Agreement abrogate any right or
obligation arising out of or applicable to the dentist-patient relationship.
Section 2.2 [Intentionally omitted.]
Section 2.3 [Intentionally omitted.]
Section 2.4 Revenues. "Revenues" shall mean all of Group's accounts
receivable (net of contractual adjustments and bad debt), and cash collections,
less applicable sales taxes and business and occupation taxes. Revenues shall
include all funds collected by, or legally due to, Group or any Affiliate of
Group, including, without limitation, the following: (a) all fee-for-service
payments for services to Group Patients or Beneficiaries; (b) all payments
established under Payor Contracts; (c) all coordination of benefits or
deductibles and third-party liability recoveries related to the Group's
services; (d) all payments, dues, fees or other compensation to Group, excluding
any consideration payable pursuant to that certain Agreement by and among
Manager, Gentle Dental of Oregon, P.C. and Tse, Saiget, Wantanabe and McClure,
Inc., P.S. of even date herewith; (e) any income, profits, dividends,
distributions or other payments from Group's investments; and (f) any interest
or other non-operating income of Group.
Section 2.5 Deposit Accounts. All cash received by Group from whatever
source shall be deposited into an account or accounts ("Accounts") in the name
of Group at a banking institution selected by Group and approved by Manager.
Group authorizes Manager to bill and collect, in Group's name, all charges and
reimbursements for Group's dental related activities and to deposit such
collections in the Accounts. Group agrees to assist and cooperate with Manager
in the billing and collection process and to immediately deliver to Manager for
deposit any monies Group may receive. Manager shall manage the cash equivalents
of Group and Manager shall be entitled (and is hereby authorized) to transfer
such cash to the account of Manager and to use such cash for purposes as Manager
deems appropriate, subject to and consistent with the terms and provisions of
this Agreement. Nothing in this Section 2.5 shall be construed to limit or
otherwise modify the requirement that Manager disburse funds in fulfillment of
the obligations of the Group and Manager under this Agreement.
ARTICLE III
OPERATION OF PRACTICE
---------------------
Section 3.1 Appointment. Subject to applicable laws and requirements
governing the practice of dentistry, Group hereby appoints Manager as its sole
and exclusive Manager for the operation of the Practice and covenants not to
enter into an agreement with any Person other than Manager to perform or assume
any of Manager's rights, duties or responsibilities as provided herein and
hereby appoints Manager as its true and lawful attorney-in-fact to negotiate and
execute on its behalf all Provided Contracts,
2.
<PAGE>
Employment Agreements and Provider Subcontracts. Manager hereby accepts
appointment as Group's attorney-in-fact and accepts full responsibility for
management of Group as more fully set forth herein.
Section 3.2 Professional Matters. Pursuant to applicable laws and
requirements governing the practice of dentistry, Group shall retain ultimate
responsibility for all activities of Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's
non-licensed status.
Section 3.3 Relationship of Parties. In the performance of its duties
and obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Group. Except as provided in this Agreement or as required
by law, Group shall neither have nor exercise any control or direction over the
methods by which Manager shall perform its obligation thereunder; nor shall
Manager have or exercise any control or direction over the methods by which
Group shall practice dentistry. It is expressly agreed by the parties that no
work, act, commission or omission of manager pursuant to the terms and
conditions of this Agreement shall be construed to make or render Manager or
Manager's employees or agents, the employees of Group. Manager and Group are not
partners or joint venturers with each other and nothing herein shall be
construed so as to make them partners or joint venturers or impose upon either
of them any liability as partners or joint venturers. Manager's responsibility
is to assure that the services covered by this Agreement shall be performed and
rendered in a competent, efficient and satisfactory manner. Both Manager and
Group will act in good faith in connection with the performance of their
respective obligations under this Agreement.
Section 3.4 Authority and Control. Strategic planning, overall
direction and control of the business and affairs of Group, and authority over
the day-to-day activities of Group shall be accomplished as follows:
a. Group. Notwithstanding anything else to the contrary contained
herein, Group shall have the sole responsibility and authority for all aspects
of the practice of the profession of dentistry and delivery of dental services
to Group Patients and Beneficiaries by Group and its Providers. Providers shall
use and occupy at the practice sites set forth on Exhibit 3.4 hereto ("Practice
Sites") the facilities provided by Manager hereunder exclusively for the
practice of dentistry ("Practice Site Facilities"). Group and Manager expressly
acknowledge that the Practice or Practices conducted at these Practice Site
Facilities shall be conducted solely by dentists and dental hygienists
associated with Group as Employee Providers or Subcontract Providers. Group
shall consult with Manager or the Joint Operations Committee, to the extent
reasonable, on all matters pertaining to or affecting the Practice and not
otherwise inconsistent with the applicable laws governing the practice of
dentistry.
b. Joint Operations Committee Authority. All other
decision-making authority over the business, affairs and operations of Group
shall be vested in a joint operations committee (the "Joint Operations
Committee"). Notwithstanding anything in this Agreement to the contrary, unless
such authority has been otherwise granted or delegated to Manager herein, or is
otherwise prohibited by applicable federal or state law, the Joint Operations
Committee shall have exclusive decision-making authority over all matters
necessary to enable Manager to consolidate Group for accounting purposes
pursuant to Financial Accounting Standards Board ("FASB") Statement No. 94 (or
any successor statement, interpretation or release), as such matters are
described and set forth in the Emerging Issues Task Force ("EITF") Issue No.
97-2 (as may be further interpreted or modified by FASB, the EITF or the
Securities and Exchange Commission) including, without limitation, scope of
services provided, patient acceptance policies and procedures, pricing of
services, negotiation and execution of contracts, establishment and approval of
operating and capital budgets, total Group compensation, establishment and
implementation of guidelines for selection, hiring and termination of dentists
and other dental professionals, and the incurrence or issuance of debt by Group
(collectively, the "Joint Operations Committee Decision Matters"). Nothing
herein shall be construed as preventing the Joint
3.
<PAGE>
Operations Committee from appointing representatives and delegating authority to
such representatives so long as the Joint Operations Committee may revoke such
appointment and delegation at any time and so long as the Joint Operations
Committee retains ultimate responsibility for the decisions of such
representatives.
Section 3.5 Joint Operations Committee. Subject to applicable laws and
requirements governing the practice of dentistry, the Joint Operations Committee
shall have authority and responsibility to provide strategic planning, overall
direction and authority over the day-to-day management and administrative
activities of the Group and shall manage the business operations of the Group as
follows:
a. Joint Operations Committee Membership. The Joint Operations
Committee shall consist of five (5) individuals (the "Committee Members"). Group
shall designate two (2) Committee Member who shall be licensed dentists (the
"Group Members") and the remaining three (3) Committee Members (the "Manager
Members") shall be appointed by Manager. The number of Committee Members may be
increased by mutual agreement of the parties. Each party shall continue to
direct the appointment of the same percentage of Committee Members as described
above. Each Committee Member shall serve at the pleasure of the party
designating such Committee Member and may be replaced, with or without cause, at
any time by such party upon the delivery of written notice thereof to the other
Committee Members. Manager, Group and their respective Committee Members shall
diligently pursue any preliminary activities that are necessary to allow the
Joint Operations Committee to take an action. Where Committee Members are
required to consult with the organization appointing such Committee Members, the
Committee shall establish and agree on a deadline for accomplishing such
consultation.
b. Ex-Officio Member. Notwithstanding the preceding, for a period
of six (6) years from the Effective Date of this Agreement, Group shall be
entitled to appoint an ex-officio member of the Joint Operations Committee (the
"Ex-Officio Member"). The Ex-Officio Member shall serve at the pleasure of Group
and may be replaced, with or without cause, at any time by Group upon the
delivery of written notice thereof to the other Committee Members. The
Ex-Officio Member shall be entitled to attend and receive notice of meetings of
the Joint Operations Committee as if the Ex-Officio Member were a Committee
Member. The Ex-Officio Member shall be entitled to vote as a Committee Member on
all matters, except for the Joint Operations Committee Decision Matters. On
those matters on which the Ex-Officio Member may vote, in the event of a tie
vote on any such matters between Group Members and the Ex-Officio Member on the
one hand, and the Manager Members on the other hand, such matter shall be
resolved by arbitration pursuant to the Federal Arbitration Act ("FAA"). The
arbitration shall be held in Portland, Oregon, and except as provided herein,
shall be conducted in accordance with the applicable rules and procedures
established by the American Arbitration Association ("AAA") then in effect
utilizing a single arbitrator. Only a practicing lawyer with experience in
health law matters may serve as an arbitrator (the "Arbitrator"). The expense of
arbitration (other than attorneys' fees) shall be shared as determined by the
Arbitrator. Each side shall pay its own attorneys' fees, unless the Arbitrator
determines, in accordance with applicable law, that attorneys' fees should be
apportioned in a different manner pursuant to express statutory authority
permitting awards of attorneys' fees. Any result reached by the Arbitrator shall
be final and binding on all parties to the arbitration, and no appeal may be
taken. The parties hereto expressly waive any right to resolve any tie votes
covered by this section through any other means.
c. Joint Operations Committee Action.
(1) Joint Action. Except as otherwise expressly set forth
above, the Joint Operations Committee shall take all actions that have been
approved by a majority of the Committee Members and both Group and Manager
hereby agree to be bound by the decision of the Joint Operations Committee.
4.
<PAGE>
(2) Consultation Forum. Consultation between Group and
Manager, if any, shall take place at a meeting of the Joint Operations
Committee, and Group and Manager hereby agree to be bound by the decision of
their Group Members or Manager Members, as the case may be.
d. Joint Operations Committee Meetings. Meetings of the Joint
Operations Committee may be held by telephone or similar communications
equipment so long as all Committee Members participating in a meeting can hear
and speak to each other. The Joint Operations Committee shall prepare and
maintain written minutes of all meetings and shall, upon request, provide a copy
of the minutes to the parties within fifteen (15) business days following each
meeting.
(1) Regular Meetings. The Joint Operations Committee shall
hold not less than four (4) regular meetings each year, at such specific times
and places as the Committee Members may determine.
(2) Special Meetings. A special meeting of the Joint
Operations Committee may be called by a majority of the Committee Members.
(3) Notice Requirement. A Committee Member calling a special
meeting must provide all other Committee Members with three (3) days' advance
written or telephonic notice. Notice must be given or sent to the Committee
Member's address or telephone number as shown on the records of the Joint
Operations Committee. Notice may be delivered directly to each Committee Member
or to a person at the Committee Member's principal place of business who
reasonably would be expected to communicate that notice promptly to the
Committee Member.
(4) Waiver of Notice Requirement.
(a) Written Waiver, Consent or Approval. Notice of a
special meeting need not be given to any Committee Member who, either before or
after the meeting, signs a waiver of notice or a written consent of the holding
of the special meeting, or an approval of the minutes of the special meeting.
Such waiver, consent or approval need not specify the purpose of the special
meeting. All such waivers, consents and approvals shall be filed with the Joint
Operations Committee records or made a part of the minutes of the special
meetings.
(b) Failure to Object. Notice of a special meeting need
not be given to any Committee Member who attends the special meeting and does
not protest before or at the commencement of the special meeting such lack of
notice.
(5) Quorum. The smallest number of Committee Members that
exceed fifty percent (50%) of all Committee Members shall constitute a quorum of
the Joint Operations Committee, provided, however, that such quorum shall
include at least one Group member and one Manager member.
(6) Proxies. The Joint Operations Committee shall provide
for the use of proxies, telephonic conference calls, written consents or other
appropriate methods by which the full participation of the Group Members and
Manager Members can be assured.
e. Limitation of Responsibility. Notwithstanding any other
provisions hereof, Committee Members shall be liable to the parties only for
actions constituting bad faith, gross negligence or breach of an express
provision of this Agreement (so long as such breach remains uncured after ten
(10) days of receiving notice of the nature of such breach). In all other
respects, Committee Members shall not be liable for negligence or mistakes of
judgment.
5.
<PAGE>
Section 3.6 Budgets. Each year during the term hereof, the Joint
Operations Committee shall approve and establish an annual capital and operating
budget ("Annual Budget") regarding all financial aspects of the Practice. The
Annual Budget shall include the following elements and other items, as
appropriate:
a. A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
b. An operating budget setting forth an estimate of revenues and
expenses for the next succeeding fiscal year, together with an explanation of
anticipated changes or modifications, if any, in the Practice's utilization,
rates, charges to patients or third party payors, salaries, costs of Providers,
non-wage cost increases, and all other similar factors expected to differ
significantly from those prevailing during the current fiscal year;
c. Other expenses of operation;
d. The amount of a reasonable reserve to satisfy possible
shortfalls from operations. The allocation of such reserve shall be made by the
Joint Operations Committee as and when necessary;
e. The total annual amount of Group Expenses for the next
succeeding fiscal year, and
f. The Management Fee, as defined below, for the next succeeding
fiscal year.
Section 3.7 Budget Process.
a. Initial Annual Budget. Not later than 45 days after the
Effective Date, the Joint Operations Committee will have prepared the initial
Annual Budget for the first fiscal year (which shall initially be the calendar
year) during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains, or, at the option of
the parties, such portion of the then current fiscal year plus the immediately
subsequent fiscal year.
b. Preliminary Budget. Not later than forty-five (45) days prior
to the end of each fiscal year during the term of this Agreement, the Manager
shall prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
c. Joint Operations Committee Approval. The Joint Operations
Committee shall review and suggest modifications to the Preliminary Budget
within ten (10) days of receipt. Manager shall prepare a revised budget based
upon the Joint Operations Committee's recommendations and the Preliminary Budget
as revised shall become the Annual Budget.
d. Adjustments. In the event of a material deviation between
financial forecasts and financial performance during a fiscal year, Manager or
Group may propose adjustments to the Annual budget which adjustments shall be
approved or disapproved by the Joint Operations Committee pursuant to the
procedures set forth above.
3.8 Personnel.
6.
<PAGE>
a. Providers. Except in unusual circumstances approved by the
Joint Operations Committee, and as permitted by law, Manager shall not employ or
contract with any Provider for the provision of dental services. All Providers
who provide dental services to Group Patients or to Beneficiaries shall be
either (1) Employee Providers, (2) Subcontract Providers, or (3) employees of
Subcontract Providers. Subject to guidelines established by the Joint Operations
Committee, Group shall have complete control of and responsibility for the
hiring, engagement, compensation, training, scheduling, supervision, evaluation,
and termination of all Employee Providers and Subcontract Providers, although
Manager shall consult with Group respecting such matters and shall coordinate
the advertising of positions available, interviewing of candidates, and
scheduling of clinical staff meetings and training sessions.
b. Non-Providers. With the exception of employees of Subcontract
Providers, Manager shall employ all non-Provider personnel reasonably necessary
for the operation of the Practice.
c. Salary and Benefits. Subject to Manager's responsibilities
under Article VII, each party to this Agreement shall remain liable for the
salary and benefits paid to such party's own employees and shall be ultimately
responsible for compliance with state and federal laws pertaining to workers'
compensation, unemployment compensation and other employment-related statutes
pertaining to the party's own employees.
d. Payments to Subcontract Providers. Subject to Manager's
responsibilities under Article VII, Group shall be liable for any payments due
Subcontract Providers under Provider Subcontracts.
ARTICLE IV
MANAGEMENT SERVICES
-------------------
Section 4.1 General Description of Services. Except as prohibited by
law and within the limitations set out elsewhere in this Agreement, Manager
shall provide or arrange for the provision to Group of all management,
administrative and support services reasonably necessary and appropriate for the
efficient operation of the Practice. Such services include all administrative
services necessary to Group's performance of its obligations under Payor
Contracts, contracting, marketing, capital formation and assistance with long
term strategic planning. Manager shall exercise reasonable commercial efforts to
fulfill the administrative functions of a well managed dental group.
Section 4.2 Practice Site Facilities. When appropriate, Manager shall
secure and maintain Practice Site Facilities, including, without limitation,
office space, improvements, furnishings, equipment, supplies, and personal
property, of a nature and in a condition necessary and appropriate for the
efficient and effective operations of the Practice subject to the general
approval of the Joint Operations Committee. Group hereby accepts and approves of
the Practice Site Facilities initially provided by Manager. However, Manager
from time to time shall make such Practice Site Facilities changes, including
but not limited to dental equipment purchases, as reasonably may be requested by
Group and consistent with the Annual Budget.
Section 4.3 Purchased Items and Services. Manager shall serve as the
purchasing agent for Group and shall arrange for personnel benefits, insurance,
and any other items and services required for the proper operation of the
Practice.
Section 4.4 Manager Personnel.
7.
<PAGE>
a. Management Team. Subject to the approval and continuing
supervision of the Joint Operations Committee, Manager may engage or designate
one or more individuals experienced in dental group management and direction,
including, but not limited to, an administrator, who will be responsible for the
overall administration of the Practice including day-to-day operations and
strategic development activities in accordance with this Agreement.
b. Other Manager Personnel. Manager shall select, hire, train,
supervise, monitor and terminate all non-Provider personnel necessary for the
operation and management of the Practice; provided, however, with respect to the
selection, hiring and termination of non-Provider clinical staff, Manager shall
obtain the consent of the Group, which consent will not be unreasonably
withheld.
Section 4.5 Day-to-Day Management and Supervision. Subject to any
approval or consulting rights of the Joint Operations Committee, Manager shall
provide general management including, but not limited to, day-to-day supervision
of:
a. manager personnel;
b. equipment and supply acquisition;
c. office space and facility maintenance;
d. patient records organization and retention;
e. third party payor contracting;
f. case management;
g. billing, collections and accounting activities as set forth
below;
h. all operating aspects and policies of the Practice including,
but not limited to, hours of operation, work schedules, standard duties and job
descriptions, for all non-Group personnel; and
i. other related and incidental matters.
Section 4.6 Billing and Collection Payment of Expenses. In addition to
the responsibilities of Manager under Article VII, Manager shall be responsible
for all billing and collection activities required by Group. Manager shall also
be responsible for reviewing and paying accounts payable of Group. Group hereby
appoints the Manager its true and lawful attorney-in-fact to take the following
actions for and on behalf of and in the name of Group:
a. bill and collect in Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Group. Group shall give
Manager all necessary access to Patient records to accomplish all billing and
collection. In so doing, Manager will use its best efforts but does not
guarantee any specific level of collections, and Manager will comply with
Group's reasonable and lawful policies regarding courtesy discounts;
b. take possession of and endorse in the name of the Group any
and all instruments received as payment of accounts receivable;
c. deposit all such collections directly into the Accounts and
make withdrawals from such Accounts in accordance with this Agreement; and
8.
<PAGE>
d. place accounts for collection, settle and compromise claims,
and institute legal action for the recovery of accounts.
Section 4.7 Bookkeeping and Accounting. Manager shall provide
bookkeeping services, financial reports, and shall implement and manage a
computerized management information system appropriate for the Practice.
a. Financial Reporting. Manager shall prepare, analyze and
deliver to the Joint Operations Committee financial reports to the extent
necessary or appropriate for the operation of the Practice, including the
following:
(1) financial statements, including balance sheets and
statements of cash flow and income;
(2) accounts payable and accounts receivable analysis;
(3) billing status including any medicaid remittances; and
(4) reconciliation of assets, liabilities and major
expenses.
b. Audits. Group shall have the right to review, inspect and/or
copy and, at its sole cost and expense (which cost and expense shall be an
Excluded Expense), obtain an audit of (separate from any annual audit or review
of Group's financial statements performed at the direction of the Manager)
Group's financial books and records maintained by the Manager. Upon five (5)
days' prior written notice, Manager shall allow Group access during reasonable
business hours to all information and documents reasonably required for such
review, inspection and/or audit. Upon Group's request and at Group's sole cost
and expense (which cost and expense shall be an Excluded Expense), Manager shall
also provide copies of such documents.
Section 4.8 Marketing and Public Relations Services. Subject to any
limitation of law, regulation or ethical standards pertaining to the practice of
dentistry and following consultation with Group, Manager shall provide such
marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Group. Manager
shall provide Group with copies of all marketing materials.
Section 4.9 Group Agreements. On behalf of Group, as its
attorney-in-fact, and subject to applicable state and federal law and the
continuing supervision of the Joint Operations Committee, Manager shall review,
evaluate, negotiate and enter into on Group's behalf, Payor Contracts,
Employment Agreements and Provider Subcontracts and any other contracts or
agreements regarding the provision of dental related items or services by Group
or Providers.
Section 4.10 Utilization Review Quality Improvement and Outcomes
Monitoring. Manager shall be responsible for providing administrative support
for Group's utilization review, quality improvement and outcomes monitoring
activities, including, without limitation, data collection, analysis and
reporting for Group Patients and Beneficiaries. Manager shall also support the
development and implementation of relevant policies, procedures, protocols,
practice guidelines and other interventions based on such activities.
Section 4.11 Patient Referrals. The parties agree that the benefits to
Group hereunder do not require, are not payment for, and are not in any way
contingent upon the admission, referral or any other arrangements for the
provision of any item or service offered by Manager or any affiliate of Manager
to any
9.
<PAGE>
of Group's Patients in any facility or laboratory controlled, managed or
operated by Manager or any affiliate of Manager.
Section 4.12 Applicable Law. Manager and Group shall comply with all
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE V
GROUP RESPONSIBILITIES
----------------------
Section 5.1 Diagnosis, Treatment Planning, Specific Patient Education
and Consultation. Group shall have sole responsibility for all professional
dental services provided to Patients with regard to the diagnosis of the
patient's condition and the development of treatment plan alternatives,
including, without limitation, the following:
a. Diagnosis. Group shall have sole responsibility for all
medical and dental history evaluation, examination, obtaining clinical records,
and diagnostic procedures appropriate for complete diagnosis.
b. Treatment Planning. Group shall have sole responsibility for
all determination of treatment alternatives that may be professionally
acceptable for the treatment of the patient's condition.
c. Specific Patient Education. Group shall have sole
responsibility for all discussion, recommendation, demonstration, and other
educational modalities intended to address the patient's specific condition, as
differentiated from general patient education intended to address the common
concerns of all patients presenting with similar conditions.
d. Consultation. Group shall have sole responsibility for all
discussion of clinical advantages, disadvantages, complications, and risks of
each alternative treatment plan, and including the likely results of no
treatment.
e. Manager to Assist with Record Procurement. Notwithstanding the
above, Manager shall be responsible for exercising reasonable efforts to
procure, at its own expense, medical and dental history information, previous
clinical records, and X-ray records prior to presentation of the patient for
treatment by Group, in accordance with protocols developed by Group in
consultation with Manager.
Section 5.2 Dental Services. Group shall have sole responsibility for
all professional dental services provided to Patients with regard to the
treatment of the patient's condition, including, without limitation, the
following:
a. Preventive Care. Group shall have sole responsibility for all
preventive care intended to delay, or intercept the development of pathologic
conditions.
b. Therapeutic Care. Group shall have sole responsibility for all
therapeutic care intended to ameliorate, or improve existing pathologic
conditions.
10.
<PAGE>
c. Referral to Specialists. Group shall have sole responsibility
for all referral to appropriate dental specialists and other allied health care
professionals in accordance with professional dental standards of care.
d. Continuing Care. Group shall have sole responsibility for all
development and execution of continuing care protocols intended to maintain the
patient's condition over the course of time.
e. Manager to Assist with Patient Compliance Tracking.
Notwithstanding the above, Manager shall be responsible for exercising
reasonable efforts to facilitate, coordinate, and document the scheduling,
tracking, and confirmation of Group's recommendations for dental diagnostic and
therapeutic services, treatments, referrals, and continuing care in accordance
with protocols developed by Group in consultation with Manager.
Section 5.3 Provision of Dental Services by Group. Group shall operate
the Practice during the Term as a dental practice in accordance with the terms
of this Agreement and shall use its best efforts to operate and conduct the
Practice in accordance with the Annual Budget. However, nothing in this
Agreement shall be construed to affect or limit in any way the professional
discretion or duty of Group insofar as such constitutes the practice of
dentistry.
Section 5.4 Providers.
a. Professional Dental Services. Subject to guidelines
established by the Joint Operations Committee, Group shall use their best
efforts to employ or contract with the number of Providers necessary for the
efficient and effective operation of the Practice and in accordance with the
Annual Budget and quality assurance, credentialing and utilization management
protocols approved by the Joint Operations Committee. Group shall provide full
and prompt dental coverage for the Practice, including emergency service
twenty-four hours per day, seven days per week, including holidays, according to
policies and schedules approved by the Joint Operations Committee.
b. Provider Subcontracts and Employment Agreements. Group shall
not negotiate or execute any Provider Subcontract, Employment Agreement, or any
amendment thereto, or terminate any Provider Subcontract or Employment Agreement
without the approval of the Joint Operations Committee. Subject to Manager's
responsibilities under Article VII, Group shall be responsible for the payment
of compensation, in accordance with the Annual Budget, of all Employee Providers
and Subcontract Providers.
Section 5.5 Peer Review. Group, after consultation with the Joint
Operations Committee, shall implement, regularly review, modify as necessary or
appropriate and obtain the commitment of Providers to actively participate in
peer review procedures for Providers. Group shall assist Manager in the
production of periodic reports describing the results of such procedures. Group
shall provide Manager with prompt notice of any information that raises a
reasonable risk to the health and safety of Group Patients or Beneficiaries. In
any event, after consultation with the Joint Operations Committee, Group shall
take such action as may be reasonably warranted under the facts and
circumstances.
Section 5.6 Fees, Charges and Payor Agreements. The Joint Operations
Committee shall, after consultation with Group, determine the fees, charges,
premiums, or other amounts due in connection with delivery of dental services to
Patients. Such fees, charges, premiums, or other amounts (regardless of whether
determined on a fee-for-service, capitated, prepaid, or other basis) shall be
reasonable and consistent with the fees, charges, premiums, and other amounts
due to dental care providers for similar
11.
<PAGE>
services within the community under similar types of reimbursement programs
involved if such programs are currently offered within the community.
Section 5.7 Hours of Clinical Operation. After consultation with
Group, the Joint Operations Committee shall establish hours of operation that
are consistent with good dental practice, and are appropriate to the need to
timely deliver professional dental care services to Group Patients.
Section 5.8 Billing Information and Assignments. Group shall promptly
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Group's
services. Group shall use reasonable efforts to procure consents to assignments
and other approvals and documents necessary to enable Manager to obtain payment
or reimbursement from third party payors and patients. With the assistance of
Manager, Group shall obtain all provider numbers necessary to obtain payment or
reimbursement for its services.
Section 5.9 Third Party Contracts. Group shall be in compliance with
all contracts, agreements and arrangements, including any contracts that exist
on the Effective Date, between Group and third parties.
Section 5.10 Use of Manager's Goods and Services. Group shall not use
any goods or services provided by Manager pursuant to this Agreement for any
purpose other than the provision of and management of dental services as
contemplated by this Agreement and purposes incidental thereto.
Section 5.11 Negative Covenants. During the Term, Group shall not,
without the prior approval of the Joint Operations Committee, either in a single
or series of related transactions (a) pledge, mortgage or otherwise encumber any
of its property, (b) sell, assign, transfer or convey all or substantially all
of its assets, including its goodwill, (c) merge or consolidate with any other
entity, (d) allow the transfer or issuance of any of its stock (other than in
accordance with the terms and provisions of that certain Shares Acquisition
Agreement dated of even date herewith between Manager and the Persons set forth
on Schedule A hereto), or (e) take or allow any act that would materially impair
the ability of Group to carry on the business of the Practice or to fulfill its
obligations under this Agreement. Notwithstanding the preceding, prior to
consummating with any third party, any transfer, sale, assignment or conveyance
or any merger or consolidation contemplated in subparagraphs (a), (b) or (c)
above, Group shall first offer (the "Offer") to Manager or its designee the
right to acquire the assets of Group or to effect a merger or consolidation with
Group upon substantially the same business and economic terms as proposed to
Group by such third party. Manager or its designee shall have 60 days to elect
to accept or reject such Offer, which election shall be binding on the parties.
Section 5.12 Group Maintains Full Professional Authority.
Notwithstanding Manager's general and specific rights and responsibilities set
forth in this Agreement, Group shall have full authority and control with
respect to all dental, professional and ethical determinations over Group's
Practice to the extent required by federal, state and local laws, rules and
regulation. Manager shall not engage in activities which constitute the practice
of dentistry as prohibited under applicable law. Manager shall neither exercise
control over nor interfere with the dentist-patient relationship, which shall be
maintained strictly between Group's Providers and their Patients.
ARTICLE VI
TERM
----
Section 6.1 Term. This Agreement shall be effective the Effective
Date, and shall remain in effect for an initial term of forty (40) years from
the Effective Date, expiring on the fortieth (40th)
12.
<PAGE>
anniversary of the Effective Date, unless earlier terminated pursuant to the
terms of this Agreement. The word "Term" shall include such initial term and,
where applicable, any extension of such initial term (whether extended pursuant
to Section 6.2a or otherwise), subject to earlier termination pursuant to the
provisions of this Agreement.
Section 6.2 Termination and Extension.
a. Automatic Extension. At the end of the initial term and any
subsequent term, this Agreement shall automatically renew for a five (5) year
term unless one of the parties provides the other party with written notice of
intent not to renew, not less than one hundred eighty (180) days prior to the
expiration of the then current term.
b. Early Termination. This Agreement may be terminated according
to the provisions of this Section.
(1) Material Breach. In the event either party materially
breaches this Agreement and such breach is not cured to the reasonable
satisfaction of the non-breaching party within thirty (30) days after the
non-breaching party serves written notice of the default upon the defaulting
party (the "Default Notice"), the Agreement shall automatically terminate at the
election of the non-breaching party upon the giving of a written notice of
termination to the defaulting party not later than fifteen (15) days after
expiration of the 30-day cure period; provided that if such uncured breach is
only capable of being cured within a reasonable period of time in excess of
thirty (30) days, the non-breaching party shall not be entitled to terminate
this Agreement so long as the defaulting party has commenced such cure and
thereafter diligently pursues such cure to completion.
(2) Refusal to Comply. In the event that Group or Manager
refuses or fails to comply with a decision of the Joint Operations Committee,
the aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if such dispute between Group and Manager continues for sixty
(60) days after the date the aggrieved party exercises its option regarding
mediation, the non-complying party shall have thirty (30) days in which to
comply with the decision of the Joint Operations Committee. If the non-complying
party has not complied by the end of such thirty (30) day period, the aggrieved
party shall have the option to terminate this Agreement upon fifteen (15) days'
prior written notice. During such mediation, Manager and Group shall continue to
operate and manage the practice in good faith.
(3) Bankruptcy. A party may, upon three (3) days' prior
written notice, terminate this Agreement if the other party:
(a) Applies for or consents to the appointment of a
receiver, trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary petition,
makes a general assignment for the benefit of its creditors, files a petition or
answer seeking reorganization or arrangement with its creditors, or admits in
writing its inability to pay its debts when due, or
(b) Suffers any order, judgment or decree to be entered
by any court of competent jurisdiction, adjudicating such party bankrupt or
approving a petition seeking its reorganization or the appointment of a
receiver, trustee or liquidator of such party or of all or a substantial part of
its assets, and such order, judgment or decree continues unstayed and in effect
for ninety (90) days after its entry.
13.
<PAGE>
(4) Nonperformance. Manager may terminate this Agreement in
the event that in any two consecutive fiscal quarters the Manager has not been
paid all of the Reimbursable Expense Portion and at least three-quarters (3/4)
of the Percentage Fee Portion of the Management Fee and, in the sole discretion
of the Manager, it is not reasonably likely that such amounts of the Management
Fee will be paid in the next fiscal quarter. Any such termination shall be
effective as of the last day of such third fiscal quarter provided at least 60
days notice shall have been given; otherwise, such termination shall be
effective on the sixtieth day after notice is given.
(5) Change in Law. In the event of any material change in
federal or state law that has a significant adverse impact on either party
hereto in connection with their performance under this Agreement, or if
performance by a party of any duties under this Agreement be deemed illegal by
any administrative agency or in a formal opinion rendered to Manager by legal
counsel knowledgeable in health law matter retained by the Manager, the affected
party shall have the right to require that the other party renegotiate the terms
of this Agreement. Solely in the event of illegality, if the parties fail to
reach an agreement within thirty (30) days of the request for renegotiation,
either party may (subject to the severability provision of this Agreement)
terminate this Agreement upon thirty (30) days' prior written notice to the
other party.
c. Effect of Termination. Upon termination of this Agreement:
(1) Group shall surrender to Manager all of Manager's
property used primarily in the operation of the Practice in the same condition
as received, reasonable wear and tear excepted.
(2) Manager shall deliver to Group all records related to
the business of and provision of dental care through the Practice including,
without limitation, patient records and any corporate, personnel and financial
records maintained for the Practice and Providers, provided, that except as
limited by law, including, but not limited to laws governing the confidentiality
of patient records, Manager shall have the option to copy (or otherwise
duplicate) at its sole cost and expense such records of Group and to retain and
utilize such records for its own use;
(3) Manager shall deliver to Group any other property of
Group in Manager's possession;
(4) Both parties shall cooperate to ensure the provision of
appropriate dental care to Group Patients and Beneficiaries;
(5) Group shall promptly deliver to Manager any Management
Fees due and payable to Manager (such fees prorated for the month of
termination) and any amounts owed to Manager for advances made pursuant to
Section 7.3; and
(6) Both parties shall cooperate to ensure the appropriate
billing and collections for dental services rendered by Group prior to the
effective date of termination, and any such cash collected shall be retained by
Group and/or paid to Manager pursuant to Article VII.
ARTICLE VII
FINANCIAL AND SECURITY ARRANGEMENTS
-----------------------------------
Section 7.1 Management Fee. Group and Manager agree that the
compensation set forth in this Article VII is being paid to Manager in
consideration of the services provided and the substantial
14.
<PAGE>
commitment and effort made by Manager hereunder and that such fees have been
negotiated at arms' length and are fair, reasonable and consistent with fair
market value. Manager shall be paid the management fee (the "Management Fee") as
set forth on Exhibit 7.1 hereto. Payment of the Management Fee is not intended
to and shall not be interpreted or implied as permitting Manager to share in
Group's fees for medical services but is acknowledged as the negotiated fair
market value compensation to Manager considering the scope of services and the
business risks assumed by Manager.
Section 7.2 Payments. Except as otherwise set forth on Exhibit 7.1
hereto, the amounts to be paid to Manager under this Article VII shall be
calculated by Manager on the accrual basis of accounting and shall be payable
monthly. Payments due for any Management Fee shall be made by Group each
calendar month as provided herein and shall be paid on the 15th day following
the end of such month (or the first preceding day that is a business day if the
15th day is not a business day) (a "Payment Date"). Such amounts paid shall be
estimates based upon available information for such month, and adjustments to
the estimated payments shall be made to reconcile final amounts due under
Section 7.1 on the next Payment Date and shall be paid in such priority as set
forth in Section 7.5 hereof.
Section 7.3 Advances. Group shall be entitled to an advance from
Manager of such additional sums, over and above Group's right to the amounts
otherwise set forth in this Article VII, as shall be required by Group to pay
Practice Expenses and Group Expenses consistent with the Annual Budget of the
Practice (prepared as provided in Section 3.6 hereof) and the Management Fee as
provided in Exhibit 7.1 hereto. Additional amounts may be advanced to Group upon
Group's request and at the sole discretion of Manager. Any amounts advanced to
Group pursuant to this Section 7.3 shall be repaid by Group in such priority as
set forth in Section 7.5 below and shall bear interest at a rate equal to one
percent (1%) above the prime rate reported by the Wall Street Journal as
adjusted on a quarterly basis, compounded monthly until all such amounts of
principal and interest are repaid to Manager as provided herein.
Section 7.4 Security Agreement. In order to enforce its rights granted
hereunder and subject to applicable law, Group shall execute a Security
Agreement in substantially the form attached hereto as Exhibit 7.4 (the
"Security Agreement"), which Security Agreement grants a security interest in
all of Group's assets and accounts receivable (as more fully described in the
Security Agreement) to Manager. In addition, Group shall cooperate with Manager
and execute all documents requested by Manager or its lenders to enable Manager
to perfect its security interest provided by the Security Agreement.
Section 7.5 Priority of Payments. Manager shall administer and make
disbursements from amounts deposited into the Accounts or transferred from the
Accounts to pay (including, without limitation the making of advances as
provided in Section 7.3) the Practice Expenses and Group Expenses as the same
become due and payable, and for which Group shall remain responsible. In
performing its obligations pursuant to Article IV, Manager shall apply funds of
Group in the following order of priority:
a. payment of all Group Expenses;
b. payment of all Practice Expenses;
c. payment of the Management Fee;
d. payment of amounts advanced to Group, and applicable interest
thereon (as contemplated in Section 7.3); and
e. payment of Excluded Expenses.
15.
<PAGE>
Any amounts which remain following the payment of the expenses and fees set
forth in subparagraphs (a) through (e) above shall be retained in the Accounts
and applied as contemplated in the Annual Budget(s).
Section 7.6 Accounts Receivable. At the option of Manager, on the
first business day of each month, Manager may purchase all or any portion of the
accounts receivable of Group relating to Revenues arising during the previous
month, by payment of cash or other readily available funds into an account for
Group or by offset of amounts owed by Group to Manager. The consideration for
the purchase shall be an amount equal to all fees recorded each month (net of
adjustments for uncollectible accounts, professional courtesies and other such
activities that do not generate a collectible fee) less Management Fees due to
Manager under this Article VII. Manager's purchase shall be effective upon full
payment of the purchase price. In the event that such purchase shall be
ineffective for any reason, Group is concurrently herewith entering into the
Security Agreement to grant a security interest in the accounts receivable to
Manager. In addition, Group shall cooperate with Manager and execute all
necessary documents in connection with the pledge of such accounts receivable to
Manager or at Manager's option, its lenders. All collections in respect of such
accounts receivable shall be deposited in a bank account at a bank selected by
mutual agreement of Group and Manager. To the extent Group comes into possession
of any payments in respect of such accounts receivable, Group shall direct such
payments to Manager for deposit.
ARTICLE VIII
INDEMNITY AND INSURANCE
-----------------------
Section 8.1 Indemnity.
a. Indemnification. Each party shall indemnify, defend and hold
harmless the other party from any and all liability, loss, claim, lawsuit,
injury, cost, damage or expense whatsoever (including reasonable attorneys' fees
and court costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Group agrees
to indemnify, defend and hold harmless Manager for all liability, loss, claim,
lawsuit, injury, cost, damage or expense whatsoever (including reasonably
attorneys' fees and court costs) arising out of the professional negligence of
Group, its employees, agents, contractors or subcontractors, including any
amounts in excess of the professional liability insurance coverage of Group or
its employees, agents, contractors or subcontractors.
b. Mutual Indemnity. Each party to this Agreement shall be
indemnified by the other party for any claim under this Agreement or otherwise
against the indemnified party for vacation pay, sick leave, retirement benefits,
Social Security benefits, workers' compensation benefits, disability or
unemployment, insurance benefits, or other employee benefits of any kind accrued
during the term of this Agreement by an employee of the indemnifying party.
Section 8.2 Manager's Insurance. Manager shall, on its own behalf and
at its sole cost and expense, procure and maintain in force during the term of
this Agreement policies in the following categories in the amount indicated:
a. Comprehensive general liability insurance covering the risks
of Manager, in an amount determined by the Joint Operations Committee;
16.
<PAGE>
b. Workers' Compensation insurance covering the employees of
Manager, in such amounts as is usual and customary under the circumstances;
c. Property insurance covering the facilities, equipment and
supplies owned or leased by Manager or Group for use in the operation of the
Practice.
Section 8.3 Group's Insurance. Manager shall obtain, and maintain on
behalf of Group in full force and effect during the Term, policies in the
following categories in the amount indicated:
a. Comprehensive professional liability insurance coverage for
Group and Group's Employee Providers in such amounts as are usual and customary
for similar dental practices within the same area and as approved by the Joint
Operations Committee, which approval shall not be unreasonably withheld (the
cost and expense of which shall be a Group Expense);
b. Workers' Compensation insurance covering the employees of
Group, in such amounts as is usual and customary under the circumstances (the
cost and expense of which shall be a Practice Expense); and
c. Comprehensive general liability insurance covering the risks
of Group, in an amount determined by the Joint Operations Committee (the cost
and expense of which shall be a Practice Expense).
ARTICLE IX
BOOKS AND RECORDS
-----------------
Section 9.1 Ownership of Records. All business records and information
relating exclusively to the business and activities of either party shall be the
property of that party, irrespective of identity of the party responsible for
producing or maintaining such records and information. Without limiting the
foregoing, all patient charts and records maintained by Manager relating to the
dental services of Group shall be the property of Group. Group also shall be
entitled to a copy at Group's sole cost of all business records pertaining to
Group. Except as limited by law, including, but not limited to laws governing
the confidentiality of patient records, Manager shall be entitled to a copy at
Manager's sole cost of all records of Group.
ARTICLE X
RESTRICTIVE COVENANTS
---------------------
Section 10.1 Covenant Regarding Proprietary Information. In the course
of the relationship created pursuant to this Agreement, Group will have access
to certain methods, trade secrets, processes, ideas, systems, procedures,
inventions, discoveries, concepts, software in various stages of development,
designs, drawings, specifications, models, data, documents, diagrams, flow
charts, research, economic and financial analysis, developments, procedures,
know-how, policy manuals, form contracts, marketing and other techniques, plans,
materials, forms, copyrightable materials and trade information (all of which is
referred to in this Agreement as "Proprietary Information") regarding the
operations of Manager and/or of its Affiliates (collectively, the "Protected
Parties"). Group shall maintain all such Proprietary Information in strict
secrecy and shall neither use for itself or any third parties nor divulge such
information to any third parties, except as may be necessary for the discharge
of their obligations under this Agreement or otherwise consented to in writing
by Manager. Group shall take all necessary and proper precautions against
disclosure of any Proprietary Information to unauthorized persons by any of its
employees or agents. Group and all employees, and agents of Group who will have
access to all or any part of the Proprietary
17.
<PAGE>
Information may be required to execute an agreement, at the request of Manager,
valid under the law of the jurisdiction in which such agreement is executed, and
in a form acceptable to Manager and its counsel, committing themselves to
maintain the Proprietary Information in strict confidence and not to disclose it
to any unauthorized person or entity. The Protected Parties not party to this
Agreement are hereby specifically made third party beneficiaries of this
Section, with the power to enforce the provisions hereof. Upon termination of
this Agreement for any reason, Group and each of its Employee Providers and
Subcontract Providers shall cease all use of any of the Proprietary Information
and, at the request of Manager, shall execute such documents as may be necessary
to evidence Group's abandonment of any claim thereto. The parties recognize that
a breach of this Section cannot be adequately compensated in money damages and
therefore agree that injunctive relief shall be available to the Protected
Parties as their respective interests may appear.
The obligations of Group under this Section 10.1 shall not apply to
information: (i) which is a matter of public knowledge on or becomes a matter of
public knowledge after the Effective Date of this Agreement, other than as a
breach of the confidentiality terms of this Agreement or as a breach of the
confidentiality terms of any other agreement between a third party and Group,
Manager and/or its Affiliates; or (ii) which was lawfully obtained by Group on a
nonconfidential basis other than in the course of performance under this
Agreement and from some Person other than Manager or its Affiliates or from some
person other than one employed or engaged by Manager or its Affiliates, which
Person has no obligation of confidentiality to Manager or its Affiliates.
Section 10.2 Covenants Not to Compete During the Term. The parties
recognize that the services to be provided by Manager shall be feasible only if
Group operates an active dental practice to which Group and its Providers devote
their full time and attention. To that end:
a. Restrictive Covenants by Group. During the term of this
Agreement and except as otherwise agreed to in writing by Manager, Group shall
not (i) establish, operate or provide dental care services at any dental office,
clinic or other facility providing services substantially similar to those
provided by Group pursuant to this Agreement anywhere other than at the Practice
Sites or as may be approved in writing by Manager; (ii) enter into any
management or administrative services agreement or other similar arrangement
with any person or entity other than Manager without Manager's prior written
approval and (iii) operate or, directly or indirectly, hold or own any type of
ownership or other form of equity interest in, or serve as a consultant to or
otherwise perform services for any person or entity engaged in the business of
providing management and administrative services to dental practices.
b. Restrictive Covenants by Providers. Group shall use its best
efforts to obtain and enforce formal agreements with its Employee Providers and
Subcontract Providers who are dentists not to establish, operate or provide
dental care services, during the term of this Agreement and for a period of two
(2) years after any termination of employment with Group (except a termination
of such employment (i) based upon a material breach by Manager which shall
remain uncured for a period of sixty (60) days after receipt of notice in
accordance with Section 11.4 hereof, (ii) by reason of nonpayment of a material
amount owed by Manager to or to be paid by Manager on behalf of Group, or (iii)
by Group without cause), at any dental office, clinic or facility located within
5 miles of any Practice Site at which the Employee Provider or Subcontract
Provider has practiced. Any variation of such restrictive covenants shall be
approved in advance in writing by Manager.
Section 10.3 Covenant Not to Solicit. For three (3) years following
the termination of this Agreement, except for a valid termination by Group
pursuant to Section 6.2(b), Group shall not:
18.
<PAGE>
a. directly or indirectly solicit, recruit or hire, or induce any
party to solicit, recruit or hire any person who is an employee of, or who has
entered into an independent contractor arrangement with, Manager or any
Affiliate of Manager;
b. directly or indirectly, whether for itself or for any other
person or entity, call upon, solicit, divert or take away, or attempt to
solicit, call upon, divert or take away any of Manager's customers, business, or
clients; or
c. directly or indirectly solicit, or induce any party to
solicit, any of Manager's contractors or the contractors of any Affiliate of
Manager, to enter into the same or a similar type of contract with any other
party.
10.4 Enforcement. Manager and Group acknowledge and agree that since a
remedy at law for any breach or attempted breach of the provisions of this
Article X shall be inadequate, either party shall be entitled to specific
performance and injunctive or other equitable relief in case of any such breach
or attempted breach, in addition to whatever other remedies may exist by law.
All parties hereto also waive any requirement for the securing or posting of any
bond in connection with the obtaining of any such injunctive or other equitable
relief.
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
Section 11.1 Assignment. Neither party shall assign this Agreement to
any other party or parties without the prior written consent of the other party,
which consent may be withheld arbitrarily or capriciously, for any reason or for
no reason whatsoever and any attempted assignment in violation of this Agreement
shall be null and void. Notwithstanding the preceding, Manager may assign this
Agreement to any Affiliate of either Manager or Parent or to a financial
institution as collateral security for the indebtedness of Manager, Parent or
any of their respective Affiliates. Group hereby agrees that (a) upon notice of
any default or event of default from any financial institution (or its agent, as
applicable) to which this Agreement has been assigned as collateral security for
such indebtedness, Group will make all payments required to be made under this
Agreement to such financial institution (or its agent, as applicable) and such
financial institution (or its agent, as applicable) shall be entitled to
exercise any and all rights and remedies of Manager under this Agreement, and
(b) Group will not, without the prior written consent of such financial
institution (or its agent, as applicable), terminate (except pursuant to the
terms hereof) or amend or otherwise modify this Agreement.
Section 11.2 Headings. The article and section headings used in this
Agreement are for purposes of convenience only. They shall not be construed to
limit or to extend the meaning of any part of this Agreement.
Section 11.3 Waiver. Waiver by either Group or Manager of any breach
of any provision of this Agreement shall not be deemed to be a waiver of such
provision or of any subsequent breach of the same or of any other provision of
this Agreement.
Section 11.4 Notices. Any notice, demand, approval, consent or other
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be shall be deemed to have been given when five (5) business
days have elapsed from the date of deposit in the United States mails, certified
and postage prepaid, addressed to the party to be served at the following
address or such other address as may be given in writing to the parties.
19.
<PAGE>
Group:
With a copy to: Kennedy & Kennedy LLP
Attorneys at Law
Pioneer Tower Suite 1170
888 S.W. Fifth Avenue
Portland, Oregon 97204-2098
Attn: James M. Kennedy, Esq.
Manager: Gentle Dental Service Corporation
22800 Savi Ranch Parkway, Suite 206
Yorba Linda, California 92887
Attn: Michael T. Fiore, President and
Chief Executive Officer
With a copy to: McDermott, Will & Emery
1301 Dove Street, Suite 500
Newport Beach, California 92660
Attn: Richard J. Babcock
Section 11.5 Attorneys' Fees. If any legal action or arbitration or
other proceeding is commenced, whether by Manager or Group concerning this
Agreement, the prevailing party shall recover form the losing party reasonable
attorneys' fees and costs and expenses, including those of appeal and not
limited to taxable costs, incurred by the prevailing party, in addition to all
other remedies to which the prevailing party may be entitled.
Section 11.6 Successors. Without limiting or otherwise affecting any
restrictions on assignments of this Agreement or rights or duties under this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
successor and assigns of Group and Manager.
Section 11.7 Entire Agreement. This Agreement and that certain
Agreement by and among Manager, Gentle Dental of Oregon, P.C. and Tse, Saiget,
Wantanabe and McClure, Inc., P.S., of even date hereof set forth the entire
agreement between Group and Manager and supersedes all prior negotiation and
agreements (including, without limitation, the Prior Agreement), written or
oral, concerning or relating to the subject matter of this Agreement, and this
Agreement may not be modified except by a writing executed by all parties and
subject to the provisions thereof.
Section 11.8 Governing Law. This Agreement and the rights and
obligations of the parties hereto shall be governed by, and construed according
to, the laws of the State of California.
Section 11.9 Severability, Contract Modifications for Prospective
Legal Events. Nothing contained in this Agreement shall be construed to require
the commission of an act contrary to law, and whenever there is any conflict
between any provision of this Agreement and any statute, law, ordinance or
regulation, the latter shall prevail. In such event, and in any case in which
any provision of this Agreement is determined to be in violation of a statute,
law, ordinance or regulation, the affected provision(s) shall be limited only to
the extent necessary to bring it within the requirements of the law and, insofar
as possible under the circumstances, to carry out the purposes of this
Agreement. The other provisions of this Agreement shall remain in full force and
effect, and the invalidity or unenforceability of any provision hereof shall not
20.
<PAGE>
affect the validity and enforceability of the other provisions of this
Agreement, nor the availability of all remedies in law or equity to the parties
with respect to such other provisions.
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision, a regulatory agency or legal counsel of both
parties in such a manner as to indicate that the substantive structure of this
Agreement may be in violation of such laws or regulations, Group and Manager
shall proceed in good faith to amend this Agreement, to the maximum extent
possible, to preserve the underlying economic, financial and composition of
Joint Operations Committee arrangements between Group and Manager. A party to
this Agreement may choose to, but shall not be required to, take any action or
to make any amendment to this Agreement if such action or amendment would put
them in a substantially and materially worse economic or financial position than
that contemplated by the terms of this Agreement. The parties acknowledge that
such amendment may require reorganization of Group or Manager, or both, and may
require either or both parties to obtain appropriate regulatory licenses and
approvals. If an amendment is not possible, either party shall have the right to
terminate this Agreement upon thirty (30) days notice to the other party.
Section 11.10 Time Is of the Essence. Time is of the essence in this
Agreement.
Section 11.11 Authority. Any Person signing this Agreement on behalf
of any entity hereby represents and warrants in its individual capacity that it
has full authority to do so on behalf of such entity.
Section 11.12 Counterparts. This Agreement may be executed in two (2)
or more counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, Group and Manager have caused their authorized
representatives to execute this Dental Group Management Agreement as of the date
first above written.
"Group"
By: WILLIAM J. K. SAIGET
------------------------------------
Its: President
------------------------------------
"Manager"
By: MICHAEL THOMAS FIORE
------------------------------------
Its: ------------------------------------
21.
<PAGE>
ADDENDUM 1.
-----------
For purposes of this Agreement, the following terms shall have the
meaning indicated below or defined at the indicated section:
(1) Accounts. See Section 2.5.
(2) Affiliate. "Affiliate" shall mean, with respect to any Person, (i)
any individual or entity directly or indirectly owned or controlled by such
Person, (ii) any individual or entity directly or indirectly owning or
controlling such Person or (iii) any individual or entity directly or indirectly
owned or controlled by the same family member, individual or entity as owns or
controls such Person. For purposes of this Agreement, neither Group nor Manager
shall be deemed an Affiliate of the Other.
(3) Agreement. "Agreement" means this Group Management Agreement.
(4) Annual Budget. See Section 3.6.
(5) Beneficiaries. See Recital A.
(6) Books and Records. "Books and Records" means Group's books of
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
(7) Capital Costs. "Capital Costs" shall mean any and all investments
that are or would be capitalized pursuant to GAAP.
(8) Committee Members. See Section 3.5a.
(9) Default Notice. See Section 6.2b(1).
(10) Effective Date. See preamble paragraph.
(11) Employee Providers. See Recital B.
(12) Employment Agreements. See Recital B.
(13) Excluded Expenses. "Excluded Expenses" shall mean those costs and
expenses incurred by Group which are (i) expressly identified as Excluded
Expenses in this Agreement, and/or (ii) not Practice Expenses or Group Expenses
expressly contemplated by or set forth in the Annual Budget.
(14) GAAP. "GAAP" means at any particular time generally accepted
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with GAAP, and all financial
computations hereunder shall be computed unless otherwise specifically provided
herein, in accordance with GAAP as consistently applied and using the same
method of valuation as used in the preparation of Manager's financial statement.
(15) Group. See first paragraph of this Agreement.
22.
<PAGE>
(16) Group Expenses. "Group Expenses" means salaries and wages,
compensation, payroll taxes, and employee benefits of Employee Providers and
Subcontract Providers, all as set forth in, and subject to and limited by, the
Annual Budget.
(17) Group Member. See Section 3.5a.
(18) Group Patients. See Recital A.
(19) Joint Operations Committee. See Section 3.4b.
(20) Management Fee. See Section 7.1.
(21) Manager. See first paragraph of this Agreement.
(22) Manager Members. See Section 3.5a.
(23) Marks. See Section 2.3a.
(24) Offer. See Section 5.1.
(25) Parent. "Parent" shall mean GDSC or any successor thereto.
(26) Patient. "Patient" shall mean and include any Group Patient
and/or Beneficiary.
(27) Payment Date. See Section 7.2.
(28) Percentage Fee Portion. See Exhibit 7.1.
(29) Payor Contracts. See Recital A.
(30) Person. "Person" shall mean any natural person, corporation,
partnership or other business structure recognized as a separate legal entity.
(31) Plans. See Recital A.
(32) Practice. See Recital C.
(33) Practice Expenses. "Practice Expenses" means all costs incurred
by Manager including amortization and/or depreciation associated with assets of
Manager utilized by Group in the conduct of its Practice or covering operations
and Capital Costs, direct labor costs, supplies, direct overhead and indirect
overhead expense attributable to the management and operation of the Practice
and direct and indirect corporate overhead of Manager including all interest
expense and other expenses which are attributable to Manager's business
operations in accordance with Manager's corporate allocation policies, all as
consistent with and/or contemplated in the Annual Budget.
(34) Practice Sites. See Section 3.4a.
(35) Practice Site Facilities. See Section 3.4a.
(36) Preliminary Budget. See Section 3.7b.
23.
<PAGE>
(37) Prior Agreement. See Recital F.
(38) Programs. See Section 2.3b.
(39) Proprietary Information. See Section 10.1.
(40) Protected Parties. See Section 10.1.
(41) Providers. See Recital B. The term "Providers" shall include
individuals or organizations licensed to practice dentistry (including
specialists) as well as other licensed dental professionals who provide
ancillary reimbursable dental services.
(42) Provider Subcontracts. See Recital B.
(43) Reimbursable Expense Portion. See Exhibit 7.1.
(44) Revenues. See Section 2.4.
(45) Security Agreement. See Section 7.4.
(46) Subcontract Providers. See Recital B.
(47) Term. See Section 6.1.
24.
===============================================================================
DENTAL GROUP MANAGEMENT AGREEMENT
by and between
Gentle Dental Service Corporation
(a Washington corporation)
and
Gentle Dental of Oregon, P.C.
(a Oregon corporation)
===============================================================================
January 1, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS.................................................. 1.
ARTICLE II SCOPE OF AGREEMENT........................................... 2.
Section 2.1 General Scope of Agreement........................ 2.
Section 2.2 (Intentionally Omitted]........................... 2.
Section 2.3 [Intentionally omitted.]
Section 2.4 Revenues.......................................... 2.
Section 2.5 Deposit Accounts.................................. 2.
ARTICLE III OPERATION OF PRACTICE...................................... 2.
Section 3.1 Appointment....................................... 2.
Section 3.2 Professional Matters.............................. 3.
Section 3.3 Relationship of Parties........................... 3.
Section 3.4 Authority and Control............................. 3.
Section 3.5 Joint Operations Committee........................ 4.
Section 3.6 Budgets........................................... 6.
Section 3.7 Budget Process.................................... 6.
ARTICLE IV MANAGEMENT SERVICES......................................... 7.
Section 4.1 General Description of Services................... 7.
Section 4.2 Practice Site Facilities.......................... 7.
Section 4.3 Purchased Items and Services...................... 8.
Section 4.4 Manager Personnel................................. 8.
Section 4.5 Day-to-Day Management and Supervision............. 8.
Section 4.6 Billing and Collection Payment of Expenses........ 8.
Section 4.7 Bookkeeping and Accounting........................ 9.
Section 4.8 Marketing and Public Relations Services........... 9.
Section 4.9 Group Agreements.................................. 10.
Section 4.10 Utilization Review Quality Improvement and
Outcomes Monitoring............................... 10.
Section 4.11 Patient Referrals................................. 10.
Section 4.12 Applicable Law.................................... 10.
ARTICLE V GROUP RESPONSIBILITIES...................................... 10.
Section 5.1 Diagnosis, Treatment Planning, Specific Patient
Education and Consultation........................ 10.
Section 5.2 Dental Services................................... 11.
Section 5.3 Provision of Dental Services by Group............. 11.
Section 5.4 Providers......................................... 11.
Section 5.5 Peer Review....................................... 12.
Section 5.6 Fees, Charges and Payor Agreements................ 12.
Section 5.7 Hours of Clinical Operation....................... 12.
Section 5.8 Billing Information and Assignments............... 12.
Section 5.9 Third Party Contracts............................. 12.
Section 5.10 Use of Manager's Goods and Services............... 12.
Section 5.11 Negative Covenants................................ 12.
Section 5.12 Group Maintains Full Professional Authority....... 13.
(i)
<PAGE>
ARTICLE VI TERM........................................................ 13.
Section 6.1 Term.............................................. 13.
Section 6.2 Termination and Extension......................... 13.
ARTICLE VII FINANCIAL AND SECURITY ARRANGEMENTS......................... 15.
Section 7.1 Management Fee.................................... 15.
Section 7.2 Payments.......................................... 15.
Section 7.3 Advances.......................................... 15.
Section 7.4 Security Agreement................................ 15.
Section 7.5 Priority of Payments.............................. 16.
Section 7.6 Accounts Receivable............................... 16.
ARTICLE VIII INDEMNITY AND INSURANCE..................................... 16.
Section 8.1 Indemnity......................................... 16.
Section 8.2 Manager's Insurance............................... 17.
Section 8.3 Group's Insurance................................. 17.
ARTICLE IX BOOKS AND RECORDS........................................... 18.
Section 9.1 Ownership of Records.............................. 18.
ARTICLE X RESTRICTIVE COVENANTS....................................... 18.
Section 10.1 Covenant Regarding Proprietary Information........ 18.
Section 10.2 Covenants Not to Compete During the Term.......... 19.
Section 10.3 Covenant Not to Solicit........................... 19.
ARTICLE XI MISCELLANEOUS PROVISIONS.................................... 20.
Section 11.1 Assignment........................................ 20.
Section 11.2 Headings.......................................... 20.
Section 11.3 Waiver............................................ 20.
Section 11.4 Notices........................................... 20.
Section 11.5 Attorneys' Fees................................... 20.
Section 11.6 Successors........................................ 21.
Section 11.7 Entire Agreement.................................. 21.
Section 11.8 Governing Law..................................... 21.
Section 11.9 Severability, Contract Modifications for
Prospective Legal Events.......................... 21.
Section 11.10 Time Is of the Essence............................ 21.
Section 11.11 Authority......................................... 21.
Section 11.12 Counterparts...................................... 21.
EXHIBITS
Addendum 1
Schedule A -- Stockholder
Schedule B -- Professional Liability Insurance Coverage
Exhibit 3.4 -- Practice Sites
Exhibit 7.1 -- Service Fee
Exhibit 7.4 -- Security Agreement
(ii)
<PAGE>
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
This Dental Group Management Agreement (this "Agreement") is dated and
effective as of January 1, 1998 ("Effective Date"), by and between Gentle Dental
Service Corporation, a Washington corporation ("Manager"), and Gentle Dental of
Oregon, P.C., a Oregon corporation ("Group").
RECITALS
--------
A. Group engages in the practice of dentistry by providing dental
services to patients of Group ("Group Patients") and to enrollees
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
between Group and Plans or between Beneficiaries and Plans.
B. Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
arrangements may include contracts ("Employment Agreements") with dentist
employees (collectively "Employee Providers") and agreements ("Provider
Subcontracts") with independent contractor dentists and non-dentist providers of
various dental care services (collectively "Subcontract Providers").
C. All activities of Group subject to this Agreement are referenced as
the "Practice." All references to "dental" care and services include general and
specialist dental services. All references to "dentists" include generalists and
specialists.
D. Manager is a dental management company that has been organized to
provide certain support services for the Practice and for other dental groups.
Manager is in the business of providing or arranging for management and
administrative services, facilities, equipment and certain personnel necessary
for the operation of the Practice and other dental groups.
E. Group desires to retain Manager on an independent contractor basis
to provide management and administrative services that are more particularly
described below, and Manager desires to provide such management services under
the terms and conditions set forth in this Agreement.
F. This Agreement supersedes that certain Support Services Agreement
dated _________ by and between Manager and Group (the "Prior Agreement").
AGREEMENTS
----------
Now, Therefore, in consideration of the covenants and conditions
contained herein, Manager and Group agree as follows:
ARTICLE I
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
ARTICLE II
SCOPE OF AGREEMENT
Section 2.1 General Scope of Agreement. This Agreement shall apply to
the Practice being conducted by Group, including, without limitation, all
professional, administrative and technical services, marketing,
1.
<PAGE>
contracting, case management, ancillary dental services, outpatient services and
dental care facilities, equipment, supplies and items, except as otherwise
specifically provided in this Agreement. Group's Employment Agreements shall
encompass substantially all such activities of Employee Providers and shall
provide that all revenues derived from such activities (and not excluded below)
shall be included in Revenues as such term is defined in Section 2.4 hereof.
Nothing in this Agreement shall be construed to alter or in any way affect the
legal, ethical and professional relationship between and among Provider and
Provider's patients, nor shall anything contained in this Agreement abrogate any
right or obligation arising out of or applicable to the dentist-patient
relationship.
Section 2.2 [Intentionally omitted.]
Section 2.3 [Intentionally omitted.]
Section 2.4 Revenues. "Revenues" shall mean all of Group's accounts
receivable (net of contractual adjustments and bad debt), and cash collections,
less applicable sales taxes and business and occupation taxes. Revenues shall
include all funds collected by, or legally due to, Group or any Affiliate of
Group, including, without limitation, the following: (a) all fee-for-service
payments for services to Group Patients or Beneficiaries; (b) all payments
established under Payor Contracts; (c) all coordination of benefits or
deductibles and third-party liability recoveries related to the Group's
services; (d) all payments, dues, fees or other compensation to Group, excluding
any consideration payable pursuant to that certain Agreement by and among
Manager, Gentle Dental of Oregon, P.C. and Tse, Saiget, Wantanabe and McClure,
Inc., P.S. of even date herewith; (e) any income, profits, dividends,
distributions or other payments from Group's investments; and (f) any interest
or other non-operating income of Group.
Section 2.5 Deposit Accounts. All cash received by Group from whatever
source shall be deposited into an account or accounts ("Accounts") in the name
of Group at a banking institution selected by Group and approved by Manager.
Group authorizes Manager to bill and collect, in Group's name, all charges and
reimbursements for Group's dental related activities and to deposit such
collections in the Accounts. Group agrees to assist and cooperate with Manager
in the billing and collection process and to immediately deliver to Manager for
deposit any monies Group may receive. Manager shall manage the cash equivalents
of Group and Manager shall be entitled (and is hereby authorized) to transfer
such cash to the account of Manager and to use such cash for purposes as Manager
deems appropriate, subject to and consistent with the terms and provisions of
this Agreement. Nothing in this Section 2.5 shall be construed to limit or
otherwise modify the requirement that Manager disburse funds in fulfillment of
the obligations of the Group and Manager under this Agreement.
ARTICLE III
OPERATION OF PRACTICE
---------------------
Section 3.1 Appointment. Subject to applicable laws and requirements
governing the practice of dentistry, Group hereby appoints Manager as its sole
and exclusive Manager for the operation of the Practice and covenants not to
enter into an agreement with any Person other than Manager to perform or assume
any of Manager's rights, duties or responsibilities as provided herein and
hereby appoints Manager as its true and lawful attorney-in-fact to negotiate and
execute on its behalf all Provided Contracts, Employment Agreements and Provider
Subcontracts. Manager hereby accepts appointment as Group's attorney-in-fact and
accepts full responsibility for management of Group as more fully set forth
herein.
Section 3.2 Professional Matters. Pursuant to applicable laws and
requirements governing the practice of dentistry, Group shall retain ultimate
responsibility for all activities of Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's
non-licensed status.
Section 3.3 Relationship of Parties. In the performance of its duties
and obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Group. Except as provided in this Agreement or as required
by law, Group shall neither have nor exercise any control or direction over the
methods by which Manager shall perform its obligation thereunder; nor shall
Manager have or exercise any control or direction over the methods by
2.
<PAGE>
which Group shall practice dentistry. It is expressly agreed by the parties that
no work, act, commission or omission of manager pursuant to the terms and
conditions of this Agreement shall be construed to make or render Manager or
Manager's employees or agents, the employees of Group. Manager and Group are not
partners or joint venturers with each other and nothing herein shall be
construed so as to make them partners or joint venturers or impose upon either
of them any liability as partners or joint venturers. Manager's responsibility
is to assure that the services covered by this Agreement shall be performed and
rendered in a competent, efficient and satisfactory manner. Both Manager and
Group will act in good faith in connection with the performance of their
respective obligations under this Agreement.
Section 3.4 Authority and Control. Strategic planning, overall
direction and control of the business and affairs of Group, and authority over
the day-to-day activities of Group shall be accomplished as follows:
a. Group. Notwithstanding anything else to the contrary contained
herein, Group shall have the sole responsibility and authority for all aspects
of the practice of the profession of dentistry and delivery of dental services
to Group Patients and Beneficiaries by Group and its Providers. Providers shall
use and occupy at the practice sites set forth on Exhibit 3.4 hereto ("Practice
Sites") the facilities provided by Manager hereunder exclusively for the
practice of dentistry ("Practice Site Facilities"). Group and Manager expressly
acknowledge that the Practice or Practices conducted at these Practice Site
Facilities shall be conducted solely by dentists and dental hygienists
associated with Group as Employee Providers or Subcontract Providers. Group
shall consult with Manager or the Joint Operations Committee, to the extent
reasonable, on all matters pertaining to or affecting the Practice and not
otherwise inconsistent with the applicable laws governing the practice of
dentistry.
b. Joint Operations Committee Authority. All other
decision-making authority over the business, affairs and operations of Group
shall be vested in a joint operations committee (the "Joint Operations
Committee"). Notwithstanding anything in this Agreement to the contrary, unless
such authority has been otherwise granted or delegated to Manager herein, or is
otherwise prohibited by applicable federal or state law, the Joint Operations
Committee shall have exclusive decision-making authority over all matters
necessary to enable Manager to consolidate Group for accounting purposes
pursuant to Financial Accounting Standards Board ("FASB") Statement No. 94 (or
any successor statement, interpretation or release), as such matters are
described and set forth in the Emerging Issues Task Force ("EITF") Issue No.
97-2 (as may be further interpreted or modified by FASB, the EITF or the
Securities and Exchange Commission) including, without limitation, scope of
services provided, patient acceptance policies and procedures, pricing of
services, negotiation and execution of contracts, establishment and approval of
operating and capital budgets, total Group compensation, establishment and
implementation of guidelines for selection, hiring and termination of dentists
and other dental professionals, and the incurrence or issuance of debt by Group
(collectively, the "Joint Operations Committee Decision Matters"). Nothing
herein shall be construed as preventing the Joint Operations Committee from
appointing representatives and delegating authority to such representatives so
long as the Joint Operations Committee may revoke such appointment and
delegation at any time and so long as the Joint Operations Committee retains
ultimate responsibility for the decisions of such representatives.
Section 3.5 Joint Operations Committee. Subject to applicable laws and
requirements governing the practice of dentistry, the Joint Operations Committee
shall have authority and responsibility to provide strategic planning, overall
direction and authority over the day-to-day management and administrative
activities of the Group and shall manage the business operations of the Group as
follows:
a. Joint Operations Committee Membership. The Joint Operations
Committee shall consist of five (5) individuals (the "Committee Members"). Group
shall designate two (2) Committee Member who shall be licensed dentists (the
"Group Members") and the remaining three (3) Committee Members (the "Manager
Members") shall be appointed by Manager. The number of Committee Members may be
increased by mutual agreement of the parties. Each party shall continue to
direct the appointment of the same percentage of Committee Members as described
above. Each Committee Member shall serve at the pleasure of the party
designating such Committee Member and may be replaced, with or without cause, at
any time by such party upon the delivery of written notice thereof to the other
Committee Members. Manager, Group and their respective Committee Members shall
diligently pursue any preliminary activities that are necessary to allow the
Joint Operations Committee to take
3.
<PAGE>
an action. Where Committee Members are required to consult with the organization
appointing such Committee Members, the Committee shall establish and agree on a
deadline for accomplishing such consultation.
b. Ex-Officio Member. Notwithstanding the preceding, for a period
of six (6) years from the Effective Date of this Agreement, Group shall be
entitled to appoint an ex-officio member of the Joint Operations Committee (the
"Ex-Officio Member"). The Ex-Officio Member shall serve at the pleasure of Group
and may be replaced, with or without cause, at any time by Group upon the
delivery of written notice thereof to the other Committee Members. The
Ex-Officio Member shall be entitled to attend and receive notice of meetings of
the Joint Operations Committee as if the Ex-Officio Member were a Committee
Member. The Ex-Officio Member shall be entitled to vote as a Committee Member on
all matters, except for the Joint Operations Committee Decision Matters. On
those matters on which the Ex-Officio Member may vote, in the event of a tie
vote on any such matters between Group Members and the Ex-Officio Member on the
one hand, and the Manager Members on the other hand, such matter shall be
resolved by arbitration pursuant to the Federal Arbitration Act ("FAA"). The
arbitration shall be held in Portland, Oregon, and except as provided herein,
shall be conducted in accordance with the applicable rules and procedures
established by the American Arbitration Association ("AAA") then in effect
utilizing a single arbitrator. Only a practicing lawyer with experience in
health law matters may serve as an arbitrator (the "Arbitrator"). The expense of
arbitration (other than attorneys' fees) shall be shared as determined by the
Arbitrator. Each side shall pay its own attorneys' fees, unless the Arbitrator
determines, in accordance with applicable law, that attorneys' fees should be
apportioned in a different manner pursuant to express statutory authority
permitting awards of attorneys' fees. Any result reached by the Arbitrator shall
be final and binding on all parties to the arbitration, and no appeal may be
taken. The parties hereto expressly waive any right to resolve any tie votes
covered by this section through any other means.
c. Joint Operations Committee Action.
(1) Joint Action. Except as otherwise expressly set forth
above, the Joint Operations Committee shall take all actions that have been
approved by a majority of the Committee Members and both Group and Manager
hereby agree to be bound by the decision of the Joint Operations Committee.
(2) Consultation Forum. Consultation between Group and
Manager, if any, shall take place at a meeting of the Joint Operations
Committee, and Group and Manager hereby agree to be bound by the decision of
their Group Members or Manager Members, as the case may be.
d. Joint Operations Committee Meetings. Meetings of the Joint
Operations Committee may be held by telephone or similar communications
equipment so long as all Committee Members participating in a meeting can hear
and speak to each other. The Joint Operations Committee shall prepare and
maintain written minutes of all meetings and shall, upon request, provide a copy
of the minutes to the parties within fifteen (15) business days following each
meeting.
(1) Regular Meetings. The Joint Operations Committee shall
hold not less than four (4) regular meetings each year, at such specific times
and places as the Committee Members may determine.
(2) Special Meetings. A special meeting of the Joint
Operations Committee may be called by a majority of the Committee Members.
(3) Notice Requirement. A Committee Member calling a special
meeting must provide all other Committee Members with three (3) days' advance
written or telephonic notice. Notice must be given or sent to the Committee
Member's address or telephone number as shown on the records of the Joint
Operations Committee. Notice may be delivered directly to each Committee Member
or to a person at the Committee Member's principal place of business who
reasonably would be expected to communicate that notice promptly to the
Committee Member.
(4) Waiver of Notice Requirement.
4.
<PAGE>
(a) Written Waiver, Consent or Approval. Notice of a special
meeting need not be given to any Committee Member who, either before or after
the meeting, signs a waiver of notice or a written consent of the holding of the
special meeting, or an approval of the minutes of the special meeting. Such
waiver, consent or approval need not specify the purpose of the special meeting.
All such waivers, consents and approvals shall be filed with the Joint
Operations Committee records or made a part of the minutes of the special
meetings.
(b) Failure to Object. Notice of a special meeting need not be
given to any Committee Member who attends the special meeting and does not
protest before or at the commencement of the special meeting such lack of
notice.
(5) Quorum. The smallest number of Committee Members that
exceed fifty percent (50%) of all Committee Members shall constitute a quorum of
the Joint Operations Committee, provided, however, that such quorum shall
include at least one Group member and one Manager member.
(6) Proxies. The Joint Operations Committee shall provide
for the use of proxies, telephonic conference calls, written consents or other
appropriate methods by which the full participation of the Group Members and
Manager Members can be assured.
e. Limitation of Responsibility. Notwithstanding any other
provisions hereof, Committee Members shall be liable to the parties only for
actions constituting bad faith, gross negligence or breach of an express
provision of this Agreement (so long as such breach remains uncured after ten
(10) days of receiving notice of the nature of such breach). In all other
respects, Committee Members shall not be liable for negligence or mistakes of
judgment.
Section 3.6 Budgets. Each year during the term hereof, the Joint
Operations Committee shall approve and establish an annual capital and operating
budget ("Annual Budget") regarding all financial aspects of the Practice. The
Annual Budget shall include the following elements and other items, as
appropriate:
a. A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
b. An operating budget setting forth an estimate of revenues and
expenses for the next succeeding fiscal year, together with an explanation of
anticipated changes or modifications, if any, in the Practice's utilization,
rates, charges to patients or third party payors, salaries, costs of Providers,
non-wage cost increases, and all other similar factors expected to differ
significantly from those prevailing during the current fiscal year;
c. Other expenses of operation;
d. The amount of a reasonable reserve to satisfy possible
shortfalls from operations. The allocation of such reserve shall be made by the
Joint Operations Committee as and when necessary;
e. The total annual amount of Group Expenses for the next
succeeding fiscal year, and
f. The Management Fee, as defined below, for the next succeeding
fiscal year.
Section 3.7 Budget Process.
a. Initial Annual Budget. Not later than 45 days after the
Effective Date, the Joint Operations Committee will have prepared the initial
Annual Budget for the first fiscal year (which shall initially be the calendar
year) during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains,
5.
<PAGE>
or, at the option of the parties, such portion of the then current fiscal year
plus the immediately subsequent fiscal year.
b. Preliminary Budget. Not later than forty-five (45) days prior
to the end of each fiscal year during the term of this Agreement, the Manager
shall prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
c. Joint Operations Committee Approval. The Joint Operations
Committee shall review and suggest modifications to the Preliminary Budget
within ten (10) days of receipt. Manager shall prepare a revised budget based
upon the Joint Operations Committee's recommendations and the Preliminary Budget
as revised shall become the Annual Budget.
d. Adjustments. In the event of a material deviation between
financial forecasts and financial performance during a fiscal year, Manager or
Group may propose adjustments to the Annual budget which adjustments shall be
approved or disapproved by the Joint Operations Committee pursuant to the
procedures set forth above.
3.8 Personnel.
a. Providers. Except in unusual circumstances approved by the
Joint Operations Committee, and as permitted by law, Manager shall not employ or
contract with any Provider for the provision of dental services. All Providers
who provide dental services to Group Patients or to Beneficiaries shall be
either (1) Employee Providers, (2) Subcontract Providers, or (3) employees of
Subcontract Providers. Subject to guidelines established by the Joint Operations
Committee, Group shall have complete control of and responsibility for the
hiring, engagement, compensation, training, scheduling, supervision, evaluation,
and termination of all Employee Providers and Subcontract Providers, although
Manager shall consult with Group respecting such matters and shall coordinate
the advertising of positions available, interviewing of candidates, and
scheduling of clinical staff meetings and training sessions.
b. Non-Providers. With the exception of employees of Subcontract
Providers, Manager shall employ all non-Provider personnel reasonably necessary
for the operation of the Practice.
c. Salary and Benefits. Subject to Manager's responsibilities
under Article VII, each party to this Agreement shall remain liable for the
salary and benefits paid to such party's own employees and shall be ultimately
responsible for compliance with state and federal laws pertaining to workers'
compensation, unemployment compensation and other employment-related statutes
pertaining to the party's own employees.
d. Payments to Subcontract Providers. Subject to Manager's
responsibilities under Article VII, Group shall be liable for any payments due
Subcontract Providers under Provider Subcontracts.
ARTICLE IV
MANAGEMENT SERVICES
-------------------
Section 4.1 General Description of Services. Except as prohibited by
law and within the limitations set out elsewhere in this Agreement, Manager
shall provide or arrange for the provision to Group of all management,
administrative and support services reasonably necessary and appropriate for the
efficient operation of the Practice. Such services include all administrative
services necessary to Group's performance of its obligations under Payor
Contracts, contracting, marketing, capital formation and assistance with long
term strategic planning. Manager shall exercise reasonable commercial efforts to
fulfill the administrative functions of a well managed dental group.
Section 4.2 Practice Site Facilities. When appropriate, Manager shall
secure and maintain Practice Site Facilities, including, without limitation,
office space, improvements, furnishings, equipment, supplies, and personal
property, of a nature and in a condition necessary and appropriate for the
efficient and effective
6.
<PAGE>
operations of the Practice subject to the general approval of the Joint
Operations Committee. Group hereby accepts and approves of the Practice Site
Facilities initially provided by Manager. However, Manager from time to time
shall make such Practice Site Facilities changes, including but not limited to
dental equipment purchases, as reasonably may be requested by Group and
consistent with the Annual Budget.
Section 4.3 Purchased Items and Services. Manager shall serve as the
purchasing agent for Group and shall arrange for personnel benefits, insurance,
and any other items and services required for the proper operation of the
Practice.
Section 4.4 Manager Personnel.
a. Management Team. Subject to the approval and continuing
supervision of the Joint Operations Committee, Manager may engage or designate
one or more individuals experienced in dental group management and direction,
including, but not limited to, an administrator, who will be responsible for the
overall administration of the Practice including day-to-day operations and
strategic development activities in accordance with this Agreement.
b. Other Manager Personnel. Manager shall select, hire, train,
supervise, monitor and terminate all non-Provider personnel necessary for the
operation and management of the Practice; provided, however, with respect to the
selection, hiring and termination of non-Provider clinical staff, Manager shall
obtain the consent of the Group, which consent will not be unreasonably
withheld.
Section 4.5 Day-to-Day Management and Supervision. Subject to any
approval or consulting rights of the Joint Operations Committee, Manager shall
provide general management including, but not limited to, day-to-day supervision
of:
a. manager personnel;
b. equipment and supply acquisition;
c. office space and facility maintenance;
d. patient records organization and retention;
e. third party payor contracting;
f. case management;
g. billing, collections and accounting activities as set forth
below;
h. all operating aspects and policies of the Practice including,
but not limited to, hours of operation, work schedules, standard duties and job
descriptions, for all non-Group personnel; and
i. other related and incidental matters.
Section 4.6 Billing and Collection Payment of Expenses. In addition to
the responsibilities of Manager under Article VII, Manager shall be responsible
for all billing and collection activities required by Group. Manager shall also
be responsible for reviewing and paying accounts payable of Group. Group hereby
appoints the Manager its true and lawful attorney-in-fact to take the following
actions for and on behalf of and in the name of Group:
a. bill and collect in Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Group. Group shall give
Manager all necessary access to Patient records to accomplish all billing and
collection. In so doing, Manager will use its best efforts but does not
guarantee any
7.
<PAGE>
specific level of collections, and Manager will comply with Group's reasonable
and lawful policies regarding courtesy discounts;
b. take possession of and endorse in the name of the Group any
and all instruments received as payment of accounts receivable;
c. deposit all such collections directly into the Accounts and
make withdrawals from such Accounts in accordance with this Agreement; and
d. place accounts for collection, settle and compromise claims,
and institute legal action for the recovery of accounts.
Section 4.7 Bookkeeping and Accounting. Manager shall provide
bookkeeping services, financial reports, and shall implement and manage a
computerized management information system appropriate for the Practice.
a. Financial Reporting. Manager shall prepare, analyze and
deliver to the Joint Operations Committee financial reports to the extent
necessary or appropriate for the operation of the Practice, including the
following:
(1) financial statements, including balance sheets and
statements of cash flow and income;
(2) accounts payable and accounts receivable analysis;
(3) billing status including any medicaid remittances; and
(4) reconciliation of assets, liabilities and major
expenses.
b. Audits. Group shall have the right to review, inspect and/or
copy and, at its sole cost and expense (which cost and expense shall be an
Excluded Expense), obtain an audit of (separate from any annual audit or review
of Group's financial statements performed at the direction of the Manager)
Group's financial books and records maintained by the Manager. Upon five (5)
days' prior written notice, Manager shall allow Group access during reasonable
business hours to all information and documents reasonably required for such
review, inspection and/or audit. Upon Group's request and at Group's sole cost
and expense (which cost and expense shall be an Excluded Expense), Manager shall
also provide copies of such documents.
Section 4.8 Marketing and Public Relations Services. Subject to any
limitation of law, regulation or ethical standards pertaining to the practice of
dentistry and following consultation with Group, Manager shall provide such
marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Group. Manager
shall provide Group with copies of all marketing materials.
Section 4.9 Group Agreements. On behalf of Group, as its
attorney-in-fact, and subject to applicable state and federal law and the
continuing supervision of the Joint Operations Committee, Manager shall review,
evaluate, negotiate and enter into on Group's behalf, Payor Contracts,
Employment Agreements and Provider Subcontracts and any other contracts or
agreements regarding the provision of dental related items or services by Group
or Providers.
Section 4.10 Utilization Review Quality Improvement and Outcomes
Monitoring. Manager shall be responsible for providing administrative support
for Group's utilization review, quality improvement and outcomes monitoring
activities, including, without limitation, data collection, analysis and
reporting for Group Patients and Beneficiaries. Manager shall also support the
development and implementation of relevant policies, procedures, protocols,
practice guidelines and other interventions based on such activities.
8.
<PAGE>
Section 4.11 Patient Referrals. The parties agree that the benefits to
Group hereunder do not require, are not payment for, and are not in any way
contingent upon the admission, referral or any other arrangements for the
provision of any item or service offered by Manager or any affiliate of Manager
to any of Group's Patients in any facility or laboratory controlled, managed or
operated by Manager or any affiliate of Manager.
Section 4.12 Applicable Law. Manager and Group shall comply with all
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE V
GROUP RESPONSIBILITIES
----------------------
Section 5.1 Diagnosis, Treatment Planning, Specific Patient Education
and Consultation. Group shall have sole responsibility for all professional
dental services provided to Patients with regard to the diagnosis of the
patient's condition and the development of treatment plan alternatives,
including, without limitation, the following:
a. Diagnosis. Group shall have sole responsibility for all
medical and dental history evaluation, examination, obtaining clinical records,
and diagnostic procedures appropriate for complete diagnosis.
b. Treatment Planning. Group shall have sole responsibility for
all determination of treatment alternatives that may be professionally
acceptable for the treatment of the patient's condition.
c. Specific Patient Education. Group shall have sole
responsibility for all discussion, recommendation, demonstration, and other
educational modalities intended to address the patient's specific condition, as
differentiated from general patient education intended to address the common
concerns of all patients presenting with similar conditions.
d. Consultation. Group shall have sole responsibility for all
discussion of clinical advantages, disadvantages, complications, and risks of
each alternative treatment plan, and including the likely results of no
treatment.
e. Manager to Assist with Record Procurement. Notwithstanding the
above, Manager shall be responsible for exercising reasonable efforts to
procure, at its own expense, medical and dental history information, previous
clinical records, and X-ray records prior to presentation of the patient for
treatment by Group, in accordance with protocols developed by Group in
consultation with Manager.
Section 5.2 Dental Services. Group shall have sole responsibility for
all professional dental services provided to Patients with regard to the
treatment of the patient's condition, including, without limitation, the
following:
a. Preventive Care. Group shall have sole responsibility for all
preventive care intended to delay, or intercept the development of pathologic
conditions.
b. Therapeutic Care. Group shall have sole responsibility for all
therapeutic care intended to ameliorate, or improve existing pathologic
conditions.
c. Referral to Specialists. Group shall have sole responsibility
for all referral to appropriate dental specialists and other allied health care
professionals in accordance with professional dental standards of care.
9.
<PAGE>
d. Continuing Care. Group shall have sole responsibility for all
development and execution of continuing care protocols intended to maintain the
patient's condition over the course of time.
e. Manager to Assist with Patient Compliance Tracking.
Notwithstanding the above, Manager shall be responsible for exercising
reasonable efforts to facilitate, coordinate, and document the scheduling,
tracking, and confirmation of Group's recommendations for dental diagnostic and
therapeutic services, treatments, referrals, and continuing care in accordance
with protocols developed by Group in consultation with Manager.
Section 5.3 Provision of Dental Services by Group. Group shall operate
the Practice during the Term as a dental practice in accordance with the terms
of this Agreement and shall use its best efforts to operate and conduct the
Practice in accordance with the Annual Budget. However, nothing in this
Agreement shall be construed to affect or limit in any way the professional
discretion or duty of Group insofar as such constitutes the practice of
dentistry.
Section 5.4 Providers.
a. Professional Dental Services. Subject to guidelines
established by the Joint Operations Committee, Group shall use their best
efforts to employ or contract with the number of Providers necessary for the
efficient and effective operation of the Practice and in accordance with the
Annual Budget and quality assurance, credentialing and utilization management
protocols approved by the Joint Operations Committee. Group shall provide full
and prompt dental coverage for the Practice, including emergency service
twenty-four hours per day, seven days per week, including holidays, according to
policies and schedules approved by the Joint Operations Committee.
b. Provider Subcontracts and Employment Agreements. Group shall
not negotiate or execute any Provider Subcontract, Employment Agreement, or any
amendment thereto, or terminate any Provider Subcontract or Employment Agreement
without the approval of the Joint Operations Committee. Subject to Manager's
responsibilities under Article VII, Group shall be responsible for the payment
of compensation, in accordance with the Annual Budget, of all Employee Providers
and Subcontract Providers.
Section 5.5 Peer Review. Group, after consultation with the Joint
Operations Committee, shall implement, regularly review, modify as necessary or
appropriate and obtain the commitment of Providers to actively participate in
peer review procedures for Providers. Group shall assist Manager in the
production of periodic reports describing the results of such procedures. Group
shall provide Manager with prompt notice of any information that raises a
reasonable risk to the health and safety of Group Patients or Beneficiaries. In
any event, after consultation with the Joint Operations Committee, Group shall
take such action as may be reasonably warranted under the facts and
circumstances.
Section 5.6 Fees, Charges and Payor Agreements. The Joint Operations
Committee shall, after consultation with Group, determine the fees, charges,
premiums, or other amounts due in connection with delivery of dental services to
Patients. Such fees, charges, premiums, or other amounts (regardless of whether
determined on a fee-for-service, capitated, prepaid, or other basis) shall be
reasonable and consistent with the fees, charges, premiums, and other amounts
due to dental care providers for similar services within the community under
similar types of reimbursement programs involved if such programs are currently
offered within the community.
Section 5.7 Hours of Clinical Operation. After consultation with
Group, the Joint Operations Committee shall establish hours of operation that
are consistent with good dental practice, and are appropriate to the need to
timely deliver professional dental care services to Group Patients.
Section 5.8 Billing Information and Assignments. Group shall promptly
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Group's
services. Group shall use reasonable efforts to procure consents to assignments
and other approvals and documents necessary to enable Manager to obtain payment
or reimbursement from third party payors
10.
<PAGE>
and patients. With the assistance of Manager, Group shall obtain all provider
numbers necessary to obtain payment or reimbursement for its services.
Section 5.9 Third Party Contracts. Group shall be in compliance with
all contracts, agreements and arrangements, including any contracts that exist
on the Effective Date, between Group and third parties.
Section 5.10 Use of Manager's Goods and Services. Group shall not use
any goods or services provided by Manager pursuant to this Agreement for any
purpose other than the provision of and management of dental services as
contemplated by this Agreement and purposes incidental thereto.
Section 5.11 Negative Covenants. During the Term, Group shall not,
without the prior approval of the Joint Operations Committee, either in a single
or series of related transactions (a) pledge, mortgage or otherwise encumber any
of its property, (b) sell, assign, transfer or convey all or substantially all
of its assets, including its goodwill, (c) merge or consolidate with any other
entity, (d) allow the transfer or issuance of any of its stock (other than in
accordance with the terms and provisions of that certain Shares Acquisition
Agreement dated of even date herewith between Manager and the Persons set forth
on Schedule A hereto), or (e) take or allow any act that would materially impair
the ability of Group to carry on the business of the Practice or to fulfill its
obligations under this Agreement. Notwithstanding the preceding, prior to
consummating with any third party, any transfer, sale, assignment or conveyance
or any merger or consolidation contemplated in subparagraphs (a), (b) or (c)
above, Group shall first offer (the "Offer") to Manager or its designee the
right to acquire the assets of Group or to effect a merger or consolidation with
Group upon substantially the same business and economic terms as proposed to
Group by such third party. Manager or its designee shall have 60 days to elect
to accept or reject such Offer, which election shall be binding on the parties.
Section 5.12 Group Maintains Full Professional Authority.
Notwithstanding Manager's general and specific rights and responsibilities set
forth in this Agreement, Group shall have full authority and control with
respect to all dental, professional and ethical determinations over Group's
Practice to the extent required by federal, state and local laws, rules and
regulation. Manager shall not engage in activities which constitute the practice
of dentistry as prohibited under applicable law. Manager shall neither exercise
control over nor interfere with the dentist-patient relationship, which shall be
maintained strictly between Group's Providers and their Patients.
ARTICLE VI
TERM
----
Section 6.1 Term. This Agreement shall be effective the Effective
Date, and shall remain in effect for an initial term of forty (40) years from
the Effective Date, expiring on the fortieth (40th) anniversary of the Effective
Date, unless earlier terminated pursuant to the terms of this Agreement. The
word "Term" shall include such initial term and, where applicable, any extension
of such initial term (whether extended pursuant to Section 6.2a or otherwise),
subject to earlier termination pursuant to the provisions of this Agreement.
Section 6.2 Termination and Extension.
a. Automatic Extension. At the end of the initial term and any
subsequent term, this Agreement shall automatically renew for a five (5) year
term unless one of the parties provides the other party with written notice of
intent not to renew, not less than one hundred eighty (180) days prior to the
expiration of the then current term.
b. Early Termination. This Agreement may be terminated according
to the provisions of this Section.
(1) Material Breach. In the event either party materially
breaches this Agreement and such breach is not cured to the reasonable
satisfaction of the non-breaching party within thirty (30) days after the
non-breaching party serves written notice of the default upon the defaulting
party (the "Default
11.
<PAGE>
Notice"), the Agreement shall automatically terminate at the election of the
non-breaching party upon the giving of a written notice of termination to the
defaulting party not later than fifteen (15) days after expiration of the 30-day
cure period; provided that if such uncured breach is only capable of being cured
within a reasonable period of time in excess of thirty (30) days, the
non-breaching party shall not be entitled to terminate this Agreement so long as
the defaulting party has commenced such cure and thereafter diligently pursues
such cure to completion.
(2) Refusal to Comply. In the event that Group or Manager
refuses or fails to comply with a decision of the Joint Operations Committee,
the aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if such dispute between Group and Manager continues for sixty
(60) days after the date the aggrieved party exercises its option regarding
mediation, the non-complying party shall have thirty (30) days in which to
comply with the decision of the Joint Operations Committee. If the non-complying
party has not complied by the end of such thirty (30) day period, the aggrieved
party shall have the option to terminate this Agreement upon fifteen (15) days'
prior written notice. During such mediation, Manager and Group shall continue to
operate and manage the practice in good faith.
(3) Bankruptcy. A party may, upon three (3) days' prior
written notice, terminate this Agreement if the other party:
(a) Applies for or consents to the appointment of a
receiver, trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary petition,
makes a general assignment for the benefit of its creditors, files a petition or
answer seeking reorganization or arrangement with its creditors, or admits in
writing its inability to pay its debts when due, or
(b) Suffers any order, judgment or decree to be entered
by any court of competent jurisdiction, adjudicating such party bankrupt or
approving a petition seeking its reorganization or the appointment of a
receiver, trustee or liquidator of such party or of all or a substantial part of
its assets, and such order, judgment or decree continues unstayed and in effect
for ninety (90) days after its entry.
(4) Nonperformance. Manager may terminate this Agreement in
the event that in any two consecutive fiscal quarters the Manager has not been
paid all of the Reimbursable Expense Portion and at least three-quarters (3/4)
of the Percentage Fee Portion of the Management Fee and, in the sole discretion
of the Manager, it is not reasonably likely that such amounts of the Management
Fee will be paid in the next fiscal quarter. Any such termination shall be
effective as of the last day of such third fiscal quarter provided at least 60
days notice shall have been given; otherwise, such termination shall be
effective on the sixtieth day after notice is given.
(5) Change in Law. In the event of any material change in
federal or state law that has a significant adverse impact on either party
hereto in connection with their performance under this Agreement, or if
performance by a party of any duties under this Agreement be deemed illegal by
any administrative agency or in a formal opinion rendered to Manager by legal
counsel knowledgeable in health law matter retained by the Manager, the affected
party shall have the right to require that the other party renegotiate the terms
of this Agreement. Solely in the event of illegality, if the parties fail to
reach an agreement within thirty (30) days of the request for renegotiation,
either party may (subject to the severability provision of this Agreement)
terminate this Agreement upon thirty (30) days' prior written notice to the
other party.
c. Effect of Termination. Upon termination of this Agreement:
(1) Group shall surrender to Manager all of Manager's
property used primarily in the operation of the Practice in the same condition
as received, reasonable wear and tear excepted.
(2) Manager shall deliver to Group all records related to
the business of and provision of dental care through the Practice including,
without limitation, patient records and any corporate, personnel and financial
records maintained for the Practice and Providers, provided, that except as
limited by law, including, but not limited to laws governing the confidentiality
of patient records, Manager shall have the option
12.
<PAGE>
to copy (or otherwise duplicate) at its sole cost and expense such records of
Group and to retain and utilize such records for its own use;
(3) Manager shall deliver to Group any other property of
Group in Manager's possession;
(4) Both parties shall cooperate to ensure the provision of
appropriate dental care to Group Patients and Beneficiaries;
(5) Group shall promptly deliver to Manager any Management
Fees due and payable to Manager (such fees prorated for the month of
termination) and any amounts owed to Manager for advances made pursuant to
Section 7.3; and
(6) Both parties shall cooperate to ensure the appropriate
billing and collections for dental services rendered by Group prior to the
effective date of termination, and any such cash collected shall be retained by
Group and/or paid to Manager pursuant to Article VII.
ARTICLE VII
FINANCIAL AND SECURITY ARRANGEMENTS
-----------------------------------
Section 7.1 Management Fee. Group and Manager agree that the
compensation set forth in this Article VII is being paid to Manager in
consideration of the services provided and the substantial commitment and effort
made by Manager hereunder and that such fees have been negotiated at arms'
length and are fair, reasonable and consistent with fair market value. Manager
shall be paid the management fee (the "Management Fee") as set forth on Exhibit
7.1 hereto. Payment of the Management Fee is not intended to and shall not be
interpreted or implied as permitting Manager to share in Group's fees for
medical services but is acknowledged as the negotiated fair market value
compensation to Manager considering the scope of services and the business risks
assumed by Manager.
Section 7.2 Payments. Except as otherwise set forth on Exhibit 7.1
hereto, the amounts to be paid to Manager under this Article VII shall be
calculated by Manager on the accrual basis of accounting and shall be payable
monthly. Payments due for any Management Fee shall be made by Group each
calendar month as provided herein and shall be paid on the 15th day following
the end of such month (or the first preceding day that is a business day if the
15th day is not a business day) (a "Payment Date"). Such amounts paid shall be
estimates based upon available information for such month, and adjustments to
the estimated payments shall be made to reconcile final amounts due under
Section 7.1 on the next Payment Date and shall be paid in such priority as set
forth in Section 7.5 hereof.
Section 7.3 Advances. Group shall be entitled to an advance from
Manager of such additional sums, over and above Group's right to the amounts
otherwise set forth in this Article VII, as shall be required by Group to pay
Practice Expenses and Group Expenses consistent with the Annual Budget of the
Practice (prepared as provided in Section 3.6 hereof) and the Management Fee as
provided in Exhibit 7.1 hereto. Additional amounts may be advanced to Group upon
Group's request and at the sole discretion of Manager. Any amounts advanced to
Group pursuant to this Section 7.3 shall be repaid by Group in such priority as
set forth in Section 7.5 below and shall bear interest at a rate equal to one
percent (1%) above the prime rate reported by the Wall Street Journal as
adjusted on a quarterly basis, compounded monthly until all such amounts of
principal and interest are repaid to Manager as provided herein.
Section 7.4 Security Agreement. In order to enforce its rights granted
hereunder and subject to applicable law, Group shall execute a Security
Agreement in substantially the form attached hereto as Exhibit 7.4 (the
"Security Agreement"), which Security Agreement grants a security interest in
all of Group's assets and accounts receivable (as more fully described in the
Security Agreement) to Manager. In addition, Group shall cooperate with Manager
and execute all documents requested by Manager or its lenders to enable Manager
to perfect its security interest provided by the Security Agreement.
13.
<PAGE>
Section 7.5 Priority of Payments. Manager shall administer and make
disbursements from amounts deposited into the Accounts or transferred from the
Accounts to pay (including, without limitation the making of advances as
provided in Section 7.3) the Practice Expenses and Group Expenses as the same
become due and payable, and for which Group shall remain responsible. In
performing its obligations pursuant to Article IV, Manager shall apply funds of
Group in the following order of priority:
a. payment of all Group Expenses;
b. payment of all Practice Expenses;
c. payment of the Management Fee;
d. payment of amounts advanced to Group, and applicable interest
thereon (as contemplated in Section 7.3); and
e. payment of Excluded Expenses.
Any amounts which remain following the payment of the expenses and
fees set forth in subparagraphs (a) through (e) above shall be retained in the
Accounts and applied as contemplated in the Annual Budget(s).
Section 7.6 Accounts Receivable. At the option of Manager, on the
first business day of each month, Manager may purchase all or any portion of the
accounts receivable of Group relating to Revenues arising during the previous
month, by payment of cash or other readily available funds into an account for
Group or by offset of amounts owed by Group to Manager. The consideration for
the purchase shall be an amount equal to all fees recorded each month (net of
adjustments for uncollectible accounts, professional courtesies and other such
activities that do not generate a collectible fee) less Management Fees due to
Manager under this Article VII. Manager's purchase shall be effective upon full
payment of the purchase price. In the event that such purchase shall be
ineffective for any reason, Group is concurrently herewith entering into the
Security Agreement to grant a security interest in the accounts receivable to
Manager. In addition, Group shall cooperate with Manager and execute all
necessary documents in connection with the pledge of such accounts receivable to
Manager or at Manager's option, its lenders. All collections in respect of such
accounts receivable shall be deposited in a bank account at a bank selected by
mutual agreement of Group and Manager. To the extent Group comes into possession
of any payments in respect of such accounts receivable, Group shall direct such
payments to Manager for deposit.
ARTICLE VIII
INDEMNITY AND INSURANCE
-----------------------
Section 8.1 Indemnity.
a. Indemnification. Each party shall indemnify, defend and hold
harmless the other party from any and all liability, loss, claim, lawsuit,
injury, cost, damage or expense whatsoever (including reasonable attorneys' fees
and court costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Group agrees
to indemnify, defend and hold harmless Manager for all liability, loss, claim,
lawsuit, injury, cost, damage or expense whatsoever (including reasonably
attorneys' fees and court costs) arising out of the professional negligence of
Group, its employees, agents, contractors or subcontractors, including any
amounts in excess of the professional liability insurance coverage of Group or
its employees, agents, contractors or subcontractors.
b. Mutual Indemnity. Each party to this Agreement shall be
indemnified by the other party for any claim under this Agreement or otherwise
against the indemnified party for vacation pay, sick
14.
<PAGE>
leave, retirement benefits, Social Security benefits, workers' compensation
benefits, disability or unemployment, insurance benefits, or other employee
benefits of any kind accrued during the term of this Agreement by an employee of
the indemnifying party.
Section 8.2 Manager's Insurance. Manager shall, on its own behalf and
at its sole cost and expense, procure and maintain in force during the term of
this Agreement policies in the following categories in the amount indicated:
a. Comprehensive general liability insurance covering the risks
of Manager, in an amount determined by the Joint Operations Committee;
b. Workers' Compensation insurance covering the employees of
Manager, in such amounts as is usual and customary under the circumstances;
c. Property insurance covering the facilities, equipment and
supplies owned or leased by Manager or Group for use in the operation of the
Practice.
Section 8.3 Group's Insurance. Manager shall obtain, and maintain on
behalf of Group in full force and effect during the Term, policies in the
following categories in the amount indicated:
a. Comprehensive professional liability insurance coverage for
Group and Group's Employee Providers in such amounts as are usual and customary
for similar dental practices within the same area and as approved by the Joint
Operations Committee, which approval shall not be unreasonably withheld (the
cost and expense of which shall be a Group Expense);
b. Workers' Compensation insurance covering the employees of
Group, in such amounts as is usual and customary under the circumstances (the
cost and expense of which shall be a Practice Expense); and
c. Comprehensive general liability insurance covering the risks
of Group, in an amount determined by the Joint Operations Committee (the cost
and expense of which shall be a Practice Expense).
ARTICLE IX
BOOKS AND RECORDS
-----------------
Section 9.1 Ownership of Records. All business records and information
relating exclusively to the business and activities of either party shall be the
property of that party, irrespective of identity of the party responsible for
producing or maintaining such records and information. Without limiting the
foregoing, all patient charts and records maintained by Manager relating to the
dental services of Group shall be the property of Group. Group also shall be
entitled to a copy at Group's sole cost of all business records pertaining to
Group. Except as limited by law, including, but not limited to laws governing
the confidentiality of patient records, Manager shall be entitled to a copy at
Manager's sole cost of all records of Group.
ARTICLE X
RESTRICTIVE COVENANTS
---------------------
Section 10.1 Covenant Regarding Proprietary Information. In the course
of the relationship created pursuant to this Agreement, Group will have access
to certain methods, trade secrets, processes, ideas, systems, procedures,
inventions, discoveries, concepts, software in various stages of development,
designs, drawings, specifications, models, data, documents, diagrams, flow
charts, research, economic and financial analysis, developments, procedures,
know-how, policy manuals, form contracts, marketing and other techniques, plans,
materials, forms, copyrightable materials and trade information (all of which is
referred to in this Agreement as "Proprietary Information") regarding the
operations of Manager and/or of its Affiliates (collectively, the "Protected
Parties"). Group shall maintain all such Proprietary Information in strict
secrecy and shall neither use for itself or
15.
<PAGE>
any third parties nor divulge such information to any third parties, except as
may be necessary for the discharge of their obligations under this Agreement or
otherwise consented to in writing by Manager. Group shall take all necessary and
proper precautions against disclosure of any Proprietary Information to
unauthorized persons by any of its employees or agents. Group and all employees,
and agents of Group who will have access to all or any part of the Proprietary
Information may be required to execute an agreement, at the request of Manager,
valid under the law of the jurisdiction in which such agreement is executed, and
in a form acceptable to Manager and its counsel, committing themselves to
maintain the Proprietary Information in strict confidence and not to disclose it
to any unauthorized person or entity. The Protected Parties not party to this
Agreement are hereby specifically made third party beneficiaries of this
Section, with the power to enforce the provisions hereof. Upon termination of
this Agreement for any reason, Group and each of its Employee Providers and
Subcontract Providers shall cease all use of any of the Proprietary Information
and, at the request of Manager, shall execute such documents as may be necessary
to evidence Group's abandonment of any claim thereto. The parties recognize that
a breach of this Section cannot be adequately compensated in money damages and
therefore agree that injunctive relief shall be available to the Protected
Parties as their respective interests may appear.
The obligations of Group under this Section 10.1 shall not apply to
information: (i) which is a matter of public knowledge on or becomes a matter of
public knowledge after the Effective Date of this Agreement, other than as a
breach of the confidentiality terms of this Agreement or as a breach of the
confidentiality terms of any other agreement between a third party and Group,
Manager and/or its Affiliates; or (ii) which was lawfully obtained by Group on a
nonconfidential basis other than in the course of performance under this
Agreement and from some Person other than Manager or its Affiliates or from some
person other than one employed or engaged by Manager or its Affiliates, which
Person has no obligation of confidentiality to Manager or its Affiliates.
Section 10.2 Covenants Not to Compete During the Term. The parties
recognize that the services to be provided by Manager shall be feasible only if
Group operates an active dental practice to which Group and its Providers devote
their full time and attention. To that end:
a. Restrictive Covenants by Group. During the term of this
Agreement and except as otherwise agreed to in writing by Manager, Group shall
not (i) establish, operate or provide dental care services at any dental office,
clinic or other facility providing services substantially similar to those
provided by Group pursuant to this Agreement anywhere other than at the Practice
Sites or as may be approved in writing by Manager; (ii) enter into any
management or administrative services agreement or other similar arrangement
with any person or entity other than Manager without Manager's prior written
approval and (iii) operate or, directly or indirectly, hold or own any type of
ownership or other form of equity interest in, or serve as a consultant to or
otherwise perform services for any person or entity engaged in the business of
providing management and administrative services to dental practices.
b. Restrictive Covenants by Providers. Group shall use its best
efforts to obtain and enforce formal agreements with its Employee Providers and
Subcontract Providers who are dentists not to establish, operate or provide
dental care services, during the term of this Agreement and for a period of two
(2) years after any termination of employment with Group (except a termination
of such employment (i) based upon a material breach by Manager which shall
remain uncured for a period of sixty (60) days after receipt of notice in
accordance with Section 11.4 hereof, (ii) by reason of nonpayment of a material
amount owed by Manager to or to be paid by Manager on behalf of Group, or (iii)
by Group without cause), at any dental office, clinic or facility located within
5 miles of any Practice Site at which the Employee Provider or Subcontract
Provider has practiced. Any variation of such restrictive covenants shall be
approved in advance in writing by Manager.
Section 10.3 Covenant Not to Solicit. For three (3) years following
the termination of this Agreement, except for a valid termination by Group
pursuant to Section 6.2(b), Group shall not:
a. directly or indirectly solicit, recruit or hire, or induce any
party to solicit, recruit or hire any person who is an employee of, or who has
entered into an independent contractor arrangement with, Manager or any
Affiliate of Manager;
16.
<PAGE>
b. directly or indirectly, whether for itself or for any other
person or entity, call upon, solicit, divert or take away, or attempt to
solicit, call upon, divert or take away any of Manager's customers, business, or
clients; or
c. directly or indirectly solicit, or induce any party to
solicit, any of Manager's contractors or the contractors of any Affiliate of
Manager, to enter into the same or a similar type of contract with any other
party.
10.4 Enforcement. Manager and Group acknowledge and agree that since a
remedy at law for any breach or attempted breach of the provisions of this
Article X shall be inadequate, either party shall be entitled to specific
performance and injunctive or other equitable relief in case of any such breach
or attempted breach, in addition to whatever other remedies may exist by law.
All parties hereto also waive any requirement for the securing or posting of any
bond in connection with the obtaining of any such injunctive or other equitable
relief.
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
Section 11.1 Assignment. Neither party shall assign this Agreement to
any other party or parties without the prior written consent of the other party,
which consent may be withheld arbitrarily or capriciously, for any reason or for
no reason whatsoever and any attempted assignment in violation of this Agreement
shall be null and void. Notwithstanding the preceding, Manager may assign this
Agreement to any Affiliate of either Manager or Parent or to a financial
institution as collateral security for the indebtedness of Manager, Parent or
any of their respective Affiliates. Group hereby agrees that (a) upon notice of
any default or event of default from any financial institution (or its agent, as
applicable) to which this Agreement has been assigned as collateral security for
such indebtedness, Group will make all payments required to be made under this
Agreement to such financial institution (or its agent, as applicable) and such
financial institution (or its agent, as applicable) shall be entitled to
exercise any and all rights and remedies of Manager under this Agreement, and
(b) Group will not, without the prior written consent of such financial
institution (or its agent, as applicable), terminate (except pursuant to the
terms hereof) or amend or otherwise modify this Agreement.
Section 11.2 Headings. The article and section headings used in this
Agreement are for purposes of convenience only. They shall not be construed to
limit or to extend the meaning of any part of this Agreement.
Section 11.3 Waiver. Waiver by either Group or Manager of any breach
of any provision of this Agreement shall not be deemed to be a waiver of such
provision or of any subsequent breach of the same or of any other provision of
this Agreement.
Section 11.4 Notices. Any notice, demand, approval, consent or other
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be shall be deemed to have been given when five (5) business
days have elapsed from the date of deposit in the United States mails, certified
and postage prepaid, addressed to the party to be served at the following
address or such other address as may be given in writing to the parties.
Group:
With a copy to: Kennedy & Kennedy LLP
Attorneys at Law
Pioneer Tower Suite 1170
888 S.W. Fifth Avenue
Portland, Oregon 97204-2098
Attn: James M. Kennedy, Esq.
18.
<PAGE>
Manager: Gentle Dental Service Corporation
22800 Savi Ranch Parkway, Suite 206
Yorba Linda, California 92887
Attn: Michael T. Fiore, President and
Chief Executive Officer
With a copy to: McDermott, Will & Emery
1301 Dove Street, Suite 500
Newport Beach, California 92660
Attn: Richard J. Babcock
Section 11.5 Attorneys' Fees. If any legal action or arbitration or
other proceeding is commenced, whether by Manager or Group concerning this
Agreement, the prevailing party shall recover form the losing party reasonable
attorneys' fees and costs and expenses, including those of appeal and not
limited to taxable costs, incurred by the prevailing party, in addition to all
other remedies to which the prevailing party may be entitled.
Section 11.6 Successors. Without limiting or otherwise affecting any
restrictions on assignments of this Agreement or rights or duties under this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
successor and assigns of Group and Manager.
Section 11.7 Entire Agreement. This Agreement and that certain
Agreement by and among Manager, Gentle Dental of Oregon, P.C. and Tse, Saiget,
Wantanabe and McClure, Inc., P.S., of even date hereof set forth the entire
agreement between Group and Manager and supersedes all prior negotiation and
agreements (including, without limitation, the Prior Agreement), written or
oral, concerning or relating to the subject matter of this Agreement, and this
Agreement may not be modified except by a writing executed by all parties and
subject to the provisions thereof.
Section 11.8 Governing Law. This Agreement and the rights and
obligations of the parties hereto shall be governed by, and construed according
to, the laws of the State of California.
Section 11.9 Severability, Contract Modifications for Prospective
Legal Events. Nothing contained in this Agreement shall be construed to require
the commission of an act contrary to law, and whenever there is any conflict
between any provision of this Agreement and any statute, law, ordinance or
regulation, the latter shall prevail. In such event, and in any case in which
any provision of this Agreement is determined to be in violation of a statute,
law, ordinance or regulation, the affected provision(s) shall be limited only to
the extent necessary to bring it within the requirements of the law and, insofar
as possible under the circumstances, to carry out the purposes of this
Agreement. The other provisions of this Agreement shall remain in full force and
effect, and the invalidity or unenforceability of any provision hereof shall not
affect the validity and enforceability of the other provisions of this
Agreement, nor the availability of all remedies in law or equity to the parties
with respect to such other provisions.
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision, a regulatory agency or legal counsel of both
parties in such a manner as to indicate that the substantive structure of this
Agreement may be in violation of such laws or regulations, Group and Manager
shall proceed in good faith to amend this Agreement, to the maximum extent
possible, to preserve the underlying economic, financial and composition of
Joint Operations Committee arrangements between Group and Manager. A party to
this Agreement may choose to, but shall not be required to, take any action or
to make any amendment to this Agreement if such action or amendment would put
them in a substantially and materially worse economic or financial position than
that contemplated by the terms of this Agreement. The parties acknowledge that
such amendment may require reorganization of Group or Manager, or both, and may
require either or both parties to obtain appropriate regulatory licenses and
approvals. If an
18.
<PAGE>
amendment is not possible, either party shall have the right to terminate this
Agreement upon thirty (30) days notice to the other party.
Section 11.10 Time Is of the Essence. Time is of the essence in this
Agreement.
Section 11.11 Authority. Any Person signing this Agreement on behalf
of any entity hereby represents and warrants in its individual capacity that it
has full authority to do so on behalf of such entity.
Section 11.12 Counterparts. This Agreement may be executed in two (2)
or more counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, Group and Manager have caused their authorized
representatives to execute this Dental Group Management Agreement as of the date
first above written.
"Group"
By: RICHARD M. BATES
------------------------------------
Its: President
------------------------------------
"Manager"
By: MICHAEL THOMAS FIORE
------------------------------------
Its:------------------------------------
19.
<PAGE>
ADDENDUM 1
For purposes of this Agreement, the following terms shall have the
meaning indicated below or defined at the indicated section:
(1) Accounts. See Section 2.5.
(2) Affiliate. "Affiliate" shall mean, with respect to any Person, (i)
any individual or entity directly or indirectly owned or controlled by such
Person, (ii) any individual or entity directly or indirectly owning or
controlling such Person or (iii) any individual or entity directly or indirectly
owned or controlled by the same family member, individual or entity as owns or
controls such Person. For purposes of this Agreement, neither Group nor Manager
shall be deemed an Affiliate of the Other.
(3) Agreement. "Agreement" means this Group Management Agreement.
(4) Annual Budget. See Section 3.6.
(5) Beneficiaries. See Recital A.
(6) Books and Records. "Books and Records" means Group's books of
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
(7) Capital Costs. "Capital Costs" shall mean any and all investments
that are or would be capitalized pursuant to GAAP.
(8) Committee Members. See Section 3.5a.
(9) Default Notice. See Section 6.2b(1).
(10) Effective Date. See preamble paragraph.
(11) Employee Providers. See Recital B.
(12) Employment Agreements. See Recital B.
(13) Excluded Expenses. "Excluded Expenses" shall mean those costs and
expenses incurred by Group which are (i) expressly identified as Excluded
Expenses in this Agreement, and/or (ii) not Practice Expenses or Group Expenses
expressly contemplated by or set forth in the Annual Budget.
(14) GAAP. "GAAP" means at any particular time generally accepted
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with GAAP, and all financial
computations hereunder shall be computed unless otherwise specifically provided
herein, in accordance with GAAP as consistently applied and using the same
method of valuation as used in the preparation of Manager's financial statement.
(15) Group. See first paragraph of this Agreement.
(16) Group Expenses. "Group Expenses" means salaries and wages,
compensation, payroll taxes, and employee benefits of Employee Providers and
Subcontract Providers, all as set forth in, and subject to and limited by, the
Annual Budget.
20.
<PAGE>
(17) Group Member. See Section 3.5a.
(18) Group Patients. See Recital A.
(19) Joint Operations Committee. See Section 3.4b.
(20) Management Fee. See Section 7.1.
(21) Manager. See first paragraph of this Agreement.
(22) Manager Members. See Section 3.5a.
(23) Marks. See Section 2.3a.
(24) Offer. See Section 5.1.
(25) Parent. "Parent" shall mean GDSC or any successor thereto.
(26) Patient. "Patient" shall mean and include any Group Patient
and/or Beneficiary.
(27) Payment Date. See Section 7.2.
(28) Percentage Fee Portion. See Exhibit 7.1.
(29) Payor Contracts. See Recital A.
(30) Person. "Person" shall mean any natural person, corporation,
partnership or other business structure recognized as a separate legal entity.
(31) Plans. See Recital A.
(32) Practice. See Recital C.
(33) Practice Expenses. "Practice Expenses" means all costs incurred
by Manager including amortization and/or depreciation associated with assets of
Manager utilized by Group in the conduct of its Practice or covering operations
and Capital Costs, direct labor costs, supplies, direct overhead and indirect
overhead expense attributable to the management and operation of the Practice
and direct and indirect corporate overhead of Manager including all interest
expense and other expenses which are attributable to Manager's business
operations in accordance with Manager's corporate allocation policies, all as
consistent with and/or contemplated in the Annual Budget.
(34) Practice Sites. See Section 3.4a.
(35) Practice Site Facilities. See Section 3.4a.
(36) Preliminary Budget. See Section 3.7b.
(37) Prior Agreement. See Recital F.
(38) Programs. See Section 2.3b.
(39) Proprietary Information. See Section 10.1.
(40) Protected Parties. See Section 10.1.
21.
<PAGE>
(41) Providers. See Recital B. The term "Providers" shall include
individuals or organizations licensed to practice dentistry (including
specialists) as well as other licensed dental professionals who provide
ancillary reimbursable dental services.
(42) Provider Subcontracts. See Recital B.
(43) Reimbursable Expense Portion. See Exhibit 7.1.
(44) Revenues. See Section 2.4.
(45) Security Agreement. See Section 7.4.
(46) Subcontract Providers. See Recital B.
(47) Term. See Section 6.1.
22.
===============================================================================
DENTAL GROUP MANAGEMENT AGREEMENT
by and between
Gentle Dental Service Corporation
(a Washington corporation)
and
Dany Tse, P.C.
(a Washington corporation)
===============================================================================
January 1, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS.................................................. 1.
ARTICLE II SCOPE OF AGREEMENT........................................... 2.
Section 2.1 General Scope of Agreement........................ 2.
Section 2.2 (Intentionally Omitted]........................... 2.
Section 2.3 [Intentionally omitted.]
Section 2.4 Revenues.......................................... 2.
Section 2.5 Deposit Accounts.................................. 2.
ARTICLE III OPERATION OF PRACTICE........................................ 2.
Section 3.1 Appointment....................................... 2.
Section 3.2 Professional Matters.............................. 3.
Section 3.3 Relationship of Parties........................... 3.
Section 3.4 Authority and Control............................. 3.
Section 3.5 Joint Operations Committee........................ 4.
Section 3.6 Budgets........................................... 6.
Section 3.7 Budget Process.................................... 6.
ARTICLE IV MANAGEMENT SERVICES.......................................... 7.
Section 4.1 General Description of Services................... 7.
Section 4.2 Practice Site Facilities.......................... 7.
Section 4.3 Purchased Items and Services...................... 8.
Section 4.4 Manager Personnel................................. 8.
Section 4.5 Day-to-Day Management and Supervision............. 8.
Section 4.6 Billing and Collection Payment of Expenses........ 8.
Section 4.7 Bookkeeping and Accounting........................ 9.
Section 4.8 Marketing and Public Relations Services........... 9.
Section 4.9 Group Agreements.................................. 10.
Section 4.10 Utilization Review Quality Improvement and
Outcomes Monitoring............................... 10.
Section 4.11 Patient Referrals................................. 10.
Section 4.12 Applicable Law.................................... 10.
ARTICLE V GROUP RESPONSIBILITIES....................................... 10.
Section 5.1 Diagnosis, Treatment Planning, Specific Patient
Education and Consultation........................ 10.
Section 5.2 Dental Services................................... 11.
Section 5.3 Provision of Dental Services by Group............. 11.
Section 5.4 Providers......................................... 11.
Section 5.5 Peer Review....................................... 12.
Section 5.6 Fees, Charges and Payor Agreements................ 12.
Section 5.7 Hours of Clinical Operation....................... 12.
Section 5.8 Billing Information and Assignments............... 12.
(i)
<PAGE>
Section 5.9 Third Party Contracts............................. 12.
Section 5.10 Use of Manager's Goods and Services............... 12.
Section 5.11 Negative Covenants................................ 12.
Section 5.12 Group Maintains Full Professional Authority....... 13.
ARTICLE VI TERM......................................................... 13.
Section 6.1 Term.............................................. 13.
Section 6.2 Termination and Extension......................... 13.
ARTICLE VII FINANCIAL AND SECURITY ARRANGEMENTS.......................... 15.
Section 7.1 Management Fee.................................... 15.
Section 7.2 Payments.......................................... 15.
Section 7.3 Advances.......................................... 15.
Section 7.4 Security Agreement................................ 15.
Section 7.5 Priority of Payments.............................. 16.
Section 7.6 Accounts Receivable............................... 16.
ARTICLE VIII INDEMNITY AND INSURANCE...................................... 16.
Section 8.1 Indemnity......................................... 16.
Section 8.2 Manager's Insurance............................... 17.
Section 8.3 Group's Insurance................................. 17.
ARTICLE IX BOOKS AND RECORDS............................................ 18.
Section 9.1 Ownership of Records.............................. 18.
ARTICLE X RESTRICTIVE COVENANTS........................................ 18.
Section 10.1 Covenant Regarding Proprietary Information........ 18.
Section 10.2 Covenants Not to Compete During the Term.......... 19.
Section 10.3 Covenant Not to Solicit........................... 19.
ARTICLE XI MISCELLANEOUS PROVISIONS..................................... 20.
Section 11.1 Assignment........................................ 20.
Section 11.2 Headings.......................................... 20.
Section 11.3 Waiver............................................ 20.
Section 11.4 Notices........................................... 20.
Section 11.5 Attorneys' Fees................................... 20.
Section 11.6 Successors........................................ 21.
Section 11.7 Entire Agreement.................................. 21.
Section 11.8 Governing Law..................................... 21.
Section 11.9 Severability, Contract Modifications for
Prospective Legal Events.......................... 21.
Section 11.10 Time Is of the Essence............................ 21.
Section 11.11 Authority......................................... 21.
Section 11.12 Counterparts...................................... 21.
EXHIBITS
(ii)
<PAGE>
Addendum 1
Schedule A -- Stockholder
Schedule B -- Professional Liability Insurance Coverage
Exhibit 3.4 -- Practice Sites
Exhibit 7.1 -- Service Fee
Exhibit 7.4 -- Security Agreement
(iii)
<PAGE>
DENTAL GROUP MANAGEMENT AGREEMENT
=================================
This Dental Group Management Agreement (this "Agreement") is dated and
effective as of January 1, 1998 ("Effective Date"), by and between Gentle Dental
Service Corporation, a Washington corporation ("Manager"), and Dany Tse, P.C., a
Washington corporation ("Group").
RECITALS
========
A. Group engages in the practice of dentistry by providing dental
services to patients of Group ("Group Patients") and to enrollees
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
between Group and Plans or between Beneficiaries and Plans.
B. Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
arrangements may include contracts ("Employment Agreements") with dentist
employees (collectively "Employee Providers") and agreements ("Provider
Subcontracts") with independent contractor dentists and non-dentist providers of
various dental care services (collectively "Subcontract Providers").
C. All activities of Group subject to this Agreement are referenced as
the "Practice." All references to "dental" care and services include general and
specialist dental services. All references to "dentists" include generalists and
specialists.
D. Manager is a dental management company that has been organized to
provide certain support services for the Practice and for other dental groups.
Manager is in the business of providing or arranging for management and
administrative services, facilities, equipment and certain personnel necessary
for the operation of the Practice and other dental groups.
E. Group desires to retain Manager on an independent contractor basis
to provide management and administrative services that are more particularly
described below, and Manager desires to provide such management services under
the terms and conditions set forth in this Agreement.
F. This Agreement supersedes that certain Support Services Agreement
dated ---------- by and between Manager and Group (the "Prior Agreement").
AGREEMENTS
----------
Now, Therefore, in consideration of the covenants and conditions
contained herein, Manager and Group agree as follows:
ARTICLE I
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its addenda and
exhibits are defined in Addendum 1.
1.
<PAGE>
ARTICLE II
SCOPE OF AGREEMENT
------------------
Section 2.1 General Scope of Agreement. This Agreement shall apply to
the Practice being conducted by Group, including, without limitation, all
professional, administrative and technical services, marketing, contracting,
case management, ancillary dental services, outpatient services and dental care
facilities, equipment, supplies and items, except as otherwise specifically
provided in this Agreement. Group's Employment Agreements shall encompass
substantially all such activities of Employee Providers and shall provide that
all revenues derived from such activities (and not excluded below) shall be
included in Revenues as such term is defined in Section 2.4 hereof. Nothing in
this Agreement shall be construed to alter or in any way affect the legal,
ethical and professional relationship between and among Provider and Provider's
patients, nor shall anything contained in this Agreement abrogate any right or
obligation arising out of or applicable to the dentist-patient relationship.
Section 2.2 [Intentionally omitted.]
Section 2.3 [Intentionally omitted.]
Section 2.4 Revenues. "Revenues" shall mean all of Group's accounts
receivable (net of contractual adjustments and bad debt), and cash collections.
Revenues shall include all funds collected by, or legally due to, Group or any
Affiliate of Group, including, without limitation, the following: (a) all
fee-for-service payments for services to Group Patients or Beneficiaries; (b)
all payments established under Payor Contracts; (c) all coordination of benefits
or deductibles and third-party liability recoveries related to the Group's
services; (d) all payments, dues, fees or other compensation to Group, excluding
any consideration payable pursuant to that certain Agreement by and among
Manager, Gentle Dental of Oregon, P.C. and Tse, Saiget, Wantanabe and McClure,
Inc., P.S. of even date herewith; (e) any income, profits, dividends,
distributions or other payments from Group's investments; and (f) any interest
or other non-operating income of Group.
Section 2.5 Deposit Accounts. All cash received by Group from whatever
source shall be deposited into an account or accounts ("Accounts") in the name
of Group at a banking institution selected by Group and approved by Manager.
Group authorizes Manager to bill and collect, in Group's name, all charges and
reimbursements for Group's dental related activities and to deposit such
collections in the Accounts. Group agrees to assist and cooperate with Manager
in the billing and collection process and to immediately deliver to Manager for
deposit any monies Group may receive. Manager shall manage the cash equivalents
of Group and Manager shall be entitled (and is hereby authorized) to transfer
such cash to the account of Manager and to use such cash for purposes as Manager
deems appropriate, subject to and consistent with the terms and provisions of
this Agreement. Nothing in this Section 2.5 shall be construed to limit or
otherwise modify the requirement that Manager disburse funds in fulfillment of
the obligations of the Group and Manager under this Agreement.
ARTICLE III
OPERATION OF PRACTICE
---------------------
Section 3.1 Appointment. Subject to applicable laws and requirements
governing the practice of dentistry, Group hereby appoints Manager as its sole
and exclusive Manager for the operation of the Practice and covenants not to
enter into an agreement with any Person other than Manager to perform or assume
any of Manager's rights, duties or responsibilities as provided herein and
hereby appoints Manager as its true and lawful attorney-in-fact to negotiate and
execute on its behalf all Provided Contracts,
2.
<PAGE>
Employment Agreements and Provider Subcontracts. Manager hereby accepts
appointment as Group's attorney-in-fact and accepts full responsibility for
management of Group as more fully set forth herein.
Section 3.2 Professional Matters. Pursuant to applicable laws and
requirements governing the practice of dentistry, Group shall retain ultimate
responsibility for all activities of Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's
non-licensed status.
Section 3.3 Relationship of Parties. In the performance of its duties
and obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Group. Except as provided in this Agreement or as required
by law, Group shall neither have nor exercise any control or direction over the
methods by which Manager shall perform its obligation thereunder; nor shall
Manager have or exercise any control or direction over the methods by which
Group shall practice dentistry. It is expressly agreed by the parties that no
work, act, commission or omission of manager pursuant to the terms and
conditions of this Agreement shall be construed to make or render Manager or
Manager's employees or agents, the employees of Group. Manager and Group are not
partners or joint venturers with each other and nothing herein shall be
construed so as to make them partners or joint venturers or impose upon either
of them any liability as partners or joint venturers. Manager's responsibility
is to assure that the services covered by this Agreement shall be performed and
rendered in a competent, efficient and satisfactory manner. Both Manager and
Group will act in good faith in connection with the performance of their
respective obligations under this Agreement.
Section 3.4 Authority and Control. Strategic planning, overall
direction and control of the business and affairs of Group, and authority over
the day-to-day activities of Group shall be accomplished as follows:
a. Group. Notwithstanding anything else to the contrary contained
herein, Group shall have the sole responsibility and authority for all aspects
of the practice of the profession of dentistry and delivery of dental services
to Group Patients and Beneficiaries by Group and its Providers. Providers shall
use and occupy at the practice sites set forth on Exhibit 3.4 hereto ("Practice
Sites") the facilities provided by Manager hereunder exclusively for the
practice of dentistry ("Practice Site Facilities"). Group and Manager expressly
acknowledge that the Practice or Practices conducted at these Practice Site
Facilities shall be conducted solely by dentists and dental hygienists
associated with Group as Employee Providers or Subcontract Providers. Group
shall consult with Manager or the Joint Operations Committee, to the extent
reasonable, on all matters pertaining to or affecting the Practice and not
otherwise inconsistent with the applicable laws governing the practice of
dentistry.
b. Joint Operations Committee Authority. All other
decision-making authority over the business, affairs and operations of Group
shall be vested in a joint operations committee (the "Joint Operations
Committee"). Notwithstanding anything in this Agreement to the contrary, unless
such authority has been otherwise granted or delegated to Manager herein, or is
otherwise prohibited by applicable federal or state law, the Joint Operations
Committee shall have exclusive decision-making authority over all matters
necessary to enable Manager to consolidate Group for accounting purposes
pursuant to Financial Accounting Standards Board ("FASB") Statement No. 94 (or
any successor statement, interpretation or release), as such matters are
described and set forth in the Emerging Issues Task Force ("EITF") Issue No.
97-2 (as may be further interpreted or modified by FASB, the EITF or the
Securities and Exchange Commission) including, without limitation, scope of
services provided, patient acceptance policies and procedures, pricing of
services, negotiation and execution of contracts, establishment and approval of
operating and capital budgets, total Group compensation, establishment and
implementation of guidelines for selection, hiring and termination of dentists
and other dental professionals, and the incurrence or issuance of debt by Group
(collectively, the "Joint Operations Committee Decision Matters"). Nothing
herein shall be construed as preventing the Joint
3.
<PAGE>
Operations Committee from appointing representatives and delegating authority to
such representatives so long as the Joint Operations Committee may revoke such
appointment and delegation at any time and so long as the Joint Operations
Committee retains ultimate responsibility for the decisions of such
representatives.
Section 3.5 Joint Operations Committee. Subject to applicable laws and
requirements governing the practice of dentistry, the Joint Operations Committee
shall have authority and responsibility to provide strategic planning, overall
direction and authority over the day-to-day management and administrative
activities of the Group and shall manage the business operations of the Group as
follows:
a. Joint Operations Committee Membership. The Joint Operations
Committee shall consist of five (5) individuals (the "Committee Members"). Group
shall designate two (2) Committee Member who shall be licensed dentists (the
"Group Members") and the remaining three (3) Committee Members (the "Manager
Members") shall be appointed by Manager. The number of Committee Members may be
increased by mutual agreement of the parties. Each party shall continue to
direct the appointment of the same percentage of Committee Members as described
above. Each Committee Member shall serve at the pleasure of the party
designating such Committee Member and may be replaced, with or without cause, at
any time by such party upon the delivery of written notice thereof to the other
Committee Members. Manager, Group and their respective Committee Members shall
diligently pursue any preliminary activities that are necessary to allow the
Joint Operations Committee to take an action. Where Committee Members are
required to consult with the organization appointing such Committee Members, the
Committee shall establish and agree on a deadline for accomplishing such
consultation.
b. Joint Operations Committee Action.
(1) Joint Action. Except as otherwise expressly set forth
above, the Joint Operations Committee shall take all actions that have been
approved by a majority of the Committee Members and both Group and Manager
hereby agree to be bound by the decision of the Joint Operations Committee.
(2) Consultation Forum. Consultation between Group and
Manager, if any, shall take place at a meeting of the Joint Operations
Committee, and Group and Manager hereby agree to be bound by the decision of
their Group Members or Manager Members, as the case may be.
c. Joint Operations Committee Meetings. Meetings of the Joint
Operations Committee may be held by telephone or similar communications
equipment so long as all Committee Members participating in a meeting can hear
and speak to each other. The Joint Operations Committee shall prepare and
maintain written minutes of all meetings and shall, upon request, provide a copy
of the minutes to the parties within fifteen (15) business days following each
meeting.
(1) Regular Meetings. The Joint Operations Committee shall
hold not less than four (4) regular meetings each year, at such specific times
and places as the Committee Members may determine.
(2) Special Meetings. A special meeting of the Joint
Operations Committee may be called by a majority of the Committee Members.
(3) Notice Requirement. A Committee Member calling a special
meeting must provide all other Committee Members with three (3) days' advance
written or telephonic notice. Notice must be given or sent to the Committee
Member's address or telephone number as shown on the records of the Joint
Operations Committee. Notice may be delivered directly to each Committee Member
or
4.
<PAGE>
to a person at the Committee Member's principal place of business who reasonably
would be expected to communicate that notice promptly to the Committee Member.
(4) Waiver of Notice Requirement.
(a) Written Waiver, Consent or Approval. Notice of a
special meeting need not be given to any Committee Member who, either before or
after the meeting, signs a waiver of notice or a written consent of the holding
of the special meeting, or an approval of the minutes of the special meeting.
Such waiver, consent or approval need not specify the purpose of the special
meeting. All such waivers, consents and approvals shall be filed with the Joint
Operations Committee records or made a part of the minutes of the special
meetings.
(b) Failure to Object. Notice of a special meeting need
not be given to any Committee Member who attends the special meeting and does
not protest before or at the commencement of the special meeting such lack of
notice.
(5) Quorum. The smallest number of Committee Members that
exceed fifty percent (50%) of all Committee Members shall constitute a quorum of
the Joint Operations Committee, provided, however, that such quorum shall
include at least one Group member and one Manager member.
(6) Proxies. The Joint Operations Committee shall provide
for the use of proxies, telephonic conference calls, written consents or other
appropriate methods by which the full participation of the Group Members and
Manager Members can be assured.
d. Limitation of Responsibility. Notwithstanding any other
provisions hereof, Committee Members shall be liable to the parties only for
actions constituting bad faith, gross negligence or breach of an express
provision of this Agreement (so long as such breach remains uncured after ten
(10) days of receiving notice of the nature of such breach). In all other
respects, Committee Members shall not be liable for negligence or mistakes of
judgment.
Section 3.6 Budgets. Each year during the term hereof, the Joint
Operations Committee shall approve and establish an annual capital and operating
budget ("Annual Budget") regarding all financial aspects of the Practice. The
Annual Budget shall include the following elements and other items, as
appropriate:
a. A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
b. An operating budget setting forth an estimate of revenues and
expenses for the next succeeding fiscal year, together with an explanation of
anticipated changes or modifications, if any, in the Practice's utilization,
rates, charges to patients or third party payors, salaries, costs of Providers,
non-wage cost increases, and all other similar factors expected to differ
significantly from those prevailing during the current fiscal year;
c. Other expenses of operation;
d. The amount of a reasonable reserve to satisfy possible
shortfalls from operations. The allocation of such reserve shall be made by the
Joint Operations Committee as and when necessary;
5.
<PAGE>
e. The total annual amount of Group Expenses for the next
succeeding fiscal year, and
f. The Management Fee, as defined below, for the next succeeding
fiscal year.
Section 3.7 Budget Process.
a. Initial Annual Budget. Not later than 45 days after the
Effective Date, the Joint Operations Committee will have prepared the initial
Annual Budget for the first fiscal year (which shall initially be the calendar
year) during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains, or, at the option of
the parties, such portion of the then current fiscal year plus the immediately
subsequent fiscal year.
b. Preliminary Budget. Not later than forty-five (45) days prior
to the end of each fiscal year during the term of this Agreement, the Manager
shall prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
c. Joint Operations Committee Approval. The Joint Operations
Committee shall review and suggest modifications to the Preliminary Budget
within ten (10) days of receipt. Manager shall prepare a revised budget based
upon the Joint Operations Committee's recommendations and the Preliminary Budget
as revised shall become the Annual Budget.
d. Adjustments. In the event of a material deviation between
financial forecasts and financial performance during a fiscal year, Manager or
Group may propose adjustments to the Annual budget which adjustments shall be
approved or disapproved by the Joint Operations Committee pursuant to the
procedures set forth above.
3.8 Personnel.
a. Providers. Except in unusual circumstances approved by the
Joint Operations Committee, and as permitted by law, Manager shall not employ or
contract with any Provider for the provision of dental services. All Providers
who provide dental services to Group Patients or to Beneficiaries shall be
either (1) Employee Providers, (2) Subcontract Providers, or (3) employees of
Subcontract Providers. Subject to guidelines established by the Joint Operations
Committee, Group shall have complete control of and responsibility for the
hiring, engagement, compensation, training, scheduling, supervision, evaluation,
and termination of all Employee Providers and Subcontract Providers, although
Manager shall consult with Group respecting such matters and shall coordinate
the advertising of positions available, interviewing of candidates, and
scheduling of clinical staff meetings and training sessions.
b. Non-Providers. With the exception of employees of Subcontract
Providers, Manager shall employ all non-Provider personnel reasonably necessary
for the operation of the Practice.
c. Salary and Benefits. Subject to Manager's responsibilities
under Article VII, each party to this Agreement shall remain liable for the
salary and benefits paid to such party's own employees and shall be ultimately
responsible for compliance with state and federal laws pertaining to workers'
compensation, unemployment compensation and other employment-related statutes
pertaining to the party's own employees.
6.
<PAGE>
d. Payments to Subcontract Providers. Subject to Manager's
responsibilities under Article VII, Group shall be liable for any payments due
Subcontract Providers under Provider Subcontracts.
ARTICLE IV
MANAGEMENT SERVICES
-------------------
Section 4.1 General Description of Services. Except as prohibited by
law and within the limitations set out elsewhere in this Agreement, Manager
shall provide or arrange for the provision to Group of all management,
administrative and support services reasonably necessary and appropriate for the
efficient operation of the Practice. Such services include all administrative
services necessary to Group's performance of its obligations under Payor
Contracts, contracting, marketing, capital formation and assistance with long
term strategic planning. Manager shall exercise reasonable commercial efforts to
fulfill the administrative functions of a well managed dental group.
Section 4.2 Practice Site Facilities. When appropriate, Manager shall
secure and maintain Practice Site Facilities, including, without limitation,
office space, improvements, furnishings, equipment, supplies, and personal
property, of a nature and in a condition necessary and appropriate for the
efficient and effective operations of the Practice subject to the general
approval of the Joint Operations Committee. Group hereby accepts and approves of
the Practice Site Facilities initially provided by Manager. However, Manager
from time to time shall make such Practice Site Facilities changes, including
but not limited to dental equipment purchases, as reasonably may be requested by
Group and consistent with the Annual Budget.
Section 4.3 Purchased Items and Services. Manager shall serve as the
purchasing agent for Group and shall arrange for personnel benefits, insurance,
and any other items and services required for the proper operation of the
Practice.
Section 4.4 Manager Personnel.
a. Management Team. Subject to the approval and continuing
supervision of the Joint Operations Committee, Manager may engage or designate
one or more individuals experienced in dental group management and direction,
including, but not limited to, an administrator, who will be responsible for the
overall administration of the Practice including day-to-day operations and
strategic development activities in accordance with this Agreement.
b. Other Manager Personnel. Manager shall select, hire, train,
supervise, monitor and terminate all non-Provider personnel necessary for the
operation and management of the Practice; provided, however, with respect to the
selection, hiring and termination of non-Provider clinical staff, Manager shall
obtain the consent of the Group, which consent will not be unreasonably
withheld.
Section 4.5 Day-to-Day Management and Supervision. Subject to any
approval or consulting rights of the Joint Operations Committee, Manager shall
provide general management including, but not limited to, day-to-day supervision
of:
a. manager personnel;
b. equipment and supply acquisition;
c. office space and facility maintenance;
7.
<PAGE>
d. patient records organization and retention;
e. third party payor contracting;
f. case management;
g. billing, collections and accounting activities as set forth
below;
h. all operating aspects and policies of the Practice including,
but not limited to, hours of operation, work schedules, standard duties and job
descriptions, for all non-Group personnel; and
i. other related and incidental matters.
Section 4.6 Billing and Collection Payment of Expenses. In addition to
the responsibilities of Manager under Article VII, Manager shall be responsible
for all billing and collection activities required by Group. Manager shall also
be responsible for reviewing and paying accounts payable of Group. Group hereby
appoints the Manager its true and lawful attorney-in-fact to take the following
actions for and on behalf of and in the name of Group:
a. bill and collect in Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Group. Group shall give
Manager all necessary access to Patient records to accomplish all billing and
collection. In so doing, Manager will use its best efforts but does not
guarantee any specific level of collections, and Manager will comply with
Group's reasonable and lawful policies regarding courtesy discounts;
b. take possession of and endorse in the name of the Group any
and all instruments received as payment of accounts receivable;
c. deposit all such collections directly into the Accounts and
make withdrawals from such Accounts in accordance with this Agreement; and
d. place accounts for collection, settle and compromise claims,
and institute legal action for the recovery of accounts.
Section 4.7 Bookkeeping and Accounting. Manager shall provide
bookkeeping services, financial reports, and shall implement and manage a
computerized management information system appropriate for the Practice.
a. Financial Reporting. Manager shall prepare, analyze and
deliver to the Joint Operations Committee financial reports to the extent
necessary or appropriate for the operation of the Practice, including the
following:
(1) financial statements, including balance sheets and
statements of cash flow and income;
(2) accounts payable and accounts receivable analysis;
(3) billing status including any medicaid remittances; and
(4) reconciliation of assets, liabilities and major
expenses.
8.
<PAGE>
b. Audits. Group shall have the right to review, inspect and/or
copy and, at its sole cost and expense (which cost and expense shall be an
Excluded Expense), obtain an audit of (separate from any annual audit or review
of Group's financial statements performed at the direction of the Manager)
Group's financial books and records maintained by the Manager. Upon five (5)
days' prior written notice, Manager shall allow Group access during reasonable
business hours to all information and documents reasonably required for such
review, inspection and/or audit. Upon Group's request and at Group's sole cost
and expense (which cost and expense shall be an Excluded Expense), Manager shall
also provide copies of such documents.
Section 4.8 Marketing and Public Relations Services. Subject to any
limitation of law, regulation or ethical standards pertaining to the practice of
dentistry and following consultation with Group, Manager shall provide such
marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Group. Manager
shall provide Group with copies of all marketing materials.
Section 4.9 Group Agreements. On behalf of Group, as its
attorney-in-fact, and subject to applicable state and federal law and the
continuing supervision of the Joint Operations Committee, Manager shall review,
evaluate, negotiate and enter into on Group's behalf, Payor Contracts,
Employment Agreements and Provider Subcontracts and any other contracts or
agreements regarding the provision of dental related items or services by Group
or Providers.
Section 4.10 Utilization Review Quality Improvement and Outcomes
Monitoring. Manager shall be responsible for providing administrative support
for Group's utilization review, quality improvement and outcomes monitoring
activities, including, without limitation, data collection, analysis and
reporting for Group Patients and Beneficiaries. Manager shall also support the
development and implementation of relevant policies, procedures, protocols,
practice guidelines and other interventions based on such activities.
Section 4.11 Patient Referrals. The parties agree that the benefits to
Group hereunder do not require, are not payment for, and are not in any way
contingent upon the admission, referral or any other arrangements for the
provision of any item or service offered by Manager or any affiliate of Manager
to any of Group's Patients in any facility or laboratory controlled, managed or
operated by Manager or any affiliate of Manager.
Section 4.12 Applicable Law. Manager and Group shall comply with all
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE V
GROUP RESPONSIBILITIES
----------------------
Section 5.1 Diagnosis, Treatment Planning, Specific Patient Education
and Consultation. Group shall have sole responsibility for all professional
dental services provided to Patients with regard to the diagnosis of the
patient's condition and the development of treatment plan alternatives,
including, without limitation, the following:
a. Diagnosis. Group shall have sole responsibility for all
medical and dental history evaluation, examination, obtaining clinical records,
and diagnostic procedures appropriate for complete diagnosis.
9.
<PAGE>
b. Treatment Planning. Group shall have sole responsibility for
all determination of treatment alternatives that may be professionally
acceptable for the treatment of the patient's condition.
c. Specific Patient Education. Group shall have sole
responsibility for all discussion, recommendation, demonstration, and other
educational modalities intended to address the patient's specific condition, as
differentiated from general patient education intended to address the common
concerns of all patients presenting with similar conditions.
d. Consultation. Group shall have sole responsibility for all
discussion of clinical advantages, disadvantages, complications, and risks of
each alternative treatment plan, and including the likely results of no
treatment.
e. Manager to Assist with Record Procurement. Notwithstanding the
above, Manager shall be responsible for exercising reasonable efforts to
procure, at its own expense, medical and dental history information, previous
clinical records, and X-ray records prior to presentation of the patient for
treatment by Group, in accordance with protocols developed by Group in
consultation with Manager.
Section 5.2 Dental Services. Group shall have sole responsibility for
all professional dental services provided to Patients with regard to the
treatment of the patient's condition, including, without limitation, the
following:
a. Preventive Care. Group shall have sole responsibility for all
preventive care intended to delay, or intercept the development of pathologic
conditions.
b. Therapeutic Care. Group shall have sole responsibility for all
therapeutic care intended to ameliorate, or improve existing pathologic
conditions.
c. Referral to Specialists. Group shall have sole responsibility
for all referral to appropriate dental specialists and other allied health care
professionals in accordance with professional dental standards of care.
d. Continuing Care. Group shall have sole responsibility for all
development and execution of continuing care protocols intended to maintain the
patient's condition over the course of time.
e. Manager to Assist with Patient Compliance Tracking.
Notwithstanding the above, Manager shall be responsible for exercising
reasonable efforts to facilitate, coordinate, and document the scheduling,
tracking, and confirmation of Group's recommendations for dental diagnostic and
therapeutic services, treatments, referrals, and continuing care in accordance
with protocols developed by Group in consultation with Manager.
Section 5.3 Provision of Dental Services by Group. Group shall operate
the Practice during the Term as a dental practice in accordance with the terms
of this Agreement and shall use its best efforts to operate and conduct the
Practice in accordance with the Annual Budget. However, nothing in this
Agreement shall be construed to affect or limit in any way the professional
discretion or duty of Group insofar as such constitutes the practice of
dentistry.
Section 5.4 Providers.
10.
<PAGE>
a. Professional Dental Services. Subject to guidelines
established by the Joint Operations Committee, Group shall use their best
efforts to employ or contract with the number of Providers necessary for the
efficient and effective operation of the Practice and in accordance with the
Annual Budget and quality assurance, credentialing and utilization management
protocols approved by the Joint Operations Committee. Group shall provide full
and prompt dental coverage for the Practice, including emergency service
twenty-four hours per day, seven days per week, including holidays, according to
policies and schedules approved by the Joint Operations Committee.
b. Provider Subcontracts and Employment Agreements. Group shall
not negotiate or execute any Provider Subcontract, Employment Agreement, or any
amendment thereto, or terminate any Provider Subcontract or Employment Agreement
without the approval of the Joint Operations Committee. Subject to Manager's
responsibilities under Article VII, Group shall be responsible for the payment
of compensation, in accordance with the Annual Budget, of all Employee Providers
and Subcontract Providers.
Section 5.5 Peer Review. Group, after consultation with the Joint
Operations Committee, shall implement, regularly review, modify as necessary or
appropriate and obtain the commitment of Providers to actively participate in
peer review procedures for Providers. Group shall assist Manager in the
production of periodic reports describing the results of such procedures. Group
shall provide Manager with prompt notice of any information that raises a
reasonable risk to the health and safety of Group Patients or Beneficiaries. In
any event, after consultation with the Joint Operations Committee, Group shall
take such action as may be reasonably warranted under the facts and
circumstances.
Section 5.6 Fees, Charges and Payor Agreements. The Joint Operations
Committee shall, after consultation with Group, determine the fees, charges,
premiums, or other amounts due in connection with delivery of dental services to
Patients. Such fees, charges, premiums, or other amounts (regardless of whether
determined on a fee-for-service, capitated, prepaid, or other basis) shall be
reasonable and consistent with the fees, charges, premiums, and other amounts
due to dental care providers for similar services within the community under
similar types of reimbursement programs involved if such programs are currently
offered within the community.
Section 5.7 Hours of Clinical Operation. After consultation with
Group, the Joint Operations Committee shall establish hours of operation that
are consistent with good dental practice, and are appropriate to the need to
timely deliver professional dental care services to Group Patients.
Section 5.8 Billing Information and Assignments. Group shall promptly
provide Manager with all billing and patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Group's
services. Group shall use reasonable efforts to procure consents to assignments
and other approvals and documents necessary to enable Manager to obtain payment
or reimbursement from third party payors and patients. With the assistance of
Manager, Group shall obtain all provider numbers necessary to obtain payment or
reimbursement for its services.
Section 5.9 Third Party Contracts. Group shall be in compliance with
all contracts, agreements and arrangements, including any contracts that exist
on the Effective Date, between Group and third parties.
Section 5.10 Use of Manager's Goods and Services. Group shall not use
any goods or services provided by Manager pursuant to this Agreement for any
purpose other than the provision of and management of dental services as
contemplated by this Agreement and purposes incidental thereto.
11.
<PAGE>
Section 5.11 Negative Covenants. During the Term, Group shall not,
without the prior approval of the Joint Operations Committee, either in a single
or series of related transactions (a) pledge, mortgage or otherwise encumber any
of its property, (b) sell, assign, transfer or convey all or substantially all
of its assets, including its goodwill, (c) merge or consolidate with any other
entity, (d) allow the transfer or issuance of any of its stock (other than in
accordance with the terms and provisions of that certain Shares Acquisition
Agreement dated of even date herewith between Manager and the Persons set forth
on Schedule A hereto), or (e) take or allow any act that would materially impair
the ability of Group to carry on the business of the Practice or to fulfill its
obligations under this Agreement. Notwithstanding the preceding, prior to
consummating with any third party, any transfer, sale, assignment or conveyance
or any merger or consolidation contemplated in subparagraphs (a), (b) or (c)
above, Group shall first offer (the "Offer") to Manager or its designee the
right to acquire the assets of Group or to effect a merger or consolidation with
Group upon substantially the same business and economic terms as proposed to
Group by such third party. Manager or its designee shall have 60 days to elect
to accept or reject such Offer, which election shall be binding on the parties.
Section 5.12 Group Maintains Full Professional Authority.
Notwithstanding Manager's general and specific rights and responsibilities set
forth in this Agreement, Group shall have full authority and control with
respect to all dental, professional and ethical determinations over Group's
Practice to the extent required by federal, state and local laws, rules and
regulation. Manager shall not engage in activities which constitute the practice
of dentistry as prohibited under applicable law. Manager shall neither exercise
control over nor interfere with the dentist-patient relationship, which shall be
maintained strictly between Group's Providers and their Patients.
ARTICLE VI
TERM
----
Section 6.1 Term. This Agreement shall be effective the Effective
Date, and shall remain in effect for an initial term of forty (40) years from
the Effective Date, expiring on the fortieth (40th) anniversary of the Effective
Date, unless earlier terminated pursuant to the terms of this Agreement. The
word "Term" shall include such initial term and, where applicable, any extension
of such initial term (whether extended pursuant to Section 6.2a or otherwise),
subject to earlier termination pursuant to the provisions of this Agreement.
Section 6.2 Termination and Extension.
a. Automatic Extension. At the end of the initial term and any
subsequent term, this Agreement shall automatically renew for a five (5) year
term unless one of the parties provides the other party with written notice of
intent not to renew, not less than one hundred eighty (180) days prior to the
expiration of the then current term.
b. Early Termination. This Agreement may be terminated according
to the provisions of this Section.
(1) Material Breach. In the event either party materially
breaches this Agreement and such breach is not cured to the reasonable
satisfaction of the non-breaching party within thirty (30) days after the
non-breaching party serves written notice of the default upon the defaulting
party (the "Default Notice"), the Agreement shall automatically terminate at the
election of the non-breaching party upon the giving of a written notice of
termination to the defaulting party not later than fifteen (15) days after
expiration of the 30-day cure period; provided that if such uncured breach is
only capable of being cured within a reasonable period of time in excess of
thirty (30) days, the non-breaching party shall not be entitled
12.
<PAGE>
to terminate this Agreement so long as the defaulting party has commenced such
cure and thereafter diligently pursues such cure to completion.
(2) Refusal to Comply. In the event that Group or Manager
refuses or fails to comply with a decision of the Joint Operations Committee,
the aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if such dispute between Group and Manager continues for sixty
(60) days after the date the aggrieved party exercises its option regarding
mediation, the non-complying party shall have thirty (30) days in which to
comply with the decision of the Joint Operations Committee. If the non-complying
party has not complied by the end of such thirty (30) day period, the aggrieved
party shall have the option to terminate this Agreement upon fifteen (15) days'
prior written notice. During such mediation, Manager and Group shall continue to
operate and manage the practice in good faith.
(3) Bankruptcy. A party may, upon three (3) days' prior
written notice, terminate this Agreement if the other party:
(a) Applies for or consents to the appointment of a
receiver, trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary petition,
makes a general assignment for the benefit of its creditors, files a petition or
answer seeking reorganization or arrangement with its creditors, or admits in
writing its inability to pay its debts when due, or
(b) Suffers any order, judgment or decree to be entered
by any court of competent jurisdiction, adjudicating such party bankrupt or
approving a petition seeking its reorganization or the appointment of a
receiver, trustee or liquidator of such party or of all or a substantial part of
its assets, and such order, judgment or decree continues unstayed and in effect
for ninety (90) days after its entry.
(4) Nonperformance. Manager may terminate this Agreement in
the event that in any two consecutive fiscal quarters the Manager has not been
paid all of the Reimbursable Expense Portion and at least three-quarters (3/4)
of the Percentage Fee Portion of the Management Fee and, in the sole discretion
of the Manager, it is not reasonably likely that such amounts of the Management
Fee will be paid in the next fiscal quarter. Any such termination shall be
effective as of the last day of such third fiscal quarter provided at least 60
days notice shall have been given; otherwise, such termination shall be
effective on the sixtieth day after notice is given.
(5) Change in Law. In the event of any material change in
federal or state law that has a significant adverse impact on either party
hereto in connection with their performance under this Agreement, or if
performance by a party of any duties under this Agreement be deemed illegal by
any administrative agency or in a formal opinion rendered to Manager by legal
counsel knowledgeable in health law matter retained by the Manager, the affected
party shall have the right to require that the other party renegotiate the terms
of this Agreement. Solely in the event of illegality, if the parties fail to
reach an agreement within thirty (30) days of the request for renegotiation,
either party may (subject to the severability provision of this Agreement)
terminate this Agreement upon thirty (30) days' prior written notice to the
other party.
c. Effect of Termination. Upon termination of this Agreement:
(1) Group shall surrender to Manager all of Manager's
property used primarily in the operation of the Practice in the same condition
as received, reasonable wear and tear excepted.
13.
<PAGE>
(2) Manager shall deliver to Group all records related to
the business of and provision of dental care through the Practice including,
without limitation, patient records and any corporate, personnel and financial
records maintained for the Practice and Providers, provided, that except as
limited by law, including, but not limited to laws governing the confidentiality
of patient records, Manager shall have the option to copy (or otherwise
duplicate) at its sole cost and expense such records of Group and to retain and
utilize such records for its own use;
(3) Manager shall deliver to Group any other property of
Group in Manager's possession;
(4) Both parties shall cooperate to ensure the provision of
appropriate dental care to Group Patients and Beneficiaries;
(5) Group shall promptly deliver to Manager any Management
Fees due and payable to Manager (such fees prorated for the month of
termination) and any amounts owed to Manager for advances made pursuant to
Section 7.3; and
(6) Both parties shall cooperate to ensure the appropriate
billing and collections for dental services rendered by Group prior to the
effective date of termination, and any such cash collected shall be retained by
Group and/or paid to Manager pursuant to Article VII.
ARTICLE VII
FINANCIAL AND SECURITY ARRANGEMENTS
-----------------------------------
Section 7.1 Management Fee. Group and Manager agree that the
compensation set forth in this Article VII is being paid to Manager in
consideration of the services provided and the substantial commitment and effort
made by Manager hereunder and that such fees have been negotiated at arms'
length and are fair, reasonable and consistent with fair market value. Manager
shall be paid the management fee (the "Management Fee") as set forth on Exhibit
7.1 hereto. Payment of the Management Fee is not intended to and shall not be
interpreted or implied as permitting Manager to share in Group's fees for
medical services but is acknowledged as the negotiated fair market value
compensation to Manager considering the scope of services and the business risks
assumed by Manager.
Section 7.2 Payments. Except as otherwise set forth on Exhibit 7.1
hereto, the amounts to be paid to Manager under this Article VII shall be
calculated by Manager on the accrual basis of accounting and shall be payable
monthly. Payments due for any Management Fee shall be made by Group each
calendar month as provided herein and shall be paid on the 15th day following
the end of such month (or the first preceding day that is a business day if the
15th day is not a business day) (a "Payment Date"). Such amounts paid shall be
estimates based upon available information for such month, and adjustments to
the estimated payments shall be made to reconcile final amounts due under
Section 7.1 on the next Payment Date and shall be paid in such priority as set
forth in Section 7.5 hereof.
Section 7.3 Advances. Group shall be entitled to an advance from
Manager of such additional sums, over and above Group's right to the amounts
otherwise set forth in this Article VII, as shall be required by Group to pay
Practice Expenses and Group Expenses consistent with the Annual Budget of the
Practice (prepared as provided in Section 3.6 hereof) and the Management Fee as
provided in Exhibit 7.1 hereto. Additional amounts may be advanced to Group upon
Group's request and at the sole discretion of Manager. Any amounts advanced to
Group pursuant to this Section 7.3 shall be repaid by Group in such priority as
set forth in Section 7.5 below and shall bear interest at a rate equal to one
percent (1%) above the
14.
<PAGE>
prime rate reported by the Wall Street Journal as adjusted on a quarterly basis,
compounded monthly until all such amounts of principal and interest are repaid
to Manager as provided herein.
Section 7.4 Security Agreement. In order to enforce its rights granted
hereunder and subject to applicable law, Group shall execute a Security
Agreement in substantially the form attached hereto as Exhibit 7.4 (the
"Security Agreement"), which Security Agreement grants a security interest in
all of Group's assets and accounts receivable (as more fully described in the
Security Agreement) to Manager. In addition, Group shall cooperate with Manager
and execute all documents requested by Manager or its lenders to enable Manager
to perfect its security interest provided by the Security Agreement.
Section 7.5 Priority of Payments. Manager shall administer and make
disbursements from amounts deposited into the Accounts or transferred from the
Accounts to pay (including, without limitation the making of advances as
provided in Section 7.3) the Practice Expenses and Group Expenses as the same
become due and payable, and for which Group shall remain responsible. In
performing its obligations pursuant to Article IV, Manager shall apply funds of
Group in the following order of priority:
a. payment of all Group Expenses;
b. payment of all Practice Expenses;
c. payment of the Management Fee;
d. payment of amounts advanced to Group, and applicable interest
thereon (as contemplated in Section 7.3); and
e. payment of Excluded Expenses.
Any amounts which remain following the payment of the expenses and fees set
forth in subparagraphs (a) through (e) above shall be retained in the Accounts
and applied as contemplated in the Annual Budget(s).
Section 7.6 Accounts Receivable. At the option of Manager, on the
first business day of each month, Manager may purchase all or any portion of the
accounts receivable of Group relating to Revenues arising during the previous
month, by payment of cash or other readily available funds into an account for
Group or by offset of amounts owed by Group to Manager. The consideration for
the purchase shall be an amount equal to all fees recorded each month (net of
adjustments for uncollectible accounts, professional courtesies and other such
activities that do not generate a collectible fee) less Management Fees due to
Manager under this Article VII. Manager's purchase shall be effective upon full
payment of the purchase price. In the event that such purchase shall be
ineffective for any reason, Group is concurrently herewith entering into the
Security Agreement to grant a security interest in the accounts receivable to
Manager. In addition, Group shall cooperate with Manager and execute all
necessary documents in connection with the pledge of such accounts receivable to
Manager or at Manager's option, its lenders. All collections in respect of such
accounts receivable shall be deposited in a bank account at a bank selected by
mutual agreement of Group and Manager. To the extent Group comes into possession
of any payments in respect of such accounts receivable, Group shall direct such
payments to Manager for deposit.
ARTICLE VIII
INDEMNITY AND INSURANCE
-----------------------
Section 8.1 Indemnity.
15.
<PAGE>
a. Indemnification. Each party shall indemnify, defend and hold
harmless the other party from any and all liability, loss, claim, lawsuit,
injury, cost, damage or expense whatsoever (including reasonable attorneys' fees
and court costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Group agrees
to indemnify, defend and hold harmless Manager for all liability, loss, claim,
lawsuit, injury, cost, damage or expense whatsoever (including reasonably
attorneys' fees and court costs) arising out of the professional negligence of
Group, its employees, agents, contractors or subcontractors, including any
amounts in excess of the professional liability insurance coverage of Group or
its employees, agents, contractors or subcontractors.
b. Mutual Indemnity. Each party to this Agreement shall be
indemnified by the other party for any claim under this Agreement or otherwise
against the indemnified party for vacation pay, sick leave, retirement benefits,
Social Security benefits, workers' compensation benefits, disability or
unemployment, insurance benefits, or other employee benefits of any kind accrued
during the term of this Agreement by an employee of the indemnifying party.
Section 8.2 Manager's Insurance. Manager shall, on its own behalf and
at its sole cost and expense, procure and maintain in force during the term of
this Agreement policies in the following categories in the amount indicated:
a. Comprehensive general liability insurance covering the risks
of Manager, in an amount determined by the Joint Operations Committee;
b. Workers' Compensation insurance covering the employees of
Manager, in such amounts as is usual and customary under the circumstances;
c. Property insurance covering the facilities, equipment and
supplies owned or leased by Manager or Group for use in the operation of the
Practice.
Section 8.3 Group's Insurance. Manager shall obtain, and maintain on
behalf of Group in full force and effect during the Term, policies in the
following categories in the amount indicated:
a. Comprehensive professional liability insurance coverage for
Group and Group's Employee Providers in such amounts as are usual and customary
for similar dental practices within the same area and as approved by the Joint
Operations Committee, which approval shall not be unreasonably withheld (the
cost and expense of which shall be a Group Expense);
b. Workers' Compensation insurance covering the employees of
Group, in such amounts as is usual and customary under the circumstances (the
cost and expense of which shall be a Practice Expense); and
c. Comprehensive general liability insurance covering the risks
of Group, in an amount determined by the Joint Operations Committee (the cost
and expense of which shall be a Practice Expense).
16.
<PAGE>
ARTICLE IX
BOOKS AND RECORDS
-----------------
Section 9.1 Ownership of Records. All business records and information
relating exclusively to the business and activities of either party shall be the
property of that party, irrespective of identity of the party responsible for
producing or maintaining such records and information. Without limiting the
foregoing, all patient charts and records maintained by Manager relating to the
dental services of Group shall be the property of Group. Group also shall be
entitled to a copy at Group's sole cost of all business records pertaining to
Group. Except as limited by law, including, but not limited to laws governing
the confidentiality of patient records, Manager shall be entitled to a copy at
Manager's sole cost of all records of Group.
ARTICLE X
RESTRICTIVE COVENANTS
---------------------
Section 10.1 Covenant Regarding Proprietary Information. In the course
of the relationship created pursuant to this Agreement, Group will have access
to certain methods, trade secrets, processes, ideas, systems, procedures,
inventions, discoveries, concepts, software in various stages of development,
designs, drawings, specifications, models, data, documents, diagrams, flow
charts, research, economic and financial analysis, developments, procedures,
know-how, policy manuals, form contracts, marketing and other techniques, plans,
materials, forms, copyrightable materials and trade information (all of which is
referred to in this Agreement as "Proprietary Information") regarding the
operations of Manager and/or of its Affiliates (collectively, the "Protected
Parties"). Group shall maintain all such Proprietary Information in strict
secrecy and shall neither use for itself or any third parties nor divulge such
information to any third parties, except as may be necessary for the discharge
of their obligations under this Agreement or otherwise consented to in writing
by Manager. Group shall take all necessary and proper precautions against
disclosure of any Proprietary Information to unauthorized persons by any of its
employees or agents. Group and all employees, and agents of Group who will have
access to all or any part of the Proprietary Information may be required to
execute an agreement, at the request of Manager, valid under the law of the
jurisdiction in which such agreement is executed, and in a form acceptable to
Manager and its counsel, committing themselves to maintain the Proprietary
Information in strict confidence and not to disclose it to any unauthorized
person or entity. The Protected Parties not party to this Agreement are hereby
specifically made third party beneficiaries of this Section, with the power to
enforce the provisions hereof. Upon termination of this Agreement for any
reason, Group and each of its Employee Providers and Subcontract Providers shall
cease all use of any of the Proprietary Information and, at the request of
Manager, shall execute such documents as may be necessary to evidence Group's
abandonment of any claim thereto. The parties recognize that a breach of this
Section cannot be adequately compensated in money damages and therefore agree
that injunctive relief shall be available to the Protected Parties as their
respective interests may appear.
The obligations of Group under this Section 10.1 shall not apply to
information: (i) which is a matter of public knowledge on or becomes a matter of
public knowledge after the Effective Date of this Agreement, other than as a
breach of the confidentiality terms of this Agreement or as a breach of the
confidentiality terms of any other agreement between a third party and Group,
Manager and/or its Affiliates; or (ii) which was lawfully obtained by Group on a
nonconfidential basis other than in the course of performance under this
Agreement and from some Person other than Manager or its Affiliates or from some
person other than one employed or engaged by Manager or its Affiliates, which
Person has no obligation of confidentiality to Manager or its Affiliates.
17.
<PAGE>
Section 10.2 Covenants Not to Compete During the Term. The parties
recognize that the services to be provided by Manager shall be feasible only if
Group operates an active dental practice to which Group and its Providers devote
their full time and attention. To that end:
a. Restrictive Covenants by Group. During the term of this
Agreement and except as otherwise agreed to in writing by Manager, Group shall
not (i) establish, operate or provide dental care services at any dental office,
clinic or other facility providing services substantially similar to those
provided by Group pursuant to this Agreement anywhere other than at the Practice
Sites or as may be approved in writing by Manager; (ii) enter into any
management or administrative services agreement or other similar arrangement
with any person or entity other than Manager without Manager's prior written
approval and (iii) operate or, directly or indirectly, hold or own any type of
ownership or other form of equity interest in, or serve as a consultant to or
otherwise perform services for any person or entity engaged in the business of
providing management and administrative services to dental practices.
b. Restrictive Covenants by Providers. Group shall use its best
efforts to obtain and enforce formal agreements with its Employee Providers and
Subcontract Providers who are dentists not to establish, operate or provide
dental care services, during the term of this Agreement and for a period of two
(2) years after any termination of employment with Group (except a termination
of such employment (i) based upon a material breach by Manager which shall
remain uncured for a period of sixty (60) days after receipt of notice in
accordance with Section 11.4 hereof, (ii) by reason of nonpayment of a material
amount owed by Manager to or to be paid by Manager on behalf of Group, or (iii)
by Group without cause), at any dental office, clinic or facility located within
30 miles of any Practice Site at which the Employee Provider or Subcontract
Provider has practiced. Any variation of such restrictive covenants shall be
approved in advance in writing by Manager.
Section 10.3 Covenant Not to Solicit. For three (3) years following
the termination of this Agreement, except for a valid termination by Group
pursuant to Section 6.2(b), Group shall not:
a. directly or indirectly solicit, recruit or hire, or induce any
party to solicit, recruit or hire any person who is an employee of, or who has
entered into an independent contractor arrangement with, Manager or any
Affiliate of Manager;
b. directly or indirectly, whether for itself or for any other
person or entity, call upon, solicit, divert or take away, or attempt to
solicit, call upon, divert or take away any of Manager's customers, business, or
clients; or
c. directly or indirectly solicit, or induce any party to
solicit, any of Manager's contractors or the contractors of any Affiliate of
Manager, to enter into the same or a similar type of contract with any other
party.
10.4 Enforcement. Manager and Group acknowledge and agree that since a
remedy at law for any breach or attempted breach of the provisions of this
Article X shall be inadequate, either party shall be entitled to specific
performance and injunctive or other equitable relief in case of any such breach
or attempted breach, in addition to whatever other remedies may exist by law.
All parties hereto also waive any requirement for the securing or posting of any
bond in connection with the obtaining of any such injunctive or other equitable
relief.
18.
<PAGE>
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
Section 11.1 Assignment. Neither party shall assign this Agreement to
any other party or parties without the prior written consent of the other party,
which consent may be withheld arbitrarily or capriciously, for any reason or for
no reason whatsoever and any attempted assignment in violation of this Agreement
shall be null and void. Notwithstanding the preceding, Manager may assign this
Agreement to any Affiliate of either Manager or Parent or to a financial
institution as collateral security for the indebtedness of Manager, Parent or
any of their respective Affiliates. Group hereby agrees that (a) upon notice of
any default or event of default from any financial institution (or its agent, as
applicable) to which this Agreement has been assigned as collateral security for
such indebtedness, Group will make all payments required to be made under this
Agreement to such financial institution (or its agent, as applicable) and such
financial institution (or its agent, as applicable) shall be entitled to
exercise any and all rights and remedies of Manager under this Agreement, and
(b) Group will not, without the prior written consent of such financial
institution (or its agent, as applicable), terminate (except pursuant to the
terms hereof) or amend or otherwise modify this Agreement.
Section 11.2 Headings. The article and section headings used in this
Agreement are for purposes of convenience only. They shall not be construed to
limit or to extend the meaning of any part of this Agreement.
Section 11.3 Waiver. Waiver by either Group or Manager of any breach
of any provision of this Agreement shall not be deemed to be a waiver of such
provision or of any subsequent breach of the same or of any other provision of
this Agreement.
Section 11.4 Notices. Any notice, demand, approval, consent or other
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be shall be deemed to have been given when five (5) business
days have elapsed from the date of deposit in the United States mails, certified
and postage prepaid, addressed to the party to be served at the following
address or such other address as may be given in writing to the parties.
Group:
With a copy to: Kennedy & Kennedy LLP
Attorneys at Law
Pioneer Tower Suite 1170
888 S.W. Fifth Avenue
Portland, Oregon 97204-2098
Attn: James M. Kennedy, Esq.
Manager: Gentle Dental Service Corporation
22800 Savi Ranch Parkway, Suite 206
Yorba Linda, California 92887
Attn: Michael T. Fiore, President and
Chief Executive Officer
With a copy to: McDermott, Will & Emery
19.
<PAGE>
1301 Dove Street, Suite 500
Newport Beach, California 92660
Attn: Richard J. Babcock
Section 11.5 Attorneys' Fees. If any legal action or arbitration or
other proceeding is commenced, whether by Manager or Group concerning this
Agreement, the prevailing party shall recover form the losing party reasonable
attorneys' fees and costs and expenses, including those of appeal and not
limited to taxable costs, incurred by the prevailing party, in addition to all
other remedies to which the prevailing party may be entitled.
Section 11.6 Successors. Without limiting or otherwise affecting any
restrictions on assignments of this Agreement or rights or duties under this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
successor and assigns of Group and Manager.
Section 11.7 Entire Agreement. This Agreement and that certain
Agreement by and among Manager, Gentle Dental of Oregon, P.C. and Tse, Saiget,
Wantanabe and McClure, Inc., P.S., of even date hereof set forth the entire
agreement between Group and Manager and supersedes all prior negotiation and
agreements (including, without limitation, the Prior Agreement), written or
oral, concerning or relating to the subject matter of this Agreement, and this
Agreement may not be modified except by a writing executed by all parties and
subject to the provisions thereof.
Section 11.8 Governing Law. This Agreement and the rights and
obligations of the parties hereto shall be governed by, and construed according
to, the laws of the State of California.
Section 11.9 Severability, Contract Modifications for Prospective
Legal Events. Nothing contained in this Agreement shall be construed to require
the commission of an act contrary to law, and whenever there is any conflict
between any provision of this Agreement and any statute, law, ordinance or
regulation, the latter shall prevail. In such event, and in any case in which
any provision of this Agreement is determined to be in violation of a statute,
law, ordinance or regulation, the affected provision(s) shall be limited only to
the extent necessary to bring it within the requirements of the law and, insofar
as possible under the circumstances, to carry out the purposes of this
Agreement. The other provisions of this Agreement shall remain in full force and
effect, and the invalidity or unenforceability of any provision hereof shall not
affect the validity and enforceability of the other provisions of this
Agreement, nor the availability of all remedies in law or equity to the parties
with respect to such other provisions.
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision, a regulatory agency or legal counsel of both
parties in such a manner as to indicate that the substantive structure of this
Agreement may be in violation of such laws or regulations, Group and Manager
shall proceed in good faith to amend this Agreement, to the maximum extent
possible, to preserve the underlying economic, financial and composition of
Joint Operations Committee arrangements between Group and Manager. A party to
this Agreement may choose to, but shall not be required to, take any action or
to make any amendment to this Agreement if such action or amendment would put
them in a substantially and materially worse economic or financial position than
that contemplated by the terms of this Agreement. The parties acknowledge that
such amendment may require reorganization of Group or Manager, or both, and may
require either or both parties to obtain appropriate regulatory licenses and
approvals. If an amendment is not possible, either party shall have the right to
terminate this Agreement upon thirty (30) days notice to the other party.
Section 11.10 Time Is of the Essence. Time is of the essence in this
Agreement.
20.
<PAGE>
Section 11.11 Authority. Any Person signing this Agreement on behalf
of any entity hereby represents and warrants in its individual capacity that it
has full authority to do so on behalf of such entity.
Section 11.12 Counterparts. This Agreement may be executed in two (2)
or more counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
21.
<PAGE>
IN WITNESS WHEREOF, Group and Manager have caused their authorized
representatives to execute this Dental Group Management Agreement as of the date
first above written.
"Group"
By: DANY TSE
------------------------------------
Its: President
------------------------------------
"Manager"
By: MICHAEL THOMAS FIORE
------------------------------------
Its:-------------------------------------
22.
<PAGE>
ADDENDUM 1.
-----------
For purposes of this Agreement, the following terms shall have the
meaning indicated below or defined at the indicated section:
(1) Accounts. See Section 2.5.
(2) Affiliate. "Affiliate" shall mean, with respect to any Person, (i)
any individual or entity directly or indirectly owned or controlled by such
Person, (ii) any individual or entity directly or indirectly owning or
controlling such Person or (iii) any individual or entity directly or indirectly
owned or controlled by the same family member, individual or entity as owns or
controls such Person. For purposes of this Agreement, neither Group nor Manager
shall be deemed an Affiliate of the Other.
(3) Agreement. "Agreement" means this Group Management Agreement.
(4) Annual Budget. See Section 3.6.
(5) Beneficiaries. See Recital A.
(6) Books and Records. "Books and Records" means Group's books of
account, accounting and financial records and all other records relating to and
used in the conduct of Manager's duties hereunder and also used in the
preparation of reports and financial statements. The books and records at all
times shall be correct and complete and contain correct and timely entries made
with respect to transactions entered into pursuant hereto in accordance with
GAAP.
(7) Capital Costs. "Capital Costs" shall mean any and all investments
that are or would be capitalized pursuant to GAAP.
(8) Committee Members. See Section 3.5a.
(9) Default Notice. See Section 6.2b(1).
(10) Effective Date. See preamble paragraph.
(11) Employee Providers. See Recital B.
(12) Employment Agreements. See Recital B.
(13) Excluded Expenses. "Excluded Expenses" shall mean those costs and
expenses incurred by Group which are (i) expressly identified as Excluded
Expenses in this Agreement, and/or (ii) not Practice Expenses or Group Expenses
expressly contemplated by or set forth in the Annual Budget.
(14) GAAP. "GAAP" means at any particular time generally accepted
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with GAAP, and all financial
computations hereunder shall be computed unless otherwise specifically provided
herein, in accordance with GAAP as consistently applied and using the same
method of valuation as used in the preparation of Manager's financial statement.
(15) Group. See first paragraph of this Agreement.
23.
<PAGE>
(16) Group Expenses. "Group Expenses" means salaries and wages,
compensation, payroll taxes, and employee benefits of Employee Providers and
Subcontract Providers, all as set forth in, and subject to and limited by, the
Annual Budget.
(17) Group Member. See Section 3.5a.
(18) Group Patients. See Recital A.
(19) Joint Operations Committee. See Section 3.4b.
(20) Management Fee. See Section 7.1.
(21) Manager. See first paragraph of this Agreement.
(22) Manager Members. See Section 3.5a.
(23) Marks. See Section 2.3a.
(24) Offer. See Section 5.1.
(25) Parent. "Parent" shall mean GDSC or any successor thereto.
(26) Patient. "Patient" shall mean and include any Group Patient
and/or Beneficiary.
(27) Payment Date. See Section 7.2.
(28) Percentage Fee Portion. See Exhibit 7.1.
(29) Payor Contracts. See Recital A.
(30) Person. "Person" shall mean any natural person, corporation,
partnership or other business structure recognized as a separate legal entity.
(31) Plans. See Recital A.
(32) Practice. See Recital C.
(33) Practice Expenses. "Practice Expenses" means all costs incurred
by Manager including amortization and/or depreciation associated with assets of
Manager utilized by Group in the conduct of its Practice or covering operations
and Capital Costs, direct labor costs, supplies, direct overhead and indirect
overhead expense attributable to the management and operation of the Practice
and direct and indirect corporate overhead of Manager including all interest
expense and other expenses which are attributable to Manager's business
operations in accordance with Manager's corporate allocation policies, all as
consistent with and/or contemplated in the Annual Budget.
(34) Practice Sites. See Section 3.4a.
(35) Practice Site Facilities. See Section 3.4a.
(36) Preliminary Budget. See Section 3.7b.
24.
<PAGE>
(37) Prior Agreement. See Recital F.
(38) Programs. See Section 2.3b.
(39) Proprietary Information. See Section 10.1.
(40) Protected Parties. See Section 10.1.
(41) Providers. See Recital B. The term "Providers" shall include
individuals or organizations licensed to practice dentistry (including
specialists) as well as other licensed dental professionals who provide
ancillary reimbursable dental services.
(42) Provider Subcontracts. See Recital B.
(43) Reimbursable Expense Portion. See Exhibit 7.1.
(44) Revenues. See Section 2.4.
(45) Security Agreement. See Section 7.4.
(46) Subcontract Providers. See Recital B.
(47) Term. See Section 6.1.
25.
================================================================================
DENTAL GROUP MANAGEMENT AGREEMENT
by and between
Gentle Dental Service Corporation
(a Washington corporation)
and
Affordable Dental Care, P.C.
(an Oregon corporation)
================================================================================
March 1, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS................................................... 1
ARTICLE II SCOPE OF AGREEMENT............................................ 2
Section 2.1 General Scope of Agreement......................... 2
Section 2.2 Revenues........................................... 2
Section 2.3 Deposit Accounts.................................... 2
ARTICLE III OPERATION OF PRACTICE......................................... 2
Section 3.1 Appointment........................................ 2
Section 3.2 Professional Matters............................... 3
Section 3.3 Relationship of Parties............................ 3
Section 3.4 Authority and Control.............................. 3
Section 3.5 Joint Operations Committee......................... 4
Section 3.6 Budgets............................................ 5
Section 3.7 Budget Process..................................... 6
Section 3.8 Personnel.......................................... 6
ARTICLE IV MANAGEMENT SERVICES........................................... 7
Section 4.1 General Description of Services.................... 7
Section 4.2 Practice Site Facilities........................... 7
Section 4.3 Purchased Items and Services....................... 7
Section 4.4 Manager Personnel.................................. 7
Section 4.5 Day-to-Day Management and Supervision.............. 8
Section 4.6 Billing and Collection Payment of Expenses......... 8
Section 4.7 Bookkeeping and Accounting......................... 8
Section 4.8 Marketing and Public Relations Services............ 9
Section 4.9 Group Agreements................................... 9
Section 4.10 Utilization Review Quality Improvement and
Outcomes Monitoring................................ 9
Section 4.11 Patient Referrals.................................. 9
Section 4.12 Applicable Law..................................... 10
ARTICLE V GROUP RESPONSIBILITIES........................................ 10
Section 5.1 Diagnosis, Treatment Planning, Specific
Patient Education and Consultation................. 10
Section 5.2 Dental Services.................................... 10
Section 5.3 Provision of Dental Services by Group.............. 11
Section 5.4 Providers.......................................... 11
Section 5.5 Peer Review........................................ 11
Section 5.6 Fees, Charges and Payor Agreements................. 11
i
<PAGE>
Section 5.7 Hours of Clinical Operation........................ 12
Section 5.8 Billing Information and Assignments................ 12
Section 5.9 Third Party Contracts.............................. 12
Section 5.10 Use of Manager's Goods and Services................ 12
Section 5.11 Negative Covenants................................. 12
Section 5.12 Group Maintains Full Professional Authority........ 12
ARTICLE VI TERM.......................................................... 13
Section 6.1 Term............................................... 13
Section 6.2 Termination and Extension.......................... 13
ARTICLE VII FINANCIAL AND SECURITY ARRANGEMENTS........................... 15
Section 7.1 Management Fee..................................... 15
Section 7.2 Payments........................................... 15
Section 7.3 Advances........................................... 15
Section 7.4 Security Agreement................................. 15
Section 7.5 Priority of Payments............................... 15
Section 7.6 Accounts Receivable................................ 16
ARTICLE VIII INDEMNITY AND INSURANCE....................................... 16
Section 8.1 Indemnity.......................................... 16
Section 8.2 Manager's Insurance................................ 17
Section 8.3 Group's Insurance.................................. 17
ARTICLE IX BOOKS AND RECORDS............................................. 17
Section 9.1 Ownership of Records............................... 17
ARTICLE X RESTRICTIVE COVENANTS......................................... 18
Section 10.1 Covenant Regarding Proprietary Information......... 18
Section 10.2 Covenants Not to Compete During the Term........... 18
Section 10.3 Covenant Not to Solicit............................ 19
Section 10.4 Enforcement........................................ 19
ARTICLE XI MISCELLANEOUS PROVISIONS...................................... 19
Section 11.1 Assignment......................................... 19
Section 11.2 Headings........................................... 20
Section 11.3 Waiver............................................. 20
Section 11.4 Notices............................................ 20
Section 11.5 Attorneys' Fees.................................... 20
Section 11.6 Successors......................................... 20
Section 11.7 Entire Agreement................................... 20
Section 11.8 Governing Law...................................... 20
ii
<PAGE>
Section 11.9 Severability, Contract Modifications for
Prospective Legal Events........................... 21
Section 11.10 Time Is of the Essence............................. 21
Section 11.11 Authority.......................................... 21
Section 11.12 Counterparts....................................... 21
EXHIBITS
Exhibit 1 - Definitions
Exhibit 7.1 - Management Fee
Exhibit 7.4 - Security Agreement
iii
<PAGE>
DENTAL GROUP MANAGEMENT AGREEMENT
---------------------------------
This Dental Group Management Agreement (this "Agreement") is dated and
effective as of March 1, 1998 ("Effective Date"), by and between Gentle Dental
Service Corporation, a Washington corporation ("Manager"), and Affordable Dental
Care, P.C., an Oregon corporation ("Group").
RECITALS
--------
A. Group engages in the practice of dentistry by providing dental
services to patients of Group ("Group Patients") and to enrollees
("Beneficiaries") of dental plans ("Plans") under contracts ("Payor Contracts")
between Group and Plans or between Beneficiaries and Plans.
B. Group provides dental services to Beneficiaries and to Group
Patients through arrangements with licensed individuals ("Providers"). Such
arrangements may include agreements ("Employment Agreements") with
professionally licensed employees, including dentists and dental hygienists
(collectively "Employee Providers"), and agreements ("Provider Subcontracts")
with independent contractor dentists and non-dentist providers of various dental
care services (collectively "Subcontract Providers").
C. All activities of Group subject to this Agreement are referenced as
the "Practice." All references to "dental" care and services include general and
specialist dental services. All references to "dentists" include generalists and
specialists.
D. Manager is a dental management company that has been organized to
provide certain support services for the Practice and for other dental groups.
Manager is in the business of providing or arranging for management and
administrative services, facilities, equipment and certain personnel necessary
for the operation of the Practice and other dental groups.
E. Group desires to retain Manager on an independent contractor basis
to provide management and administrative services that are more particularly
described below, and Manager desires to provide such management services under
the terms and conditions set forth in this Agreement.
AGREEMENTS
----------
Now, Therefore, in consideration of the covenants and conditions
contained herein, Manager and Group agree as follows:
ARTICLE I
DEFINITIONS
-----------
Terms that are capitalized within this Agreement and its exhibits are
defined in Exhibit 1.
1
<PAGE>
ARTICLE II
SCOPE OF AGREEMENT
------------------
Section 2.1 General Scope of Agreement. This Agreement shall apply to
the Practice being conducted by Group, including, without limitation, all
professional, administrative and technical services, marketing, contracting,
case management, ancillary dental services, outpatient services and dental care
facilities, equipment, supplies and items, except as otherwise specifically
provided in this Agreement. Group's Employment Agreements shall encompass
substantially all such activities of Employee Providers and shall provide that
all revenues derived from such activities (and not excluded below) shall be
included in Revenues as such term is defined in Section 2.2 hereof. Nothing in
this Agreement shall be construed to alter or in any way affect the legal,
ethical and professional relationship between and among Provider and Provider's
patients, nor shall anything contained in this Agreement abrogate any right or
obligation arising out of or applicable to the dentist-patient relationship.
Section 2.2 Revenues. "Revenues" shall mean all of Group's billings
(net of contractual adjustments and bad debt), cash collections and any other
amounts that would be considered revenues of Group under GAAP. Revenues shall
include all funds collected by, or legally due to, Group or any Affiliate of
Group, including, without limitation, the following: (a) all fee-for-service
payments for services to Group Patients or Beneficiaries; (b) all payments
established under Payor Contracts; (c) all coordination of benefits or
deductibles and third-party liability recoveries related to the Group's
services; (d) all payments, dues, fees or other compensation to Group; (e) any
income, profits, dividends, distributions or other payments from Group's
investments; and (f) any interest or other non-operating income of Group.
Section 2.3 Deposit Accounts. All cash received by Group from whatever
source shall be deposited into an account or accounts ("Accounts") in the name
of Group at a banking institution selected by Group and approved by Manager.
Group authorizes Manager to bill and collect, in Group's name, all charges and
reimbursements for Group's dental related activities and to deposit such
collections in the Accounts. Group agrees to assist and cooperate with Manager
in the billing and collection process and to immediately deliver to Manager for
deposit any monies Group may receive. Manager shall manage the cash equivalents
of Group and Manager shall be entitled (and is hereby authorized) to transfer
such cash to the account of Manager and to use such cash for purposes as Manager
deems appropriate, subject to and consistent with the terms and provisions of
this Agreement. Nothing in this Section 2.3 shall be construed to limit or
otherwise modify the requirement that Manager disburse funds in fulfillment of
the obligations of the Group and Manager under this Agreement.
ARTICLE III
OPERATION OF PRACTICE
---------------------
Section 3.1 Appointment. Subject to applicable laws and requirements
governing the practice of dentistry, Group hereby appoints Manager as its sole
and exclusive Manager for the operation of the Practice and covenants not to
enter into an agreement with any Person other than Manager to perform or assume
any of Manager's rights, duties or responsibilities as provided herein and
hereby appoints Manager as its true and lawful attorney-in-fact to negotiate and
execute on its behalf all Payor Contracts, Employment Agreements and Provider
Subcontracts. Manager hereby accepts appointment as Group's attorney-in-fact and
accepts full responsibility for management of Group as more fully set forth
herein.
2
<PAGE>
Section 3.2 Professional Matters. Pursuant to applicable laws and
requirements governing the practice of dentistry, Group shall retain ultimate
responsibility for all activities of Group that are within the scope of a
dentist's licensure and cannot be performed by Manager due to Manager's non-
licensed status.
Section 3.3 Relationship of Parties. In the performance of its duties
and obligations under this Agreement, it is understood and agreed that Manager
shall, at all times, be acting and performing as an independent contractor and
not as an employee of Group. Except as provided in this Agreement or as required
by law, Group shall neither have nor exercise any control or direction over the
methods by which Manager shall perform its obligations hereunder; nor shall
Manager have or exercise any control or direction over the methods by which
Group shall practice dentistry. It is expressly agreed by the parties that no
work, act, commission or omission of Manager pursuant to the terms and
conditions of this Agreement shall be construed to make or render Manager or
Manager's employees or agents, the employees of Group. Manager and Group are not
partners or joint venturers with each other and nothing herein shall be
construed so as to make them partners or joint venturers or impose upon either
of them any liability as partners or joint venturers. Manager's responsibility
is to assure that the services covered by this Agreement shall be performed and
rendered in a competent, efficient and satisfactory manner. Both Manager and
Group will act in good faith in connection with the performance of their
respective obligations under this Agreement.
Section 3.4 Authority and Control. Strategic planning, overall
direction and control of the business and affairs of Group, and authority over
the day-to-day activities of Group shall be accomplished as follows:
a. Group. Notwithstanding anything else to the contrary contained
herein, Group shall have the sole responsibility and authority for all aspects
of the practice of the profession of dentistry and delivery of dental services
to Group Patients and Beneficiaries by Group and its Providers. Providers shall
use and occupy at the practice sites of Group established from time to time
under this Agreement ("Practice Sites") the facilities provided by Manager
hereunder ("Practice Site Facilities") exclusively for the practice of
dentistry. Group and Manager expressly acknowledge that the Practice or
Practices conducted at these Practice Site Facilities shall be conducted solely
by dentists and dental hygienists associated with Group as Employee Providers or
Subcontract Providers. Group shall consult with Manager or the Joint Operations
Committee, to the extent reasonable, on all matters pertaining to or affecting
the Practice and not otherwise inconsistent with the applicable laws governing
the practice of dentistry.
b. Joint Operations Committee Authority. All other
decision-making authority over the business, affairs and operations of Group
shall be vested in a joint operations committee (the "Joint Operations
Committee"). Notwithstanding anything in this Agreement to the contrary, unless
such authority has been otherwise granted or delegated to Manager herein, or is
otherwise prohibited by applicable federal or state law, the Joint Operations
Committee shall have exclusive decision-making authority over all matters
necessary to enable Manager to consolidate Group for accounting purposes
pursuant to Financial Accounting Standards Board ("FASB") Statement No. 94 (or
any successor statement, interpretation or release), as such matters are
described and set forth in the Emerging Issues Task Force ("EITF") Issue No.
97-2 (as may be further interpreted or modified by FASB, the EITF or the
Securities and Exchange Commission) including, without limitation, scope of
services provided, patient acceptance policies and procedures, pricing of
services, negotiation and execution of contracts, establishment and approval of
operating and capital budgets, total Group compensation, establishment and
implementation of guidelines for selection, hiring and termination of dentists
and other dental professionals, and the incurrence or issuance of debt by Group.
Nothing herein shall be construed as preventing the Joint Operations Committee
from appointing representatives and
3
<PAGE>
delegating authority to such representatives so long as the Joint Operations
Committee may revoke such appointment and delegation at any time and so long as
the Joint Operations Committee retains ultimate responsibility for the decisions
of such representatives.
Section 3.5 Joint Operations Committee. Subject to applicable laws and
requirements governing the practice of dentistry, the Joint Operations Committee
shall have authority and responsibility (in addition to the matters set forth in
Section 3.4b) to provide strategic planning and to manage the business
operations and administrative activities of the Group as follows:
a. Joint Operations Committee Membership. The Joint Operations
Committee shall consist of three (3) individuals (the "Committee Members").
Group shall designate one (1) Committee Member who shall be licensed dentists
(the "Group Members") and the remaining two (2) Committee Members (the "Manager
Members") shall be appointed by Manager. The number of Committee Members may be
increased by mutual agreement of the parties. Each party shall continue to
direct the appointment of the same percentage of Committee Members as described
above. Each Committee Member shall serve at the pleasure of the party
designating such Committee Member and may be replaced, with or without cause, at
any time by such party upon the delivery of written notice thereof to the other
Committee Members. Manager, Group and their respective Committee Members shall
diligently pursue any preliminary activities that are necessary to allow the
Joint Operations Committee to take an action. Where Committee Members are
required to consult with the organization appointing such Committee Members, the
Committee shall establish and agree on a deadline for accomplishing such
consultation.
b. Joint Operations Committee Action.
(1) Joint Action. Except as otherwise expressly set forth
above, the Joint Operations Committee shall take all actions that have been
approved by a majority of the Committee Members and both Group and Manager
hereby agree to be bound by the decisions of the Joint Operations Committee.
(2) Consultation Forum. Consultation between Group and
Manager, if any, shall take place at a meeting of the Joint Operations
Committee, and Group and Manager hereby agree to be bound by the decision of
their Group Members or Manager Members, as the case may be.
c. Joint Operations Committee Meetings. Meetings of the Joint
Operations Committee may be held by telephone or similar communications
equipment so long as all Committee Members participating in a meeting can hear
and speak to each other. The Joint Operations Committee shall prepare and
maintain written minutes of all meetings and shall, upon request, provide a copy
of the minutes to the parties within fifteen (15) business days following each
meeting.
(1) Regular Meetings. The Joint Operations Committee shall
hold not less than four (4) regular meetings each year, at such specific times
and places as the Committee Members may determine.
(2) Special Meetings. A special meeting of the Joint
Operations Committee may be called by a majority of the Committee Members.
(3) Notice Requirement. A Committee Member calling a special
meeting must provide all other Committee Members with three (3) days' advance
written or telephonic notice.
4
<PAGE>
Notice must be given or sent to the Committee Member's address or telephone
number as shown on the records of the Joint Operations Committee. Notice may be
delivered directly to each Committee Member or to a person at the Committee
Member's principal place of business who reasonably would be expected to
communicate that notice promptly to the Committee Member.
(4) Waiver of Notice Requirement.
(a) Written Waiver, Consent or Approval. Notice of a
special meeting need not be given to any Committee Member who, either before or
after the meeting, signs a waiver of notice or a written consent to the holding
of the special meeting, or an approval of the minutes of the special meeting.
Such waiver, consent or approval need not specify the purpose of the special
meeting. All such waivers, consents and approvals shall be filed with the Joint
Operations Committee records or made a part of the minutes of the special
meetings.
(b) Failure to Object. Notice of a special meeting need
not be given to any Committee Member who attends the special meeting and does
not protest before or at the commencement of the special meeting such lack of
notice.
(5) Quorum. The smallest number of Committee Members that
exceed fifty percent (50%) of all Committee Members shall constitute a quorum of
the Joint Operations Committee, provided, however, that such quorum shall
include at least one Group Member and one Manager Member.
(6) Proxies. The Joint Operations Committee shall provide
for the use of proxies, telephonic conference calls, written consents or other
appropriate methods by which the full participation of the Group Members and
Manager Members can be assured.
d. Limitation of Responsibility. Notwithstanding any other
provisions hereof, Committee Members shall be liable to the parties only for
actions constituting bad faith, gross negligence or breach of an express
provision of this Agreement (so long as such breach remains uncured after ten
(10) days of receiving notice of the nature of such breach). In all other
respects, Committee Members shall not be liable for negligence or mistakes of
judgment.
Section 3.6 Budgets. Each year during the term hereof, the Joint
Operations Committee shall approve and establish an annual capital and operating
budget ("Annual Budget") regarding all financial aspects of the Practice. The
Annual Budget shall include the following elements and other items, as
appropriate:
a. A capital expenditure budget outlining a program of capital
expenditures, if any, that are required for the next succeeding fiscal year;
b. An operating budget setting forth an estimate of revenues and
expenses for the next succeeding fiscal year, together with an explanation of
anticipated changes or modifications, if any, in the Practice's utilization,
rates, charges to patients or third party payors, salaries, costs of Providers,
non- wage cost increases, and all other similar factors expected to differ
significantly from those prevailing during the current fiscal year;
c. Other expenses of operation;
5
<PAGE>
d. The amount of a reasonable reserve to satisfy possible
shortfalls from operations. The allocation of such reserve shall be made by the
Joint Operations Committee as and when necessary;
e. The total annual amount of Group Expenses for the next
succeeding fiscal year, and
f. The Management Fee, as defined below, for the next succeeding
fiscal year.
Section 3.7 Budget Process.
a. Initial Annual Budget. Not later than 45 days after the
Effective Date, the Joint Operations Committee will have prepared the initial
Annual Budget for the first fiscal year (which shall initially be the calendar
year) during the term of this Agreement. If the Effective Date is other than the
first day of a fiscal year, then such initial Annual Budget shall encompass only
such portion of the then current fiscal year as remains, or, at the option of
the parties, such portion of the then current fiscal year plus the immediately
subsequent fiscal year.
b. Preliminary Budget. Not later than forty-five (45) days prior
to the end of each fiscal year during the term of this Agreement, the Manager
shall prepare and deliver to the Joint Operations Committee a preliminary Annual
Budget for the next succeeding fiscal year ("Preliminary Budget").
c. Joint Operations Committee Approval. The Joint Operations
Committee shall review and suggest modifications to the Preliminary Budget
within ten (10) days of receipt. Manager shall prepare a revised budget based
upon the Joint Operations Committee's recommendations and the Preliminary Budget
as revised shall become the Annual Budget.
d. Adjustments. In the event of a material deviation between
financial forecasts and financial performance during a fiscal year, Manager or
Group may propose adjustments to the Annual Budget which adjustments shall be
approved or disapproved by the Joint Operations Committee pursuant to the
procedures set forth above.
3.8 Personnel.
a. Providers. Except in unusual circumstances approved by the
Joint Operations Committee, and as permitted by law, Manager shall not employ or
contract with any Provider for the provision of dental services. All Providers
who provide dental services to Group Patients or to Beneficiaries shall be
either (1) Employee Providers, (2) Subcontract Providers, or (3) employees of
Subcontract Providers. Subject to guidelines established by the Joint Operations
Committee, Group shall have complete control of and responsibility for the
hiring, engagement, compensation, training, scheduling, supervision, evaluation,
and termination of all Employee Providers and Subcontract Providers, although
Manager shall consult with Group respecting such matters and shall coordinate
the advertising of positions available, interviewing of candidates, and
scheduling of clinical staff meetings and training sessions.
b. Non-Providers. With the exception of employees of Subcontract
Providers, Manager shall employ all non-Provider personnel reasonably necessary
for the operation of the Practice.
6
<PAGE>
c. Salary and Benefits. Subject to Manager's responsibilities
under Article VII, each party to this Agreement shall remain liable for the
salary and benefits paid to such party's own employees and shall be ultimately
responsible for compliance with state and federal laws pertaining to workers'
compensation, unemployment compensation and other employment-related statutes
pertaining to the party's own employees.
d. Payments to Subcontract Providers. Subject to Manager's
responsibilities under Article VII, Group shall be liable for any payments due
Subcontract Providers under Provider Subcontracts.
ARTICLE IV
MANAGEMENT SERVICES
-------------------
Section 4.1 General Description of Services. Except as prohibited by
law and within the limitations set out elsewhere in this Agreement, Manager
shall provide or arrange for the provision to Group of all management,
administrative and support services reasonably necessary and appropriate for the
efficient operation of the Practice. Such services include all administrative
services necessary to Group's performance of its obligations under Payor
Contracts, contracting, marketing, capital formation and assistance with long
term strategic planning. Manager shall exercise reasonable commercial efforts to
fulfill the administrative functions of a well managed dental group.
Section 4.2 Practice Site Facilities. Manager shall secure and
maintain Practice Site Facilities, including, without limitation, office space,
improvements, furnishings, equipment, supplies, and personal property, of a
nature and in a condition necessary and appropriate for the efficient and
effective operations of the Practice subject to the general approval of the
Joint Operations Committee. Group hereby accepts and approves of the Practice
Site Facilities initially provided by Manager. However, Manager from time to
time shall make such changes to Practice Site Facilities, including but not
limited to dental equipment purchases, as reasonably may be requested by Group
and consistent with the Annual Budget.
Section 4.3 Purchased Items and Services. Manager shall serve as the
purchasing agent for Group and shall arrange for personnel benefits, insurance,
and any other items and services required for the proper operation of the
Practice.
Section 4.4 Manager Personnel.
a. Management Team. Subject to the approval and continuing
supervision of the Joint Operations Committee, Manager may engage or designate
one or more individuals experienced in dental group management and direction,
including, but not limited to, an administrator, who will be responsible for the
overall administration of the Practice including day-to-day operations and
strategic development activities in accordance with this Agreement.
b. Other Manager Personnel. Manager shall select, hire, train,
supervise, monitor and terminate all non-Provider personnel necessary for the
operation and management of the Practice; provided, however, with respect to the
selection, hiring and termination of non-Provider clinical staff, Manager shall
obtain the consent of the Group, which consent will not be unreasonably
withheld.
7
<PAGE>
Section 4.5 Day-to-Day Management and Supervision. Subject to any
approval or consulting rights of the Joint Operations Committee, Manager shall
provide general management including, but not limited to, day-to-day supervision
of:
a. manager personnel;
b. equipment and supply acquisition;
c. office space and facility maintenance;
d. patient records organization and retention;
e. third party payor contracting;
f. case management;
g. billing, collections and accounting activities as set forth
below;
h. all operating aspects and policies of the Practice including,
but not limited to, hours of operation, work schedules, standard duties and job
descriptions, for all non-Group personnel; and
i. other related and incidental matters.
Section 4.6 Billing and Collection. In addition to the
responsibilities of Manager under Article VII, Manager shall be responsible for
all billing and collection activities required by Group. Manager shall also be
responsible for reviewing and paying accounts payable of Group. Group hereby
appoints the Manager its true and lawful attorney-in-fact to take the following
actions for and on behalf of and in the name of Group:
a. bill and collect in Group's name or the name of the individual
practicing dentist, all charges and reimbursements for Group. Group shall give
Manager all necessary access to Patient records to accomplish all billing and
collection. In so doing, Manager will use its best efforts but does not
guarantee any specific level of collections, and Manager will comply with
Group's reasonable and lawful policies regarding courtesy discounts;
b. take possession of and endorse in the name of the Group any
and all instruments received as payment of accounts receivable;
c. deposit all such collections directly into the Accounts and
make withdrawals from such Accounts in accordance with this Agreement; and
d. place accounts for collection, settle and compromise claims,
and institute legal action for the recovery of accounts.
Section 4.7 Bookkeeping and Accounting. Manager shall provide
bookkeeping services, financial reports, and shall implement and manage a
computerized management information system appropriate for the Practice.
8
<PAGE>
a. Financial Reporting. Manager shall prepare, analyze and
deliver to the Joint Operations Committee financial reports to the extent
necessary or appropriate for the operation of the Practice, including the
following:
(1) financial statements, including balance sheets and
statements of cash flow and income;
(2) accounts payable and accounts receivable analysis;
(3) billing status including any medicaid remittances; and
(4) reconciliation of assets, liabilities and major
expenses.
b. Audits. Group shall have the right to review, inspect and/or
copy and, at its sole cost and expense (which cost and expense shall be an
Excluded Expense), obtain an audit of (separate from any annual audit or review
of Group's financial statements performed at the direction of the Manager)
Group's financial books and records maintained by the Manager. Upon five (5)
days' prior written notice, Manager shall allow Group access during reasonable
business hours to all information and documents reasonably required for such
review, inspection and/or audit. Upon Group's request and at Group's sole cost
and expense (which cost and expense shall be an Excluded Expense), Manager shall
also provide copies of such documents.
Section 4.8 Marketing and Public Relations Services. Subject to any
limitation of law, regulation or ethical standards pertaining to the practice of
dentistry and following consultation with Group, Manager shall provide such
marketing and public relations services as Manager determines reasonably
necessary to promote, market and develop the dental services of Group. Manager
shall provide Group with copies of all marketing materials.
Section 4.9 Group Agreements. On behalf of Group, as its
attorney-in-fact, and subject to applicable state and federal law and the
continuing supervision of the Joint Operations Committee, Manager shall review,
evaluate, negotiate and enter into on Group's behalf, Payor Contracts,
Employment Agreements and Provider Subcontracts and any other contracts or
agreements regarding the provision of dental related items or services by Group
or Providers.
Section 4.10 Utilization Review Quality Improvement and Outcomes
Monitoring. Manager shall be responsible for providing administrative support
for Group's utilization review, quality improvement and outcomes monitoring
activities, including, without limitation, data collection, analysis and
reporting for Group Patients and Beneficiaries. Manager shall also support the
development and implementation of relevant policies, procedures, protocols,
practice guidelines and other interventions based on such activities.
Section 4.11 Patient Referrals. The parties agree that the benefits to
Group hereunder do not require, are not payment for, and are not in any way
contingent upon the admission, referral or any other arrangements for the
provision of any item or service offered by Manager or any affiliate of Manager
to any of Group's Patients in any facility or laboratory controlled, managed or
operated by Manager or any affiliate of Manager.
9
<PAGE>
Section 4.12 Applicable Law. Manager and Group shall comply with all
applicable federal and state laws, statutes, rules and regulations, including
without limitation, those relating to Medicaid reimbursement and any other
applicable governmental rules or the guidelines governing the standards for
administering a professional dental practice.
ARTICLE V
GROUP RESPONSIBILITIES
----------------------
Section 5.1 Diagnosis, Treatment Planning, Specific Patient Education
and Consultation. Group shall have sole responsibility for all professional
dental services provided to Patients with regard to the diagnosis of the
Patient's condition and the development of treatment plan alternatives,
including, without limitation, the following:
a. Diagnosis. Group shall have sole responsibility for all
medical and dental history evaluation, examination, obtaining clinical records,
and diagnostic procedures appropriate for complete diagnosis.
b. Treatment Planning. Group shall have sole responsibility for
all determination of treatment alternatives that may be professionally
acceptable for the treatment of the Patient's condition.
c. Specific Patient Education. Group shall have sole
responsibility for all discussion, recommendation, demonstration, and other
educational modalities intended to address the Patient's specific condition, as
differentiated from general Patient education intended to address the common
concerns of all Patients presenting with similar conditions.
d. Consultation. Group shall have sole responsibility for all
discussion of clinical advantages, disadvantages, complications, and risks of
each alternative treatment plan, and including the likely results of no
treatment.
e. Manager to Assist with Record Procurement. Notwithstanding the
above, Manager shall be responsible for exercising reasonable efforts to
procure, at its own expense, medical and dental history information, previous
clinical records, and X-ray records prior to presentation of the Patient for
treatment by Group, in accordance with protocols developed by Group in
consultation with Manager.
Section 5.2 Dental Services. Group shall have sole responsibility for
all professional dental services provided to Patients with regard to the
treatment of the Patient's condition, including, without limitation, the
following:
a. Preventive Care. Group shall have sole responsibility for all
preventive care intended to delay, or intercept the development of pathologic
conditions.
b. Therapeutic Care. Group shall have sole responsibility for all
therapeutic care intended to ameliorate, or improve existing pathologic
conditions.
10
<PAGE>
c. Referral to Specialists. Group shall have sole responsibility
for all referral to appropriate dental specialists and other allied health care
professionals in accordance with professional dental standards of care.
d. Continuing Care. Group shall have sole responsibility for all
development and execution of continuing care protocols intended to maintain the
Patient's condition over the course of time.
e. Manager to Assist with Patient Compliance Tracking.
Notwithstanding the above, Manager shall be responsible for exercising
reasonable efforts to facilitate, coordinate, and document the scheduling,
tracking, and confirmation of Group's recommendations for dental diagnostic and
therapeutic services, treatments, referrals, and continuing care in accordance
with protocols developed by Group in consultation with Manager.
Section 5.3 Provision of Dental Services by Group. Group shall operate
the Practice during the Term as a dental practice in accordance with the terms
of this Agreement and shall use its best efforts to operate and conduct the
Practice in accordance with the Annual Budget. However, nothing in this
Agreement shall be construed to affect or limit in any way the professional
discretion or duty of Group insofar as such constitutes the practice of
dentistry.
Section 5.4 Providers.
a. Professional Dental Services. Subject to guidelines
established by the Joint Operations Committee, Group shall use its best efforts
to employ or contract with the number of Providers necessary for the efficient
and effective operation of the Practice and in accordance with the Annual Budget
and quality assurance, credentialing and utilization management protocols
approved by the Joint Operations Committee. Group shall provide full and prompt
dental coverage for the Practice, including emergency service twenty-four hours
per day, seven days per week, including holidays, according to policies and
schedules approved by the Joint Operations Committee.
b. Provider Subcontracts and Employment Agreements. Group shall
not negotiate or execute any Provider Subcontract, Employment Agreement, or any
amendment thereto, or terminate any Provider Subcontract or Employment Agreement
without the approval of the Joint Operations Committee. Subject to Manager's
responsibilities under Article VII, Group shall be responsible for the payment
of compensation, in accordance with the Annual Budget, of all Employee Providers
and Subcontract Providers.
Section 5.5 Peer Review. Group, after consultation with the Joint
Operations Committee, shall implement, regularly review, modify as necessary or
appropriate and obtain the commitment of Providers to actively participate in
peer review procedures for Providers. Group shall assist Manager in the
production of periodic reports describing the results of such procedures. Group
shall provide Manager with prompt notice of any information that raises a
reasonable risk to the health and safety of Group Patients or Beneficiaries. In
any event, after consultation with the Joint Operations Committee, Group shall
take such action as may be reasonably warranted under the facts and
circumstances.
Section 5.6 Fees, Charges and Payor Agreements. The Joint Operations
Committee shall, after consultation with Group, determine the fees, charges,
premiums, or other amounts due in connection with delivery of dental services to
Patients. Such fees, charges, premiums, or other amounts
11
<PAGE>
(regardless of whether determined on a fee-for-service, capitated, prepaid, or
other basis) shall be reasonable and consistent with the fees, charges,
premiums, and other amounts due to dental care providers for similar services
within the community under similar types of reimbursement programs involved if
such programs are currently offered within the community.
Section 5.7 Hours of Clinical Operation. After consultation with
Group, the Joint Operations Committee shall establish hours of operation that
are consistent with good dental practice, and are appropriate to the need to
timely deliver professional dental care services to Group Patients.
Section 5.8 Billing Information and Assignments. Group shall promptly
provide Manager with all billing and Patient encounter information reasonably
requested by Manager for purposes of billing and collecting for Group's
services. Group shall use reasonable efforts to procure consents to assignments
and other approvals and documents necessary to enable Manager to obtain payment
or reimbursement from third party payors and Patients. With the assistance of
Manager, Group shall obtain all provider numbers necessary to obtain payment or
reimbursement for its services.
Section 5.9 Third Party Contracts. Group shall be in compliance with
all contracts, agreements and arrangements, including any contracts that exist
on the Effective Date, between Group and third parties.
Section 5.10 Use of Manager's Goods and Services. Group shall not use
any goods or services provided by Manager pursuant to this Agreement for any
purpose other than the provision of and management of dental services as
contemplated by this Agreement and purposes incidental thereto.
Section 5.11 Negative Covenants. During the Term, Group shall not,
without the prior approval of the Joint Operations Committee, either in a single
or series of related transactions (a) pledge, mortgage or otherwise encumber any
of its property, (b) sell, assign, transfer or convey all or substantially all
of its assets, including its goodwill, (c) merge or consolidate with any other
entity, (d) allow the transfer or issuance of any of its stock (other than in
accordance with the terms and provisions of that certain Shares Acquisition
Agreement dated of even date herewith between Manager and the sole shareholder
of Group), or (e) take or allow any act that would materially impair the ability
of Group to carry on the business of the Practice or to fulfill its obligations
under this Agreement. Notwithstanding the preceding, prior to consummating with
any third party, any transfer, sale, assignment or conveyance or any merger or
consolidation contemplated in subparagraphs (a), (b) or (c) above, Group shall
first offer (the "Offer") to Manager or its designee the right to acquire the
assets of Group or to effect a merger or consolidation with Group upon
substantially the same business and economic terms as proposed to Group by such
third party. Manager or its designee shall have 60 days to elect to accept or
reject such Offer, which election shall be binding on the parties.
Section 5.12 Group Maintains Full Professional Authority.
Notwithstanding Manager's general and specific rights and responsibilities set
forth in this Agreement, Group shall have full authority and control with
respect to all dental, professional and ethical determinations over Group's
Practice to the extent required by federal, state and local laws, rules and
regulation. Manager shall not engage in activities which constitute the practice
of dentistry as prohibited under applicable law. Manager shall neither exercise
control over nor interfere with the dentist-patient relationship, which shall be
maintained strictly between Group's Providers and their Patients.
12
<PAGE>
ARTICLE VI
TERM
----
Section 6.1 Term. This Agreement shall be effective the Effective
Date, and shall remain in effect for an initial term of forty (40) years from
the Effective Date, expiring on the fortieth (40th) anniversary of the Effective
Date, unless earlier terminated pursuant to the terms of this Agreement. The
word "Term" shall include such initial term and, where applicable, any extension
of such initial term (whether extended pursuant to Section 6.2a or otherwise),
subject to earlier termination pursuant to the provisions of this Agreement.
Section 6.2 Termination and Extension.
a. Automatic Extension. At the end of the initial term and any
subsequent term, this Agreement shall automatically renew for a five (5) year
term unless one of the parties provides the other party with written notice of
intent not to renew not less than one hundred eighty (180) days prior to the
expiration of the then current term.
b. Early Termination. This Agreement may be terminated according
to the provisions of this Section.
(1) Material Breach. In the event either party materially
breaches this Agreement and such breach is not cured to the reasonable
satisfaction of the non-breaching party within thirty (30) days after the
non-breaching party serves written notice of the default upon the defaulting
party (the "Default Notice"), the Agreement shall automatically terminate at the
election of the non-breaching party upon the giving of a written notice of
termination to the defaulting party not later than fifteen (15) days after
expiration of the 30-day cure period; provided that if such uncured breach is
only capable of being cured within a reasonable period of time in excess of
thirty (30) days, the non-breaching party shall not be entitled to terminate
this Agreement so long as the defaulting party has commenced such cure and
thereafter diligently pursues such cure to completion.
(2) Refusal to Comply. In the event that Group or Manager
refuses or fails to comply with a decision of the Joint Operations Committee,
the aggrieved party shall have the option to require the non-complying party to
participate in good faith mediation under the auspices of the American Mediation
Association, and if such dispute between Group and Manager continues for sixty
(60) days after the date the aggrieved party exercises its option regarding
mediation, the non-complying party shall have thirty (30) days in which to
comply with the decision of the Joint Operations Committee. If the noncomplying
party has not complied by the end of such thirty (30) day period, the aggrieved
party shall have the option to terminate this Agreement upon fifteen (15) days'
prior written notice. During such mediation, Manager and Group shall continue to
operate and manage the practice in good faith.
(3) Bankruptcy. A party may, upon three (3) days' prior
written notice, ---------- terminate this Agreement if the other party:
(a) Applies for or consents to the appointment of a
receiver, trustee or liquidator of all or a substantial part of its assets,
files a voluntary petition in bankruptcy or consents to an involuntary petition,
makes a general assignment for the benefit of its creditors, files a petition or
answer seeking reorganization or arrangement with its creditors, or admits in
writing its inability to pay its debts when due, or
13
<PAGE>
(b) Suffers any order, judgment or decree to be entered
by any court of competent jurisdiction, adjudicating such party bankrupt or
approving a petition seeking its reorganization or the appointment of a
receiver, trustee or liquidator of such party or of all or a substantial part of
its assets, and such order, judgment or decree continues unstayed and in effect
for ninety (90) days after its entry.
(4) Nonperformance. Manager may terminate this Agreement in
the event that in any two consecutive fiscal quarters the Manager has not been
paid all of the Reimbursable Expense Portion and at least three-quarters (3/4)
of the Percentage Fee Portion of the Management Fee and, in the sole discretion
of the Manager, it is not reasonably likely that such amounts of the Management
Fee will be paid in the next fiscal quarter. Any such termination shall be
effective as of the last day of such third fiscal quarter provided at least 60
days notice shall have been given; otherwise, such termination shall be
effective on the sixtieth day after notice is given.
(5) Change in Law. In the event of any material change in
federal or state law that has a significant adverse impact on either party
hereto in connection with their performance under this Agreement, or if
performance by a party of any duties under this Agreement be deemed illegal by
any administrative agency or in a formal opinion rendered to Manager by legal
counsel knowledgeable in health law matters retained by the Manager, the
affected party shall have the right to require that the other party renegotiate
the terms of this Agreement. Solely in the event of illegality, if the parties
fail to reach an agreement within thirty (30) days of the request for
renegotiation, either party may (subject to the severability provision of this
Agreement) terminate this Agreement upon thirty (30) days' prior written notice
to the other party.
c. Effect of Termination. Upon termination of this Agreement:
(1) Group shall surrender to Manager all of Manager's
property used primarily in the operation of the Practice in the same condition
as received, reasonable wear and tear excepted.
(2) Manager shall deliver to Group all records related to
the business of and provision of dental care through the Practice including,
without limitation, patient records and any corporate, personnel and financial
records maintained for the Practice and Providers, provided, that except as
limited by law, including, but not limited to laws governing the confidentiality
of patient records, Manager shall have the option to copy (or otherwise
duplicate) at its sole cost and expense such records of Group and to retain and
utilize such records for its own use;
(3) Manager shall deliver to Group any other property of
Group in Manager's possession;
(4) Both parties shall cooperate to ensure the provision of
appropriate dental care to Group Patients and Beneficiaries;
(5) Group shall promptly deliver to Manager any Management
Fees due and payable to Manager (such fees prorated for the month of
termination) and any amounts owed to Manager for advances made pursuant to
Section 7.3; and
14
<PAGE>
(6) Both parties shall cooperate to ensure the appropriate
billing and collections for dental services rendered by Group prior to the
effective date of termination, and any such cash collected shall be retained by
Group and/or paid to Manager pursuant to Article VII.
ARTICLE VII
FINANCIAL AND SECURITY ARRANGEMENTS
-----------------------------------
Section 7.1 Management Fee. Group and Manager agree that the
compensation set forth in this Article VII is being paid to Manager in
consideration of the services provided and the substantial commitment and effort
made by Manager hereunder and that such fees have been negotiated at arms'
length and are fair, reasonable and consistent with fair market value. Manager
shall be paid the management fee (the "Management Fee") as set forth on Exhibit
7.1 hereto. Payment of the Management Fee is not intended to and shall not be
interpreted or implied as permitting Manager to share in Group's fees for dental
services but is acknowledged as the negotiated fair market value compensation to
Manager considering the scope of services and the business risks assumed by
Manager.
Section 7.2 Payments. Except as otherwise set forth on Exhibit 7.1
hereto, the amounts to be paid to Manager under this Article VII shall be
calculated by Manager on the accrual basis of accounting and shall be payable
monthly. Payments due for any Management Fee shall be made by Group each
calendar month as provided herein and shall be paid on the 15th day following
the end of such month (or the first preceding day that is a business day if the
15th day is not a business day) (a "Payment Date"). Such amounts paid shall be
estimates based upon available information for such month, and adjustments to
the estimated payments shall be made to reconcile final amounts due under
Section 7.1 on the next Payment Date and shall be paid in such priority as set
forth in Section 7.5 hereof.
Section 7.3 Advances. Group shall be entitled to an advance from
Manager of such additional sums, over and above Group's right to the amounts
otherwise set forth in this Article VII, as shall be required by Group to pay
Practice Expenses and Group Expenses consistent with the Annual Budget of the
Practice (prepared as provided in Section 3.6 hereof) and the Management Fee as
provided in Exhibit 7.1 hereto. Additional amounts may be advanced to Group upon
Group's request and at the sole discretion of Manager. Any amounts advanced to
Group pursuant to this Section 7.3 shall be repaid by Group in such priority as
set forth in Section 7.5 below and shall bear interest at a rate equal to one
percent (1%) above the prime rate reported by the Wall Street Journal as
adjusted on a quarterly basis, compounded monthly until all such amounts of
principal and interest are repaid to Manager as provided herein.
Section 7.4 Security Agreement. In order to enforce Manager's rights
granted hereunder and subject to applicable law, Group shall execute a Security
Agreement in substantially the form attached hereto as Exhibit 7.4 (the
"Security Agreement"), which Security Agreement grants a security interest in
all of Group's assets and accounts receivable (as more fully described in the
Security Agreement) to Manager. In addition, Group shall cooperate with Manager
and execute all documents requested by Manager or its lenders to enable Manager
to perfect its security interest provided by the Security Agreement.
Section 7.5 Priority of Payments. Manager shall administer and make
disbursements from amounts deposited into the Accounts or transferred from the
Accounts to pay (including, without limitation the making of advances as
provided in Section 7.3) the Practice Expenses and Group Expenses as the same
become due and payable, and for which Group shall remain responsible. In
performing its obligations pursuant to Article IV, Manager shall apply funds of
Group in the following order of priority:
15
<PAGE>
a. payment of all Group Expenses;
b. payment of all Practice Expenses;
c. payment of the Management Fee;
d. repayment of amounts advanced to Group, and applicable
interest thereon (as contemplated in Section 7.3); and
e. payment of Excluded Expenses.
Any amounts which remain following the payment of the expenses and fees set
forth in subparagraphs (a) through (e) above shall be retained in the Accounts
and applied as contemplated in the Annual Budget(s).
Section 7.6 Accounts Receivable. At the option of Manager, on the
first business day of each month, Manager may purchase all or any portion of the
accounts receivable of Group relating to Revenues arising during the previous
month, by payment of cash or other readily available funds into an account for
Group or by offset of amounts owed by Group to Manager. The consideration for
the purchase shall be an amount equal to all fees recorded each month (net of
adjustments for uncollectible accounts, professional courtesies and other such
activities that do not generate a collectible fee) less Management Fees due to
Manager under this Article VII. Manager's purchase shall be effective upon full
payment of the purchase price. In the event that such purchase shall be
ineffective for any reason, Group is concurrently herewith entering into the
Security Agreement to grant a security interest in the accounts receivable to
Manager. In addition, Group shall cooperate with Manager and execute all
necessary documents in connection with the pledge of such accounts receivable to
Manager or at Manager's option, its lenders. All collections in respect of such
accounts receivable shall be deposited in a bank account at a bank selected by
mutual agreement of Group and Manager. To the extent Group comes into possession
of any payments in respect of such accounts receivable, Group shall direct such
payments to Manager for deposit.
ARTICLE VIII
INDEMNITY AND INSURANCE
-----------------------
Section 8.1 Indemnity.
a. Indemnification. Each party shall indemnify, defend and hold
harmless the other party from any and all liability, loss, claim, lawsuit,
injury, cost, damage or expense whatsoever (including reasonable attorneys' fees
and court costs) arising out of, incident to or in any manner occasioned by the
performance or nonperformance of any duty or responsibility under this Agreement
by such indemnifying party, or any of their employees, agents, contractors or
subcontractors; provided, however, that neither party shall be liable to the
other party hereunder for any claim covered by insurance, except to the extent
that the liability of such party exceeds the amount of such insurance coverage.
Specifically, and without limiting the generality of the foregoing, Group agrees
to indemnify, defend and hold harmless Manager for all liability, loss, claim,
lawsuit, injury, cost, damage or expense whatsoever (including reasonably
attorneys' fees and court costs) arising out of the professional negligence of
Group, its employees, agents, contractors or subcontractors, including any
amounts in excess of the professional liability insurance coverage of Group or
its employees, agents, contractors or subcontractors.
16
<PAGE>
b. Mutual Indemnity. Each party to this Agreement shall be
indemnified by the other party for any claim under this Agreement or otherwise
against the indemnified party for vacation pay, sick leave, retirement benefits,
Social Security benefits, workers' compensation benefits, disability or
unemployment, insurance benefits, or other employee benefits of any kind accrued
during the term of this Agreement by an employee of the indemnifying party.
Section 8.2 Manager's Insurance. Manager shall, on its own behalf and
at its sole cost and expense, procure and maintain in force during the term of
this Agreement policies in the following categories in the amount indicated:
a. Comprehensive general liability insurance covering the risks
of Manager, in an amount determined by the Joint Operations Committee;
b. Workers' Compensation insurance covering the employees of
Manager, in such amounts as is usual and customary under the circumstances;
c. Property insurance covering the facilities, equipment and
supplies owned or leased by Manager or Group for use in the operation of the
Practice.
Section 8.3 Group's Insurance. Manager shall obtain, and maintain on
behalf of Group in full force and effect during the Term, policies in the
following categories in the amount indicated:
a. Comprehensive professional liability insurance coverage for
Group and Group's Employee Providers in such amounts as are usual and customary
for similar dental practices within the same area and as approved by the Joint
Operations Committee, which approval shall not be unreasonably withheld (the
cost and expense of which shall be a Group Expense);
b. Workers' Compensation insurance covering the employees of
Group, in such amounts as is usual and customary under the circumstances (the
cost and expense of which shall be a Practice Expense); and
c. Comprehensive general liability insurance covering the risks
of Group, in an amount determined by the Joint Operations Committee (the cost
and expense of which shall be a Practice Expense).
ARTICLE IX
BOOKS AND RECORDS
-----------------
Section 9.1 Ownership of Records. All business records and information
relating exclusively to the business and activities of either party shall be the
property of that party, irrespective of identity of the party responsible for
producing or maintaining such records and information. Without limiting the
foregoing, all patient charts and records maintained by Manager relating to the
dental services of Group shall be the property of Group. Group also shall be
entitled to a copy at Group's sole cost of all business records pertaining to
Group. Except as limited by law, including, but not limited to laws governing
the confidentiality of patient records, Manager shall be entitled to a copy at
Manager's sole cost of all records of Group.
17
<PAGE>
ARTICLE X
RESTRICTIVE COVENANTS
---------------------
Section 10.1 Covenant Regarding Proprietary Information. In the course
of the relationship created pursuant to this Agreement, Group will have access
to certain methods, trade secrets, processes, ideas, systems, procedures,
inventions, discoveries, concepts, software in various stages of development,
designs, drawings, specifications, models, data, documents, diagrams, flow
charts, research, economic and financial analysis, developments, procedures,
know-how, policy manuals, form contracts, marketing and other techniques, plans,
materials, forms, copyrightable materials and trade information (all of which is
referred to in this Agreement as "Proprietary Information") regarding the
operations of Manager and/or of its Affiliates (collectively, the "Protected
Parties"). Group shall maintain all such Proprietary Information in strict
secrecy and shall neither use for itself or any third parties nor divulge such
information to any third parties, except as may be necessary for the discharge
of their obligations under this Agreement or otherwise consented to in writing
by Manager. Group shall take all necessary and proper precautions against
disclosure of any Proprietary Information to unauthorized persons by any of its
employees or agents. Group and all employees, and agents of Group who will have
access to all or any part of the Proprietary Information may be required to
execute an agreement, at the request of Manager, valid under the law of the
jurisdiction in which such agreement is executed, and in a form acceptable to
Manager and its counsel, committing themselves to maintain the Proprietary
Information in strict confidence and not to disclose it to any unauthorized
person or entity. The Protected Parties not party to this Agreement are hereby
specifically made third party beneficiaries of this Section, with the power to
enforce the provisions hereof. Upon termination of this Agreement for any
reason, Group and each of its Employee Providers and Subcontract Providers shall
cease all use of any of the Proprietary Information and, at the request of
Manager, shall execute such documents as may be necessary to evidence Group's
abandonment of any claim thereto. The parties recognize that a breach of this
Section cannot be adequately compensated in money damages and therefore agree
that injunctive relief shall be available to the Protected Parties as their
respective interests may appear.
The obligations of Group under this Section 10.1 shall not apply to
information: (i) which is a matter of public knowledge on or becomes a matter of
public knowledge after the Effective Date of this Agreement, other than as a
breach of the confidentiality terms of this Agreement or as a breach of the
confidentiality terms of any other agreement between a third party and Group,
Manager and/or its Affiliates; or (ii) which was lawfully obtained by Group on a
nonconfidential basis other than in the course of performance under this
Agreement and from some Person other than Manager or its Affiliates or from some
person other than one employed or engaged by Manager or its Affiliates, which
Person has no obligation of confidentiality to Manager or its Affiliates.
Section 10.2 Covenants Not to Compete During the Term. The parties
recognize that the services to be provided by Manager shall be feasible only if
Group operates an active dental practice to which Group and its Providers devote
their full time and attention. To that end:
a. Restrictive Covenants by Group. During the term of this
Agreement and except as otherwise agreed to in writing by Manager, Group shall
not (i) establish, operate or provide dental care services at any dental office,
clinic or other facility providing services substantially similar to those
provided by Group pursuant to this Agreement anywhere other than at the Practice
Sites or as may be approved in writing by Manager; (ii) enter into any
management or administrative services agreement or other similar arrangement
with any person or entity other than Manager without Manager's prior written
approval and (iii) operate or, directly or indirectly, hold or own any type of
ownership or other form of equity interest
18
<PAGE>
in, or serve as a consultant to or otherwise perform services for any person or
entity engaged in the business of providing management and administrative
services to dental practices.
b. Restrictive Covenants by Providers. Group shall use its best
efforts to obtain and enforce formal agreements with its Employee Providers and
Subcontract Providers who are dentists not to establish, operate or provide
dental care services, during the term of this Agreement and for a period of two
(2) years after any termination of employment with Group (except a termination
of such employment (i) based upon a material breach by Manager which shall
remain uncured for a period of sixty (60) days after receipt of notice in
accordance with Section 11.4 hereof, (ii) by reason of nonpayment of a material
amount owed by Manager to or to be paid by Manager on behalf of Group, or (iii)
by Group without cause), at any dental office, clinic or facility located within
30 miles of any Practice Site at which the Employee Provider or Subcontract
Provider has practiced. Any variation of such restrictive covenants shall be
approved in advance in writing by Manager.
Section 10.3 Covenant Not to Solicit. For three (3) years following
the termination of this Agreement, except for a valid termination by Group
pursuant to Section 6.2b, Group shall not:
a. directly or indirectly solicit, recruit or hire, or induce any
party to solicit, recruit or hire any person who is an employee of, or who has
entered into an independent contractor arrangement with, Manager or any
Affiliate of Manager;
b. directly or indirectly, whether for itself or for any other
person or entity, call upon, solicit, divert or take away, or attempt to
solicit, call upon, divert or take away any of Manager's customers, business, or
clients; or
c. directly or indirectly solicit, or induce any party to
solicit, any of Manager's contractors or the contractors of any Affiliate of
Manager, to enter into the same or a similar type of contract with any other
party.
Section 10.4 Enforcement. Manager and Group acknowledge and agree that
since a remedy at law for any breach or attempted breach of the provisions of
this Article X shall be inadequate, either party shall be entitled to specific
performance and injunctive or other equitable relief in case of any such breach
or attempted breach, in addition to whatever other remedies may exist by law.
All parties hereto also waive any requirement for the securing or posting of any
bond in connection with the obtaining of any such injunctive or other equitable
relief.
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
Section 11.1 Assignment. Neither party shall assign this Agreement to
any other party or parties without the prior written consent of the other party,
which consent may be withheld arbitrarily or capriciously, for any reason or for
no reason whatsoever and any attempted assignment in violation of this Agreement
shall be null and void. Notwithstanding the preceding, Manager may assign this
Agreement to any Affiliate of Manager or to a financial institution as
collateral security for the indebtedness of Manager or any of its Affiliates.
Group hereby agrees that (a) upon notice of any default or event of default from
any financial institution (or its agent, as applicable) to which this Agreement
has been assigned as collateral security for such indebtedness, Group will make
all payments required to be made under this Agreement to such financial
institution (or its agent, as applicable) and such financial institution (or its
agent, as applicable)
19
<PAGE>
shall be entitled to exercise any and all rights and remedies of Manager under
this Agreement, and (b) Group will not, without the prior written consent of
such financial institution (or its agent, as applicable), terminate (except
pursuant to the terms hereof) or amend or otherwise modify this Agreement.
Section 11.2 Headings. The article and section headings used in this
Agreement are for purposes of convenience only. They shall not be construed to
limit or to extend the meaning of any part of this Agreement.
Section 11.3 Waiver. Waiver by either Group or Manager of any breach
of any provision of this Agreement shall not be deemed to be a waiver of such
provision or of any subsequent breach of the same or of any other provision of
this Agreement.
Section 11.4 Notices. Any notice, demand, approval, consent or other
communication required or desired to be given under this Agreement in writing
shall be personally served or given by overnight express carrier or by mail, and
if mailed, shall be shall be deemed to have been given when five (5) business
days have elapsed from the date of deposit in the United States mails, certified
and postage prepaid, addressed to the party to be served at the following
address or such other address as may be given in writing to the parties:
Group: Affordable Dental Care, P.C.
215 N. Blaine St.
Newberg, OR 97321
Attn: President and Chief Executive Officer
Manager: Gentle Dental Service Corporation
22800 Savi Ranch Parkway, Suite 206
Yorba Linda, California 92887
Attn: President and Chief Executive Officer
Section 11.5 Attorneys' Fees. If any legal action or arbitration or
other proceeding is commenced, whether by Manager or Group concerning this
Agreement, the prevailing party shall recover from the losing party reasonable
attorneys' fees and costs and expenses, including those of appeal and not
limited to taxable costs, incurred by the prevailing party, in addition to all
other remedies to which the prevailing party may be entitled.
Section 11.6 Successors. Without limiting or otherwise affecting any
restrictions on assignments of this Agreement or rights or duties under this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
successors and assigns of Group and Manager.
Section 11.7 Entire Agreement. This Agreement, and that certain Shares
Acquisition Agreement by and among Manager, Group and the sole shareholder of
Group of even date herewith, set forth the entire agreement between Group and
Manager and supersede all prior negotiations and agreements, written or oral,
concerning or relating to the subject matter of this Agreement, and this
Agreement may not be modified except by a writing executed by all parties and
subject to the provisions thereof.
Section 11.8 Governing Law. This Agreement and the rights and
obligations of the parties hereto shall be governed by, and construed according
to, the laws of the State of Oregon.
20
<PAGE>
Section 11.9 Severability, Contract Modifications for Prospective
Legal Events. Nothing contained in this Agreement shall be construed to require
the commission of an act contrary to law, and whenever there is any conflict
between any provision of this Agreement and any statute, law, ordinance or
regulation, the latter shall prevail. In such event, and in any case in which
any provision of this Agreement is determined to be in violation of a statute,
law, ordinance or regulation, the affected provision(s) shall be limited only to
the extent necessary to bring it within the requirements of the law and, insofar
as possible under the circumstances, to carry out the purposes of this
Agreement. The other provisions of this Agreement shall remain in full force and
effect, and the invalidity or unenforceability of any provision hereof shall not
affect the validity and enforceability of the other provisions of this
Agreement, nor the availability of all remedies in law or equity to the parties
with respect to such other provisions.
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision, a regulatory agency or legal counsel of both
parties in such a manner as to indicate that the substantive structure of this
Agreement may be in violation of such laws or regulations, Group and Manager
shall proceed in good faith to amend this Agreement, to the maximum extent
possible, to preserve the underlying economic, financial and composition of
Joint Operations Committee arrangements between Group and Manager. A party to
this Agreement may choose to, but shall not be required to, take any action or
to make any amendment to this Agreement if such action or amendment would put
them in a substantially and materially worse economic or financial position than
that contemplated by the terms of this Agreement. The parties acknowledge that
such amendment may require reorganization of Group or Manager, or both, and may
require either or both parties to obtain appropriate regulatory licenses and
approvals. If an amendment is not possible, either party shall have the right to
terminate this Agreement upon thirty (30) days notice to the other party.
Section 11.10 Time Is of the Essence. Time is of the essence in this
Agreement.
Section 11.11 Authority. Any Person signing this Agreement on behalf
of any entity hereby represents and warrants in his or her individual capacity
that he or she has full authority to do so on behalf of such entity.
Section 11.12 Counterparts. This Agreement may be executed in two (2)
or more counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, Group and Manager have caused their authorized
representatives to execute this Dental Group Management Agreement as of the date
first above written.
AFFORDABLE DENTAL CARE, P.C.
By: L. T. VAN EERDEN
-----------------------------------
Its: Secretary
GENTLE DENTAL SERVICE CORPORATION
By: L. T. VAN EERDEN
-----------------------------------
Its: Executive Vice President
21
<PAGE>
EXHIBIT 1
---------
Definitions
-----------
For purposes of this Agreement, the following terms shall have the meaning
indicated below or defined at the indicated section:
(1) Accounts. See Section 2.3.
(2) Affiliate. "Affiliate" shall mean, with respect to any Person, (i) any
individual or entity directly or indirectly owned or controlled by such Person,
(ii) any individual or entity directly or indirectly owning or controlling such
Person or (iii) any individual or entity directly or indirectly owned or
controlled by the same family member, individual or entity as owns or controls
such Person. For purposes of this Agreement, neither Group nor Manager shall be
deemed an Affiliate of the other.
(3) Agreement. "Agreement" means this Dental Group Management Agreement.
(4) Annual Budget. See Section 3.6.
(5) Beneficiaries. See Recital A.
(6) Capital Costs. "Capital Costs" shall mean any and all investments that
are or would be capitalized pursuant to GAAP.
(7) Committee Members. See Section 3.5a.
(8) Default Notice. See Section 6.2b(1).
(9) EITF. See Section 3.4b.
(10) Effective Date. See first paragraph of this Agreement.
(11) Employee Providers. See Recital B.
(12) Employment Agreements. See Recital B.
(13) Excluded Expenses. "Excluded Expenses" shall mean those costs and
expenses incurred by Group which are (i) expressly identified as Excluded
Expenses in this Agreement, and/or (ii) not Practice Expenses or Group Expenses
expressly contemplated by or set forth in the Annual Budget.
(14) FASB. See Section 3.4b.
(15) GAAP. "GAAP" means at any particular time generally accepted
accounting principles as in effect at such time. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided herein, the
meaning customarily given in accordance with GAAP, and all financial
computations hereunder shall be computed unless otherwise specifically provided
herein, in accordance with GAAP as consistently applied and using the same
method of valuation as used in the preparation of Manager's financial statement.
22
<PAGE>
(16) Group. See first paragraph of this Agreement.
(17) Group Expenses. "Group Expenses" means salaries and wages,
compensation, payroll taxes, and employee benefits of Employee Providers and
Subcontract Providers, and costs of professional liability insurance,
professional dues and license fees, continuing education and similar costs for
Employee Providers, all as set forth in, and subject to and limited by, the
Annual Budget.
(18) Group Members. See Section 3.5a.
(19) Group Patients. See Recital A.
(20) Joint Operations Committee. See Section 3.4b.
(21) Management Fee. See Section 7.1.
(22) Manager. See first paragraph of this Agreement.
(23) Manager Members. See Section 3.5a.
(24) Offer. See Section 5.11.
(25) Patient. "Patient" shall mean and include any Group Patient and/or
Beneficiary.
(26) Payment Date. See Section 7.2.
(27) Percentage Fee Portion. See Exhibit 7.1.
(28) Payor Contracts. See Recital A.
(29) Person. "Person" shall mean any natural person, corporation,
partnership or other business structure recognized as a separate legal entity.
(30) Plans. See Recital A.
(31) Practice. See Recital C.
(32) Practice Expenses. "Practice Expenses" means all costs incurred by
Manager including amortization and/or depreciation associated with assets of
Manager utilized by Group in the conduct of its Practice or covering operations
and Capital Costs, direct labor costs, supplies, direct overhead and indirect
overhead expense attributable to the management and operation of the Practice
and direct and indirect corporate overhead of Manager including all interest
expense and other expenses which are attributable to Manager's business
operations in accordance with Manager's corporate allocation policies, all as
consistent with and/or contemplated in the Annual Budget.
(33) Practice Sites. See Section 3.4a.
(34) Practice Site Facilities. See Section 3.4a.
23
<PAGE>
(35) Preliminary Budget. See Section 3.7b.
(36) Proprietary Information. See Section 10.1.
(37) Protected Parties. See Section 10.1.
(38) Providers. See Recital B. The term "Providers" shall include
individuals or organizations licensed to practice dentistry (including
specialists) as well as other licensed dental professionals who provide
ancillary reimbursable dental services.
(39) Provider Subcontracts. See Recital B.
(40) Reimbursable Expense Portion. See Exhibit 7.1.
(41) Revenues. See Section 2.2.
(42) Security Agreement. See Section 7.4.
(43) Subcontract Providers. See Recital B.
(44) Term. See Section 6.1.
24
AMENDMENT TO MERGER AGREEMENT
This Amendment to Merger Agreement ("Amendment") is made and entered into
this 28th day of February, 1998, by and between Gentle Dental Service
Corporation, a Washington corporation ("GDSC"), Gentle Dental Merger
Corporation, a California corporation ("GD Merger"), Dedicated Dental Systems,
Inc., a California corporation ("DDS"), Arthur G. Kaiser, D.D.S, and Robert J.
Newman.
RECITALS
--------
The parties listed above are parties to that certain Merger Agreement dated
September 21, 1997 ("Agreement") pursuant to which GDSC agreed to acquire all of
the outstanding stock of DDS through a merger of GD Merger with and into DDS.
The parties mutually desire to make certain amendments to the Agreement as set
forth in this Amendment, including changing the structure of the transaction
from a merger to a taxable stock purchase. Capitalized terms used in this
Amendment and not otherwise defined shall have the meanings ascribed to such
terms in the Agreement.
In consideration of the mutual covenants contained herein and in the
Agreement, the parties agree as follows:
1. Article 1 of the Agreement is amended to read as follows:
ARTICLE I
Purchase and Sale of DDS Common Stock
1.01 Purchase and Sale; Tax Election; Directors.
1.01-1 Subject to all the terms and conditions of this Agreement and
for the consideration herein stated, on the "Closing Date," as that term is
defined in Section 1.06, Shareholders agree to sell, convey, assign, transfer
and deliver all of the outstanding shares of common stock, no par value, of DDS
(the "DDS Common Stock") to GDSC, and GDSC agrees to purchase and accept the DDS
Common Stock from Shareholders.
1.01-2 In connection with the purchase and sale of the DDS Common
Stock, Shareholders shall join with GDSC in timely filing an election under
Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the
"Code"), in accordance with Treas. Reg. section 1.338(h)(10)-1 to have the
transaction taxed as an asset purchase, and shall take all other similar actions
required to give effect to the election for state and local tax purposes to the
greatest extent allowed by law.
1.01-3 At and as of the Closing Date, the directors of DDS shall be as
follows: Dany Y. Tse, DMD, Arthur G. Kaiser, DDS, and L. Theodore Van Eerden.
<PAGE>
1.02 Purchase Price. The total purchase price for the DDS Common Stock (the
"Purchase Price" shall be the following, which shall be divided among the
Shareholders pro rata according to their ownership of DDS Common Stock:
1.02-1 $9,000,000 (reduced by any outstanding debt of DDS, which
consists of any long-term debt and the current portion thereof as determined
consistently with the classification of such items in DDS's audited financial
statements, as of the Closing Date), payable by wire transfer on the Closing
Date.
1.02-2 A number of shares of GDSC's Common Stock ("GDSC Common Stock")
determined by dividing $5,219,000 by 8.1818 (the "Stock Price"), which is the
number equal to the average of the closing prices of GDSC Common Stock reported
by NASDAQ for the thirty trading days prior to the date of this Agreement
(subject to adjustment as set forth in Section 1.02-4).
1.02-3 Additional payments by wire transfer to the Shareholders (the
"Earnout Payments") based on the EBITDA (as defined below) for the first
12-month period, second 12- month period and, possibly, the third 12-month
period (the "Earnout Period") starting on the first day of the first calendar
month after the Closing Date. The first Earnout Payment will equal three
multiplied by the excess over $3.8 million, if any, of the EBITDA for the first
12- month period of the Earnout Period. The second Earnout Payment will equal
three multiplied by the excess over $4.0 million, if any, of the EBITDA for the
second 12-month period of the Earnout Period. If, and only if, the sum of the
first Earnout Payment and the second Earnout Payment does not exceed $2.7
million, a third Earnout Payment will be made equal to three multiplied by the
excess over $4.25 million, if any, of the EBITDA for the third 12-month period
of the Earnout Period except that the third Earnout Payment, when combined with
the first Earnout Payment and the second Earnout Payment, shall not exceed $2.9
million. All Earnout Payments must be made within 90 days of the end of the
applicable 12-month period of the Earnout Period.
"EBITDA" means the combined net income of:
(a) DDS,
(b) the Professional Corporations (as defined in the Acquisition
Agreements, which term is itself defined in Section 1.03-2 below), and
(c) GDSC from the provision of services to the Professional Corporations,
before any reduction for interest, income taxes, depreciation or
amortization, and excluding any allocation of GDSC corporate or
regional overhead expense, as reflected on a combined income statement
prepared in conformity with generally accepted accounting principles
applied in a manner consistent with the application of such principles
to the preparation of GDSC's audited financial statements, and
excludes all revenues and expenses attributable to any dental office other than
the 15 dental offices that are either presently owned by DDS or subject to the
Acquisition Agreements. The
2
<PAGE>
parties understand and agree that during the Earnout Period the business of DDS,
including but not limited to the businesses of the dental offices owned by DDS
as of the Closing Date, as well as the businesses of the four dental offices
subject to the Acquisition Agreements, will be operated in the same general
manner as those businesses were operated prior to the Closing Date.
1.02-4 The number of shares of GDSC Common Stock included in the
Purchase Price may be subject to adjustment after the Closing Date as set forth
in this Section 1.02-4.
(a) As soon as reasonably possible after Closing, the amount of
the "Net Current Assets" (as defined in Section 1.02-4(c)) shall be determined
as provided in Section 1.02-4(d). If the amount of Net Current Assets is $30,000
more or less than $68,400, the number of shares of GDSC Common Stock included in
the Purchase Price shall be adjusted. If the difference between Net Current
Assets and $68,400 does not exceed $30,000, there shall be no adjustment.
(b) If the Net Current Assets are greater than $98,400, the
number of shares of GDSC Common Stock included in the Purchase Price shall be
increased. If the Net Current Assets are less than $38,400, the number of shares
of GDSC Common Stock included in the Purchase Price shall be decreased. The
amount of the increase or decrease in the number of shares included in the
Purchase Price shall be determined by calculating the difference between the Net
Current Assets and $68,400 and dividing that difference by the Stock Price.
(c) "Net Current Assets" means the sum of (a) the amount of
accounts receivable, net of contractual allowances and bad debt reserve, of DDS
as of the Closing Date and (b) any prepaid expenses properly recordable on a
balance sheet for DDS as of the Closing Date reduced by the sum of (x) the
accounts payable of DDS at the Closing Date and (y) the accrued liabilities of
DDS at the Closing Date, specifically including an accrual of payroll and
payroll-related charges up to and including the Closing Date, all as determined
consistently with the accounting conventions applied in determining the amounts
set forth in paragraphs (a) and (b) above.
(d) At or after the Closing Date, and as a condition to the
issuance to Shareholders of certificates for GDSC Common Stock, Shareholders
shall execute and deliver to GDSC a certificate detailing the calculation of Net
Current Assets and including as schedules thereto lists of all receivables,
prepaid expenses, payables and accrued liabilities as of the Closing Date
included in the calculation. In this certificate Shareholders shall certify the
accuracy and completeness of the schedules to the certificate and the accuracy
of the calculation of Net Current Assets.
1.03 Escrow Shares.
1.03-1 At the "Closing" (as that term is defined in Section 1.06),
GDSC shall withhold an aggregate of 375,000 shares from the shares of GDSC
Common Stock to be delivered under this Agreement (the "Escrow Shares"). The
Escrow Shares shall be withheld pro rata according to the relative ownership
interests of the Shareholders in DDS Common
3
<PAGE>
Stock. The Escrow Shares shall be evidenced by certificates issued in the names
of Shareholders. GDSC shall hold the certificates for the Escrow Shares for the
benefit of the respective Shareholders, who shall for all purposes be considered
the legal owners of the Escrow Shares held for their accounts and who shall have
all rights of a shareholder of GDSC, including the right to vote, either
directly or through an authorized agent, and receive current distributions of
cash dividends, if any, with respect to Escrow Shares held for their accounts,
other than the right to transfer Escrow Shares. The Escrow Shares will appear as
issued and outstanding on the balance sheet and stock records of GDSC. GDSC
shall hold and dispose of the Escrow Shares only as provided in this Agreement.
1.03-2 At the election of GDSC, any liability of Shareholders under
Section 12.02 of this Agreement or under the similar section of the Asset
Purchase Agreements dated as of the date hereof (the "Acquisition Agreements")
relating to the acquisition by GDSC of certain assets of three dental practices
managed by California Dental Practice Management Company ("DPM"), known as
Crosstown Family Dentistry and Wasco Family Dentistry, Ming-& H Family
Dentistry, and Indio Family Dentistry (the "Dentist-owned Practices"), once such
liability is established either by agreement or litigation, may be satisfied
from the Escrow Shares. In that event, GDSC shall have the right to transfer to
its own name or cancel whole Escrow Shares having an aggregate value as nearly
equal as possible but in no event greater than the amount of Shareholders'
liability. The value of Escrow Shares for this purpose shall be the Stock Price.
Notwithstanding the foregoing, if GDSC elects to satisfy Shareholders' liability
from the Escrow Shares, Shareholders may elect within 30 days thereafter to pay
such liability in cash and upon such election Shareholders may arrange to have
sold such number of Escrow Shares as are necessary to pay such liability in cash
and, contingent upon the Shareholders arranging for GDSC to receive directly
from a broker, buyer or other representative of the Shareholders such cash upon
sale of those certain Escrow Shares, GDSC shall release such number of Escrow
Shares directly to such buyer, broker or representative of the Shareholders for
the purpose of such sale and distribution of proceeds. Should Shareholders elect
to pay such liability in cash (and not request that Escrow Shares be released
for the purpose of raising cash through a sale to pay such liability) and such
liability is paid by the Shareholders, then Shareholders may request that after
such payment within 30 days they receive a release of a number of Escrow Shares
equal to the amount of the liability paid divided by the closing price of GDSC
Common Stock reported by NASDAQ on the date of such payment. On the first
anniversary of the Closing Date, if there are no claims outstanding by GDSC
against Shareholders under this Agreement or the Acquisition Agreements, GDSC
shall release all Escrow Shares that have not been transferred to GDSC or
canceled, and shall deliver the certificates for those shares to Shareholders.
If a claim is outstanding on the first anniversary of the Closing Date, GDSC
shall promptly release all remaining Escrow Shares once all outstanding claims
have been resolved and paid.
1.04 Instruments of Transfer. On the Closing Date, Shareholders shall
deliver to GDSC certificates for all of the DDS Common Stock, duly endorsed for
transfer.
1.05 Further Assurances. Shareholders agree that, at any time and from time
to time on and after the Closing Date, they will, upon the request of GDSC and
without further
4
<PAGE>
consideration, take all steps reasonably necessary to place GDSC in possession
and operating control of the business of DDS and the assets and properties of
DDS.
1.06 Closing. The consummation of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Stoel Rives LLP,
Portland, Oregon, effective as of the close of business on the last day of the
month in which all conditions to the Closing are satisfied (other than those
conditions that by their terms are to occur at the Closing) or at another date,
time and place agreed upon in writing by the parties (the "Closing Date");
provided, however, that if all conditions to the Closing (other than those
conditions that by their terms are to occur at the Closing) are satisfied on or
after the 20th day of a month, the Closing shall occur effective as of the close
of business on the last day of the following month or at an earlier date and
time agreed upon in writing by the parties.
1.07 Allocation of Purchase Price. The Purchase Price shall be allocated
among the assets of DDS in accordance with Schedule 1.07, and GDSC and
Shareholders shall be bound by that allocation in reporting the transactions
contemplated by this Agreement to any governmental authority (including without
limitation the Internal Revenue Service).
2. Section 5.22-3 is added to the Agreement as follows:
5.22-3 S Corporation Status. DDS at all times since incorporation has
maintained an effective election to be taxed as an S corporation as defined in
Section 1361(a)(1) of the Code.
3. Section 6.07-2 of the Agreement is amended to read as follows:
6.07-2 Supplemental Lock-Up. Each Shareholder agrees that until the
first anniversary of the Closing Date he will not directly or indirectly sell,
offer to sell, contract to sell (including, without limitation, any short sale),
grant any option to purchase or otherwise transfer or dispose of (other than to
donees or pledgees who agree to be similarly bound) any Shares owned by him,
except Shares sold pursuant to the piggyback registration rights provided for in
Section 7.02. Shareholders consent to having appropriate legends placed on the
certificates representing the Shares relating to the lock-up restriction.
4. Sections 7.02-1 through 7.02-3 of the Agreement are amended to read as
follows:
7.02-1 Piggyback Rights. The rights provided in this Section 7.02
shall apply if GDSC determines to register shares of GDSC Common Stock under the
1933 Act for an underwritten offering for its account, except that this Section
7.02 shall not apply to the offering covered by the Registration Statement on
Form SB-2 filed by GDSC on January 9, 1998 or to any registration that is filed
after the second anniversary of the Closing Date. Prior to filing a registration
statement for any such offering, GDSC shall give Shareholders written notice
thereof and will include in such registration and underwriting all the
Registrable Securities specified in
5
<PAGE>
a written request or requests, made within 10 days after receipt of such written
notice from GDSC by Shareholders, except as set forth in Section 7.02-2 below.
For purposes of this Agreement, the term "Registrable Securities" means (i) the
Shares and (ii) any GDSC Common Stock issued as (or issuable upon the conversion
or exercise of any warrant, right or other security which is issued as) a
dividend or other distribution with respect to, or in exchange for or in
replacement of, the Shares.
7.02-2 Underwriting.
(a) The right of Shareholders to registration pursuant to Section
7.02-1 is conditioned upon Shareholders' participation in such underwriting and
the inclusion of Shareholders' Registrable Securities in the underwriting to the
extent provided herein. Shareholders shall (together with GDSC and any other
shareholders distributing their securities through such underwriting) enter into
an underwriting agreement in the form agreed to between GDSC and the underwriter
or underwriters selected for such underwriting by GDSC.
(b) If the total amount of securities, including Registrable
Securities, requested by GDSC shareholders with registration rights ("Requesting
Shareholders") to be included in such underwriting exceeds the amount of
securities to be sold by selling shareholders that the underwriters determine in
their sole discretion is compatible with the success of the underwriting for
GDSC, then GDSC shall be required to include in the registration only that
number of such securities, including Registrable Securities, which the
underwriters determine in their sole discretion will not jeopardize the success
of the underwriting. The securities so included will be apportioned pro rata
among the Requesting Shareholders according to the total amount of securities
entitled to be included in the registration owned by each Requesting Shareholder
or in such other proportion as shall mutually be agreed to by such Requesting
Shareholders.
7.02-3 S-3 Registration. No later than 30 days after the Closing Date,
GDSC shall file a Registration Statement on Form S-3 to register all Registrable
Securities for resale by the Shareholders in ordinary market transactions;
provided, however, that GDSC may delay such filing on a one-time basis for up to
90 days if GDSC reasonably determines that (a) such filing might be detrimental
to the offering covered by the Registration Statement on Form SB-2 filed by GDSC
on January 9, 1998, or (b) additional time is necessary to obtain and file
financial statements required for such Registration Statement on Form S-3. GDSC
shall use its best efforts to maintain an effective registration statement
permitting the unrestricted sale of such remaining Registrable Securities until
the second anniversary of the Closing Date.
5. Section 11.01-4 of the Agreement is amended to read as follows:
11.01-4 by either DDS or GDSC, by written notice to the other party,
if the Closing shall not have occurred on or prior to December 31, 1998;
provided, however, that if the California Department of Corporations shall not
have approved the material modification to DDS's license under the Knox-Keene
Act filed by DDS in connection with the transaction contemplated by this
Agreement prior to December 31, 1998, such date shall be extended to the
6
<PAGE>
date 45 days after the receipt of such approval; provided further, however, that
the right to terminate this Agreement under this Section 11.01-4 shall not be
available to any party whose failure to fulfill or perform any obligation under
this Agreement has been the cause of, or resulted in, the failure of the Closing
to occur on or before such date.
6. All references in the Agreement to the "Effective Time" are changed to
the "Closing Date." All references in the Agreement to the "Merger" are changed
to the "transaction contemplated by this Agreement."
7. Sections 3.06, 4.04, 4.05, 9.09 and 12.06 of the Agreement are deleted.
8. Except as expressly provided in this Amendment, the Agreement is not
otherwise modified and remains in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first written above.
GDSC: GENTLE DENTAL SERVICE CORPORATION
By: L. T. VAN EERDEN
------------------------------------
L. T. Van Eerden
Title: Executive V. P.
GD Merger: GENTLE DENTAL MERGER CORPORATION.
By: L. T. VAN EERDEN
-----------------------------------
L. T. Van Eerden
Title: V. P.
DDS: DEDICATED DENTAL SYSTEMS, INC.
By: ARTHUR G. KAISER, D.D.S.
------------------------------------
Arthur G. Kaiser, D.D.S.
Title: President
The Shareholders: ARTHUR G. KAISER, D.D.S.
----------------------------------------
Arthur G. Kaiser, D.D.S.
ROBERT J. NEWMAN
----------------------------------------
Robert J. Newman
7
AMENDMENT TO ASSET PURCHASE AGREEMENT
This Amendment to Asset Purchase Agreement ("Amendment") is made and
entered into this 28th day of February, 1998, by and between Gentle Dental
Service Corporation, a Washington corporation ("GDSC"), California Dental
Practice Management Company, a California General Partnership ("DPM"), Arthur G.
Kaiser, D.D.S, Robert J. Newman, and Mark Thomas, D.D.S. ("Thomas").
RECITALS
--------
The parties listed above are parties to that certain Asset Purchase
Agreement dated September 21, 1997 ("Agreement") pursuant to which the Sellers
have agreed to sell to GDSC substantially all of the assets associated with the
Dental Practice. The parties mutually desire to make certain amendments to the
Agreement as set forth in this Amendment. Capitalized terms used in this
Amendment and not otherwise defined shall have the meanings ascribed to such
terms in the Agreement.
In consideration of the mutual covenants contained herein and in the
Agreement, the parties agree as follows:
1. Although the Agreement provides that the dental practice conducted under
the name Crosstown Family Dentistry will be conducted by Thomas Dental
Corporation after the Closing and that the dental practice conducted under the
name Wasco Family Dentistry will be conducted by a new professional corporation
(the "Professional Corporation") after the Closing, the parties have agreed that
both dental practices will be conducted by Thomas Dental Corporation after the
Closing. Accordingly, the Agreement is hereby amended to either eliminate all
references to the Professional Corporation or to modify such references to apply
to Thomas Dental Corporation consistent with the immediately preceding sentence.
Sellers represent that Thomas currently holds a valid and effective Additional
Office Permit from the California Board of Dental Examiners to operate the two
dental practices and that such permit will allow Thomas Dental Corporation to
continue to operate the two dental practices.
2. Section 1.04-5 of the Agreement is amended to read as follows:
1.04-5 An additional payment to be made to Thomas (the "Earnout
Payment") to be made as provided in this Section 1.04-5. The average annual
EBITDA (as defined below) for the 24-month period beginning on the day after the
Closing Date shall be multiplied by .438 to determine the Earnout Payment. The
"EBITDA" shall mean the combined net income of (a) the Thomas Professional
Corporation, and (b) GDSC from the provision of services to the Thomas
Professional Corporation, before any reduction for interest, income taxes,
depreciation or amortization, and excluding any allocation of GDSC corporate or
regional overhead expense, as reflected on a combined income statement for the
Practice Locations prepared in conformity with generally accepted accounting
principles applied in a manner consistent with the application
<PAGE>
of such principles to the preparation of GDSC's audited financial statements. In
the event that GDSC exercises its rights under Sections 1.4 or 1.5 of the
Assignable Option Agreement described in Section 8.07 of this Agreement, the
"EBITDA" shall mean the net income of the Successor Shareholder (as defined in
the Assignable Option Agreement) from the Dental Practice, before any reduction
for interest, income taxes, depreciation or amortization and excluding any
allocation of corporate or regional overhead expense, as reflected on income
statement for the Practice Locations prepared in conformity with generally
accepted accounting principles applied in a manner consistent with the
application of such principles to the preparation of GDSC's audited financial
statements. The calculation of the Earnout Amount and payment of the Earnout
Payment, if any, shall be completed within 90 days of the completion of the
aforementioned 24-month period. The parties understand and agree that during the
aforementioned 24-month period the Dental Practice will be operated in the same
general manner as it was operated prior to the Closing Date.
3. Section 1.08 of the Agreement is amended to read as follows:
1.08 Closing. The consummation of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Stoel Rives LLP,
Portland, Oregon, effective as of the close of business on the last day of the
month in which all conditions to the Closing are satisfied (other than those
conditions that by their terms are to occur at the Closing) or at another date,
time and place agreed upon in writing by the parties (the "Closing Date");
provided, however, that if all conditions to the Closing (other than those
conditions that by their terms are to occur at the Closing) are satisfied on or
after the 20th day of a month, the Closing shall occur effective as of the close
of business on the last day of the following month or at an earlier date and
time agreed upon in writing by the parties.
4. Section 5.08-2 of the Agreement is amended to read as follows:
5.08-2 Supplemental Lock-Up. Thomas agrees that until the first
anniversary of the Closing Date he will not directly or indirectly sell, offer
to sell, contract to sell (including, without limitation, any short sale), grant
any option to purchase or otherwise transfer or dispose of (other than to donees
or pledgees who agree to be similarly bound) any Shares owned by him, except
Shares sold pursuant to the piggyback registration rights provided for in
Section 6.01. Thomas consents to having appropriate legends placed on the
certificates representing the Shares relating to the lock-up restriction.
5. Section 6.01-1 of the Agreement is amended to read as follows:
6.01-1 Piggyback Rights. The rights provided in this Section 6.01
shall apply if GDSC determines to register shares of GDSC Common Stock under the
1933 Act for an underwritten offering for its account, except that this Section
6.01 shall not apply to the offering
2
<PAGE>
covered by the Registration Statement on Form SB-2 filed by GDSC on January 9,
1998 or to any registration that is filed after the second anniversary of the
Closing Date. Prior to filing a registration statement for any such offering,
GDSC shall give Thomas written notice thereof and will include in such
registration and underwriting all the Registrable Securities specified in a
written request or requests, made within 10 days after receipt of such written
notice from GDSC by Thomas, except as set forth in Section 6.01-2 below. For
purposes of this Agreement, the term "Registrable Securities" means (i) the
Shares and (ii) any GDSC Common Stock issued as (or issuable upon the conversion
or exercise of any warrant, right or other security which is issued as) a
dividend or other distribution with respect to, or in exchange for or in
replacement of, the Shares.
6. Section 6.01-3 of the Agreement is amended to read as follows:
6.01-3 S-3 Registration. No later than 30 days after the Closing Date,
GDSC shall file a Registration Statement on Form S-3 to register all Registrable
Securities for resale by Thomas in ordinary market transactions; provided,
however, that GDSC may delay such filing on a one-time basis for up to 90 days
if GDSC reasonably determines that (a) such filing might be detrimental to the
offering covered by the Registration Statement on Form SB-2 filed by GDSC on
January 9, 1998, or (b) additional time is necessary to obtain and file
financial statements required for such Registration Statement on Form S-3. GDSC
shall use its best efforts to maintain an effective registration statement
permitting the unrestricted sale of such remaining Registrable Securities until
the second anniversary of the Closing Date.
7. Section 8.10 of the Agreement is deleted.
8. Section 10.01-4 of the Agreement is amended to read as follows:
10.01-4 by either Sellers or GDSC, by written notice to the other
party, if the Closing shall not have occurred on or prior to December 31, 1998;
provided, however, that if the California Department of Corporations shall not
have approved the material modification (filed by DDS in connection with the
Transactions) to the license of DDS under the Knox-Keene Health Care Service
Plan Act of 1975 prior to December 31, 1998, such date shall be extended to the
date 45 days after the receipt of such approval; provided further, however, that
the right to terminate this Agreement under this Section 10.01-4 shall not be
available to any party whose failure to fulfill or perform any obligation under
this Agreement has been the cause of, or resulted in, the failure of the Closing
to occur on or before such date.
3
<PAGE>
9. The following Exhibits to the Agreement are replaced with the
corresponding Exhibits attached to this Amendment:
Exhibit D Support Services Agreement
Exhibit E Assignable Option Agreement
Exhibit F Employment Agreement
10. Except as expressly provided in this Amendment, the Agreement is not
otherwise modified and remains in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first written above.
GDSC: GENTLE DENTAL SERVICE CORPORATION
By: L. T. VAN EERDEN
------------------------------------
L. T. Van Eerden
Title: Executive V. P.
DPM: CALIFORNIA DENTAL PRACTICE
MANAGEMENT COMPANY
By: ARTHUR G. KAISER, D.D.S.
------------------------------------
Arthur G. Kaiser, D.D.S.
Title: Partner
The Partners: ARTHUR G. KAISER, D.D.S.
----------------------------------------
Arthur G. Kaiser, D.D.S.
ROBERT J. NEWMAN
----------------------------------------
Robert J. Newman
Thomas: MARK THOMAS, D.D.S.
----------------------------------------
Mark Thomas, D.D.S.
4
AMENDMENT TO ASSET PURCHASE AGREEMENT
This Amendment to Asset Purchase Agreement ("Amendment") is made and
entered into this 28th day of February, 1998, by and between Gentle Dental
Service Corporation, a Washington corporation ("GDSC"), California Dental
Practice Management Company, a California General Partnership ("DPM"), Arthur G.
Kaiser, D.D.S, Robert J. Newman, and Clarence Au, D.D.S. ("Au").
RECITALS
--------
The parties listed above are parties to that certain Asset Purchase
Agreement dated September 21, 1997 ("Agreement") pursuant to which the Sellers
have agreed to sell to GDSC substantially all of the assets associated with the
Dental Practice. The parties mutually desire to make certain amendments to the
Agreement as set forth in this Amendment. Capitalized terms used in this
Amendment and not otherwise defined shall have the meanings ascribed to such
terms in the Agreement.
In consideration of the mutual covenants contained herein and in the
Agreement, the parties agree as follows:
1. Section 1.04-5 of the Agreement is amended to read as follows:
1.04-5 An additional payment to be made to Au (the "Earnout Payment")
to be made as provided in this Section 1.04-5. The average annual EBITDA (as
defined below) for the 24-month period beginning on the day after the Closing
Date shall be multiplied by .384 to determine the Earnout Payment. The "EBITDA"
shall mean the combined net income of (a) the Professional Corporation, and (b)
GDSC from the provision of services to the Professional Corporation, before any
reduction for interest, income taxes, depreciation or amortization, and
excluding any allocation of GDSC corporate or regional overhead expense, as
reflected on a combined income statement for the Practice Locations prepared in
conformity with generally accepted accounting principles applied in a manner
consistent with the application of such principles to the preparation of GDSC's
audited financial statements. In the event that GDSC exercises its rights under
Sections 1.4 or 1.5 of the Assignable Option Agreement described in Section 8.07
of this Agreement, the "EBITDA" shall mean the net income of the Successor
Shareholder (as defined in the Assignable Option Agreement) from the Dental
Practice, before any reduction for interest, income taxes, depreciation or
amortization and excluding any allocation of corporate or regional overhead
expense, as reflected on income statement for the Practice Locations prepared in
conformity with generally accepted accounting principles applied in a manner
consistent with the application of such principles to the preparation of GDSC's
audited financial statements. The calculation of the Earnout Amount and payment
of the Earnout Payment, if any, shall be completed within 90 days of the
completion of the aforementioned 24- month period. The parties understand and
agree that during the aforementioned 24-month period the Dental Practice will be
operated in the same general manner as it was operated prior to the Closing
Date.
<PAGE>
2. Section 1.08 of the Agreement is amended to read as follows:
1.08 Closing. The consummation of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Stoel Rives LLP,
Portland, Oregon, effective as of the close of business on the last day of the
month in which all conditions to the Closing are satisfied (other than those
conditions that by their terms are to occur at the Closing) or at another date,
time and place agreed upon in writing by the parties (the "Closing Date");
provided, however, that if all conditions to the Closing (other than those
conditions that by their terms are to occur at the Closing) are satisfied on or
after the 20th day of a month, the Closing shall occur effective as of the close
of business on the last day of the following month or at an earlier date and
time agreed upon in writing by the parties.
3. Section 5.08-2 of the Agreement is amended to read as follows:
5.08-2 Supplemental Lock-Up. Au agrees that until the first
anniversary of the Closing Date he will not directly or indirectly sell, offer
to sell, contract to sell (including, without limitation, any short sale), grant
any option to purchase or otherwise transfer or dispose of (other than to donees
or pledgees who agree to be similarly bound) any Shares owned by him, except
Shares sold pursuant to the piggyback registration rights provided for in
Section 6.01. Au consents to having appropriate legends placed on the
certificates representing the Shares relating to the lock-up restriction.
4. Section 6.01-1 of the Agreement is amended to read as follows:
6.01-1 Piggyback Rights. The rights provided in this Section 6.01
shall apply if GDSC determines to register shares of GDSC Common Stock under the
1933 Act for an underwritten offering for its account, except that this Section
6.01 shall not apply to the offering covered by the Registration Statement on
Form SB-2 filed by GDSC on January 9, 1998 or to any registration that is filed
after the second anniversary of the Closing Date. Prior to filing a registration
statement for any such offering, GDSC shall give Au written notice thereof and
will include in such registration and underwriting all the Registrable
Securities specified in a written request or requests, made within 10 days after
receipt of such written notice from GDSC by Au, except as set forth in Section
6.01-2 below. For purposes of this Agreement, the term "Registrable Securities"
means (i) the Shares and (ii) any GDSC Common Stock issued as (or issuable upon
the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of, the Shares.
2
<PAGE>
5. Section 6.01-3 of the Agreement is amended to read as follows:
6.01-3 S-3 Registration. No later than 30 days after the Closing Date,
GDSC shall file a Registration Statement on Form S-3 to register all Registrable
Securities for resale by Au in ordinary market transactions; provided, however,
that GDSC may delay such filing on a one-time basis for up to 90 days if GDSC
reasonably determines that (a) such filing might be detrimental to the offering
covered by the Registration Statement on Form SB-2 filed by GDSC on January 9,
1998, or (b) additional time is necessary to obtain and file financial
statements required for such Registration Statement on Form S-3. GDSC shall use
its best efforts to maintain an effective registration statement permitting the
unrestricted sale of such remaining Registrable Securities until the second
anniversary of the Closing Date.
6. Section 8.10 of the Agreement is deleted.
7. Section 10.01-4 of the Agreement is amended to read as follows:
10.01-4 by either Sellers or GDSC, by written notice to the other
party, if the Closing shall not have occurred on or prior to December 31, 1998;
provided, however, that if the California Department of Corporations shall not
have approved the material modification (filed by DDS in connection with the
Transactions) to the license of DDS under the Knox-Keene Health Care Service
Plan Act of 1975 prior to December 31, 1998, such date shall be extended to the
date 45 days after the receipt of such approval; provided further, however, that
the right to terminate this Agreement under this Section 10.01-4 shall not be
available to any party whose failure to fulfill or perform any obligation under
this Agreement has been the cause of, or resulted in, the failure of the Closing
to occur on or before such date.
8. The following Exhibits to the Agreement are replaced with the
corresponding Exhibits attached to this Amendment:
Exhibit D Support Services Agreement
Exhibit E Assignable Option Agreement
Exhibit F Employment Agreement
9. Except as expressly provided in this Amendment, the Agreement is not
otherwise modified and remains in full force and effect.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first written above.
GDSC: DENTAL SERVICE CORPORATION
By: L. T. VAN EERDEN
------------------------------------
L. T. Van Eerden
Title: Executive V. P.
DPM: CALIFORNIA DENTAL PRACTICE
MANAGEMENT COMPANY
By: ARTHUR G. KAISER, D.D.S.
------------------------------------
Arthur G. Kaiser, D.D.S.
Title: Partner
The Partners: ARTHUR G. KAISER, D.D.S.
----------------------------------------
Arthur G. Kaiser, D.D.S.
ROBERT J. NEWMAN
----------------------------------------
Robert J. Newman
Au: CLARENCE AU, D.D.S.
----------------------------------------
4
AMENDMENT TO ASSET PURCHASE AGREEMENT
This Amendment to Asset Purchase Agreement ("Amendment") is made and
entered into this 28th day of February, 1998, by and between Gentle Dental
Service Corporation, a Washington corporation ("GDSC"), and Arthur G. Kaiser,
D.D.S. ("Kaiser").
RECITALS
--------
The parties listed above are parties to that certain Asset Purchase
Agreement dated September 21, 1997 ("Agreement") pursuant to which Kaiser has
agreed to sell to GDSC substantially all of the assets associated with the
Dental Practice. The parties mutually desire to make certain amendments to the
Agreement as set forth in this Amendment. Capitalized terms used in this
Amendment and not otherwise defined shall have the meanings ascribed to such
terms in the Agreement.
In consideration of the mutual covenants contained herein and in the
Agreement, the parties agree as follows:
1. The parties agree that Glenn A. Huddleston, D.D.S. shall be the sole
shareholder of the Professional Corporation and that the name of the
Professional Corporation shall be Huddleston Dental Corporation.
2. Section 1.08 of the Agreement is amended to read as follows:
1.08 Closing. The consummation of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Stoel Rives LLP,
Portland, Oregon, effective as of the close of business on the last day of the
month in which all conditions to the Closing are satisfied (other than those
conditions that by their terms are to occur at the Closing) or at another date,
time and place agreed upon in writing by the parties (the "Closing Date");
provided, however, that if all conditions to the Closing (other than those
conditions that by their terms are to occur at the Closing) are satisfied on or
after the 20th day of a month, the Closing shall occur effective as of the close
of business on the last day of the following month or at an earlier date and
time agreed upon in writing by the parties.
3. Section 8.08 of the Agreement is amended to read as follows:
8.08 Employment Agreements. Each dentist employed in the Dental Practice
shall have executed and delivered an Employment Agreement with the Professional
Corporation in the form attached hereto as Exhibit F and Dr. Huddleston shall
have executed and delivered an Addendum to such Employment Agreement in the form
attached hereto as Exhibit G.
4. Section 8.10 of the Agreement is deleted.
<PAGE>
5. Section 10.01-4 of the Agreement is amended to read as follows:
10.01-4 by either Seller or GDSC, by written notice to the other
party, if the Closing shall not have occurred on or prior to December 31, 1998;
provided, however, that if the California Department of Corporations shall not
have approved the material modification (filed by DDS in connection with the
Transactions) to the license of DDS under the Knox-Keene Health Care Service
Plan Act of 1975 prior to December 31, 1998, such date shall be extended to the
date 45 days after the receipt of such approval; provided further, however, that
the right to terminate this Agreement under this Section 10.01-4 shall not be
available to any party whose failure to fulfill or perform any obligation under
this Agreement has been the cause of, or resulted in, the failure of the Closing
to occur on or before such date.
6. The following Exhibits to the Agreement are replaced with the
corresponding Exhibits attached to this Amendment:
Exhibit D Support Services Agreement
Exhibit E Assignable Option Agreement
Exhibit F Employment Agreement
Exhibit G Addendum to Employment Agreement
7. Except as expressly provided in this Amendment, the Agreement is not
otherwise modified and remains in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first written above.
GDSC: GENTLE DENTAL SERVICE CORPORATION
By: L. T. VAN EERDEN
------------------------------------
L. T. Van Eerden
Title: Executive V. P.
Kaiser: ARTHUR G. KAISER, D.D.S.
----------------------------------------
Arthur G. Kaiser, D.D.S.
2
EXECUTION COPY
AMENDED AND RESTATED CREDIT AGREEMENT
By and Among
GENTLE DENTAL SERVICE CORPORATION,
as Borrower,
and
THE OTHER CREDIT PARTIES PARTY HERETO,
and
IMPERIAL BANK
as Agent,
and
THE FINANCIAL INSTITUTIONS PARTY HERETO
Dated as of January 7, 1998
$25,000,000
<PAGE>
TABLE OF CONTENTS
Page(s)
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Certain Defined Terms. . . . . . . . . . . . . . . . . . . . . 2
1.2 Other Interpretive Provisions. . . . . . . . . . . . . . . . . 20
1.3 Accounting Principles. . . . . . . . . . . . . . . . . . . . . 21
ARTICLE II THE CREDITS . . . . . . . . . . . . . . . . . . . . . . . 21
2.1 Amounts and Terms of Commitments . . . . . . . . . . . . . . . 21
2.2 Loan Accounts. . . . . . . . . . . . . . . . . . . . . . . . . 28
2.3 Procedure for Borrowing. . . . . . . . . . . . . . . . . . . . 28
2.4 Conversion and Continuation Elections for
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.5 Voluntary Termination, Reduction of Combined Commitments;
Increase in Combined Commitments . . . . . . . . . . . . . . . 30
2.6 Optional Prepayments . . . . . . . . . . . . . . . . . . . . . 31
2.7 Repayment. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.8 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.9 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.10 Computation of Fees and Interest . . . . . . . . . . . . . . . 33
2.11 Payments by the Borrower . . . . . . . . . . . . . . . . . . . 33
2.12 Payments by the Banks to the Agent . . . . . . . . . . . . . . 34
2.13 Sharing of Payments, Etc.. . . . . . . . . . . . . . . . . . . 35
2.14 Security Documents . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY. . . . . . . . . . 36
3.1 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.2 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.3 Increased Costs and Reduction of Return. . . . . . . . . . . . 38
3.4 Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . 38
3.5 Inability to Determine Rates . . . . . . . . . . . . . . . . . 39
3.6 Certificates of Banks. . . . . . . . . . . . . . . . . . . . . 39
3.7 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE IV CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . 40
4.1 Condition of Initial Loans or Letter of Credit . . . . . . . . 40
4.2 Conditions to All Loans and Letters of Credit. . . . . . . . . 42
ARTICLE V REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . 43
5.1 Existence and Power. . . . . . . . . . . . . . . . . . . . . . 43
5.2 Corporate Authorization; No Contravention. . . . . . . . . . . 43
5.3 Governmental Authorization . . . . . . . . . . . . . . . . . . 44
5.4 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . 44
-i-
<PAGE>
5.5 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.6 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.7 Financial Condition. . . . . . . . . . . . . . . . . . . . . . 44
5.8 ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . 45
5.9 Use of Proceeds; Margin Regulations. . . . . . . . . . . . . . 45
5.10 Real Property. . . . . . . . . . . . . . . . . . . . . . . . . 46
5.11 Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . 46
5.12 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . 46
5.13 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
5.14 Environmental Matters. . . . . . . . . . . . . . . . . . . . . 47
5.15 Regulated Entities . . . . . . . . . . . . . . . . . . . . . . 47
5.16 No Burdensome Restrictions . . . . . . . . . . . . . . . . . . 47
5.17 Copyrights, Patents, Trademarks and Licenses, etc. . . . . . . 48
5.18 Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . 48
5.19 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 48
5.20 Business Activity. . . . . . . . . . . . . . . . . . . . . . . 48
5.21 Accreditation, Etc.. . . . . . . . . . . . . . . . . . . . . . 48
5.22 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
5.23 Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . 49
5.24 Transactional Documents . . . . . . . . . . . . . . . . . . . 49
5.25 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . 49
ARTICLE VI AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . 49
6.1 Financial Statements.. . . . . . . . . . . . . . . . . . . . . 49
6.2 Certificates; Other Information. . . . . . . . . . . . . . . . 50
6.3 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
6.4 Preservation of Corporate Existence, Etc.. . . . . . . . . . . 53
6.5 Maintenance of Property. . . . . . . . . . . . . . . . . . . . 53
6.6 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 53
6.7 Payment of Obligations . . . . . . . . . . . . . . . . . . . . 53
6.8 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . 54
6.9 Compliance with ERISA. . . . . . . . . . . . . . . . . . . . . 54
6.10 Inspection of Property and Books and Records . . . . . . . . . 54
6.11 Environmental Laws.. . . . . . . . . . . . . . . . . . . . . . 54
6.12 Acquisitions.. . . . . . . . . . . . . . . . . . . . . . . . . 55
6.13 Concentration Account. . . . . . . . . . . . . . . . . . . . . 56
6.14 Financial Covenants. . . . . . . . . . . . . . . . . . . . . . 57
6.15 Additional Credit Parties and Collateral. . . . . . . . . . . 57
6.16 Required Future Action. . . . . . . . . . . . . . . . . . . . 58
ARTICLE VII NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . 59
7.1 Limitation on Liens. . . . . . . . . . . . . . . . . . . . . . 59
7.2 Disposition of Assets. . . . . . . . . . . . . . . . . . . . . 61
7.3 Consolidations and Mergers . . . . . . . . . . . . . . . . . . 61
7.4 Change of Business . . . . . . . . . . . . . . . . . . . . . . 61
7.5 Loans and Investments. . . . . . . . . . . . . . . . . . . . . 61
7.6 Limitation on Indebtedness . . . . . . . . . . . . . . . . . . 62
7.7 Contingent Obligations . . . . . . . . . . . . . . . . . . . . 62
7.8 Lease Obligations. . . . . . . . . . . . . . . . . . . . . . . 62
7.9 Restricted Payments. . . . . . . . . . . . . . . . . . . . . . 62
-ii-
<PAGE>
7.10 Prepayments of Subordinated Permitted
Indebtedness.. . . . . . . . . . . . . . . . . . . . . . . . . 62
7.11 Transactions with Affiliates.. . . . . . . . . . . . . . . . . 63
7.12 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . 63
7.13 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
7.14 Accounting Changes . . . . . . . . . . . . . . . . . . . . . . 63
ARTICLE VIII EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . 63
8.1 Event of Default . . . . . . . . . . . . . . . . . . . . . . . 63
8.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
8.3 Rights Not Exclusive . . . . . . . . . . . . . . . . . . . . . 67
ARTICLE IX THE AGENT . . . . . . . . . . . . . . . . . . . . . . . . 67
9.1 Appointment and Authorization. . . . . . . . . . . . . . . . . 67
9.2 Delegation of Duties . . . . . . . . . . . . . . . . . . . . . 67
9.3 Liability of Agent . . . . . . . . . . . . . . . . . . . . . . 67
9.4 Reliance by Agent. . . . . . . . . . . . . . . . . . . . . . . 68
9.5 Notice of Default. . . . . . . . . . . . . . . . . . . . . . . 69
9.6 Credit Decision. . . . . . . . . . . . . . . . . . . . . . . . 69
9.7 Indemnification of Agent . . . . . . . . . . . . . . . . . . . 69
9.8 Agent in Individual Capacity . . . . . . . . . . . . . . . . . 70
9.9 Successor Agent. . . . . . . . . . . . . . . . . . . . . . . . 70
9.10 Withholding Tax. . . . . . . . . . . . . . . . . . . . . . . . 71
ARTICLE X MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 72
10.1 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . 72
10.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
10.3 No Waiver; Cumulative Remedies . . . . . . . . . . . . . . . . 74
10.4 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . 74
10.5 Borrower Indemnification . . . . . . . . . . . . . . . . . . . 74
10.6 Payments Set Aside . . . . . . . . . . . . . . . . . . . . . . 75
10.7 Successors and Assigns . . . . . . . . . . . . . . . . . . . . 75
10.8 Assignments, Participations, etc.. . . . . . . . . . . . . . . 75
10.9 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . 77
10.10 Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
10.11 Notification of Addresses, Lending
Offices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . 78
10.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . 78
10.13 Severability. . . . . . . . . . . . . . . . . . . . . . . . . 79
10.14 No Third Parties Benefited. . . . . . . . . . . . . . . . . . 79
10.15 Governing Law and Jurisdiction. . . . . . . . . . . . . . . . 79
10.16 Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . . 79
10.17 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . 80
-iii-
<PAGE>
EXHIBITS
Exhibit A Form of Promissory Note
Exhibit B Form of Amended and Restated Guaranty
Exhibit C Form of Amended and Restated Security Agreement
Exhibit D Form of Compliance Certificate
Exhibit E Form of Notice of Borrowing
Exhibit F Form of Notice of Conversion/Extension
Exhibit G Form of Certificate re Real Property and Business
Locations
Exhibit H Terms and Conditions of Permitted Subordinated
Indebtedness
Exhibit I Form of Legal Opinion of Counsel to the Borrower
and Its Subsidiaries
Exhibit J Form of Assignment and Acceptance Agreement
Exhibit K Form of Credit Agreement Supplement
-i-
<PAGE>
SCHEDULES
Schedule 1.1(b) Existing Permitted Indebtedness
Schedule 2.1 Commitment
Schedule 4.1(o) List of Transactional Documents
Schedule 5.1 Jurisdictions of Subsidiaries
Schedule 5.5 Litigation
Schedule 5.8 ERISA Compliance
Schedule 5.12 Material Contracts
Schedule 5.14 Environmental Matters
Schedule 5.15 Regulated Entities
Schedule 5.17 Intellectual Property Rights
Schedule 5.18 Ownership of Subsidiaries
Schedule 5.19 Insured Properties
Schedule 7.1 Existing Liens
Schedule 7.6 Indebtedness on Closing Date
Schedule 7.7 Contingent Obligations of Credit Parties as of
Closing Date
Schedule 10.2 Addresses
-ii-
<PAGE>
ANNEXES
Annex 1 Form of Management Agreement
Annex 2 Form of Security Agreement
Annex 2 Form of Share Acquisition Agreement
-iii-
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT
This AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement") is entered
into as of January 7, 1998, among GENTLE DENTAL SERVICE CORPORATION, a
Washington corporation ("Borrower"), GMS DENTAL GROUP MANAGEMENT, INC., a
Delaware corporation ("GMS Management"), GMS DENTAL GROUP MANAGEMENT OF SOUTHERN
CALIFORNIA, INC., a California corporation ("GMS California"), GMS HAWAII
ACQUISITION COMPANY, a Delaware corporation ("GMS Hawaii Acquisition"), GMS
DENTAL GROUP MANAGEMENT OF HAWAII, INC., a Hawaii corporation ("GMS Hawaii"),
GMS DENTAL GROUP MANAGEMENT OF THE MOUNTAIN STATES, INC., a Delaware corporation
("GMS Mountain"), and the Additional Credit Parties (as defined in Section 6.15
hereof) (each of the Borrower, GMS Management, GMS California, GMS Hawaii
Acquisition, GMS Hawaii, GMS Mountain and the Additional Credit Parties herein
called a "Credit Party" and collectively the "Credit Parties"), the financial
institutions from time to time party to this Agreement (collectively, the
"Banks" and individually, a "Bank"), and IMPERIAL BANK, as agent (the "Agent")
for the Banks.
Recitals
--------
A. The Banks and the Agent have entered into the Credit Agreement, dated as
of October 10, 1996, as amended by the First Amendment to Credit Agreement,
dated as of April 21, 1997, the Second Amendment to Credit Agreement, dated as
of May 1, 1997, and the Third Amendment to Credit Agreement, dated as of July
23, 1997 (as so amended, the "Old Credit Agreement"), with GMS Management, GMS
Dental Group, Inc. ("GMS Holding"), GMS California, GMS Hawaii Acquisition, GMS
Hawaii and GMS Mountain. GMS Management was the "borrower" under the Old Credit
Agreement.
B. Pursuant to the Agreement and Plan of Merger, dated as of October 30,
1997, between GMS Holding and the Borrower, (i) GMS Holding was merged with and
into the Borrower on November 4, 1997, (ii) all of the assets and liabilities of
GMS Holding, including the liabilities of GMS Holding under the Loan Documents,
were transferred to the Borrower and (iii) the separate corporate existence of
GMS Holding ceased and the Borrower continued as the surviving corporation.
C. The Old Credit Agreement was further amended pursuant to the Fourth
Amendment to Credit Agreement, dated as of December 31, 1997 (the "Fourth
Amendment"), by and among GMS Management (as the borrower), the Borrower (as a
Credit Party), GMS California, GMS Hawaii Acquisition, GMS Hawaii, GMS Mountain,
the Banks and the Agent in order to increase the maximum aggregate commitment
amount under the Old Credit Agreement from $10,000,000 and $10,500,000.
D. The Credit Parties have requested that (i) the Borrower substitute GMS
Management as the "borrower" under the Old Credit
<PAGE>
Agreement, as amended by the Fourth Amendment, and (ii) further increase the
maximum aggregate commitment amount thereunder from $10,500,000 to $25,000,000.
The Banks and the Agent have agreed to accept the request of the Credit Parties.
E. The Credit Parties, the Banks and the Agent have agreed to amend and
restate the Old Credit Agreement, as amended by the Fourth Amendment, upon the
terms and conditions set forth below.
ARTICLE I
DEFINITIONS
-----------
1.1 Certain Defined Terms. The following terms have the following meanings:
"Acquisition" means any transaction or series of related transactions for
the purpose of or resulting, directly or indirectly, in (a) the acquisition of
all or substantially all of the assets of a Person, or of any line or segment of
business or division of a Person or (b) the acquisition of in excess of 50% of
the capital stock, partnership interests, membership interests or equity of any
Person, or otherwise causing any Person to become a Subsidiary.
"Affiliate" means, as to any Person, any other Person which, directly or
indirectly, is in control of, is controlled by, or is under common control with,
such Person. A Person shall be deemed to control another Person if the
controlling Person possesses, directly or indirectly, the power to direct or
cause the direction of the management policies of the other Person, whether
through the owners of voting securities, membership interests, by contract or
otherwise; provided that no Person shall be deemed to be an Affiliate of the
Borrower or any of its Subsidiaries solely as a result of management or
consulting agreements between such Person and the Borrower or any of its
Subsidiaries executed by the Borrower or any of its Subsidiaries in the ordinary
course of business and pursuant to which the Borrower or its Subsidiaries
provide such services.
"Agent" means Imperial Bank in its capacity as agent for the Banks
hereunder, and any successor agent arising under Section 9.9 hereof.
"Agent-Related Persons" means Imperial Bank and any successor agent arising
under Section 9.9 hereof, together with their respective Affiliates, and the
officers, directors, employees, agents and attorneys-in-fact of such Persons and
Affiliates.
"Agent's Payment Office" means 9777 Wilshire Boulevard, Beverly Hills, 4th
Floor, Beverly Hills, California 90212, or such other address as the Agent may
from time to time specify.
2
<PAGE>
"Agreement" means this Credit Agreement.
"Applicable Margin" means, subject to the following proviso, the rates per
annum set forth below:
PRIME
TOTAL LEVERAGE RATIO RATE LIBOR
-------------------- MARGIN MARGIN
------ ------
Less than 2.25:1 0.00% 2.00%
Greater than or equal to
2.25:1 but lesser than
2.75:1 0.25% 2.25%
Greater than or equal to
2.75:1 but lesser than
3.25:1 0.50% 2.50%
Greater than or equal to
3.25:1 but lesser than
3.75:1 0.75% 2.75%
Greater than or equal to
3.75:1 but lesser than
4.25:1 1.00% 3.00%
Greater than or equal to
4.25:1 1.00% 3.25%
The Applicable Margin shall be based on the Total Leverage Ratio as set forth in
the most recent Compliance Certificate, and shall be effective from and
including the date required by Section 6.2(b) hereof if the Agent receives such
Compliance Certificate on or before such date, to but excluding the next date of
delivery of the Compliance Certificate required by Section 6.2(b) hereof;
provided, however, that if the Agent does not receive the Compliance Certificate
by the date required by Section 6.2(b) hereof, the Applicable Margin shall be,
effective as of such date, the highest Applicable Margin to but excluding the
date the Agent receives such Compliance Certificate. Subject to the foregoing
proviso, until the delivery of the first Compliance Certificate after the
Closing Date, the Applicable Margin for Prime Rate Loans shall be 1.0% and the
Applicable Margin for LIBOR Loans shall be 3.25%.
"Assignee" has the meaning specified in Section 10.8.
"Attorney Costs" means and includes all reasonable fees and disbursements
of any law firm or other external counsel, the allocated cost of internal legal
services and all disbursements of internal counsel.
"Bank" has the meaning specified in the introductory clause hereto.
"Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11
U.S.C. ss. 101, et seq.).
"Base LIBOR" means, for any Interest Period, the rate of interest per annum
determined by the Agent to be the arithmetic mean (rounded upward, if necessary,
to the nearest 1/16th of it) of the rates of interest per annum notified to the
Agent by the
3
<PAGE>
Reference Bank as the rate of interest at which dollar deposits in the
approximate amount of the LIBOR Loan to be made by the Reference Bank, and
having a maturity comparable to such Interest Period, would be offered to major
banks in the London interbank market at their request at approximately 11:00
a.m. (London time) two (2) Business Days prior to the commencement of such
Interest Period.
"Borrower's Business" means providing, directly or indirectly (a) dental
care services, (b) management, administrative or other support services to
providers of dental care services and (c) dental care insurance.
"Borrowing" means a Borrowing hereunder consisting of Loans made on the
same day by the Banks ratably according to their respective Pro Rata Shares and,
in the case of LIBOR Loans, having the same Interest Periods.
"Borrowing Date" means any date on which a Borrowing occurs under Sections
2.3 or 2.12 hereof.
"Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks in Los Angeles are authorized or required by law to close
and, if the applicable Business Day relates to any LIBOR Loan, means, in
addition to the foregoing, such a day on which dealings are carried on in the
applicable offshore dollar interbank market.
"Capital Adequacy Regulation" means any guideline, request or directive of
any central bank or other Governmental Authority, or any other law, rule or
regulation, whether or not having the force of law, in each case, regarding
capital adequacy of any bank or of any corporation controlling a bank.
"Capital Expenditures" means, for any period, the sum of
(a) the aggregate amount of all expenditures of the Borrower and its
Subsidiaries for fixed or capital assets made during such period which, in
accordance with GAAP, would be classified as capital expenditures; and
(b) the aggregate amount of all monetary obligations of the Borrower
or any of its Subsidiaries under any Capital Lease incurred during such period.
"Capital Lease" means any lease of property which in accordance with GAAP
should be capitalized on the lessee's balance sheet or disclosed in a footnote
thereto as a capitalized lease.
"Change of Control" means the acquisition by any Person or by two or more
Persons acting in concert of beneficial ownership (within the meaning of Rule
13d-3 of the Securities and Exchange
4
<PAGE>
Commission under the Securities Exchange Act of 1934) of 40% or more of the
outstanding shares of voting stock of the Borrower.
"Closing Date" means the date on which all conditions precedent set forth
in Section 4.1 are satisfied or waived by all Banks.
"Code" means the Internal Revenue Code of 1986, as amended, and regulations
promulgated thereunder.
"Combined Commitments" shall have the meaning set forth in Section 2.1
hereof.
"Commitment," as to each Bank, has the meaning specified in Section 2.1.
"Compliance Certificate" means a certificate substantially in the form of
Exhibit D attached hereto.
"Contingent Obligation" means, as to any Person, any direct or indirect
liability of that Person, whether or not contingent, with or without recourse,
(a) with respect to any indebtedness, lease, dividend, letter of credit or other
obligation (the "primary obligations") of another Person (the "primary
obligor"), including any obligation of that Person (i) to purchase, repurchase
or otherwise acquire such primary obligations or any security therefor, (ii) to
advance or provide funds for the payment or discharge of any such primary
obligation, or to maintain working capital or equity capital of the primary
obligor or otherwise to maintain the net worth or solvency or any balance sheet
item, level of income or financial condition of the primary obligor, (iii) to
purchase property, securities or service primarily for the purpose of assuring
the owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation, or (iv) otherwise to assure or hold
harmless the holder of any such primary obligation against loss in respect
thereof (each, a "Guaranty Obligation"); (b) with respect to any Surety
Instrument issued for the account of that Person or as to which that Person is
otherwise liable for reimbursement of drawings or payments; or (c) to purchase
any materials, supplies or other property from, or to obtain the services of,
another Person if the relevant contract or other related document or obligation
requires that payment for such materials, supplies or other property, or for
such service shall be made regardless of whether delivery of such materials,
supplies or other property is ever made or tendered, or such services are ever
performed or tendered. The amount of any Contingent Obligation shall, in the
case of Guaranty Obligations, be deemed equal to the stated or determinable
amount of the primary obligation-in respect of which such Guaranty Obligation is
made or, if not stated or if indeterminable, the maximum reasonably anticipated
liability in respect thereof, and in the case of other Contingent Obligations,
5
<PAGE>
shall be equal to the maximum reasonably anticipated liability in respect
thereof.
"Contractual Obligation" means, as to any Person, any provision of any
security issued by such Person or of any agreement, undertaking, contract,
indenture, mortgage, deed of trust or other instrument, document or agreement to
which such Person is a party or by which it or any of its property is bound.
"Conversion/Continuation Date" means any date on which, under Section 2.4,
the Borrower (a) converts Loans of one Type to another Type, or (b) continues as
Loans of the same Type, but with a new Interest Period, Loans having Interest
Periods expiring on such date.
"Coverage Ratio" means, as of the last day of any fiscal quarter of the
Borrower, the ratio of (i) EBITDAR for the fiscal quarter ending on such date to
(ii) Fixed Charges as of such date; provided, however, that EBITDAR as of each
such date shall be multiplied by four (4), so as to represent the four-quarter
equivalent of EBITDAR for such period.
"Current Assets" means, for any period, for the Borrower and its
Subsidiaries on a consolidated basis, all items that would, in accordance with
GAAP, be classified as current assets of the Borrower and its Subsidiaries,
after deducting adequate reserves in each case in which a reserve is proper in
accordance with GAAP.
"Current Liabilities" means, for any period, for the Borrower and its
Subsidiaries on a consolidated basis, all items that would, in accordance with
GAAP, be classified as current liabilities of the Borrower and its Subsidiaries,
including the current portion of long-term Indebtedness and the Loans hereunder.
"Current Ratio" means, as of the last day of any fiscal quarter of the
Borrower, the ratio of (i) Current Assets for such period to (ii) Current
Liabilities for such period.
"Default" means any event or circumstance which, with the giving of notice,
the lapse of time, or both, would (if not cured or otherwise remedied during
such time) constitute an Event of Default.
"Dental Practices" means the dental groups engaged in the practice of
dentistry for which the Borrower, directly or indirectly, provides management,
administrative or other support services under long-term management agreements
or other similar agreements and which under GAAP are considered Subsidiaries of
the Borrower for the purposes of determining the Persons whose financial results
are to be consolidated with those of the Borrower.
6
<PAGE>
"Dollars," "dollars" and "$" each mean lawful money of the United States.
"EBITDAR" means, for any fiscal period, for the Borrower and its
Subsidiaries on a consolidated basis, earnings before Interest Expense, income
taxes, depreciation, amortization and Operating Lease Rentals; provided,
however, that with respect to any fiscal quarter during which a Permitted
Acquisition has been consummated, EBITDAR for such quarter may be adjusted to
reflect EBITDAR applicable to such Permitted Acquisition for the entire quarter
based on its annual run-rate for such quarter as shown on the financial
projections delivered to and approved by the Agent in connection with such
Permitted Acquisition under Section 6.12(a) hereof.
"Eligible Assignee" means (a) a commercial bank organized under the laws of
the United States, or any state thereof, and having a combined capital and
surplus of at least $100,000,000, (b) a commercial bank organized under the laws
of any other country which is a member of the organization for Economic
Cooperation and Development (the "OECD"), or a political subdivision of any such
country, and having a combined capital and surplus of at least $100,000,000,
provided that such bank is acting through a branch or agency located in the
United States and (c) a Person that is primarily engaged in the business of
commercial banking and that is (i) a Subsidiary of a Bank, (ii) a Subsidiary of
a Person of which a Bank is a Subsidiary, or (iii) a Person of which a Bank is a
Subsidiary, in each case approved by the Borrower pursuant to Section 10.8
hereof.
"Environmental Claims" means all claims asserted by any Governmental
Authority or other Person alleging potential liability or responsibility for
violation of any Environmental Law, or for release or injury to the environment.
"Environmental Laws" means all federal, state or local laws, statutes,
rules, regulations, ordinances and codes, together with all administrative
orders, directed duties, requests, licenses, authorizations and permits of, and
agreements with, any Governmental Authorities, in each case relating to
environmental, health, safety and land use matters.
"ERISA" means the Employee Retirement Income Security Act of 1974, and
regulations promulgated thereunder.
"ERISA Affiliate" means any trade or business (whether or not incorporated)
under common control with the Borrower within the meaning of Section 414(b) or
(c) of the Code (and Sections 414(m) and (o) of the Code for purposes of
provisions relating to Section 412 of the Code).
7
<PAGE>
"ERISA Event" means (a) a Reportable Event with respect to a Pension Plan;
(b) a withdrawal by the Borrower or any ERISA Affiliate from a Pension Plan
subject to Section 4063 of ERISA during a plan year in which it was a
substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation
of operations which is treated as such a withdrawal under Section 4062(e) of
ERISA; (c) a complete or partial withdrawal by the Borrower or any ERISA
Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is
in reorganization; (d) the filing of a notice of intent to terminate, the
treatment of a Plan amendment as a termination under Section 4041 or 4041A of
ERISA, or the commencement of proceedings by the PBGC to terminate a Pension
Plan or Multiemployer Plan; (e) an event or condition which might reasonably be
expected to constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Pension Plan or
Multiemployer Plan; or (f) the imposition of any liability under Title IV of
ERISA, other than PBGC premiums due but not delinquent under Section 4007 of
ERISA, upon the Borrower or any ERISA Affiliate.
"Event of Default" means any of the events or circumstances specified in
Section 8.1.
"Exchange Act" means the Securities and Exchange Act of 1934, and
regulations promulgated thereunder.
"FDIC" means the Federal Deposit Insurance Corporation, and any
Governmental Authority succeeding to any of its principal functions.
"Federal Funds Rate" means, for any day, the rate set forth in the weekly
statistical release designated as H.15(519), or any successor publication,
published by the Federal Reserve Bank of New York (including any such successor,
"H.15(519)11) on the preceding Business Day opposite the caption "Federal Funds
(Effective)"; or, if for any relevant day such rate is not so published on any
such preceding Business Day, the rate for such day will be the arithmetic mean
as determined by the Agent of the rates for the last transaction in overnight
Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by
each of three leading brokers of Federal funds transactions in New York City
selected by the Agent.
"Fee Letter" has the meaning specified in Section 2.9(a).
"Fixed Charges" means, for any fiscal quarter and without duplication, for
the Borrower and its Subsidiaries on a consolidated basis the sum of (i)
Interest Expense and fees paid on, and amortization of debt discount in respect
of, all Indebtedness, multiplied by four (4) plus (ii) Operating Lease Rentals
paid during such period, multiplied by four (4) plus (iii) the aggregate
principal amount of all current maturities of long
8
<PAGE>
term Indebtedness (including the principal portion of rentals under Capital
Leases) obligated to be paid by the Borrower and its Subsidiaries.
"FRB" means the Board of Governors of the Federal Reserve System, and any
Governmental Authority succeeding to any of its principal functions.
"GAAP" means generally accepted accounting principles set forth from time
to time in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the U.S. accounting
profession).
"Governmental Approvals" shall mean any authorization, consent, approval,
license, lease, ruling, permit, waiver, exemption, filing, registration or
notice by or with any Governmental Authority.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
and any corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
"Guaranty Obligation" has the meaning specified in the definition of
"Contingent Obligation."
"Indebtedness" of any Person means, without duplication, (a) all
indebtedness for borrowed money; (b) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than trade
payables entered into in the ordinary course of business on ordinary terms); (c)
all non-contingent reimbursement or payment obligations with respect to Surety
Instruments; (d) all obligations evidenced by notes, bonds, debentures or
similar instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses; (e) all indebtedness
created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to property
acquired by the Person (even though the rights and remedies of the seller or
bank under such agreement in the event of default are limited to repossession or
sale of such property); (f) all obligations with respect to Capital Leases; (g)
all indebtedness referred to in clauses (a) through (f) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien upon or in property (including accounts
and contracts rights) owned by such
9
<PAGE>
Person, even though such Person has not assumed or become liable for the payment
of such Indebtedness; and (h) all Guaranty Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses (a)
through (f) above.
"Indemnified Liabilities" has the meaning specified in Section 10.5.
"Indemnified Person" has the meaning specified in Section 10.5.
"Independent Auditor" has the meaning specified in Section 6.1(a).
"Insolvency Proceeding" means (a) any case, action or proceeding before any
court or other Governmental Authority relating to bankruptcy, reorganization,
insolvency, liquidation, receivership, dissolution, winding-up or relief of
debtors, or (b) any general assignment for the benefit of creditors,
composition, marshalling of assets for creditors, or other, similar arrangement
in respect of its creditors generally or any substantial portion of its
creditors; undertaken under U.S. Federal, state or foreign law, including the
Bankruptcy Code.
"Interest Expense" of the Borrower and its Subsidiaries for any period
means the aggregate amount of interest paid, accrued or scheduled to be paid or
accrued in respect of any Indebtedness (including the interest portion of
rentals under Capital Leases) and all but the principal component of payments in
respect of conditional sales, equipment trust or other title retention
agreements or under a Capital Lease paid, accrued or scheduled to be paid or
accrued by the Borrower and its Subsidiaries during such period, in each case
determined in accordance with GAAP on a consolidated basis and excluding
periodic maintenance, insurance, taxes and similar charges not properly
characterized as interest expense under GAAP.
"Interest Payment Date" means, as to any LIBOR Loan, the last day of each
Interest Period applicable to such Loan and, as to any Prime Rate Loan, the last
Business Day of each calendar quarter; provided, however, that if any Interest
Period for a LIBOR Loan exceeds three months, the date that falls three months
after the beginning of such Interest Period and after each Interest Payment Date
thereafter is also an Interest Payment Date.
"Interest Period" means, as to any LIBOR Loan, the period commencing on the
Borrowing Date on which such Loan is disbursed, or on the Conversion/
Continuation Date on which the Loan is converted into or continued as a LIBOR
Loan, and ending on the date one, two, three or six months thereafter as
selected by the Borrower in its Notice of Borrowing or Notice of
10
<PAGE>
Conversion/Continuation, as the case may be; provided, however, that:
(a) if any Interest Period would otherwise end on a day that is not a
Business Day, that Interest Period shall be extended to the following Business
Day unless the result of such extension would be to carry such Interest Period
into another calendar month, in which event such Interest Period shall end on
the preceding Business Day;
(b) any Interest Period pertaining to a LIBOR Loan that begins on the
last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of the calendar month at the end of
such Interest Period; and
(c) no Interest Period for any Loan shall extend beyond the Maturity
Date.
"IRS" means the Internal Revenue Service, and any Governmental Authority
succeeding to any of its principal functions under the Code.
"Issuing Bank" means Imperial Bank.
"Issuing Bank Fees" shall have the meaning assigned to such term in Section
2.9(b)(iii) hereof.
"Lending Office" means, as to any Bank, the office or as its "Lending
Office" or "Domestic Lending Office" or "Offshore Lending Office," as the case
may be, on Schedule 10.2 attached hereto, or such other office or offices as
such Bank may from time to time notify the Borrower and the Agent.
"Letter of Credit" means any letter of credit issued by the Issuing Bank
for the account of the Borrower in accordance with the terms of Section 2.1(b)
hereof.
"LIBOR Loan" means any Loan that bears interest based on the LIBOR Rate.
"LIBOR Rate" means, for any Interest Period with respect to a LIBOR Loan,
the rate per annum (rounded upward, if necessary, to the nearest 1/100 of 1%)
determined by the Agent to be equal to the Base LIBOR for such Loan for such
Interest Period divided by 1 minus the Reserve Requirement for such Loan for
such Interest Period.
"Lien" means any security interest, mortgage, deed of trust, pledge,
hypothecation, assignment, charge or deposit arrangement, encumbrance, lien
(statutory or other) or preferential arrangement
11
<PAGE>
of any kind or nature whatsoever in respect of any property (including those
created by, arising under or evidenced by any conditional sale or other title
retention agreement, the interest of a lessor under a capital lease, any
financing lease having substantially the same economic effect as any of the
foregoing, or the filing of any financing statement naming the owner of the
asset to which such lien relates as debtor, under the Uniform Commercial Code or
any comparable law) and any contingent or other agreement to provide any of the
foregoing, but not including the interest of a lessor under an operating lease.
"Loan" means a Loan by a Bank to the Borrower under Section 2.3, and may be
a LIBOR Loan or a Prime Rate Loan (each, a "Type" of Loan).
"Loan Documents" means this Agreement, any Notes, the Fee Letter, the
Guaranty, the Security Agreement, the LOC Documents and all other documents
delivered to the Agent or any Bank in connection herewith.
"LOC Documents" means, with respect to any Letter of Credit, such Letter of
Credit, any amendments thereto, any documents delivered in connection therewith,
any application therefor, and any agreements, instruments, guarantees or other
documents (whether general in application or applicable only to such Letter of
Credit) governing or providing for (i) the rights and obligations of the parties
concerned or at risk or (ii) any collateral security for such obligations.
"LOC Obligations" means, at any time, the sum of (i) the maximum amount
which is, or at any time thereafter may become, available to be drawn under
Letters of Credit then outstanding, assuming compliance with all requirements
for drawings referred to in such Letters of Credit plus (ii) the aggregate
amount of all drawings under Letters of Credit honored by the Issuing Bank but
not theretofore reimbursed by the Borrower.
"Majority Banks" means at any time Banks holding more than 50% of the then
aggregate unpaid principal amount of the Loans, or, if no such principal amount
is then outstanding, Banks having in excess of 50% of the Combined Commitments.
"Margin Stock" means "margin stock" as such term is defined in Regulation
G, T, U or X of the FRB.
"Material Adverse Effect" means (a) a material adverse change in, or a
material adverse effect upon, the operations, business, properties or condition
(financial or otherwise) of the Borrower and its Subsidiaries taken as a whole;
(b) a material impairment of the ability of the Borrower or any of its
Subsidiaries, including the Borrower, to perform under any Loan Document and to
avoid any Event of Default; or (c) a material adverse effect upon the
12
<PAGE>
legality, validity, binding effect or enforceability against the Borrower or any
of its Subsidiaries of any Loan Document.
"Maturity Date" shall mean September 30, 2002.
"Model Documents" shall mean the forms of Management Agreement, Security
Agreement and Share Acquisition Agreement attached hereto as Annexes 1, 2 and 3,
respectively.
"Multiemployer Plan" means a "multiemployer plan", within the meaning of
Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate makes,
is making, or is obligated to make contributions or, during the preceding three
calendar years, has made, or been obligated to make, contributions.
"Net Worth" means, for any period, for the Borrower and its Subsidiaries on
a consolidated basis an amount equal to the excess of Total Assets over Total
Liabilities.
"Note" means a promissory note executed by the Borrower in favor of a Bank
at its request pursuant to Section 2.2(b) substantially in the form of Exhibit A
attached hereto and evidencing such Bank's Loans.
"Notice of Borrowing" means a notice in substantially the form of Exhibit E
attached hereto.
"Notice of Conversion/Continuation" means a notice in substantially the
form of Exhibit F attached hereto.
"Obligations" means all advances, debts, liabilities, obligations,
covenants and duties arising under any Loan Document, owing by the Borrower to
any Bank, the Agent, or any Indemnified Person, whether direct or indirect
(including those acquired by assignment), absolute or contingent, due or to
become due, now existing or hereafter arising.
"Operating Cash Flow" means, for any period, for the Borrower and its
Subsidiaries (i) net income (before extraordinary gains but after (1)
extraordinary losses and (2) for fiscal quarters ending on December 31, 1997,
March 31, 1998 and June 30, 1998 only, non-recurring merger expenses and
restructuring charges taken by the Borrower during any such fiscal quarter,
which expenses and charges shall not exceed $3,000,000 in aggregate) for such
period plus (ii) Interest Expense, income tax expense, depreciation and
amortization (all to the extent deducted in determining net income) for such
period, all determined on a consolidated basis in accordance with GAAP;
provided, however, that with respect to any fiscal quarter during which a
Permitted Acquisition has been consummated, Operating Cash Flow for such quarter
may be adjusted to reflect Operating Cash Flow applicable to such Permitted
Acquisition for the entire quarter based on its annual run-rate for such quarter
as shown
13
<PAGE>
on the financial projections delivered to and approved by the Agent in
connection with such Permitted Acquisition under Section 6.12(a) hereof.
"Operating Lease" means any noncancellable lease of property (real,
personal or mixed) which does not constitute a Capital Lease.
"Operating Lease Rentals" means all rents and other amounts paid or accrued
by the Borrower and its Subsidiaries under and with respect to Operating Leases
during and for the relevant period, but excluding periodic maintenance,
insurance, taxes and similar charges not properly characterized as rent under
GAAP.
"Organization Documents" means, for any corporation, the certificate or
articles of incorporation, the bylaws, any certificate of determination or
instrument relating to the rights of preferred shareholders of such corporation,
any shareholder rights agreement, and all applicable resolutions of the board of
directors (or any committee thereof) of such corporation.
"Other Taxes" means any present or future stamp or documentary taxes or any
other excise or property taxes, charges or similar levies which arise from any
payment made hereunder or from the execution, delivery or registration of, or
otherwise with respect to, this Agreement or any other Loan Documents.
"Participant" has the meaning specified in Section 10.8(d).
"PBGC" means the Pension Benefit Guaranty Corporation, or any Governmental
Authority succeeding to any of its principal functions under ERISA.
"Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA)
subject to Title IV of ERISA which the Borrower sponsors, maintains, or to which
it makes, is making, or is obligated to make contributions, or in the case of a
multiple employer plan (as described in Section 4064(a) of ERISA) has made
contributions at any time during the immediately preceding five (5) plan years.
"Permitted Acquisitions" means Acquisitions by the Borrower or any of its
Subsidiaries of assets of a Person which are to be used by Borrower or any of
its Subsidiaries in Borrower's Business; provided, however, that (a) immediately
before and after giving effect to the consummation of each such Acquisition, no
Default has occurred and is continuing or will exist, (b) the Transactional
Documents relating to such Acquisition shall conform in all material respects to
the Model Documents, unless the Agent and the
14
<PAGE>
Majority Banks otherwise confirm in writing and (c) the Borrower shall have
complied with the requirements of Sections 6.12(a) and 6.15 hereof.
"Permitted Capital Expenditures" means Capital Expenditures made or used by
the Borrower or any of its Subsidiaries in connection with the Borrower's
Business, provided that (a) immediately before and after giving effect to the
consummation of each such Capital Expenditure, no Default has occurred and is
continuing or will exist, (b) such Capital Expenditures in excess of $5,000,000
in the aggregate, computed on a cumulative consolidated basis for the Borrower
and the Subsidiaries, during any fiscal year of the Borrower shall have been
approved in writing by the Agent and the Majority Banks and (c) the Borrower
shall have complied with the requirements of Section 6.12(c) hereof.
"Permitted Capital Leases" means Capital Leases entered into by the
Borrower or any of its Subsidiaries in the ordinary course of business during
any fiscal year of the Borrower, provided that the aggregate amount of all
obligations created, incurred or assumed thereunder during such fiscal year does
not exceed $2,000,000, computed on a cumulative consolidated basis for the
Borrower and the Subsidiaries.
"Permitted Encumbrances" has the meaning specified in Section 7.1 hereof.
"Permitted Indebtedness" means:
(i) The Obligations of the Borrower and its Subsidiaries under
the Loan Documents;
(ii) Indebtedness of the Borrower and its Subsidiaries listed in
Schedule 1.1(b) and existing on the date of this Agreement;
(iii) Indebtedness of the Borrower and its Subsidiaries arising
from the endorsement of instruments for collection in the ordinary course of the
Borrower's or a Subsidiary's business;
(iv) Indebtedness of the Borrower and its Subsidiaries for trade
accounts payable, provided that (A) such accounts arise in the ordinary course
of business and (B) no material part of such account is more than ninety (90)
days past due (unless subject to a bona fide dispute and for which adequate
reserves have been established);
(v) (A) Permitted Subordinated Indebtedness of the Borrower, (B)
the Indebtedness of GMS Management evidenced by that certain promissory note,
dated July 23, 1997, in the principal amount of up to $6,229,174 (the "Fremont
Subordinated
15
<PAGE>
Indebtedness"), made by GMS Management in favor of Fremont Dental Group, which
Indebtedness is subordinated to in right to payment to the Obligations hereunder
pursuant to that certain Intercreditor Agreement, dated as of July 23, 1997 (the
"Fremont Intercreditor Agreement"), among the Borrower, GMS Management, the
Agent and Fremont Dental Group and (C) the Guaranty Obligations of the Borrower
in respect of the Fremont Subordinated Indebtedness (the "Fremont Guaranty
Obligations");
(vi) Indebtedness of the Borrower and its Subsidiaries under
initial or subsequent refinancings of any Indebtedness permitted by clause (ii)
above, provided that (A) the principal amount of any such refinancing does not
exceed the principal amount of the Indebtedness being refinanced and (B) the
material terms and provisions of any such refinancing (including maturity,
redemption, prepayment, default and subordination provisions) are no less
favorable to the Banks than the Indebtedness being refinanced;
(vii) Indebtedness of the Borrower and its Subsidiaries under
purchase money financing incurred by the Borrower or any of its Subsidiaries to
finance the acquisition by such Person of fixtures or equipment; provided,
however, that in each case (A) such Indebtedness is incurred at the time of the
acquisition of such fixture or equipment, (B) such Indebtedness does not exceed
100% of the purchase price of such fixture or equipment so financed and (C) such
Indebtedness in the aggregate at any time outstanding during any fiscal year of
the Borrower, together with the Permitted Capital Leases, does not exceed
$2,000,000;
(viii) Guaranty Obligations of the Borrower in respect of
Permitted Indebtedness of its Subsidiaries; and
(ix) Indebtedness of the Borrower to any of its Subsidiaries,
Indebtedness of any of the Borrower's Subsidiaries to the Borrower or
Indebtedness of any of the Borrower's Subsidiaries to any the Borrower's other
Subsidiaries; provided, however, that (A) such Subsidiaries shall be Credit
Parties and (B) such Indebtedness shall be evidenced by promissory notes and
pledged to the Agent pursuant to the terms of the Security Agreement.
"Permitted Market Investments" means investments having a maturity of not
greater than 180 days from the date of acquisition thereof in (a) obligations
issued or unconditionally guaranteed by the United States or any agency thereof
and (b) certificates of deposit of any commercial bank organized under the laws
of the United States or any State thereof reasonably acceptable to the Agent.
"Permitted Subordinated Indebtedness" means unsecured Indebtedness of the
Borrower (and not any Subsidiary of the
16
<PAGE>
Borrower) evidencing seller financing incurred in connection with a Permitted
Acquisition, which Indebtedness is subordinated to the Obligations upon
substantially the terms set forth on Exhibit H attached hereto or upon such
other terms as may be satisfactory to the Agent and the Majority Banks.
"Person" means an individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association,
joint venture or Governmental Authority.
"Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA)
which the Borrower sponsors or maintains or to which the Borrower makes, is
making, or is obligated to make contributions and includes any Pension Plan.
"Prime Rate" means, for any day, the rate of interest in effect for such
day as publicly announced from time to time by Imperial Bank in Los Angeles,
California, as its "prime rate." (The "prime rate" is a rate set by Imperial
Bank based upon various factors including Imperial Bank's costs and desired
return, general economic conditions and other factors, and is used as a
reference point for pricing some loans, which may be priced at, above, or below
such announced rate.) Any change in the prime rate announced by Imperial Bank
shall take effect at the opening of business on the day specified in the public
announcement of such change.
"Prime Rate Loan" means a Loan that bears interest based on the Prime Rate.
"Pro Rata Share" means, as to any Bank at any time, the percentage
equivalent (expressed as a decimal, rounded to the ninth decimal place) at such
time of such Bank's Commitment divided by the Combined Commitments of all Banks.
"Real Property Certificate" means a certificate substantially in the form
of Exhibit G attached hereto.
"Reference Bank" means Imperial Bank.
"Reportable Event" means any of the events set forth in Section 4043(b) of
ERISA or the regulations thereunder, other than any such event for which the
30-day notice requirement under ERISA has been waived in regulations issued by
the PBGC.
"Requirement of Law" means, as to any Person, any law (statutory or
common), treaty, rule or regulation or determination of an arbitrator or of a
Governmental Authority, in each case applicable to or binding upon the Person or
any of its property or to which the Person or any of its property is subject.
17
<PAGE>
"Reserve Requirement" shall mean, for any Interest Period with respect to a
LIBOR Loan, the average maximum rate in effect at which reserves (including any
marginal, supplemental or emergency reserves) are required to be maintained
during such Interest Period under Regulation D by member banks of the Federal
Reserve System in New York City with deposits exceeding one billion Dollars
against "Eurocurrency liabilities" (as such term is used in Regulation D).
Without limiting the effect of the foregoing, the Reserve Requirement shall
include any other reserves required to be maintained by such member banks by
reason of any regulatory change with respect to (i) any category of liabilities
that includes deposits by reference to which the LIBOR Rate is to be determined
as provided in the definition of "LIBOR Rate" in this Article I or (ii) any
category of extensions of credit or other assets that includes LIBOR Loans.
"Responsible Officer" means a chief executive officer, a president or a
chief financial officer of the Borrower, or any other officer having
substantially the same authority and responsibility.
"Revolving Termination Date" means the earlier to occur
(a) September 30, 1999; and
(b) the date on which the Combined Commitments terminate in accordance
with the provisions of this Agreement.
"SEC" means the Securities and Exchange Commission, or any Governmental
Authority succeeding to any of its principal functions.
"Senior Leverage Ratio" means, as of the last day of any fiscal quarter of
the Borrower, the ratio of (i) the sum of (x) the aggregate principal amount of
Indebtedness (including the principal portion of rentals under Capital Leases
but excluding Permitted Subordinated Indebtedness) of the Borrower and its
Subsidiaries on a consolidated basis which matures more than one year from the
date of determination plus (y) the aggregate principal amount of all
Indebtedness (including the principal portion of rentals under Capital Leases
but excluding Permitted Subordinated Indebtedness) which is scheduled to be paid
by the Borrower and its Subsidiaries on a consolidated basis within one year
from the date of determination to (ii) the Operating Cash Flow for the fiscal
quarter ending on such date; provided, however, that Operating Cash Flow as of
each such date shall be multiplied by four (4), so as to represent the
four-quarter equivalent of Operating Cash Flow for such period.
"Solvent" means, when used with respect to any Person, that at the time of
determination:
18
<PAGE>
(a) the fair value of its assets (both at fair valuation and at
present fair salable value) is in excess of the total amount of all of its debts
and liabilities, including contingent, subordinated, unmatured and unliquidated
liabilities; and
(b) it is then able to pay its debts as they become due; and
(c) it owns property having a value (both at fair valuation and at
present fair salable value) in excess of the total amount required to pay its
debts; and
(d) it has capital sufficient to carry on its business.
"Subsidiary" of a Person means any corporation, association, partnership,
limited liability company, joint venture or other business entity of which more
than 50% of the voting stock, membership interests or other equity interests (in
the case of Persons other than corporations), is owned or controlled directly or
indirectly by the Person, or one or more of the Subsidiaries of, the Person, or
a combination thereof. Unless the context otherwise clearly requires, references
herein to a "Subsidiary" refer to a Subsidiary of the Borrower. The Dental
Practices shall not be deemed to be Subsidiaries except as provided in Section
1.3 hereof.
"Surety Instruments" means all letters of credit (including standby and
commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds
and similar instruments.
"Taxes" means any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of each Bank and the Agent, such taxes (including income
taxes or franchise taxes) as are imposed on or measured by each Bank's net
income by the jurisdiction (or any politic subdivision thereof) under the laws
of which such Bank or the Agent, as the case may be, is organized or maintains a
lending office.
"Total Assets" means, for the Borrower and its Subsidiaries on a
consolidated basis, all property, whether real, personal, tangible, intangible
or otherwise, that, in accordance with GAAP, should be included in determining
total assets as shown on the assets side of a consolidated balance sheet.
"Total Leverage Ratio" means, as of the last day of any fiscal quarter of
the Borrower, the ratio of (i) the sum of (x) the aggregate principal amount of
Indebtedness (including the principal portion of rentals under Capital Leases
and Permitted Subordinated Indebtedness) of the Borrower and its Subsidiaries on
a consolidated basis which matures more than one year from the date of
determination plus (y) the aggregate principal amount of all
19
<PAGE>
Indebtedness (including the principal portion of rentals under Capital Leases
and Permitted Subordinated Indebtedness) which is scheduled to be paid by the
Borrower and its Subsidiaries on a consolidated basis within one year from the
date of determination to (ii) the Operating Cash Flow for the fiscal quarter
ending on such date; provided, however, that Operating Cash Flow as of each such
date shall be multiplied by four (4), so as to represent the four-quarter
equivalent of Operating Cash Flow for such period.
"Total Liabilities" means, for the Borrower and its Subsidiaries on a
consolidated basis, all obligations that, in accordance with GAAP, should be
included in determining total liabilities as shown on the liabilities side of a
consolidated balance sheet.
"Transactional Documents" means the purchase or acquisition agreement, the
management agreement, the security agreement, the share acquisition agreement
and all other agreements and documents, including all exhibits thereto,
delivered in connection with a Permitted Acquisition.
"Type" has the meaning specified in the definition of "Loan."
"Unfunded Pension Liability" means the excess of a Plan's benefit
liabilities under Section 4001(a)(16) of ERISA, over the current value of that
Plan's assets, determined in accordance with the assumptions used for funding
the Pension Plan pursuant to Section 412 of the Code for the applicable plan
year.
"United States" and "U.S." each means the United States of America.
"Working Capital Loan" means a Loan of any Type made by a Bank to the
Borrower under Section 2.3 hereof the proceeds of which are used to meet the
working capital requirements of the Borrower.
1.2 Other Interpretive Provisions.
(a) The meanings of defined terms are equally applicable to the
singular and plural forms of the defined terms.
(b) The words "hereof," "herein," "hereunder" and similar words refer
to this Agreement as a whole and not to any particular provision of this
Agreement; and subsection, section, Schedule and Exhibit references are to this
Agreement unless otherwise specified.
(c) The term "documents" includes any and all instruments, documents,
agreements, certificates, indentures, notices and other writings, however
evidenced. The term "including" is not limiting and means "including without
limitation." In the computation of periods of time from a
20
<PAGE>
specified date to a later specified date, the word "from" means "from and
including'" the words "to" and "until" each mean "to but excluding," and the
word "through" means "to and including."
(d) Unless otherwise expressly provided herein, (i) references to
agreements (including this Agreement) and other contractual instruments shall be
deemed to include all subsequent amendments and other modifications thereto
(including, in the case of this Agreement, all amendments and modifications
validly entered into pursuant to Section 10.1 hereof), but only to the extent
such amendments and other modifications to agreements other than this Agreement
and the other Loan Documents are not prohibited by the terms of any Loan
Document, and (ii) references to any statute or regulation are to be construed
as including all statutory and regulatory provisions consolidating, amending,
replacing, supplementing or interpreting the statute or regulation.
(e) The captions and headings of this Agreement are for convenience of
reference only and shall not affect the interpretation of this Agreement.
(f) This Agreement and other Loan Documents may use several different
limitations, tests or measurements to regulate the same or similar matters. All
such limitations, tests and measurements are cumulative and shall each be
performed in accordance with their terms.
(g) This Agreement and the other Loan Documents are the result of
negotiations among and have been reviewed by counsel to the Agent, the Borrower
and the other parties, and are the products of all parties. Accordingly, they
shall not be construed against the Banks or the Agent merely because of the
Agent's or Banks, involvement in their preparation.
1.3 Accounting Principles. Unless the context otherwise clearly requires,
(a) all accounting terms not expressly defined herein shall be construed, and
all financial computations required under this Agreement shall be made, in
accordance with GAAP, consistently applied, (b) references herein to "fiscal
year" and "fiscal quarter" refer to such fiscal periods of the Borrower and (c)
references herein to "Subsidiary" in Sections 5.7, 6.1, 6.2 and 6.14 hereof
include Dental Practices.
ARTICLE II
THE CREDITS
-----------
2.1 Amounts and Terms of Commitments.
(a) Revolving Loans. Each Bank severally agrees, on the terms and
conditions set forth herein, to make revolving loans to the Borrower (each such
loan, a "Loan") from time to time on any
21
<PAGE>
Business Day during the period from the Closing Date to the Revolving
Termination Date, in an aggregate amount not to exceed at any time outstanding
the amount set forth on Schedule 2.1 attached hereto (such amount as the same
may be reduced under Section 2.5(a) or as a result of one or more assignments
under Section 10.8, or increased under Section 2.5(b), the Bank's "Commitment"
and all such Commitments, referred to herein, collectively, as the "Combined
Commitments"); provided, however, that, after giving effect to any Borrowing,
(a) the aggregate principal amount of all outstanding Loans shall not at any
time exceed the Combined Commitments and (b) the sum of (i) the aggregate
principal amount of all outstanding Working Capital Loans and (ii) the LOC
Obligations shall not exceed $4,000,000 at any time. Within the limits of each
Bank's Commitment, and subject to the other terms and conditions hereof, the
Borrower may borrow under this Section 2.1, prepay under Section 2.6 and
reborrow under this Section 2.1.
(b) Letter of Credit Subfacility.
(i) Issuance. Subject to the terms and conditions hereof and of
the LOC Documents, if any, and any other terms and conditions which the Issuing
Bank may reasonably require and in reliance upon the representations and
warranties set forth herein, the Issuing Bank agrees to issue, and each Bank
severally agrees to participate in the issuance by the Issuing Bank of, standby
Letters of Credit in Dollars from time to time from the Closing Date until the
date five (5) days prior to the Revolving Termination Date as the Borrower may
request, in a form acceptable to the Issuing Bank; provided, however, that the
sum of (1) the aggregate principal amount of all outstanding Working Capital
Loans and (2) the LOC Obligations shall not exceed $4,000,000 at any time. No
Letter of Credit shall (x) have an original expiry date more than one year from
the date of issuance or (y) as originally issued or as extended, have an expiry
date extending beyond the Revolving Termination Date. Each Letter of Credit
shall comply with the related LOC Documents. The issuance and expiry dates of
each Letter of Credit shall be a Business Day.
(ii) Notice and Reports. The request for the issuance of a Letter
of Credit shall be submitted by the Borrower to the Issuing Bank at least three
(3) Business Days prior to the requested date of issuance. The Issuing Bank
will, at least quarterly and more frequently upon request, disseminate to each
of the Banks a detailed report specifying the Letters of Credit which are then
issued and outstanding and any activity with respect thereto which may have
occurred since the date of the prior report, and including therein, among other
things, the beneficiary, the face amount and the expiry date, as well as any
payment or expirations which may have occurred.
22
<PAGE>
(iii) Participation. Each Bank, upon issuance of a Letter of
Credit, shall be deemed to have purchased without recourse a Participation
Interest from the applicable Issuing Bank in such Letter of Credit and the
obligations arising thereunder and any collateral relating thereto, in each case
in an amount equal to its pro rata share of the obligations under such Letter of
Credit (based on the respective Pro Rata Shares of the Banks) and shall
absolutely, unconditionally and irrevocably assume and be obligated to pay to
the Issuing Bank and discharge when due, its pro rata share of the obligations
arising under such Letter of Credit. Without limiting the scope and nature of
each Bank's Participation Interest in any Letter of Credit, to the extent that
the Issuing Bank has not been reimbursed as required hereunder or under any such
Letter of Credit, each such Bank shall pay to the Issuing Bank its pro rata
share of such unreimbursed drawing in same day funds on the day of notification
by the Issuing Bank of an unreimbursed drawing pursuant to the provisions of
subsection (iv) below. The obligation of each Bank to so reimburse the Issuing
Bank shall be absolute and unconditional and shall not be affected by the
occurrence of a Default, an Event of Default or any other occurrence or event.
Any such reimbursement shall not relieve or otherwise impair the obligation of
the Borrower to reimburse the Issuing Bank under any Letter of Credit, together
with interest as hereinafter provided.
(iv) Reimbursement. In the event of any drawing under any Letter
of Credit, the Issuing Bank will promptly notify the Borrower. Unless the
Borrower shall immediately notify the Issuing Bank that the Borrower intends to
otherwise reimburse the Issuing Bank for such drawing, the Borrower shall be
deemed to have requested that the Banks make a Loan in the amount of the drawing
as provided in subsection (v) below on the related Letter of Credit, the
proceeds of which will be used to satisfy the related reimbursement obligations.
The Borrower promises to reimburse the Issuing Bank on the day of drawing under
any Letter of Credit (either with the proceeds of a Loan obtained hereunder or
otherwise) in same day funds. If the Borrower shall fail to reimburse the
Issuing Bank as provided hereinabove, the unreimbursed amount of such drawing
shall bear interest at a per annum rate applicable to a Prime Rate Loan. The
Borrower's reimbursement obligations hereunder shall be absolute and
unconditional under all circumstances irrespective of any rights of setoff,
counterclaim or defense to payment the Borrower may claim or have against the
Issuing Bank, the Agent, the Banks, the beneficiary of the Letter of Credit
drawn upon or any other Person, including without limitation any defense based
on any failure of the Borrower or any other Credit Party to receive
consideration or the legality, validity, regularity or unenforceability of the
Letter of Credit. The Issuing Bank will promptly notify the other Banks of the
amount of any unreimbursed drawing and each Bank shall promptly pay to the Agent
for the account of the Issuing Bank in Dollars and in immediately available
funds, the amount of such
23
<PAGE>
Bank's pro rata share of such unreimbursed drawing. Such payment shall be made
on the day such notice is received by such Bank from the Issuing Bank if such
notice is received at or before 2:00 P.M. (Pacific Standard Time) otherwise such
payment shall be made at or before 12:00 Noon (Pacific Standard Time) on the
Business Day next succeeding the day such notice is received. If such Bank does
not pay such amount to the Issuing Bank in full upon such request, such Bank
shall, on demand, pay to the Agent for the account of the Issuing Bank interest
on the unpaid amount during the period from the date of such drawing until such
Bank pays such amount to the Issuing Bank in full at a rate per annum equal to,
if paid within two (2) Business Days of the date that such Bank is required to
make payments of such amount pursuant to the preceding sentence, the Federal
Funds Rate and thereafter at a rate equal to the Prime Rate. Each Bank's
obligation to make such payment to the Issuing Bank, and the right of the
Issuing Bank to receive the same, shall be absolute and unconditional, shall not
be affected by any circumstance whatsoever and without regard to the termination
of this Agreement or the Combined Commitments hereunder, the existence of a
Default or Event of Default or the acceleration of the obligations of the
Borrower hereunder and shall be made without any offset, abatement, withholding
or reduction whatsoever. Simultaneously with the making of each such payment by
a Bank to the Issuing Bank, such Bank shall, automatically and without any
further action on the part of the Issuing Bank or such Bank, acquire a
Participation Interest in an amount equal to such payment (excluding the portion
of such payment constituting interest owing to the Issuing Bank) in the related
unreimbursed drawing portion of the LOC Obligation and in the interest thereon
and in the related LOC Documents, and shall have a claim against the Borrower
with respect thereto.
(v) Repayment with Loans. On any day on which the Borrower shall
have requested, or been deemed to have requested, a Loan advance to reimburse a
drawing under a Letter of Credit, the Agent shall give notice to the Banks that
a Loan has been requested or deemed requested by the Borrower to be made in
connection with a drawing under a Letter of Credit, in which case a Loan advance
comprised of Prime Rate Loans (or LIBOR Loans to the extent the Borrower has
complied with the procedures of Section 2.3 hereof with respect thereto) shall
be immediately made to the Borrower by all Banks (notwithstanding any
termination of the Combined Commitments pursuant to Section 2.5(a)) pro rata
based on the respective Pro Rata Shares of the Banks (determined before giving
effect to any termination of the Combined Commitments pursuant to Section 9.2)
and the proceeds thereof shall be paid directly to the Issuing Bank for
application to the respective LOC Obligations. Each such Bank hereby irrevocably
agrees to make its pro rata share of each such Loan immediately upon any such
request or deemed request in the amount, in the manner and on the date specified
in the preceding sentence notwithstanding (i) the amount of such borrowing may
not comply with the minimum amount for advances of
24
<PAGE>
Loans otherwise required hereunder, (ii) whether any conditions specified in
Section 4.3 are then satisfied, (iii) whether a Default or an Event of Default
then exists, (iv) failure for any such request or deemed request for Loan to be
made by the time otherwise required hereunder, (v) whether the date of such
Borrowing is a date on which Loans are otherwise permitted to be made hereunder
or (vi) any termination of the Combined Commitments relating thereto immediately
prior to or contemporaneously with such Borrowing. In the event that any Loan
cannot for any reason be made on the date otherwise required above (including,
without limitation, as a result of the commencement of a proceeding under the
Bankruptcy Code with respect to the Borrower or any Credit Party), then each
such Bank hereby agrees that it shall forthwith purchase (as of the date such
Borrowing would otherwise have occurred, but adjusted for any payments received
from the Borrower on or after such date and prior to such purchase) from the
Issuing Bank such Participation Interests in the outstanding LOC Obligations as
shall be necessary to cause each such Bank to share in such LOC Obligations
ratably (based upon the respective Pro Rata Shares of the Banks (determined
before giving effect to any termination of the Combined Commitments pursuant to
Section 2.5(a))), provided that at the time any purchase of Participation
Interests pursuant to this sentence is actually made, the purchasing Bank shall
be required to pay to the Issuing Bank, to the extent not paid to the Issuing
Bank by the Borrower in accordance with the terms of subsection (d) above,
interest on the principal amount of Participation Interests purchased for each
day from and including the day upon which such Borrowing would otherwise have
occurred to but excluding the date of payment for such Participation Interests,
at the rate equal to, if paid within two (2) Business Days of the date of the
Loan advance, the Federal Funds Rate, and thereafter at a rate equal to the
Prime Rate.
(vi) Designation of Credit Parties as Account Parties.
Notwithstanding anything to the contrary set forth in this Agreement, a Letter
of Credit issued hereunder may contain a statement to the effect that such
Letter of Credit is issued for the account of a Credit Party other than the
Borrower, provided that notwithstanding such statement, the Borrower shall be
the actual account party for all purposes of this Agreement for such Letter of
Credit and such statement shall not affect the Borrower's reimbursement
obligations hereunder with respect to such Letter of Credit.
(vii) Renewal; Extension. The renewal or extension of any Letter
of Credit shall, for purposes hereof, be treated in all respects the same as the
issuance of a new Letter of Credit hereunder.
(viii) Uniform Customs and Practices. The Issuing Bank may have
the Letters of Credit be subject to The Uniform Customs and Practice for
Documentary Credits, as published as of
25
<PAGE>
the date of issue by the International Chamber of Commerce (the "UCP"), in which
case the UCP may be incorporated therein and deemed in all respects to be a part
thereof.
(ix) Indemnification; Nature of Issuing Bank's Duties.
(A) In addition to its other obligations under this Section
2.1(b), the Borrower hereby agrees to pay, and protect, indemnify and
save each Bank harmless from and against, any and all claims, demands,
liabilities, damages, losses, costs, charges and expenses (including
reasonable attorneys' fees) that such Bank may incur or be subject to
as a consequence, direct or indirect, of (1) the issuance of any
Letter of Credit or (2) the failure of such Bank to honor a drawing
under a Letter of Credit as a result of any act or omission, whether
rightful or wrongful, of any present or future de jure or de facto
government or Governmental Authority (all such acts or omissions,
herein called "Government Acts").
(B) As between the Borrower and the Banks (including the
Issuing Bank), the Borrower shall assume all risks of the acts,
omissions or misuse of any Letter of Credit by the beneficiary
thereof. No Bank (including the Issuing Bank) shall be responsible:
(1) for the form, validity, sufficiency, accuracy, genuineness or
legal effect of any document submitted by any party in connection with
the application for and issuance of any Letter of Credit, even if it
should in fact prove to be in any or all respects invalid,
insufficient, inaccurate, fraudulent or forged; (2) for the validity
or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign any Letter of Credit or the rights or
benefits thereunder or proceeds thereof, in whole or in part, that may
prove to be invalid or ineffective for any reason; (3) for errors,
omissions, interruptions or delays in transmission or delivery of any
messages, by mail, cable, telegraph, telex or otherwise, whether or
not they be in cipher; (4) for any loss or delay in the transmission
or otherwise of any document required in order to make a drawing under
a Letter of Credit or of the proceeds thereof; and (5) for any
consequences arising from causes beyond the control of such Bank,
including, without limitation, any Government Acts. None of the above
shall affect, impair, or prevent the vesting of the Issuing Bank's
rights or powers hereunder.
26
<PAGE>
(C) In furtherance and extension and not in limitation of
the specific provisions hereinabove set forth, any action taken or
omitted by any Bank (including the Issuing Bank), under or in
connection with any Letter of Credit or the related certificates, if
taken or omitted in good faith, shall not put such Bank under any
resulting liability to the Borrower or any other Credit Party. It is
the intention of the parties that this Agreement shall be construed
and applied to protect and indemnify each Bank (including the Issuing
Bank) against any and all risks involved in the issuance of the
Letters of Credit, all of which risks are hereby assumed by the
Borrower (on behalf of itself and each of the other Credit Parties),
including, without limitation, any and all Government Acts. No Bank
(including the Issuing Bank) shall, in any way, be liable for any
failure by such Bank or anyone else to pay any drawing under any
Letter of Credit as a result of any Government Acts or any other cause
beyond the control of such Bank.
(D) Nothing in this subsection (ix) is intended to limit the
reimbursement obligations of the Borrower contained in subsection (iv)
above. The obligations of the Borrower under this subsection (ix)
shall survive the termination of this Agreement. No act or omissions
of any current or prior beneficiary of a Letter of Credit shall in any
way affect or impair the rights of the Banks (including the Issuing
Bank) to enforce any right, power or benefit under this Agreement.
(E) Notwithstanding anything to the contrary contained in
this subsection (ix), the Borrower shall have no obligation to
indemnify any Bank (including the Issuing Bank) in respect of any
liability incurred by such Bank (1) arising solely out of the gross
negligence or willful misconduct of such Bank, as determined by a
court of competent jurisdiction, or (2) caused by such Bank's failure
to pay under any Letter of Credit after presentation to it of a
request strictly complying with the terms and conditions of such
Letter of Credit, as determined by a court of competent jurisdiction,
unless such payment is prohibited by any law, regulation, court order
or decree.
(x) Responsibility of Issuing Bank. It is expressly understood
and agreed that the obligations of the Issuing Bank hereunder to the Banks are
only those expressly set forth in this Agreement and that the Issuing Bank shall
be entitled to assume that the conditions precedent set forth in Section 4.3
hereof have been satisfied unless it shall have acquired actual
27
<PAGE>
knowledge that any such condition precedent has not been satisfied; provided,
however, that nothing set forth in this Section 2.1(b) shall be deemed to
prejudice the right of any Bank to recover from the Issuing Bank any amounts
made available by such Bank to the Issuing Bank pursuant to this Section 2.1(b)
in the event that it is determined by a court of competent jurisdiction that the
payment with respect to a Letter of Credit constituted gross negligence or
willful misconduct on the part of the Issuing Bank.
(xi) Conflict with LOC Documents. In the event of any conflict
between this Agreement and any LOC Document (including any letter of credit
application), this Agreement shall control.
2.2 Loan Accounts.
(a) The Loans made by each Bank shall be evidenced by one or more loan
accounts or records maintained by such Bank in the ordinary course of business.
The loan accounts or records maintained by the Agent and each Bank shall be
conclusive absent manifest error of the amount of the Loans made by the Banks to
the Borrower and the interest and payments thereon. Any failure so to record or
any error in doing so shall not, however, limit or otherwise affect the
obligation of the Borrower hereunder to pay any amount owing with respect to the
Loans.
(b) Upon the request of any Bank made through the Agent, the Loans
made by such Bank may be evidenced by one or more Notes, instead of loan
accounts. Each such Bank shall endorse on the schedules annexed to its Note the
date, amount and maturity of each Loan made by it and the amount of each payment
of principal made by the Borrower with respect thereto. Each such Bank is
irrevocably authorized by the Borrower to endorse its Note and each Bank's
record shall be conclusive absent manifest error; provided, however, that the
failure of a Bank to make, or an error in making, a notation thereon with
respect to any Loan shall not limit or otherwise affect the obligations of the
Borrower hereunder or under any such Note to such Bank.
2.3 Procedure for Borrowing.
(a) Each Borrowing shall be made upon the Borrower's irrevocable
telephonic notice (such notice to be immediately confirmed in writing) delivered
to the Agent in the form of a Notice of Borrowing (which notice must be received
by the Agent prior to 9:00 a.m. (Los Angeles time) (i) three (3) Business Days
prior to the requested Borrowing Date, in the case of LIBOR Loans, and (ii) one
(1) Business Day prior to the requested Borrowing Date, in the case of Prime
Rate Loans, specifying:
(A) the amount of the Borrowing, which shall be (1) in the case
of a Prime Rate Loan, in an aggregate minimum amount of $100,000 or any multiple
of $100,000 in excess thereof
28
<PAGE>
and (2) in the case of a LIBOR Loan, in an aggregate minimum amount of
$1,000,000 or any multiple of $500,000 in excess thereof;
(B) the requested Borrowing Date, which shall be a Business Day;
(C) the Type of Loans comprising the Borrowing; and
(D) with respect to the LIBOR Loans only, the duration of the
Interest Period applicable to such Loans included in such notice. If the Notice
of Borrowing fails to specify the duration of the Interest Period for any
Borrowing comprised of LIBOR Loans, such Interest Period shall be three months.
(b) The Agent will promptly notify each Bank of receipt of any Notice
of Borrowing and of the amount of such Bank's Pro Rata Share of that Borrowing.
(c) Each Bank will make the amount of its Pro Rata Share of each
Borrowing available to the Agent for the account of the Borrower at the Agent's
Payment Office by 12:00 noon (Los Angeles time) on the Borrowing Date requested
by the Borrower in funds immediately available to the Agent. The proceeds of all
such Loans will then be made available to the Borrower or the Borrower's
designee by the Agent by wire transfer in accordance with written instructions
provided to the Agent by the Borrower in like funds as received by the Agent.
(d) After giving effect to any Borrowing, there may not be more than 3
different Interest Periods in effect in respect of all LIBOR Loans then
outstanding.
2.4 Conversion and Continuation Elections for Borrowings.
(a) The Borrower may, upon irrevocable telephonic notice (such notice
to be immediately confirmed in writing), to the Agent in accordance with Section
2.4(b) elect, as of any Business Day, in the case of Prime Rate Loans, or as of
the last day of the applicable Interest Period, in the case of LIBOR Loans, to
convert any such Loans (or any part thereof in an amount not less than
$1,000,000, or that is in an integral multiple of $500,000 in excess thereof);
provided, however, that if at any time the aggregate amount of LIBOR Loans in
respect of any Borrowing is reduced, by payment, prepayment, or conversion of
part thereof to be less than $1,000,000, such LIBOR Loans shall automatically
convert into Prime Rate Loans, and on and after such date the right of the
Borrower to continue such Loans as, and convert such Loans into, LIBOR Loans
shall terminate.
(b) The Borrower shall deliver a Notice of Conversion/Continuation to
be received by the Agent not later than
29
<PAGE>
9:00 a.m. (Los Angeles time) at least (i) three (3) Business Days in advance of
the Conversion/Continuation Date, if the Loans are to be converted into or
continued as LIBOR Loans; and (ii) one (1) Business Day in advance of the
Conversion/Continuation Date, if the Loans are to be converted into Prime Rate
Loans, specifying:
(A) the proposed Conversion/Continuation Date;
(B) the aggregate amount of Loans to be converted or continued;
(C) the Type of Loans resulting from the proposed conversion or
continuation; and
(D) other than in the case of conversions into Prime Rate Loans,
the duration of the requested Interest Period.
(c) If upon the expiration of any Interest Period applicable to LIBOR
Loans, the Borrower has failed to select timely a new Interest Period to be
applicable to such LIBOR Loans, or if any Default or Event of Default then
exists, the Borrower shall be deemed to have elected to convert such LIBOR Loans
into Prime Rate Loans effective as of the expiration date of such Interest
Period.
(d) The Agent will promptly notify each Bank of its receipt of a
Notice of Conversion/Continuation, or, if no timely notice is provided by the
Borrower, the Agent will promptly notify each Bank and the Borrower of the
details of any automatic conversion. All conversions and continuation shall be
made ratably according to the respective outstanding principal amounts of the
Loans with respect to which the notice was given held by each Bank.
(e) Unless the Majority Banks otherwise agree, during the existence of
a Default or Event of Default, the Borrower may not elect to have a Loan be made
as or converted into or continued as a LIBOR Loan.
(f) After giving effect to any conversion or continuation of Loans,
there may not be more than three different Interest Periods in effect in respect
of all LIBOR Loans then outstanding.
2.5 Voluntary Termination, Reduction of Combined Commitments; Increase in
Combined Commitments. (a) The Borrower may, upon not less than five (5) Business
Days' prior notice to the Agent, terminate the Combined Commitments, or
permanently reduce the Combined Commitments by an aggregate minimum amount of
$1,000,000 or any multiple of $500,000 in excess thereof, unless, after giving
effect thereto and to any prepayments of Loans made on the effective date
thereof, the then outstanding principal amount of the Loans would exceed the
amount of the Combined Commitments then in effect. Once reduced in accordance
with this Section
30
<PAGE>
2.5(a), the Combined Commitments may not be increased. Any reduction of the
Combined Commitments shall be applied to each Bank according to its Pro Rata
Share. All accrued unused commitment fees due and owing, pursuant to Section
2.9(b) hereof, to, but not including the effective date of any reduction or
termination of Combined Commitments, shall be paid on the effective date of such
reduction or termination.
(b) Increase in Combined Commitments. The Borrower shall have the
right upon at least fifteen (15) Business Days' prior written notice to the
Agent to increase the Combined Commitments by up to $5,000,000, in a single
increase, at any time after the Closing Date, subject, however, in any such
case, to satisfaction of the following conditions precedent:
(i) no Default or Event of Default has occurred and is continuing
on the date on which the Combined Commitments increase is to become
effective;
(ii) the representations and warranties set forth in Article V of
this Agreement shall be true and correct in all respects on and as of the
date on which the Combined Commitments increase is to become effective;
(iii) on or before the date on which the Combined Commitments
increase is to become effective, the Agent shall have received, for its own
account, the fees and expenses required by the Fee Letter; and
(iv) such requested Combined Commitments increase shall be
effective on such date only to the extent that, on or before such date, the
Agent shall have received evidence satisfactory to the Agent that the
aggregate amount of net cash proceeds received by the Borrower from an
equity offering of the Borrower exceeds $20,000,000.
2.6 Optional Prepayments. (a) Subject to Section 3.4, the Borrower may, at
any time or from time to time, upon not less than three (3) Business Days'
irrevocable notice to the Agent, ratably prepay Loans in whole or in part, in
minimum amounts of $1,000,000 or any multiple of $500,000 in excess thereof.
Such notice of prepayment shall specify the date and amount of such prepayment
and the Type(s) of Loans to be prepaid. The Agent will promptly notify each Bank
of its receipt of any such notice, and of such Bank's Pro Rata Share of such
prepayment. If such notice is given by the Borrower, the Borrower shall make
such prepayment and the payment amount specified in such notice shall be due and
payable on the date specified therein, together with, in the case of LIBOR Loans
only, accrued interest to each such date on the amount prepaid and any amounts
required pursuant to Section 3.4.
31
<PAGE>
2.7 Repayment. The Borrower shall repay to the Banks the aggregate
principal amount of Loans outstanding on the Revolving Termination Date in 12
equal, consecutive quarterly installments commencing ninety days after the
Revolving Termination Date and ending on the Maturity Date; provided, however,
that the last such installment shall be in the amount necessary to pay in full
the unpaid principal amount of the Loans.
2.8 Interest.
(a) Each Loan shall bear interest on the outstanding principal amount
thereof from the applicable Borrowing Date at a rate per annum equal to the
LIBOR Rate or the Prime Rate, as the case may be (and subject to the Borrower's
right to convert to other Types of Loans under Section 2.4), plus the Applicable
Margin.
(b) Interest on each Loan shall be paid in arrears on each Interest
Payment Date. Interest shall also be paid on the date of conversion to another
Type of Loan, on the date of any prepayment for the portion of the Loans so
prepaid and upon payment (including prepayment) in full thereof and, during the
existence of any Event of Default, interest shall be paid on demand of the Agent
at the request or with the consent of the Majority Banks.
(c) Notwithstanding Section (a) of this Section, while any Event of
Default exists or after acceleration, the Borrower shall pay interest (after as
well as before entry of judgment thereon to the extent permitted by law) on the
principal amount of all outstanding Obligations, at a rate per annum which is
determined by adding 2% per annum, to the Applicable Margin then in effect for
such Loans; provided, however, that, on and after the expiration of any Interest
Period applicable to any LIBOR Loan outstanding on the date of occurrence of
such Event of Default or acceleration, the principal amount of such Loan shall,
during the continuation of such Event of Default or after acceleration, bear
interest at a rate per annum equal to the Prime Rate, plus Applicable Margin
plus 2%.
(d) Anything herein to the contrary notwithstanding, the obligations
of the Borrower to any Bank hereunder shall be subject to the limitation that
payments of interest shall not be required for any period for which interest is
computed hereunder, to the extent (but only to the extent) that contracting for
or receiving such payment by such Bank would be contrary to the provisions of
any law applicable to such Bank limiting the highest rate of interest that may
be lawfully contracted for, charged or received by such Bank, and in such event
the Borrower shall pay such Bank interest at the highest rate permitted by
applicable law.
32
<PAGE>
2.9 Fees.
(a) Agency Fees. The Borrower shall pay the commitment fee to the
Agent for the Agent's own account, as required by the letter agreement between
the Borrower and the Agent dated December 5, 1997 (the "Fee Letter").
(b) Unused Commitment Fees. The Borrower shall pay to the Agent, for
the period from and including the Closing Date to the Revolving Termination
Date, for the account of each Bank an unused-commitment fee at the rate of 0.50%
per annum on the average daily amount by which the Combined Commitments exceeds
the aggregate amount of all Loans outstanding from time to time; provided,
however, that in the event the Total Leverage Ratio of the Borrower falls below
2.75 to 1 at the end of any fiscal quarter, as reflected in the applicable
Compliance Certificate, the unused-commitment fee shall decrease to 0.375% per
annum, effective from and including the date required by Section 6.2(b) hereof
if the Agent receives such Compliance Certificate on or before such date, to but
excluding the next date of delivery of the Compliance Certificate required by
Section 6.2(b) hereof. Such commitment fee shall be payable in arrears on the
last Business Day of each calendar quarter and on the Revolving Termination
Date.
(c) Letter of Credit Fees.
(i) Standby Letter of Credit Issuance Fee. In consideration of
the issuance of standby Letters of Credit hereunder, the Borrower promises to
pay to the Agent for the account of each Bank a fee (the "Standby Letter of
Credit Fee") on such Bank's Pro Rata Share of the initial maximum amount
available to be drawn under each such standby Letter of Credit computed at a per
annum rate for each day from the date of issuance to the date of expiration
equal to the Applicable Margin then in effect for LIBOR Loans. The Standby
Letter of Credit Fee will be payable quarterly in advance on the date of
issuance and the last Business Day of each March, June, September and December
for the immediately succeeding quarter.
(ii) Issuing Bank Fees. In addition to the Standby Letter of
Credit Fee payable pursuant to clause (i) above, the Borrower promises to pay to
the Issuing Bank for its own account without sharing by the other Banks (A) a
standby letter of credit fronting fee equal to 0.125% on the initial maximum
amount available to be drawn under each such standby Letter of Credit (such fee
to be payable quarterly in advance on the date of issuance and the last Business
Day of each March, June, September and December for the immediately succeeding
quarter) and (B) the customary charges from time to time of the Issuing Bank
with respect to the issuance, amendment, transfer, administration, cancellation
and conversion of, and drawings under, such Letters of Credit (collectively, the
"Issuing Bank Fees").
33
<PAGE>
2.10 Computation of Fees and Interest.
(a) All computations of fees and interest shall be made on the basis
of a 360-day year and actual days elapsed (which results in more interest being
paid than if computed on the basis of a 365-day year). Interest and fees shall
accrue during each period during which interest or such fees are computed from
the first day thereof to the last day thereof.
(b) Each determination of an interest rate by the Agent shall be
conclusive and binding on the Borrower and the Banks in the absence of manifest
error.
2.11 Payments by the Borrower.
(a) All payments to be made by the Borrower shall be made without
set-off, recoupment or counterclaim. Except as otherwise expressly provided
herein, all payments by the Borrower shall be made to the Agent for the account
of the Banks to the Agent's account no. 14-076-484, regarding: Gentle Dental
Service Corporation, ABA No. 122201444, or at such other account as the Agent
may from time to time designate by notice to the Borrower, and shall be made in
dollars and in immediately available funds, no later than 12:00 noon (Los
Angeles time) on the date specified herein. The Agent will promptly distribute
to each Bank its Pro Rata Share (or other applicable share as expressly provided
herein) of such payment in like funds as received. Any payment received by the
Agent later than 12:00 noon (Los Angeles time) shall be deemed to have been
received on the following Business Day and any applicable interest or fee shall
continue to accrue.
(b) Subject to the provisions set forth in the definition of "Interest
Period" herein, whenever any payment is due on a day other than a Business Day,
such payment shall be made on the following Business Day, and such extension of
time shall in such case be included in the computation of interest or fees, as
the case may be.
(c) Unless the Agent receives notice from the Borrower prior to the
date on which any payment is due to the Banks that the Borrower will not make
such payment in full as and when required, the Agent may assume that the
Borrower has made such payment in full to the Agent on such date in immediately
available funds and the Agent may (but shall not be so required), in reliance
upon such assumption, distribute to each Bank on such due date an amount equal
to the amount then due such Bank. If and to the extent the Borrower has not made
such payment in full to the Agent, each Bank, shall repay to the Agent on demand
such amount distributed to such Bank, together with interest thereon at the
Federal Funds Rate for each day from the date such amount is distributed to such
Bank until the date repaid.
34
<PAGE>
2.12 Payments by the Banks to the Agent.
(a) Unless the Agent receives notice from a Bank on or prior to the
Closing Date or, with respect to any Borrowing after the Closing Date, at least
one Business Day prior to the date of such Borrowing, that such Bank will not
make available as and when required hereunder to the Agent for the account of
the Borrower the amount of that Bank's Pro Rata Share of the Borrowing, the
Agent may assume that each Bank has made such amount available to the Agent in
immediately available funds on the Borrowing Date and the Agent may (but shall
not be so required), in reliance upon such assumption, make available to the
Borrower on such date a corresponding amount. If and to the extent any Bank
shall not have made its full amount available to the Agent in immediately
available funds and the Agent in such circumstances has made available to the
Borrower such amount, such Bank and the Borrower severally agree to repay to the
Agent forthwith on demand such corresponding amount, together with interest
thereon, for each day from the date such amount is made available to the
Borrower until the date such amount is repaid to the Agent, (i) in the case of
the Borrower, at a rate per annum equal to the interest rate applicable at the
time to the Loans comprising such Borrowing and (ii) in the case of such Bank,
at the Federal Funds Rate for each day during such period. A notice of the Agent
submitted to any Bank and the Borrower with respect to amounts owing under this
Section 2.12(a) shall be conclusive, absent manifest error. If such Bank shall
repay to the Agent such corresponding amount, such payment so repaid shall
constitute such Bank's Loan as part of such Borrowing for all purposes of this
Agreement.
(b) The failure of any Bank to make any Loan on any Borrowing Date
shall not relieve any other Bank of any obligation hereunder to make a Loan on
such Borrowing Date, but no Bank shall be responsible for the failure of any
other Bank to make the Loan to be made by such other Bank on any Borrowing Date.
The Borrower reserves the right to seek compensation from any Bank wrongfully
failing to make a Loan on a Borrowing Date for any costs, losses and expenses
incurred by the Borrower resulting from such failure.
2.13 Sharing of Payments, Etc. If, other than as expressly provided
elsewhere herein, any Bank shall obtain on account of the Loans made by it any
payment (whether voluntary, involuntary, through the exercise of any right of
set-off, or otherwise) in excess of its Pro Rata Share, such Bank shall
immediately (a) notify the Agent of such fact, and (b) purchase from the other
Banks such participations in the Loans made by them as shall be necessary to
cause such purchasing Bank to share the excess payment pro rata with each of
them; provided, however, that if all or any portion of such excess payment is
thereafter recovered from the purchasing Bank, such purchase shall to that
extent be rescinded and each other Bank shall repay to the purchasing Bank the
purchase price paid therefor, together with an amount equal to such paying
35
<PAGE>
Bank's ratable share (according to the proportion of (i) the amount of such
paying Bank's required repayment to (ii) the total amount so recovered from the
purchasing Bank) of any interest or other amount paid or payable by the
purchasing Bank in respect of the total amount so recovered. The Borrower agrees
that any Bank so purchasing a participation from another Bank may, to the
fullest extent permitted by law, exercise all its rights of payment (including
the right of set-off, but subject to Section 10.10) with respect to such
participation as fully as if such Bank were the direct creditor of the Borrower
in the amount of such participation. The Agent will keep records (which shall be
conclusive and binding in the absence of manifest error) of participations
purchased under this Section and will in each case notify the Banks following
any such purchases or repayments.
2.14 Security Documents. The Obligations shall be (a) unconditionally
guaranteed as set forth in an Amended and Restated Guaranty to be executed and
delivered by each of the Subsidiaries of the Borrower (as amended, modified or
supplemented from time to time, the "Guaranty") in the form of Exhibit B
attached hereto and (b) secured by an Amended and Restated Security Agreement to
be executed and delivered by each of the Borrower and by each of the
Subsidiaries of the Borrower (as amended, modified or supplemented from time to
time, the "Security Agreement") in the form of Exhibit C attached hereto.
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY
--------------------------------------
3.1 Taxes. (a) Any and all payments by the Borrower to each Bank or the
Agent under this Agreement and any other Loan Document shall be made free and
clear of, and without deduction or withholding for any Taxes. In addition, the
Borrower shall pay all Other Taxes.
(b) The Borrower agrees to indemnify and hold harmless each Bank and
the Agent for the full amount of Taxes or Other Taxes (including any Taxes or
Other Taxes imposed by any jurisdiction on amounts payable under this Section)
paid by the Bank or the Agent and any liability (including penalties, interest,
additions to tax and expenses) arising therefrom or with respect thereto,
whether or not such Taxes or Other Taxes were correctly or legally asserted.
Payment under this indemnification shall be made within thirty (30) days after
the date the Bank or the Agent makes written demand therefor.
(c) If the Borrower shall be required by law to deduct or withhold any
Taxes or Other Taxes from or in respect of any sum payable hereunder to any Bank
or the Agent, then:
36
<PAGE>
(i) the sum payable shall be increased as necessary so that after
making all required deductions and withholdings (including deductions and
withholdings applicable to additional sums payable under this Section) such Bank
or the Agent, as the case may be, receives an amount equal to the sum it would
have received had no such deductions or withholdings been made;
(ii) the Borrower shall make such deductions and withholdings;
(iii) the Borrower shall pay the full amount deducted or withheld
to the relevant taxing authority or other authority in accordance with
applicable law; and
(iv) the Borrower shall also pay to each Bank or the Agent for
the account of such Bank at the time interest is paid, all additional amounts
which the respective Bank specifies as necessary to preserve the after-tax yield
the Bank would have received if such Taxes or Other Taxes had not been imposed.
(d) Within thirty (30) days after the date of any payment by the
Borrower of Taxes or Other Taxes, the Borrower shall furnish the Agent the
original or a certified copy of a receipt evidencing payment thereof, or other
evidence of payment satisfactory to the Agent.
(e) If the Borrower is required to pay additional amounts to any Bank
or the Agent pursuant to subsection (c) of this Section, then such Bank shall
use reasonable efforts (consistent with legal and regulatory restrictions) to
change the jurisdiction of its Lending Office so as to eliminate any such
additional payment by the Borrower which may thereafter accrue, if such change
in the judgment of such Bank is not otherwise disadvantageous to such Bank.
3.2 Illegality.
(a) If any Bank determines that the introduction of any Requirement of
Law, or any change in any Requirement of Law, or in the interpretation or
administration of any Requirement of Law, has made it unlawful, or that any
central bank or other Governmental Authority has asserted that it is unlawful,
for any Bank or its applicable Lending Office to make LIBOR Loans, then, on
notice thereof by the Bank to the Borrower through the Agent, any obligation of
that Bank to make LIBOR Loans shall be suspended until the Bank notifies the
Agent and the Borrower that the circumstances giving rise to such determination
no longer exist.
(b) If a Bank determines that it is unlawful to maintain any LIBOR
Loan, the Borrower shall, upon its receipt of notice of such fact and demand
from such Bank (with a copy to the Agent), prepay in full such LIBOR Loans of
that Bank then
37
<PAGE>
outstanding, together with interest accrued thereon and amounts required under
Section 3.4, either on the last day of the Interest Period thereof, if the Bank
may lawfully continue to maintain such LIBOR Loans to such day, or immediately,
if the Bank may not lawfully continue to maintain such LIBOR Loan. If the
Borrower is required to so prepay any LIBOR Loan, then concurrently with such
prepayment, the Borrower shall borrow from the affected Bank, in the amount of
such repayment, a Prime Rate Loan.
(c) If the obligation of any Bank to make or maintain LIBOR Loans has
been so terminated or suspended, the Borrower may elect, by giving notice to the
Bank through the Agent that all Loans which would otherwise be made by the Bank
as LIBOR Loans shall be instead Prime Rate Committee Loans.
(d) Before giving any notice to the Agent under this Section, the
affected Bank shall designate a different Lending Office with respect to its
LIBOR Loans if such designation will avoid the need for giving such notice or
making such demand and will not, in the judgment of the Bank, be illegal or
otherwise disadvantageous to the Bank.
3.3 Increased Costs and Reduction of Return.
(a) If any Bank determines that, due to either (i) the introduction of
or any change in or in the interpretation of any law or regulation or (ii) the
compliance by that Bank with any guideline or request from any central bank or
other Governmental Authority (whether or not having the force of law), there
shall be any increase in the cost to such Bank of agreeing to make or making,
funding or maintaining any LIBOR Loans then, in any such case, such Bank shall
notify the Borrower of any such event of which it has knowledge and shall
deliver to the Agent and the Borrower a written statement specifying in
reasonable detail the losses or expenses sustained or incurred. The Borrower
shall within ten (10) days following demand therefor, pay the amount sufficient
to compensate such Bank for such increased costs.
(b) If any Bank shall have determined that (i) the introduction of any
Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation,
(iii) any change in the interpretation or administration of any Capital Adequacy
Regulation by any central bank or other Governmental Authority charged with the
interpretation or administration thereof, or (iv) compliance by the Bank (or its
Lending Office) or any corporation controlling the Bank with any Capital
Adequacy Regulation, affects or would affect the amount of capital required or
expected to be maintained by the Bank or any corporation controlling the Bank
and (taking into consideration such Bank's or such corporation's policies with
respect to capital adequacy and such Bank's desired return on capital)
determines that the amount of such capital is increased as a consequence of its
Commitment, loans, credits or obligations
38
<PAGE>
under this Agreement; then, in any such case, such Bank shall notify the
Borrower of any such event of which it has knowledge and shall deliver to the
Agent and the Borrower a written statement specifying in reasonable detail the
losses or expense sustained or incurred. The Borrower shall within ten (10) days
following demand therefor, pay the amount sufficient to compensate such Bank for
such increased costs.
3.4 Funding Losses. The Borrower shall reimburse each Bank and hold each
Bank harmless from any loss or expense which the Bank may sustain or incur as a
consequence of:
(a) the failure of the Borrower to make on a timely basis any payment
of principal of any LIBOR Loan;
(b) the failure of the Borrower to borrow, continue or convert a Loan
after the Borrower has given (or is deemed to have given) a Notice of Borrowing
or a Notice of Conversion/Continuation;
(c) the failure of the Borrower to make any prepayment of any Loan in
accordance with any notice delivered under Section 2.6;
(d) the prepayment (including pursuant to Section 2.6 or 3.7) or other
payment (including after acceleration thereof) of any LIBOR Loan on a day that
is not the last day of the relevant Interest Period; or
(e) the automatic conversion under Section 2.4(a) of any LIBOR Loan to
a Prime Rate Loan on a day that is not the last day of the relevant Interest
Period; including any such loss or expense arising from the liquidation or
reemployment of funds obtained by it to maintain its LIBOR Loans or from fees
payable to terminate the deposits from which such funds were obtained.
For purposes of calculating amounts payable by the Borrower to the Banks under
this Section and under subsection 3.3(a), each LIBOR Loan made by a Bank (and
each related reserve, special deposit or similar requirement) shall be
conclusively deemed to have been funded at the LIBOR Rate for such LIBOR Loan by
a matching deposit or other borrowing in the interbank eurodollar market for a
comparable amount and for a comparable period, whether or not such LIBOR Loan is
in fact so funded. Each Bank that claims compensation under this section shall
deliver to the Agent and the Borrower a written statement specifying in
reasonable detail any amounts due to the Banks as provided above.
3.5 Inability to Determine Rates. If the Agent determines that for any
reason adequate and reasonable means do not exist for determining the LIBOR Rate
for any requested Interest Period with respect to a proposed LIBOR Loan, or that
the LIBOR Rate for any
39
<PAGE>
requested Interest Period with respect to a proposed LIBOR Loan does not
adequately and fairly reflect the cost to the Banks of funding such Loan, the
Agent will promptly so notify the Borrower and each Bank. Thereafter, the
obligation of the Banks to make or maintain LIBOR Loans, hereunder shall be
suspended until the Agent revokes such notice in writing. Upon receipt of such
notice, the Borrower may revoke any Notice of Borrowing or Notice of
Conversion/Continuation then submitted by it. If the Borrower does not revoke
such Notice, the Banks shall make, convert or continue the Loans, as proposed by
the Borrower, in the amount specified in the applicable notice submitted by the
Borrower, but such Loans shall be made, converted or continued as Prime Rate
Loans instead of LIBOR Loans.
3.6 Certificates of Banks. Any Bank claiming reimbursement or compensation
under this Article III shall deliver to the Borrower (with a copy to the Agent)
a certificate setting forth in reasonable detail the amount payable to the Bank
hereunder and such certificate shall be conclusive and binding on the Borrower
in the absence of manifest error.
3.7 Survival. The agreements and obligations of the Borrower in this
Article III shall survive the payment of all other Obligations.
ARTICLE IV
CONDITIONS PRECEDENT
--------------------
4.1 Condition of Initial Loans or Letter of Credit. The obligation of each
Bank to make its initial Loans or the Issuing Bank to issue the initial Letter
of Credit, whichever shall occur first, hereunder is subject to the condition
that the Agent has received on or before the Closing Date all of the following,
in form and substance satisfactory to the Agent and each Bank, and in sufficient
copies for each Bank:
(a) Credit Agreement. This Agreement executed by the Borrower;
(b) Notes. If requested by any Bank, a Note in favor of such Bank
executed by the Borrower;
(c) Security Documents. The Guaranty and the Security Agreement
executed by each party thereto;
(d) Resolutions; Incumbency.
(i) Copies of the resolutions of the board of directors of the
Borrower and its Subsidiaries parties to any Loan Document authorizing the
transactions contemplated hereby or thereby, certified as of the Closing Date by
the Secretary or an Assistant Secretary of such party; and
40
<PAGE>
(ii) A certificate of the Secretary or Assistant Secretary of
each of the Borrower and its Subsidiaries parties to any Loan Document
certifying the names and true signatures of the officers of such party
authorized to execute, deliver and perform, as applicable, this Agreement and
all other Loan Documents to be delivered by such party hereunder;
(e) Organization Documents: Good Standing. Each of the following
documents:
(i) the articles or certificate of incorporation and the bylaws
of each of the Borrower and its Subsidiaries parties to any Loan Document as in
effect on the Closing Date, certified by the Secretary or Assistant Secretary of
such party as of the Closing Date; and
(ii) a good standing and tax good standing certificate for each
of the Borrower and its Subsidiaries parties to any Loan Document from the
Secretary of State (or similar, applicable Governmental Authority) of such
party's state of incorporation and each state where such party is qualified to
do business as a foreign corporation as of a recent date;
(f) Payment of Fees. Evidence of payment to the Agent by the Borrower
of all accrued and unpaid fees, costs and expenses to the extent then due and
payable on the Closing Date, together with Attorney Costs of Imperial Bank and
any such costs, fees and expenses arising under or referenced in Section 2.9(a)
and Section 10.4;
(g) Certificate. A certificate signed by a Responsible Officer, dated
as of the Closing Date:
(i) stating that the representations and warranties contained in
Article V are true and correct on and as of such date, as though made on and as
of such date;
(ii) stating that no Default or Event of Default exists; and
(iii) stating that there has occurred since September 30, 1997,
no event or circumstance that has resulted or could reasonably be expected to
result in a Material Adverse Effect;
(h) Perfection of Liens and Security Interests. The Banks shall have
obtained assurance satisfactory to Majority Banks that the security interests
created by the Security Agreement in the property specified therein shall have
been duly perfected under applicable law and shall be of first priority, subject
only to Permitted Encumbrances, including, without limitation:
41
<PAGE>
(i) delivery of pre-filing UCC search reports;
(ii) evidence of pledge of Pledged Equity (as such term is
defined in the Security Agreement) in favor of the Agent;
(iii) evidence of pledge of Pledged Debt (as such term is defined
in the Security Agreement) in favor of the Agent;
(iv) evidence of assignment by the Borrower of all management
agreements between the Borrower and its Subsidiaries in favor of the Agent;
(v) filing of UCC-1 financing statements made by the Credit
Parties in favor of the Agent; and
(vi) filing of UCC-2 amendments made by the Credit Parties in
favor of the Agent to change the name of the Borrower hereunder; and
(vii) post-filing UCC search reports;
(i) Legal Opinion. An opinion of McDermott, Will & Emery, counsel to
each of the Borrower and the Subsidiaries parties to any Loan Document, and
addressed to the Agent and the Banks, substantially in the form of Exhibit I
attached hereto;
(j) No Existing Default. No Event of Default or event which, upon the
lapse of time or the giving of notice or both, would constitute an Event of
Default shall exist on the Closing Date or after giving effect to the
transactions contemplated to take place hereunder on such date;
(k) Representations and Warranties Correct. The representations and
warranties set forth in Article V hereof shall be true and correct on the
Closing Date, and after giving effect to the transactions contemplated to occur
on such date;
(l) Insurance. Evidence of insurance called for in Section 5.19 hereof
and evidence satisfactory to the Majority Banks that such insurance is in
effect;
(m) Solvency. The Agent shall have received a certificate of the
Responsible Officer, in form and substance satisfactory to the Majority Banks
that the Borrower and each of its Subsidiaries is Solvent on and as of the
Closing Date;
(n) Regulatory Compliance. A certificate of a Responsible Officer on
behalf of each of the Subsidiaries to the effect that such Subsidiary is in
compliance in all material respects with the Requirements of Law;
42
<PAGE>
(o) Transactional Documents. Copies of all Transactional Documents
listed in Schedule 4.1(o) attached hereto relating to the Acquisitions by the
Credit Parties anticipated to be consummated on the Closing Date or as soon as
practicable thereafter (including the Acquisitions in the States of California,
Washington and Oregon); and
(p) Other Documents. Such other approvals, opinions, documents or
materials as the Agent or any Bank may reasonably request.
4.2 Conditions to All Loans and Letters of Credit. The obligations of each
Bank to make, convert or extend any Loan and of the Issuing Bank to issue or
extend any Letter of Credit (including the initial Loans and the initial Letter
of Credit) to be made by it (including its initial Loan), is subject to the
satisfaction of the following conditions precedent on the relevant Borrowing
Date:
(a) Notice of Borrowing. (i) In the case of any Loan, the Agent shall
have received a Notice of Borrowing or (ii) in the case of any Letter of Credit,
the Issuing Bank shall have received an appropriate request for issuance in
accordance with the provisions of Section 2.1(b) hereof.
(b) Continuation of Representations and Warranties. The
representations and warranties in Article V shall be true and correct on and as
of such Borrowing Date with the same effect as if made on and as of such
Borrowing Date (except to the extent such representations and warranties
expressly refer to an earlier date, in which case they shall be true and correct
as of such earlier date); and
(c) No Existing Default. No Default or Event of Default shall exist or
shall result from such Borrowing. Each Notice of Borrowing submitted by the
Borrower hereunder shall constitute a representation and warranty by the
Borrower hereunder, as of the date of each such notice or request and as of each
Borrowing Date that the conditions in this Section 4.2 are satisfied.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
------------------------------
Each of the Credit Parties represents and warrants to the Agent and each
Bank that:
5.1 Existence and Power. Such Credit Party and each of its Subsidiaries (a)
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, (b) has the power and authority
and all material Governmental Approvals to own its material assets, carry on its
43
<PAGE>
business and to execute, deliver, and perform its obligations under this
Agreement and the other Loan Documents to which it is a party, (c) is duly
qualified as a foreign corporation and is licensed and in good standing under
the laws of each jurisdiction where its ownership, lease or operation of
property or the conduct of its business requires such qualification or license
(except for jurisdictions in which the failure to so qualify or remain in good
standing could not reasonably be expected to have a Material Adverse Effect) and
(d) is in compliance in all material respects with all Requirements of Law. Set
forth in Schedule 5.1 attached hereto is a complete and accurate list of such
Credit Party's Subsidiaries, showing their respective jurisdictions of
incorporation or organization and, as of the Closing Date, the jurisdictions in
which each is qualified to do business.
5.2 Corporate Authorization; No Contravention. The execution, delivery and
performance by such Credit Party of this Agreement and each other Loan Document
to which such Credit Party is party, have been duly authorized by all necessary
corporate action, and do not and will not (a) contravene the terms of any of
such Credit Party's Organization Documents, (b) conflict with or result in any
breach or contravention of, or the creation of any Lien under, any document
evidencing any material Contractual Obligation to which such Credit Party is a
party or any material order, injunction, writ or decree of any Governmental
Authority to which such Credit Party or its property is subject or (c) violate
any Requirement of Law.
5.3 Governmental Authorization. No Governmental Approval is necessary or
required in connection with the execution, delivery or performance by, or
enforcement against, such Credit Party of this Agreement or any other Loan
Document.
5.4 Binding Effect. This Agreement and each other Loan Document to which
such Credit Party is a party constitute the legal, valid and binding obligations
of such Credit Party, enforceable against such Credit Party in accordance with
their respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relating to enforceability.
5.5 Litigation. Except as specifically disclosed in Schedule 5.5 attached
hereto, there are no actions, suits, proceedings, claims or disputes pending, or
to the best knowledge of such Credit Party, threatened or contemplated, at law,
in equity, in arbitration or before any Governmental Authority, against such
Credit Party, or its Subsidiaries or any of their respective properties which
(i) purport to affect or pertain to this Agreement or any other Loan Document,
or any of the transactions contemplated hereby or thereby, or (ii) if determined
adversely to such Credit Party or its Subsidiaries, would
44
<PAGE>
reasonably be expected to have a Material Adverse Effect. No injunction, writ,
temporary restraining order or any order of any nature has been issued by any
court or other Governmental Authority purporting to enjoin or restrain the
execution, delivery or performance of this Agreement or any other Loan Document,
or directing that the transactions provided for herein or therein not be
consummated as herein or therein provided.
5.6 No Default. No Default or Event of Default has occurred and is
continuing or would result from the execution, delivery or performance of this
Agreement, the Security Agreement and the other Loan Documents.
5.7 Financial Condition.
(a) The pro forma consolidated financial statements of Credit Parties,
dated as of the fiscal quarter ended September 30, 1997, have been delivered to
the Agent. Except as disclosed in such financial statements or otherwise
disclosed in writing to the Banks, neither such Credit Party nor any Subsidiary
of such Credit Party is liable for any material liability, direct or contingent,
including, but not limited to, liabilities for taxes, long-term leases or
long-term commitments, which would be required to be shown as a liability or
otherwise disclosed in current financial statements.
(b) Since September 30, 1997, there has been no Material Adverse
Effect and there is no fact known to such Credit Party which could reasonably be
expected to have a Material Adverse Effect which has not been disclosed in
documents furnished to the Banks in connection with this Agreement.
5.8 ERISA Compliance. Except as specifically disclosed in Schedule 5.8
attached hereto:
(a) Each Plan is in compliance in all material respects with the
applicable provisions of ERISA, the Code and other federal or state law. Each
Plan which is intended to qualify under Section 401(a) of the Code has received
a favorable determination letter from the IRS and to the best knowledge of such
Credit Party, nothing has occurred which would cause the loss of such
qualification. Such Credit Party and each ERISA Affiliate has made all required
contributions to any Plan subject to Section 412 of the Code, and no application
for a funding waiver or an extension of any amortization period pursuant to
Section 412 of the Code has been made with respect to any Plan.
(b) There are no pending or, to the best knowledge of such Credit
Party, threatened claims, actions or lawsuits, or action by any Governmental
Authority, with respect to any Plan which has resulted or could reasonably be
expected to result in a Material Adverse Effect. There has been no prohibited
transaction
45
<PAGE>
or violation of the fiduciary responsibility rules with respect to any Plan
which has resulted or could reasonably be expected to result in a Material
Adverse Effect.
(c) (A) No ERISA Event has occurred or is reasonably expected to
occur, (B) no Pension Plan has any Unfunded Pension Liability, (C) neither such
Credit Party nor any ERISA Affiliate has incurred, or reasonably expects to
incur, any liability under Title IV of ERISA with respect to any Pension Plan
(other than premiums due and not delinquent under Section 4007 of ERISA), (D)
neither such Credit Party nor any ERISA Affiliate has incurred, or reasonably
expects to incur, any liability (and no event has occurred which, with the
giving of notice under Section 421 of ERISA, would result in such liability)
under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan and (E)
neither such Credit Party nor any ERISA Affiliate has engaged in a transaction
that could be subject to Section 406 or 4212(c) of ERISA.
5.9 Use of Proceeds; Margin Regulations. The proceeds of the Loans are to
be used solely for the purposes set forth in and permitted by Sections 6.12 and
7.12 of this Agreement. Neither such Credit Party nor any Subsidiary is
generally engaged in the business of purchasing or selling Margin Stock or
extending credit for the purpose of purchasing or carrying Margin Stock.
5.10 Real Property. Such Credit Party and each Subsidiary have good record
and marketable title in fee simple to, or valid leasehold interests in, all real
property necessary or used in the ordinary conduct of their respective
businesses, except for such defects in title as could not, individually or in
the aggregate, have a Material Adverse Effect. As of the Closing Date, the
property of such Credit Party and its Subsidiaries is subject to no Liens, other
than Permitted Encumbrances.
5.11 Equipment. Such Credit Party and its Subsidiaries own or have the
right to use under valid and subsisting leases, equipment and fixtures,
reasonably necessary for the operation of their business as a whole.
Substantially all of the tangible property of such Credit Party and its
Subsidiaries used in connection with their business is in good operating
condition (ordinary wear and tear excepted), usable in the ordinary course of
business, and is adequate for the operation of their business.
5.12 Contracts. Schedule 5.12 attached hereto contains a list of each
material contract to which such Credit Party or any of its Subsidiaries is a
party (the "Material Contracts"). Each of the Material Contracts is in effect.
Except as disclosed in Schedule 5.12 attached hereto, neither such Credit Party,
nor any of its Subsidiaries nor, to the best knowledge of such Credit Party, any
other party to any of the Material Contracts is in material default thereunder,
and there are no presently existing facts or circumstances which, if continued
or on notice, could
46
<PAGE>
reasonably be expected to result in such a material default on the part of such
Credit Party or any of its Subsidiaries, or, to the best knowledge of such
Credit Party, on the part of the other party thereto. Such Credit Party does not
have any knowledge that any other party to any of the Material Contracts intends
to terminate such Material Contract. Each contract with a supplier to which such
Credit Party or any of its Subsidiaries is a party is on normal trade terms and
has been entered into in the ordinary course of business. Each contract with a
customer of such Credit Party or any of its Subsidiaries has been entered into
in the ordinary course of business. Performance by the parties to all contracts
and other commitments of such Credit Party and its Subsidiaries would not in the
aggregate have a Material Adverse Effect.
5.13 Taxes. Such Credit Party and its Subsidiaries have filed all Federal
and other material tax returns and reports required to be filed, and have paid
all Federal and other material taxes, assessments, fees and other governmental
charges levied or imposed upon them or their properties, income or assets
otherwise due and payable, except those which are being contested in good faith
by appropriate proceedings and for which adequate reserves have been provided in
accordance with GAAP. There is no proposed tax assessment against such Credit
Party or any Subsidiary that would, if made, have a Material Adverse Effect.
5.14 Environmental Matters. Except as specifically disclosed in Schedule
5.14 attached hereto, (i) the properties and operations of such Credit Party and
each of its Subsidiaries comply in all material respects with all applicable
Environmental Laws; (ii) none of the properties or operations of such Credit
Party or any of its Subsidiaries is subject to any judicial or administrative
proceeding alleging the violation of any Environmental Law; (iii) none of the
properties or operations of such Credit Party or any of its Subsidiaries is the
subject of any federal or state investigation concerning any use or release of
any Hazardous Substance; (iv) neither such Credit Party nor any of its
Subsidiaries, nor, to the best knowledge of such Credit Party, any predecessor
of such Credit Party or any of its Subsidiaries, has filed any notice under any
federal or state law indicating past or present treatment, storage or disposal
of a Hazardous Substance or reporting a spill or release of a Hazardous
Substance into the environment; (v) neither such Credit Party nor any of its
Subsidiaries has any contingent liability in connection with any release of any
Hazardous Substance into the environment and no such release which could, under
applicable law, require remediation has occurred; (vi) neither such Credit
Party's nor any of its Subsidiaries' operations involve the generation,
transportation, treatment, storage or disposal of Hazardous Substances, except
for the generation of Hazardous Substances in the ordinary course of business,
and except for such activities carried out through licensed independent
contractors; (vii) neither such Credit Party nor any of its Subsidiaries has
disposed of any Hazardous Substance in, on or
47
<PAGE>
about any premises owned, leased or used by such Credit Party or any of its
Subsidiaries and, to the best of the knowledge of such Credit Party, neither has
any lessee, prior owner, or other Person; and (viii) no surface impoundments or,
to the best of such Credit Party, underground storage tanks are located in, on
or about any of the premises owned, leased or used by such Credit Party or any
of its Subsidiaries.
5.15 Regulated Entities. None of such Credit Party, any Person controlling
such Credit Party, or any Subsidiary, is an "Investment Company" within the
meaning of the Investment Company Act of 1940. Such Credit Party is not subject
to regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act, the Interstate Commerce Act, any state public utilities code, or
except as specifically disclosed in Schedule 5.15 attached hereto, any other
Federal or state statute or regulation limiting its ability to incur
Indebtedness.
5.16 No Burdensome Restrictions. Neither such Credit Party nor any
Subsidiary is a party to or bound by any Contractual Obligation, or subject to
any restriction in any Organization Document, or any Requirement of Law, which
could reasonably be expected to have a Material Adverse Effect.
5.17 Copyrights, Patents, Trademarks and Licenses, etc. Schedule 5.17
attached hereto contains a complete and correct list of all material patents,
copyrights, trademarks, licenses, service marks, trade names and other similar
rights (the "Intellectual Property Rights") used by such Credit Party or any of
its Subsidiaries. No proceedings have been instituted or are pending or have
been threatened in writing which challenge the validity, ownership or use of any
such Intellectual Property Rights. To the best knowledge of such Credit Party,
no infringement of any Intellectual Property Right of any third party has
occurred or would result in any way from the operations or business of such
Credit Party or any of its Subsidiaries, and, except as set forth in Schedule
5.5 attached hereto, no claim has been made by any such third party based on
allegation of any such infringement.
5.18 Capital Stock. All of the outstanding capital stock of such Credit
Party and its Subsidiaries has been validly issued in compliance with all
federal and state securities laws and is fully paid and nonassessable. Schedule
5.18 attached hereto contains a list of all Subsidiaries of such Credit Party
and its ownership interest in each of such Subsidiaries. All of the capital
stock of or other ownership interest in and each of such Subsidiaries is owned
by such Credit Party or one of its Subsidiaries free and clear of all mortgages,
deeds of trust, pledges, liens, security interests and other charges or
encumbrances other than pursuant to the Loan Documents. Neither such Credit
Party nor any of its Subsidiaries is subject to any obligation (contingent or
otherwise)
48
<PAGE>
to repurchase or otherwise acquire or retire any shares of its capital stock or
any other equity interest therein.
5.19 Insurance. Except as specifically disclosed in Schedule 5.19 attached
hereto, the properties of such Credit Party and its Subsidiaries are insured or
self-insured, in such amounts, with such deductibles and covering such risks as
are customary for companies of like size and nature.
5.20 Business Activity. Neither such Credit Party nor any of its
Subsidiaries is engaged in any line or lines of business activity other than the
Dentistry Business.
5.21 Accreditation, Etc. Each of such Credit Party and the Subsidiaries
maintains (i) all material licenses and certifications required pursuant to any
Requirement of Law, (ii) all material certifications and authorizations
necessary to ensure that each of such Credit Party and the Subsidiaries is
eligible for all reimbursements available under the Requirements of Law to the
extent applicable and (iii) all material licenses, permits, authorizations and
qualifications required under the Requirements of Law in connection with the
ownership or operation of its business.
5.22 Solvency. As of the Closing Date and after giving effect to the
transactions contemplated by the Credit Agreement and the other Loan Documents,
including all of the Loans made and to be made hereunder, such Credit Party is
Solvent and each of the Subsidiaries is Solvent.
5.23 Fiscal Year. The fiscal year of such Credit Party ends on December 31.
5.24 Transactional Documents. The Banks have received complete copies of
all Transactional Documents relating to the Acquisitions by the Credit Parties
anticipated to be consummated on the Closing Date or as soon as practicable
thereafter. Each of the Transactional Documents sets forth the entire agreement
among the parties thereto relating to the applicable Acquisition. Each of the
Transactional Documents is in full force and effect and, to the best knowledge
of such Credit Party, no default exists thereunder on the part of any party
thereto.
49
<PAGE>
5.25 Full Disclosure. None of the representations or warranties made by
such Credit Party or any Subsidiary in this Agreement or in any of the documents
previously delivered to the Agent and the Banks as of the date such
representations and warranties are made or deemed made, and none of the
statements contained in any exhibit, report, statement or certificate furnished
by or on behalf of such Credit Party or any Subsidiary pursuant to Sections 6.1,
6.2 or 6.3 hereof, contains any untrue statement of material fact or omits any
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they are made, not
materially misleading as of the time when made or delivered.
ARTICLE VI
AFFIRMATIVE COVENANTS
---------------------
So long as any Bank shall have any Commitment hereunder, or any of the
Obligations shall remain unpaid or unsatisfied, unless the Majority Banks waive
compliance in writing:
6.1 Financial Statements. The Borrower shall deliver to the Agent and the
Banks, in form and detail reasonably satisfactory to the Agent and the Majority
Banks:
(a) as soon as available, but not later than ninety (90) days after
the end of each fiscal year (commencing with the fiscal year ended December 31,
1997), a copy of the audited consolidated and consolidating balance sheet of the
Borrower and its Subsidiaries as at the end of such fiscal year and the related
consolidated and consolidating statements of income or operations, shareholders'
equity and cash flows for such fiscal year, setting forth in each case in
comparative form the figures for the previous fiscal year (except for the
figures for the fiscal year ended December 31, 1995), and accompanied by the
opinion of a nationally-recognized independent public accounting firm (the
"Independent Auditor") which report shall state that such consolidated and
consolidating financial statements present fairly the financial position for the
periods indicated in conformity with GAAP applied on a basis consistent with
prior years. Such opinion shall not be qualified or limited because of a
restricted or limited examination by the Independent Auditor of any material
portion of the Borrower's or any Subsidiary's records;
(b) as soon as available, but not later than forty-five (45) days
after the end of each fiscal quarter of each fiscal year, a copy of the
unaudited consolidated and consolidating balance sheet of the Borrower and its
Subsidiaries as of the end of such fiscal quarter and the related consolidated
and consolidating statements of income, shareholders' equity and cash flows for
the period commencing on the first day and ending on the last day of such fiscal
quarter, and certified by a Responsible
50
<PAGE>
Officer as fairly presenting, in accordance with GAAP (subject to ordinary, good
faith year-end audit adjustments), the financial position and the results of
operations of such Credit Party and the Subsidiaries; and
(c) as soon as available, but not later than thirty (30) days after
the end of each calendar month (except for the month of December), a copy of the
unaudited consolidated balance sheet of the Borrower and its Subsidiaries as of
the end of such calendar month and the related consolidated statements of
income, shareholders' equity and cash flows for the period commencing on the
first day and ending on the last day of such calendar month, and certified by a
Responsible Officer as fairly presenting, in accordance with GAAP (subject to
ordinary, good faith year-end audit adjustments), the financial position and the
results of operations of such Credit Party and the Subsidiaries.
6.2 Certificates; Other Information. Such Credit Party shall furnish to the
Agent and the Banks:
(a) concurrently with the delivery of the financial statements
referred to in Section 6.1(a), a certificate of the Independent Auditor, to the
effect that in the course of the regular annual examination of the business of
the Borrower and its Subsidiaries, which examination was conducted by the
Independent Auditor in accordance with generally accepted auditing standards,
the Independent Auditor has obtained no knowledge that a Default or an Event of
Default has occurred and is continuing as of the date of certification, or if,
in the opinion of the Independent Auditor, a Default or an Event of Default has
occurred and is continuing, a statement as to the nature thereof;
(b) concurrently with the delivery of the financial statements
referred to in Sections 6.1(a) and 6.1(b), a Compliance Certificate and a Real
Property Certificate each executed by a Responsible Officer; provided, however,
that with respect to any fiscal quarter during which a Permitted Acquisition has
been consummated, the financial ratios described in the Compliance Certificate
for such fiscal quarter may be adjusted to reflect the financial ratios
applicable to such Permitted Acquisition for the entire quarter based on its
annual run-rate for such quarter as shown on the financial projections delivered
to and approved by the Agent in connection with such Permitted Acquisition under
Section 6.12(a) hereof;
(c) concurrently with the delivery of the financial statements
referred to in Section 6.1(b), an aging report on accounts receivable of the
Borrower and its Subsidiaries in form and detail satisfactory to the Agent;
(d) promptly, copies of all financial statements and reports that such
Credit Party or any of its Subsidiaries sends to
51
<PAGE>
its shareholders, copies of all letters and reports prepared by the Independent
Auditor and delivered to the management of such Credit Party, and copies of all
financial statements and regular, periodical or special reports (including Forms
10K, 10Q and 8K) that such Credit Party or any Subsidiary thereof may make to,
or file with, the SEC;
(e) promptly following the receipt of the same, a copy of each notice
relating to the loss by such Credit Party or any Subsidiary of any material
operating permit, license or certification by any Governmental Authority;
(f) promptly following the receipt of the same, all correspondence
received by such Credit Party or any Subsidiary from a Governmental Authority
which asserts that such Credit Party or any Subsidiary is not in substantial
compliance with any Requirement of Law or which threatens the taking of any
action against such Credit Party or any Subsidiary under any Requirement of Law;
(g) from time to time upon receipt of a request by any Bank through
the Agent specifying in reasonable detail the types of documents to be provided,
copies of any and all statements, audits, studies or reports submitted by or on
behalf of such Credit Party or any Subsidiary to any Governmental Authority; and
(h) promptly, such additional information regarding the business,
financial or corporate affairs of such Credit Party or any Subsidiary as the
Agent, at the request of any Bank, may from time to time reasonably request.
6.3 Notices. Such Credit Party shall promptly, but in no event more than
three (3) Business Days thereafter, notify the Agent and each Bank:
(a) of the occurrence of any Default or Event of Default, and of the
occurrence or existence of any event or circumstance that foreseeably will
become a Default or Event of Default;
(b) of any matter that has resulted or would be reasonably likely to
result in a Material Adverse Effect, including, without limitation, (A) breach
or non-performance of, or any default under, a material Contractual Obligation
of such Credit Party or any Subsidiary, (B) any material dispute, litigation,
investigation, proceeding or suspension between such Credit Party or any
Subsidiary and any Governmental Authority or (C) the commencement of, or any
material development in, any material litigation or proceeding affecting such
Credit Party or any Subsidiary, including pursuant to any applicable
Environmental Laws;
52
<PAGE>
(c) of the occurrence of any of the following events affecting such
Credit Party or any ERISA Affiliate (but in no event more than ten (10) days
after such event), and deliver to the Agent and each Bank a copy of any notice
with respect to such event that is filed with a Governmental Authority and any
notice delivered by a Governmental Authority to such Credit Party or any ERISA
Affiliate with respect to such event: (A) an ERISA Event; (B) a material
increase in the Unfunded Pension Liability of any Pension Plan; (C) the adoption
of, or the commencement of contributions to, any Plan subject to Section 412 of
the Code by such Credit Party or any ERISA Affiliate; or (D) the adoption of any
amendment to a Plan subject to Section 412 of the Code, if such amendment
results in a material increase in contributions or Unfunded Pension Liability;
and
(d) of any material change in accounting policies or financial
reporting practices by such Credit Party or any of its Subsidiaries.
Each notice under this Section 6.3 shall be accompanied by a written
statement by a Responsible Officer setting forth details of the occurrence
referred to therein, and stating what action such Credit Party or any affected
Subsidiary proposes to take with respect thereto and at what time. Each notice
under Section 6.3(a) shall describe with particularity any and all clauses or
provisions of this Agreement or other Loan Document that have been (or
foreseeably will be) breached or violated.
6.4 Preservation of Corporate Existence, Etc. Such Credit Party shall, and
shall cause each Subsidiary to:
(a) preserve and maintain in full force and effect its corporate
existence and good standing under the laws of its state or jurisdiction of
incorporation;
(b) except as otherwise expressly permitted by this Agreement,
preserve and maintain in full force and effect all material governmental rights,
privileges, qualifications, permits, licenses and franchises necessary or
desirable in the normal conduct of its business, including all material licenses
and certifications required pursuant to any Requirement of Law, all material
certifications and authorizations necessary to ensure that each of the
Subsidiaries is eligible for all reimbursements available under the Requirement
of Law to the extent applicable, and all material licenses, permits,
authorization and qualifications required under the Requirement of Law in
connection with the ownership or operation of dental practice groups;
(c) except as otherwise expressly permitted by this Agreement, use
reasonable efforts, in the ordinary course of business, to preserve its business
organization and goodwill; and
53
<PAGE>
(d) preserve or renew all of its registered patents, trademarks, trade
names and service marks, the non-preservation of which could reasonably be
expected to have a Material Adverse Effect.
6.5 Maintenance of Property. Such Credit Party shall maintain, and shall
cause each Subsidiary to maintain, and preserve all its property which is
material to its business in good working order and condition, ordinary wear and
tear excepted.
6.6 Insurance. Such Credit Party shall maintain, and shall cause each
Subsidiary to maintain, insurance or self-insurance with respect to its
properties and business against loss or damage of such types and in such amounts
as are customary for companies of like size and nature.
6.7 Payment of Obligations. Such Credit Party shall, and shall cause each
Subsidiary to, pay and discharge as the same shall become due and payable, all
their respective obligations and liabilities, including:
(a) all tax liabilities, assessments and governmental charges or
levies upon it or its properties or assets, unless the same are being contested
in good faith by appropriate proceedings and adequate reserves in accordance
with GAAP are being maintained by such Credit Party or such Subsidiary;
(b) all lawful claims which, if unpaid, would by law become a Lien
upon its property, except for any such claims that are being contested in good
faith and by appropriate proceedings; and
(c) all Indebtedness, as and when due and payable, but subject to any
subordination provisions contained in any instrument or agreement evidencing
such Indebtedness, and except for any such Indebtedness that is being contested
in good faith and by appropriate proceedings.
6.8 Compliance with Laws. Such Credit Party shall comply, and shall cause
each Subsidiary to comply, in all material respects with all Requirements of Law
of any Governmental Authority having jurisdiction over it or its business,
except such as may be contested in good faith or as to which a bona fide dispute
may exist.
6.9 Compliance with ERISA. Such Credit Party shall, and shall cause each of
its ERISA Affiliates to, (i) maintain each Plan in compliance in all material
respects with the applicable provisions of ERISA, the Code and other federal or
state law, (ii) cause each Plan which is qualified under Section 401(a) of the
Code to maintain such qualification and (iii) make all required contributions to
any Plan subject to Section 412 of the Code.
54
<PAGE>
6.10 Inspection of Property and Books and Records. Such Credit Party shall
maintain, and shall cause each Subsidiary to maintain, proper books of record
and account to the extent necessary to permit the preparation of the financial
statements in conformity with GAAP consistently applied. Such Credit Party shall
permit, and shall cause each Subsidiary to permit, representatives and
independent contractors of the Agent, at the request of any Bank, or any Bank to
visit and inspect any of their respective properties, to examine their
respective corporate, financial and operating records, and make copies thereof
or abstracts therefrom, and to discuss their respective affairs, finances and
accounts with their respective officers and independent public accountants, all
at the expense of such Credit Party and at such reasonable times during normal
business hour and as often as may be reasonably desired, upon reasonable advance
notice to such Credit Party; provided, however, when a Default or an Event of
Default exists the Agent or any Bank may do any of the foregoing at the expense
of such Credit Party at any time during normal business hours and without
advance notice.
6.11 Environmental Laws. Such Credit Party shall, and shall cause each
Subsidiary to, conduct its operations and keep and maintain its property in
material compliance with all Environmental Laws.
6.12 Acquisitions. (a) Prior to consummating any Permitted Acquisition, the
Borrower shall have delivered to the Agent (in form and detail satisfactory to
each Bank and in sufficient copies for each Bank) a written request for such
Permitted Acquisition, together with the following:
(i) At least fifteen (15) days prior to the consummation of such
Permitted Acquisition, a description of the substantive terms and
conditions thereof and certified copies of (A) the executed letter of
intent or a memorandum of understanding, (B) the most recent drafts of the
purchase or acquisition agreement (including all exhibits attached thereto)
relating to such Permitted Acquisition, together with copies of business
plans, financing sources, financial projections and budgets and (C) a
description of the differences between the Model Documents and the actual
Transactional Documents relating to such Permitted Acquisition;
(ii) an officer's certificate, executed by a Responsible Officer,
certifying that immediately before and after giving effect to such
Permitted Acquisition (A) no Default has occurred and is continuing or will
exist, (B) that the Borrower will be in compliance with each of the
financial ratios specified in Section 6.14 hereof, together with a
reasonably detailed worksheet setting forth the calculation of such ratios
and (C) that the Borrower will be in compliance
55
<PAGE>
with Section 6.15 hereof (including all of the disclosure requirements set forth
therein); and
(iii) copies of the executed purchase or acquisition agreement,
certified by a Responsible Officer, as soon as such agreement is executed
and delivered by the parties thereto.
(b) The Agent and each Bank may accept or reject any request of the
Borrower for a Permitted Acquisition under Section 6.12(a) hereof in their sole
and absolute discretion within fifteen (15) days after receipt thereof and the
failure by the Agent or a Bank to respond to such a request shall be deemed to
be a rejection thereof; provided, however, that with respect to any Permitted
Acquisition (so long as all of the definitional requirements of the term
"Permitted Acquisition" are met), (i) the aggregate purchase price of which is
less than $3,000,000, the approval of the Agent and the Banks shall not be
required and (ii) the aggregate purchase price of which is equal to and greater
than $3,000,000 but less than $5,000,000, the approval of the Agent and the
Banks shall not be required so long as all of the following conditions are met:
(A) the target entity which is the subject of the Permitted
Acquisition is engaged in a business similar to the Borrower's Business;
(B) the aggregate purchase price is less than 600% of the
Operating Cash Flow of the target entity;
(C) the sum of the cash and debt portions of the aggregate
purchase price does not exceed 350% of the Operating Cash Flow of the
target entity;
(D) no Default or Event of Default has then occurred and is
continuing and no Default or Event of Default will occur after giving
effect to such Permitted Acquisition; and
(E) each of the Transactional Documents relating to such
Permitted Acquisition conforms in all material respects to the applicable
Model Document.
(c) Prior to consummating Capital Expenditures in excess of $5,000,000
in the aggregate during any fiscal year of the Borrower, computed on a
cumulative consolidated basis, the Borrower shall have delivered to the Agent
(in form and detail satisfactory to each Bank and in sufficient copies for each
Bank) a written request for such Capital Expenditure, together with the
following:
(i) At least fifteen (15) days prior to the consummation of such
Capital Expenditure, a description of the substantive terms and conditions
thereof, including a list of
56
<PAGE>
items being purchased and the source of funds for such Capital Expenditure;
(ii) an officer's certificate, executed by a Responsible Officer,
certifying that immediately before and after giving effect to such Capital
Expenditure (A) no Default has occurred and is continuing or will exist and
(B) that the Borrower and its Subsidiaries, on a consolidated basis, will
be in compliance with each of the financial ratios specified in Section
6.14 hereof, together with a reasonably detailed worksheet setting forth
the calculation of such ratios; and
(iii) copies of the executed purchase agreement relating to such
Capital Expenditure, certified by a Responsible Officer, as soon as such
agreement is executed and delivered by the parties thereto.
The Agent and each Bank may accept or reject any such request in their
sole and absolute discretion within 30 days after receipt thereof. The failure
by the Agent or a Bank to respond to such a request shall be deemed to be a
rejection thereof.
6.13 Concentration Account. The Borrower shall maintain the Concentration
Account (as such term is defined in the Security Agreement) with the Agent.
Within 30 days after the Closing Date, all other bank accounts maintained by the
Borrower or any of its Subsidiaries shall be and at all times remain subject to
instructions to transfer all funds out of such accounts into the Concentration
Account no less frequently than Friday of each week (or, when a Friday is not a
Banking Day, then on the previous Banking Day).
6.14 Financial Covenants. The Borrower shall, on a consolidated basis:
(a) maintain a Senior Leverage Ratio of not more than (i) 3.75 to 1.00
at all times from the Closing Date through and including April 1, 1998, (ii)
3.50 to 1.00 at all times from April 2 through and including October 1, 1998 and
(iii) 3.25 to 1.00 at all times thereafter;
(b) maintain a Total Leverage Ratio of not more than (i) 4.85 to 1.00
at all times from the Closing Date through and including April 1, 1998, (ii)
4.50 to 1.00 at all times from April 2 through and including October 1, 1998,
(iii) 4.25 to 1.00 at all times after October 2, 1998 through and including
April 1, 1999 and (iv) 4.00 to 1.00 at all times thereafter;
(c) maintain a Current Ratio not less than 1.40 to 1.00 at all times;
57
<PAGE>
(d) maintain a Net Worth at all times of not less than the Net Worth
as of December 31, 1997 (i) minus the sum of (A) $500,000 and (B) non-recurring
merger expenses and restructuring charges taken by the Borrower after December
31, 1997 through and including June 30, 1998 and (ii) plus the sum of (A) 100%
of extraordinary gains arising after December 31, 1997, computed on a cumulative
consolidated basis, (B) 100% of net proceeds from any sale of common stock of
the Borrower or any of its Subsidiaries arising after December 31, 1997,
computed on a cumulative consolidated basis, (C) 100% of any capital stock
issued by the Borrower or any of its Subsidiaries as consideration in the
Permitted Acquisitions arising after December 31, 1997, computed on a cumulative
consolidated basis, and (D) 70% of positive net income of the Borrower and its
Subsidiaries arising after December 31, 1997, computed on a cumulative
consolidated basis; and
(e) maintain a Coverage Ratio of not less than (i) 1.15 to 1.00 at all
times after March 30, 1998 through and including June 29, 1998 and (ii) 1.25 to
1.00 at all times thereafter.
6.15 Additional Credit Parties and Collateral. (a) As soon as practicable
and in any event within 5 days after any Person becomes a Subsidiary of any
Credit Party, the Borrower shall provide the Agent with written notice thereof
setting forth information in reasonable detail describing all of the assets of
such Person and shall cause (i) such Person to execute and deliver a supplement
to this Agreement substantially in the form of Exhibit K hereto (each a "Credit
Agreement Supplement"), with such Person being referred to as an "Additional
Credit Party" and becoming a Credit Party, and all other instruments and
documents, including, but not limited to, a supplement to the Guaranty and a
supplement to the Security Agreement, that may be necessary, or that the Agent
may request, in order to enable the Agent to exercise its rights hereunder, (ii)
such Person to furnish to the Agent and the Banks all of the schedules and
exhibits to this Agreement and the Security Agreement, including schedules on
existing Liens and Indebtedness, (iii) all of the capital stock of such Person
owned by any of the Credit Parties to be delivered to the Agent (together with
undated stock powers signed in blank) and pledged to the Agent pursuant to the
Security Agreement and (iv) such Person to deliver such other documentation as
the Agent may reasonably request in connection with the foregoing, including,
without limitation, appropriate UCC- 1 financing statements, insurance policies,
certified resolutions and other organizational and authorizing documents of such
Person, favorable opinions of counsel to such Person (which shall cover, among
other things, the legality, validity, binding effect and enforceability of the
documentation referred to above and the perfection of the Agent's Liens
thereunder) and, to the extent applicable, other items of the types required to
be delivered pursuant to Section 6.12(a), all in form, content and scope
reasonably satisfactory to the Agent. Without limiting the generality of the
above, the Credit Parties will cause
58
<PAGE>
100% of the capital stock in each direct or indirect Subsidiary of the Borrower
to be subject at all times to a first priority, perfected Lien in favor of the
Agent pursuant to the terms and conditions of the Security Agreement.
(b) If, subsequent to the Closing Date, a Credit Party shall acquire
any personal property required to be delivered to the Agent as Collateral under
the Security Agreement, the Borrower shall promptly (and in any event within
three (3) Business Days) notify the Agent of same. Each Credit Party shall, and
shall cause each of its Subsidiaries to, take such action at its own expense as
requested by the Agent to ensure that the Agent has a first priority (subject to
Permitted Liens), perfected Lien in all personal property of the Credit Parties
located in the United States. Each Credit Party shall, and shall cause each of
its Subsidiaries to, adhere to the covenants regarding the location of personal
property as set forth in the Security Agreement.
6.16 Required Future Action.
(a) A Subsidiary of the Borrower engaged in the business of providing
management services to Dental Practices shall have entered into certain
Transactional Documents with each of Gentle Dental of Oregon, P.C. and Gentle
Dental of Washington, P.C., which Transaction Documents shall conform with the
Model Documents, on or before April 30, 1998. Such Transaction Documents shall
provide, among other things, that (a) the accounts receivable of such
professional corporations shall secure the obligations of such professional
corporation under the management agreement and (b) an assignment of such
security interest and the management agreement by such Subsidiary in favor of
the Agent in accordance with the Security Agreement. In the event the Borrower
fails to cause such Subsidiary to enter into such Transaction Documents on or
before April 30, 1998, the rate of interest accruing on all Loans then
outstanding shall increase by 0.5% per annum until such failure is remedied.
59
<PAGE>
(b) The Borrower shall have converted to a holding company owning no
assets other than the capital stock of its Subsidiaries on or before May 31,
1998. In the event the Borrower fails to convert to such holding company on or
before May 31, 1998, the rate of interest accruing on all Loans then outstanding
shall increase by 0.5% per annum until such failure is remedied; provided,
however, that in the event such failure continues unremedied until July 31,
1998, such failure shall constitute an Event of Default hereunder.
ARTICLE VII
NEGATIVE COVENANTS
------------------
So long as any Bank shall have any Commitment hereunder, or any Loan or
other Obligation shall remain unpaid or unsatisfied, unless the Majority Banks
waive compliance in writing:
7.1 Limitation on Liens. Such Credit Party shall not, and shall not suffer
or permit any Subsidiary to, directly or indirectly, make, create, incur, assume
or suffer to exist any Lien upon or with respect to any part of its property,
whether now owned or hereafter acquired, other than the following ("Permitted
Encumbrances"):
(a) Liens in favor of Agent or any Bank securing the Obligations;
(b) Liens listed in Schedule 7.1 and existing on the date of this
Agreement;
(c) Liens for taxes or other governmental charges not at the time
delinquent or thereafter payable without penalty or being contested in good
faith, provided that adequate reserves for the payment thereof have been
established in accordance with GAAP;
(d) Liens of carriers, warehousemen, mechanics, materialmen, vendors,
and landlords and other similar Liens imposed by law incurred in the ordinary
course of business for sums not overdue or being contested in good faith,
provided that adequate reserves for the payment thereof have been established in
accordance with GAAP;
(e) Deposits under workers' compensation, unemployment insurance and
social security laws or to secure the performance of bids, tenders, contracts
(other than for the repayment of borrowed money) or leases, or to secure
statutory obligations of surety or appeal bonds or to secure indemnity,
performance or other similar bonds in the ordinary course of business, provided
all such Liens in the aggregate would not (even if enforced) cause a Material
Adverse Effect;
60
<PAGE>
(f) Zoning restrictions, easements, rights-of-way, title
irregularities and other similar encumbrances, which alone or in the aggregate
are not substantial in amount and do not materially detract from the value of
the property subject thereto or interfere with the ordinary conduct of the
business of Borrower or any of its Subsidiaries;
(g) Liens on property or assets of any corporation which becomes a
Subsidiary of the Borrower or which are acquired by a Subsidiary or the Borrower
after the date of this Agreement, provided that (i) such Liens exist at the time
the stock of such corporation or property is acquired, (ii) such Liens were
disclosed to the Agent and the Banks under Section 6.15 hereof and (iii) such
Liens were not created in anticipation of such acquisition and provided further
that all such Liens in the aggregate at any time outstanding, together with
Liens permitted under Section 7.1(h) below, do not exceed $2,000,000, computed
on a cumulative consolidated basis for the Borrower and the Subsidiaries;
(h) Liens securing Indebtedness which constitutes Permitted Capital
Expenditures provided that, in each case, such Lien (i) attaches solely to the
property financed by such Permitted Capital Expenditures and (ii) the principal
amount of such Indebtedness secured thereby does not exceed 100% of the cost of
such property;
(i) Liens on the property or assets of any Subsidiary of the Borrower
in favor of the Borrower or any other Subsidiary of the Borrower, provided that
such Subsidiary is a party to this Agreement, the Security Agreement and the
Guaranty;
(j) Liens incurred in connection with the extension, renewal or
refinancing of the Indebtedness secured by the Liens described in clause (b) or
(h) above, provided that any extension, renewal or replacement (i) is limited to
the property covered by the existing Lien and (ii) secures Indebtedness which is
no greater in amount and has material terms no less favorable to the Banks than
the Indebtedness secured by the existing Lien;
(k) Banker's Liens, rights of setoff or similar rights as to deposit
accounts; provided that (i) such deposit account is not a dedicated cash
collateral account and is not subject to restrictions against access by such
Credit Party in excess of those set forth by regulations promulgated by the FRB
and (ii) such deposit account is not intended by such Credit Party to provide
collateral to the depository institution;
(l) Rights of (i) vendors or lessors under conditional sale agreements
or other title retention agreements, provided that (A) any such right covers
only the equipment so acquired and (B) the Indebtedness secured thereby is
permitted under Section 7.6 hereof and (ii) lessors under (A) Operating Leases
permitted by the
61
<PAGE>
Agent under Section 7.8(b) hereof and (B) Permitted Capital Leases; and
(m) Liens securing the Fremont Subordinated Indebtedness and the
Fremont Guaranty Obligations.
7.2 Disposition of Assets. Such Credit Party shall not, and shall not
suffer or permit any Subsidiary to, directly or indirectly, sell, assign, lease,
convey, transfer or otherwise dispose of any property (including accounts and
notes receivable, with or without recourse) or enter into any agreement to do
any of the foregoing, except (a) dispositions of inventory, equipment or
operations, all in the ordinary course of business and (b) the sale of equipment
or operations to the extent that such assets are exchanged for credit against
the purchase price of similar replacement assets, or the proceeds of such sale
are reasonably promptly applied to the purchase price of such replacement
assets.
7.3 Consolidations and Mergers. Such Credit Party shall not, and shall not
suffer or permit any Subsidiary to, enter into any merger, consolidation,
reorganization or recapitalization, or any agreement to do any of the foregoing,
except that the Borrower or any of its Subsidiaries may make Permitted
Acquisitions.
7.4 Change of Business. Neither such Credit Party nor any of its
Subsidiaries shall change the nature of its business or engage in any other
business other than the businesses which are substantially similar to the lines
of business in which such Credit Party and its Subsidiaries are engaged as of
the Closing Date.
7.5 Loans and Investments. Such Credit Party shall not purchase or acquire,
or suffer or permit any Subsidiary to purchase or acquire, or make any
commitment therefor, any capital stock, equity interest, or any obligations or
other securities of, or any interest in, any Person, or make or commit to make
any Acquisitions, or make or commit to make any advance, loan, extension of
credit or capital contribution to or any other investment in, any Person, except
for (a) Permitted Market Investments, (b) extensions of credit in the nature of
accounts receivable or notes receivable arising from the sale or lease of goods
or services in the ordinary course of business, (c) Permitted Acquisitions and
(d) wholly-owned Subsidiaries of the Borrower formed in connection with
Permitted Acquisitions.
7.6 Limitation on Indebtedness. Such Credit Party shall not, and shall not
suffer or permit any Subsidiary to, create, incur, assume, suffer to exist, or
otherwise become or remain directly or indirectly liable with respect to, any
Indebtedness, except Permitted Indebtedness.
7.7 Contingent Obligations. Such Credit Party shall not, and shall not
suffer or permit any Subsidiary to, create, incur,
62
<PAGE>
assume or suffer to exist any Contingent Obligations, except (a) endorsements
for collection or deposit in the ordinary course of business and (b) Contingent
Obligations of such Credit Party and its Subsidiaries (i) existing as of the
Closing Date and listed in Schedule 7.7 attached hereto or (ii) assumed in
connection with Permitted Acquisitions and disclosed to the Agent and the Banks
under Section 6.15 hereof.
7.8 Lease Obligations. Such Credit Party shall not, and shall not suffer or
permit any Subsidiary to, create or suffer to exist any obligations for the
payment of rent for any property under lease or agreement to lease, except for
(a) leases of such Credit Party and of Subsidiaries in existence on the Closing
Date, (b) Operating Leases entered into by such Credit Party or any Subsidiary
after the Closing Date in the ordinary course of business and (c) Permitted
Capital Leases.
7.9 Restricted Payments. Such Credit Party shall not, and shall not suffer
or permit any Subsidiary to, (a) declare or make any dividend payment or other
distribution of assets, properties, cash, rights, obligations or securities on
account of any shares of any class of its capital stock or (b) purchase, redeem
or otherwise acquire for value any shares of its capital stock or any warrants,
rights or options to acquire such shares, now or hereafter outstanding;
provided, however, (i) the Borrower may make the 10% cumulative dividend
payments payable on its Series B-1 and Series B-2 Preferred Stock upon any
initial public offering of the equity securities of the Borrower and (ii) so
long as no Default or Event of Default has occurred and is continuing, the
Borrower may make dividend payments to the Borrower from time to time in an
amount not to exceed the amount required to make the regularly scheduled payment
of interest and principal in respect of any Permitted Subordinated Indebtedness.
7.10 Prepayments of Subordinated Permitted Indebtedness. The Borrower shall
not purchase, redeem, retire or otherwise acquire for value, or set apart any
money for a sinking, defeasance or other analogous fund for, the purchase,
redemption, retirement or other acquisition of, or make any payment or
prepayment of the principal of or interest on, or any other amount owing in
respect of, any Subordinated Permitted Indebtedness, except that the Borrower
may make regularly scheduled payments of interest and principal in respect of
such Permitted Subordinated Indebtedness required pursuant to the instruments
evidencing such Permitted Subordinated Indebtedness in accordance with the terms
and conditions set forth in Exhibit H attached hereto.
7.11 Transactions with Affiliates. Such Credit Party shall not, and shall
not suffer or permit any Subsidiary to, enter into any transaction with any
Affiliate of such Credit Party, except upon fair and reasonable terms no less
favorable to such Credit Party or such Subsidiary than would obtain in a
comparable arm's-
63
<PAGE>
length transaction with a Person not an Affiliate of such Credit Party or such
Subsidiary.
7.12 Use of Proceeds. The Borrower shall not, and shall not suffer or
permit any Subsidiary to, use any portion of the Loan proceeds, directly or
indirectly, (a) for any purpose other than for Permitted Acquisitions, Permitted
Capital Expenditures and working capital purposes, provided that (i) the
aggregate principal amount of all outstanding Working Capital Loans and (ii) the
LOC Obligations shall not exceed $4,000,000 at any time, (b) to purchase or
carry Margin Stock, (c) to repay or otherwise refinance indebtedness of the
Borrower or others incurred to purchase or carry Margin Stock, (d) to extend
credit for the purpose of purchasing or carrying any Margin Stock or (e) to
acquire any security in any transaction that is subject to Section 13 or 14 of
the Exchange Act. No part of the proceeds of the Loans will be used for any
purpose which violates the provisions of Regulations G, T, U or X of the FRB.
7.13 ERISA. Such Credit Party shall not, and shall not suffer or permit any
of its ERISA Affiliates to: (a) engage in a prohibited transaction or violation
of the fiduciary responsibility rules with respect to any Plan which has
resulted or could reasonably expected to result in liability of such Credit
Party in an aggregate amount in excess of $250,000; or (b) engage in a
transaction that could be subject to Section 4069 or 4212 (c) of ERISA.
7.14 Accounting Changes. Such Credit Party shall not, and shall not suffer
or permit any Subsidiary to, make any significant change in accounting treatment
or reporting practices, except as required by GAAP or as required to conform the
practices of a Person acquired in connection with a Permitted Acquisition, or
change the fiscal year of such Credit Party or of any Subsidiary.
ARTICLE VIII
EVENTS OF DEFAULT
-----------------
8.1 Event of Default. Any of the following shall constitute an "Event of
Default":
(a) Non-Payment. The Borrower fails to pay, (i) when and as required
to be paid herein, any amount of principal of any Loan or any amount of interest
on any Loan, or (ii) within three (3) Business Days after the same becomes due,
any interest, fee or any other amount payable hereunder or under any other Loan
Document; or
(b) Representation or Warranty. Any representation or warranty by any
Credit Party made or deemed made herein, in any other Loan Document, or which is
contained in any certificate,
64
<PAGE>
document or financial or other statement by any Credit Party or any Responsible
Officer, furnished at any time under this Agreement, or in or under any other
Loan Document, is incorrect in any material respect on or as of the date made or
deemed made; or
(c) Specific Defaults. Any Credit Party fails to perform or observe
any term, covenant or agreement contained in (i) Section 6.3, 6.14 or 6.15; (ii)
any of Section 6.1, 6.2, or 6.9 and such default shall continue unremedied for a
period of ten (10) days after the earlier of (A) the date upon which a
Responsible Officer knew or reasonably should have known of such failure or (B)
the date upon which written notice thereof is given to such Credit Party by the
Agent or any Bank; or (iii) Article VII; or
(d) Other Defaults. Such Credit Party fails to perform or observe any
other term or covenant contained in this Agreement or any other Loan Document,
and such default shall continue unremedied for a period of thirty (30) days
after the earlier of (i) the date upon which a Responsible Officer knew or
reasonably should have known of such failure or (ii) the date upon which written
notice thereof is given to such Credit Party by the Agent or any Bank; or
(e) Cross-Default. Any Credit Party (i) fails to make any payment in
respect of any Indebtedness or Contingent Obligation having an aggregate
principal amount (including undrawn committed or available, amounts and
including amounts owing to all creditors under any combined or syndicated credit
arrangement) of more than $250,000 when due (whether by scheduled maturity,
required prepayment, acceleration, demand, or otherwise) and such failure
continues after any applicable grace or notice period, if any; (ii) fails to
perform or observe any other condition or covenant, or any other event shall
occur or condition exist, under any agreement or instrument relating to any such
Indebtedness or Contingent Obligation, and such failure continues after the
applicable grace or notice period, if any, specified in the relevant document on
the date of such failure if the effect of such failure, event or condition is to
cause, or to permit the holder or holders of such Indebtedness or beneficiary or
beneficiaries of such Indebtedness (or a trustee or agent on behalf of such
holder or holders or beneficiary or beneficiaries) to cause such Indebtedness to
be declared to be due and payable prior to its stated maturity, or such
Contingent Obligation to become payable or cash collateral in respect thereof to
be demanded; or (iii) fails to make any payment in respect of any Permitted
Subordinated Indebtedness when due (whether by scheduled maturity, required
prepayment, acceleration, demand, or otherwise) and such failure continues after
any applicable grace or notice period, if any; or
(f) Insolvency; Voluntary Proceedings. Any Credit Party (i) ceases or
fails to be Solvent, or generally fails to pay, or admits in writing its
inability to pay, its debts as they become
65
<PAGE>
due, subject to applicable grace periods, if any, whether at stated maturity or
otherwise; (ii) except as otherwise expressly provided in this Agreement,
voluntarily ceases to conduct its business in the ordinary course; (iii)
commences any Insolvency Proceeding with respect to itself; or (iv) takes any
action to effectuate or authorize any of the foregoing; or
(g) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding
is commenced or filed against any Credit Party, or any writ, judgment, warrant
of attachment, execution or similar process, is issued or levied against a
substantial part of any Credit Party's properties, and any such proceeding or
petition shall not be dismissed, or such writ, judgment, warrant of attachment,
execution or similar process shall not be released, vacated or fully bonded
within sixty (60) days after commencement, filing or levy; (ii) any Credit Party
admits the material allegations of a petition against it in any Insolvency
Proceeding, or an order for relief (or similar order under non-U.S. law) is
ordered in any Insolvency Proceeding; or (iii) any Credit Party acquiesces in
the appointment of a receiver, trustee, custodian, conservator, liquidator,
mortgagee it possession (or agent therefor), or other similar Person for itself
or a substantial portion of its property or business; or
(h) ERISA. (i) An ERISA Event shall occur with respect to a Pension
Plan or Multiemployer Plan which has resulted or could reasonably be expected to
result in liability of any Credit Party under Title IV of ERISA to the Pension
Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of
$250,000; (ii) the aggregate amount of Unfunded Pension Liability among all
Pension Plans at any time exceeds $250,000; or (iii) any Credit Party or any
ERISA Affiliate shall fail to pay when due, after the expiration of any
applicable grace period, any installment payment with respect to its withdrawal
liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate
amount in excess of $250,000; or
(i) Monetary Judgments. One or more final judgments, final orders,
decrees or arbitration awards is entered against any Credit Party involving in
the aggregate a liability (to the extent not covered by independent third-party
insurance as to which the insurer does not dispute coverage) as to any single or
related series of transactions, incidents or conditions, of $250,000 or more,
and the same shall remain unsatisfied, unvacated and unstayed pending appeal for
a period of twenty (20) days after the entry thereof or such Credit Party shall
not settle such judgment or award for less than $250,000 within ten (10) days
after the entry thereof; or
(j) Non-Monetary Judgments. Any non-monetary judgment, order or decree
is entered against any Credit Party which does or would reasonably be expected
to have a Material Adverse Effect, and
66
<PAGE>
there shall be any period of ten (10) consecutive days during which a stay of
enforcement of such judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect; or
(k) Change of Control. There occurs any Change of Control; or
(l) Material Adverse Effect. An event occurs which constitutes a
Material Adverse Effect; or
(m) Invalidity of Security Document Provisions. The provisions of the
Guaranty, the Security Agreement or any agreement or instrument relating thereto
is for any reason revoked or invalidated, or otherwise ceases to be in full
force and effect, any Person contests in any manner the validity or
enforceability thereof or denies that it has any further liability or obligation
thereunder, or the Indebtedness secured by the Security Agreement fails to
maintain, for any reason, the priority contemplated by the Security Agreement.
(n) Invalidity of Subordination Provisions. The subordination
provisions of the Permitted Subordinated Indebtedness set forth in Exhibit H
attached hereto or any agreement or instrument governing any such Permitted
Subordinated Indebtedness is for any reason revoked or invalidated, or otherwise
cease to be in full force and effect, any Person contests in any manner the
validity or enforceability thereof or denies that it has any further liability
or obligation thereunder, or the Indebtedness hereunder is for any reason
subordinated or does not have the priority contemplated by this Agreement or
such subordination provisions.
8.2 Remedies. If any Event of Default occurs, the Agent shall, at the
request of, or may, with the consent of, the Majority Banks,
(a) declare the Commitment of each Bank to make Loans to be
terminated, whereupon such Commitments shall be terminated;
(b) declare the unpaid principal amount of all outstanding Loans, all
interest accrued and unpaid thereon, and all other amounts owing or payable
hereunder or under any other Loan Document to be immediately due and payable,
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by the Borrower; and
(c) exercise on behalf of itself and the Banks all rights and remedies
available to it and the Banks under the Loan Documents or applicable law;
provided, however, that upon the occurrence of any event specified in subsection
(f) or (g) of Section 8.1 (in the case of clause (i) of subsection (g) upon the
expiration of the 60-day period mentioned therein), the obligation
67
<PAGE>
of each Bank to make Loans shall automatically terminate and the unpaid
principal amount of all outstanding Loans and all interest and other amounts as
aforesaid shall automatically become due and payable without further act of the
Agent or any Bank.
8.3 Rights Not Exclusive. The rights provided for in this Agreement and the
other Loan Documents are cumulative and are not exclusive of any other rights,
powers, privileges or remedies provided by law or in equity, or under any other
instrument, document or agreement now existing or hereafter arising.
ARTICLE IX
THE AGENT
---------
9.1 Appointment and Authorization. Each Bank hereby irrevocably (subject to
Section 9.9) appoints, designates and authorizes the Agent to take such action
on its behalf under the provisions of this Agreement and each other Loan
Document and to exercise such powers and perform such duties as are expressly
delegated to it by the terms of this Agreement or any other Loan Document,
together with such powers as are reasonably incidental thereto. Notwithstanding
any provision to the contrary contained elsewhere in this Agreement or in any
other Loan Document, the Agent shall not have any duties or responsibilities,
except those expressly set forth herein, nor shall the Agent have or be deemed
to have any fiduciary relationship with any Bank, and no implied covenants,
functions, responsibilities, duties, obligations or liabilities shall be read
into this Agreement or any other Loan Document or otherwise exist against the
Agent.
9.2 Delegation of Duties. The Agent may execute any of its duties under
this Agreement or any other Loan Document by or through agents, employees or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agent or attorney-in-fact that it selects with
reasonable care.
9.3 Liability of Agent. None of the Agent-Related Persons shall (a) be
liable for any action taken or omitted to be taken by any of them under or in
connection with this Agreement or any other Loan Document or the transactions
contemplated hereby (except for its own gross negligence or willful misconduct),
or (b) be responsible in any manner to any of the Banks for any recital,
statement, representation or warranty made by the Borrower or any Subsidiary or
Affiliate of the Borrower, or any officer thereof, contained in this Agreement
or in any other Loan Document, or in any certificate, report, statement or other
document referred to or provided for in, or received by the Agent under or in
connection with, this Agreement or any other Loan Document, or the validity,
effectiveness, genuineness, enforceability or sufficiency of this
68
<PAGE>
Agreement or any other Loan Document, or for any failure of the Borrower or any
other party to any Loan Document to perform its obligations hereunder or
thereunder. No Agent-Related Person shall be under any obligation to any Bank to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of the Borrower or any
of the Borrower's Subsidiaries or Affiliates.
9.4 Reliance by Agent.
(a) The Agent shall be entitled to rely, and shall be fully protected
in relying, upon any writing, resolution, notice, consent, certificate,
affidavit, letter, telegram, facsimile, telex or telephone message, statement or
other document or conversation believed by it to be genuine and correct and to
have been signed, sent or made by the proper Person or Persons, and upon advice
and statements of legal counsel (including counsel to the Borrower), independent
accountants and other experts selected by the Agent. The Agent shall be fully
justified in failing or refusing to take any action under this Agreement or any
other Loan Document unless it shall first receive such advice or concurrence of
the majority Banks as it deems appropriate and, if it so requests, it shall
first be indemnified to its satisfaction by the Banks against any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action. The Agent shall in all cases be fully
protected in acting, or in refraining from acting, under this Agreement or any
other Loan Document in accordance with a request or consent of the Majority
Banks and such request and any action taken or failure to act pursuant thereto
shall be binding upon all of the Banks.
(b) For purposes of determining compliance with the conditions
specified in Sections 4.1 and 4.2, each Bank that has executed this Agreement
shall be deemed to have consented to, approved or accepted or to be satisfied
with, each document or other matter either sent by the Agent to such Bank for
consent, approval, acceptance or satisfaction, or required thereunder to be
consented to or approved by or acceptable or satisfactory to the Bank.
9.5 Notice of Default. The Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default, except with respect
to defaults in the payment of principal, interest and fees required to be paid
to the Agent for the account of the Banks, unless the Agent shall have received
written notice from a Bank or the Borrower referring to this Agreement,
describing such Default or Event of Default and stating that such notice is a
"notice of default". The Agent will notify the Banks of its receipt of any such
notice. The Agent shall take such action with respect to such Default or Event
of Default as may be requested by the Majority Banks in accordance with Article
VIII;
69
<PAGE>
provided, however, that unless and until the Agent has received any such
request, the Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable or in the best interest of the Banks.
9.6 Credit Decision. Each Bank acknowledges that none of the Agent-Related
Persons has made any representation or warranty to it and that no act by the
Agent hereinafter taken, including any review of the affairs of the Borrower and
its subsidiaries, shall be deemed to constitute any representation or warranty
by any Agent-Related Person to any Bank. Each Bank represents to the Agent that
it has, independently and without reliance upon any Agent- Related Person and
based on such documents and information as it has deemed appropriate, made its
own appraisal of and investigation into the business, prospects, operations,
property, financial and other condition and credit worthiness of the Borrower
and its Subsidiaries, and all applicable bank regulatory laws relating to the
transactions contemplated hereby, and made its own decision to enter into this
Agreement and to extend credit to the Borrower hereunder. Each Bank also
represents that it will, independently and without reliance upon any
Agent-Related Person and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this Agreement and
the other Loan Documents, and to make such investigations as it deems necessary
to inform itself as to the business, prospects, operations, property, financial
and other condition and credit worthiness of the Borrower. Except for notices,
reports and other documents expressly herein required to be furnished to the
Banks by the Agent, the Agent shall not have any duty or responsibility to
provide any Bank with any credit or other information concerning the business,
prospects, operations, property, financial and other condition or credit
worthiness of the Borrower which may come into the possession of any of the
Agent-Related Persons.
9.7 Indemnification of Agent. Whether or not the transactions contemplated
hereby are consummated, the Banks shall indemnify upon demand the Agent-Related
Persons (to the extent not reimbursed by or on behalf of the Borrower and
without limiting the obligation of the Borrower to do so), pro rata, from and
against any and all Indemnified Liabilities; provided, however, that no Bank
shall be liable for the payment to the Agent-Related Persons of any portion of
such Indemnified Liabilities resulting solely from such Person's gross
negligence or willful misconduct. Without limitation of the foregoing, each Bank
shall reimburse the Agent upon demand for its ratable share of any costs or
out-of-pocket expenses (including Attorney Costs) incurred by the Agent in
connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this
70
<PAGE>
Agreement, any other Loan Document, or any document contemplated by or referred
to herein, to the extent that the Agent is not reimbursed for such expenses by
or on- behalf of the Borrower. The undertaking in this Section 9.7 shall survive
the payment of all Obligations hereunder and the resignation or replacement of
the Agent.
9.8 Agent in Individual Capacity. Imperial Bank and its Affiliates may make
loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and generally engage in any kind of banking, trust,
financial advisory, underwriting or other business with the Borrower and its
Subsidiaries and Affiliates as though Imperial Bank were not the Agent hereunder
and without notice to or consent of the Banks. The Banks acknowledge that,
pursuant to such activities, Imperial Bank or its Affiliates may receive
information regarding the Borrower or its Affiliates (including information that
may be subject to confidentiality obligations in favor of the Borrower or such
Subsidiary) and acknowledge that the Agent shall be under no obligation to
provide such information to them. With respect to its Loans, Imperial Bank shall
have the same rights and powers under this Agreement as any other Bank and may
exercise the same as though it were not the Agent, and the terms "Bank" and
"Banks" include Imperial Bank in its individual capacity.
9.9 Successor Agent. The Agent may, and at the request of the Majority
Banks shall, resign as Agent upon thirty (30) days, notice to the Banks and the
Borrower. If the Agent resigns under this Agreement, the Majority Banks shall
appoint from among the Banks a successor agent for the Banks. If no successor
agent is appointed prior to the effective date of the resignation of the Agent,
the Agent may appoint, after consulting with the Banks and the Borrower, a
successor agent from among the Banks. Upon the acceptance of its appointment as
successor agent hereunder, such successor agent shall succeed to all the rights,
powers and duties of the retiring Agent and the term "Agent" shall mean such
successor agent and the retiring Agent's appointment, powers and duties as Agent
shall be terminated. After any retiring Agent's resignation hereunder as Agent,
the provisions of this Article IX and Sections 10.4, 10.5 and 10.6 shall inure
to its benefit as to any actions taken or omitted to be taken by it while it was
Agent under this Agreement. If no successor agent has accepted appointment as
Agent by the date which is thirty (30) days following a retiring Agent's notice
of resignation, the retiring Agent's resignation shall nevertheless thereupon
become effective and the Banks shall perform all of the duties of the Agent
hereunder until such time, if any, as the Majority Banks appoint a successor
agent as provided for above.
9.10 Withholding Tax.
71
<PAGE>
(a) If any Bank is a "foreign corporation, partnership or trust"
within the meaning of the Code and such Bank claims exemption from, or a
reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such
Bank agrees with and in favor of the Agent, to deliver to the Agent:
(i) if such Bank claims an exemption from, or a reduction of,
withholding tax under a United States tax treaty, properly completed IRS Forms
1001 and W-8 prior to the Closing Date and prior to the first day of each
calendar year thereafter;
(ii) if such Bank claims that interest paid under this Agreement
is exempt from United States withholding tax because it is effectively connected
with a United States trade or business of such Bank, two properly completed and
executed copies of IRS Form 4224 prior to the Closing Date and prior to the
first day of each calendar year thereafter and IRS Form W-9; and
(iii) such other form or forms as may be required under the Code
or other laws of the United States as a condition to exemption from, or
reduction of, United States withholding tax.
Such Bank agrees to promptly notify the Agent of any change in
circumstances which would modify or render invalid any claimed exemption or
reduction.
(b) If any Bank claims exemption from, or reduction of, withholding
tax under a United States tax treaty by providing IRS Form 1001 and such Bank
sells, assigns, grants a participation in, or otherwise transfers all or part of
the Obligations of the Borrower to such Bank, such Bank agrees to notify the
Agent of the percentage amount in which it is no longer the beneficial owner of
Obligations of the Borrower to such Bank. To the extent of such percentage
amount, the Agent will treat such Bank's IRS Form 1001 as no longer valid.
(c) If any Bank claiming exemption from United States withholding tax
by filing IRS Form 4224 with the Agent sells, assigns, grants a participation
in, or otherwise transfers all or part of the Obligations of the Borrower to
such Bank, such Bank agrees to undertake sole responsibility for complying with
the withholding tax requirements imposed by Sections 1441 and 1442 of the Code.
(d) If any Bank is entitled to a reduction in the applicable
withholding tax, the Agent may withhold from any interest payment to such Bank
an amount equivalent to the applicable withholding tax after taking into account
such reduction. If the forms or other documentation required by subsection (a)
of this Section are not delivered to the Agent, then the Agent may withhold from
any interest payment to such Bank not
72
<PAGE>
providing such forms or other documentation an amount equivalent to the
applicable withholding tax.
(e) If the IRS or any other Governmental Authority of the United
States or other jurisdiction asserts a claim that the Agent did not properly
withhold tax from amounts paid to or for the account of any Bank (because the
appropriate form was not delivered, was not properly executed, or because such
Bank failed to notify the Agent of a change in circumstances which rendered the
exemption from, or reduction of, withholding tax ineffective, or for any other
reason) such Bank shall indemnify the Agent fully for all amounts aid, directly
or indirectly, by the Agent as tax or otherwise, including penalties and
interest, and including any taxes imposed by any jurisdiction on the amounts
payable to the Agent under this Section, together with all costs and expenses
(including Attorney Costs). The obligation of the Banks under this subsection
shall survive the payment of all Obligations and the resignation or replacement
of the Agent.
ARTICLE X
MISCELLANEOUS
-------------
10.1 Amendments and Waivers. No amendment or waiver of any provision of
this Agreement or any other Loan Document, and no consent with respect to any
departure by the Borrower therefrom, shall be effective unless the same shall be
in writing and signed by the Majority Banks (or by the Agent at the written
request of the Majority Banks) and the Borrower and acknowledged by the Agent,
and then any such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given; provided, however, that
no such waiver, amendment, or consent shall, unless in writing and signed by all
the Banks and the Borrower and acknowledged by the Agent, do any of the
following:
(a) increase or extend the Commitment of any Bank (or reinstate any
Commitment terminated pursuant to Section 8.2);
(b) postpone or delay any date fixed by this Agreement or any other
Loan Document for any payment of principal, interest, fees or other amounts due
to the Banks (or any of them) hereunder or under any other Loan Document;
(c) reduce the principal of, or the rate of interest specified herein
on any Loan, or (subject to clause (ii) below) any fees or other amounts payable
hereunder or under any other Loan Document;
(d) change the percentage of the Combined Commitments or of the
aggregate unpaid principal amount of the Loans which is required for the Banks
or any of them to take any action hereunder;
(e) amend this Section, Section 2.13 or Section 7.1, or any provision
herein providing for consent or other action by all Banks; or
(f) amend the definition of "Change of Control" or waive any Event of
Default under Section 8.1(k).
and, provided further, that (i) no amendment, waiver or consent shall, unless in
writing and signed by the Agent in addition to the Majority Banks or all the
Banks, as the case may be, affect the rights or duties of the Agent under this
Agreement or any other Loan Document, and (ii) the Fee Letter may be amended, or
rights or privileges thereunder waived, in a writing executed by the parties
thereto.
73
<PAGE>
10.2 Notices.
(a) All notices, requests and other communications shall be in writing
(including, unless the context expressly otherwise provides, by facsimile
transmission, provided that any matter transmitted by the Borrower by facsimile
(i) shall be immediately confirmed by a telephone call to the recipient at the
number specified on Schedule 10.2, and (ii) shall be followed promptly by
delivery of a hard copy original thereof) and mailed, faxed or delivered, to the
address or facsimile number specified for notices on Schedule 10.2; or, as
directed to the Borrower or the Agent, to such other address as shall be
designated by such party in a written notice to the other parties, and as
directed to any other party, at such other address as shall be designated by
such party in a written notice to the Borrower and the Agent.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery, or faxed, be effective when delivered for
overnight (next-day) delivery, or transmitted in legible form by facsimile
machine, respectively, or if mailed, upon the third Business Day after the date
deposited into the U.S. mail, or if delivered, upon delivery; except that
notices pursuant to Article II or IX shall not be effective until actually
received by the Agent.
(c) Any agreement of the Agent and the Banks herein to receive certain
notices by telephone or facsimile is solely for the convenience and at the
request of the Borrower. The Agent and the Banks shall be entitled to rely on
the authority of any Person purporting to be a Person authorized by the Borrower
to give such notice and the Agent and the Banks shall not have any liability to
the Borrower or other Person on account of any action taken or not taken by the
Agent or the Banks in reliance upon such telephonic or facsimile notice. The
obligation of the Borrower to repay the Loans shall not be affected in any way
or to any extent by any failure by the Agent and the Banks to receive written
confirmation of any telephonic or facsimile notice or the receipt by the Agent
and the Banks of a confirmation which is at variance with the terms understood
by the Agent and the Banks to be contained in the telephonic or facsimile
notice.
10.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in
exercising, on the part of the Agent or any Bank, any right, remedy, power or
privilege hereunder, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or
74
<PAGE>
further exercise thereof or the exercise of any other right, remedy, power or
privilege.
10.4 Costs and Expenses. The Borrower shall:
(a) subject to the terms of the Fee Letter, whether or not the
transactions contemplated hereby are consummated, pay or reimburse the Agent
within fifteen (15) Business Days after demand (subject to Section 4.1(e)) for
all costs and expenses incurred by the Agent in connection with the development,
preparation, delivery, administration and execution of, and any amendment,
supplement, waiver or modification to (in each case, whether or not
consummated), this Agreement, any Loan Document and any other documents prepared
in connection herewith or therewith, and the consummation of the transactions
contemplated hereby and thereby, including reasonable Attorney Costs incurred by
the Agent with respect thereto; and
(b) pay or reimburse the Agent and each Bank within five (5) Business
Days after demand for all costs and expenses (including Attorney Costs) incurred
by them in connection with the enforcement, attempted enforcement, or
preservation of any rights or remedies under this Agreement or any other Loan
Document during the existence of an Event of Default or after acceleration of
the Loans (including in connection with any "workout" or restructuring regarding
the Loans, and including in any Insolvency Proceeding or appellate proceeding).
10.5 Borrower Indemnification. Whether or not the transactions contemplated
hereby are consummated, the Borrower shall indemnify and hold the Agent-Related
Persons, and each Bank and each of its respective officers, directors,
employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person")
harmless from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, charges, expenses and disbursements
(including Attorney Costs) of any kind or nature whatsoever which may at any
time (including at any time following repayment of the Loans and the
termination, resignation or replacement of the Agent or replacement of any Bank)
be imposed on, incurred by or asserted against any such Person in any way
relating to or arising out of this Agreement or any document contemplated by or
referred to herein, or the transactions contemplated hereby, or any action taken
or omitted by any such Person under or in connection with any of the foregoing,
including with respect to any investigation, litigation or proceeding (including
any Insolvency Proceeding or appellate proceeding)
75
<PAGE>
related to or arising out of this Agreement or the Loans or the use of the
proceeds thereof, whether or not any Indemnified Person is a party thereto (all
the foregoing, collectively, the "Indemnified Liabilities"); provided, that the
Borrower shall have no obligation hereunder to any Indemnified Person with
respect to Indemnified Liabilities resulting solely from the gross negligence or
willful misconduct of such Indemnified Person. The agreements in this Section
shall survive payment of all other Obligations.
10.6 Payments Set Aside. To the extent that the Borrower makes a payment to
the Agent or the Banks, or the Agent or the Banks exercise their right of
set-off, and such payment or the proceeds of such set-off or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside or required (including pursuant to any settlement entered into by the
Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any
other party, in connection with any Insolvency Proceeding or otherwise, then (a)
to the extent of such recovery the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and effect
as if such payment had not been made or such set-off had not occurred, and (b)
each Bank severally agrees to pay to the Agent upon demand its pro rata share of
any amount so recovered from or repaid by the Agent.
10.7 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that the Borrower may not assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of the Agent and each Bank.
10.8 Assignments, Participations, etc.
(a) Any Bank may, with the written consents of the Borrower and the
Agent, which consents shall be at the sole discretion of the Borrower and the
Agent, at any time assign and delegate to one or more Eligible Assignees
(provided that (i) no written consent of the Borrower shall be required during
the existence of an Event of Default after the Agent has declared the Commitment
of each Bank to make Loans to be terminated and (ii) no written consent of the
Borrower or the Agent shall be required in connection with any assignment and
delegation by a Bank to an Eligible Assignee that is an Affiliate of such Bank)
(each an "Assignee") all, or any ratable part of all, of the Loans, the Combined
Commitments and the other rights and obligations of such
76
<PAGE>
Bank hereunder, in a minimum amount of $5,000,000; provided, however, that the
Borrower and the Agent may continue to deal solely and directly with such Bank
in connection with the interest so assigned to an Assignee until (i) written
notice of such assignment, together with payment instructions, addresses and
related information with respect to the Assignee, shall have been given to the
Borrower and the Agent such Bank and the Assignee; (ii) such Bank and its
Assignee shall have delivered to the Borrower and the Agent an Assignment and
Acceptance in the form of Exhibit J ("Assignment and Acceptance") together with
any Note or Notes subject to such assignment and (iii) the assignor Bank or
Assignee has paid to the Agent a processing fee in the amount of $2,500.
(b) From and after the date that the Agent notifies the assignor Bank
that it has received (and provided its consent with respect to) an executed
Assignment and Acceptance and payment of the above-referenced processing fee,
(i) the Assignee thereunder shall be a party hereto and, to the extent that
rights and obligations hereunder have been assigned to it pursuant to such
Assignment and Acceptance, shall have the rights and obligations of a Bank under
the Loan Documents, and (ii) the assignor Bank shall, to the extent that rights
and obligations hereunder and under the other Loan Documents have been assigned
by it pursuant to such Assignment and Acceptance, relinquish its rights and be
released from its obligations under the Loan Documents.
(c) Within five (5) Business Days after its receipt of notice by the
Agent that it has received an executed Assignment and Acceptance and payment of
the processing fee, (and provided that it consents to such assignment in
accordance with Section 10.8(a)), the Borrower shall execute and deliver to the
Agent, new Notes evidencing such Assignee's assigned Loans and Commitment and,
if the assignor Bank has retained a portion of its Loans and its Commitment,
replacement Notes in the principal amount of the Loans retained by the assignor
Bank (such Notes to be in exchange for, but not in payment of, the Notes held by
such Bank). Immediately upon each Assignee's making its processing fee payment
under the Assignment and Acceptance, this Agreement shall be deemed to be
amended to the extent, but only to the extent, necessary to reflect the addition
of the Assignee and the resulting adjustment of the Combined Commitments arising
therefrom. The Commitment allocated to each Assignee shall reduce such
Commitments of the assigning Bank pro tanto.
(d) Any Bank may at any time sell to one or more commercial banks or
other Persons not Affiliates of the Borrower (a "Participant") participating
interests in any Loans, the Commitment of that Bank and the other interests of
that Bank (the "Originator") hereunder and under the other Loan Documents;
provided, however, that (i) the Originator's obligations under this Agreement
shall remain unchanged, (ii) the Originator shall remain solely responsible for
the performance of such obligations, (iii) the Borrower and the Agent shall
continue to deal solely and directly with the Originator in connection with the
Originator's
77
<PAGE>
rights and obligations under this Agreement and the other Loan Documents, and
(iv) no Bank shall transfer or grant any participating interest under which the
Participant has rights to approve any amendment to, or any consent or waiver
with respect to, this Agreement or any other Loan Document, except to waiver
would require unanimous consent of the Banks as described in the first proviso
to Section 10.1. In the case of any such participation, the Participant shall be
entitled to the benefit of Sections 3.1, 3.3 and 10.5 as though it were also a
Bank hereunder, and if amounts outstanding under this Agreement are due and
unpaid, or shall have been declared or shall have become due and payable upon
the occurrence of an Event of Default, each Participant shall be deemed to have
the right of set-off in respect of its participating interest in amounts owing
under this Agreement to the same extent as if the amount of its participating
interest were owing directly to it as a Bank under this Agreement.
(e) Notwithstanding any other provision in this Agreement, any Bank
may at any time assign all or any portion of its rights under and interest in
this Agreement and the Note held by it for the purpose of creating a security
interest in favor of any Federal Reserve Bank in accordance with Regulation A of
the FRB or U.S. Treasury Regulation 31 CFR ss.203.14, and such Federal Reserve
Bank may enforce such pledge or security interest in any manner permitted under
applicable law.
10.9 Confidentiality. Each Bank agrees to take and to cause its Affiliates
to take normal and reasonable precautions and exercise due care to maintain the
confidentiality of all information identified as "confidential" or "secret" by
the Borrower and provided to it by the Borrower or any Subsidiary, or by the
Agent on such Company's or Subsidiary's behalf, under this Agreement or any
other Loan Document, and neither it nor any of its Affiliates shall use any such
information other than in connection with or in enforcement of this Agreement
and the other Loan Documents or in connection with other business now or
hereafter existing or contemplated with the Borrower or any Subsidiary; except
to the extent such information (i) was or becomes generally available to the
public other than as a result of disclosure by the Bank, or (ii) was or becomes
available on a non-confidential basis from a source other than the Borrower,
provided that such source is not bound by a legal or contractual obligation
known to the Bank; provided, however, that any Bank may disclose such
information (A) at the request or pursuant to any requirement of any
Governmental Authority to which the Bank is subject or in connection with an
examination of such Bank by any such authority; (B) pursuant to subpoena or
other court process; (C) when required to do so in accordance with the
provisions of any applicable Requirement of Law; (D) to the extent reasonably
required in connection with any litigation or proceeding to which the Agent, any
Bank or their respective Affiliates may be party; (E) after the occurrence of a
Default, to the extent reasonably required in connection with the
78
<PAGE>
exercise of any remedy hereunder or under any other Loan Document; (F) to such
Bank's independent auditors and other professional advisors; (G) to any
Participant or Assignee, actual or potential, provided that such Person agrees
in writing to keep such information confidential to the same extent required of
the Banks hereunder; (H) as to any Ban or its Affiliates, as expressly permitted
under the terms of any other document or agreement regarding confidentiality to
which the Borrower or any Subsidiary is party with such Bank or such Affiliate;
and (I) to its Affiliates; provided, however, that in the event any Bank is
requested to disclose confidential information pursuant to this Section 10.9
(A), (B), (C) or (D), such Bank shall notify the Borrower promptly, if it may
lawfully so do, so that the Borrower may seek a protective order or other
appropriate remedy.
10.10 Set-off. In addition to any rights and remedies of the Banks provided
by law, if an Event of Default exists or the Loans have been accelerated, each
Bank or any Affiliate, which is an Eligible Assignee, thereof is authorized at
any time and from time to time, without prior notice to the Borrower, any such
notice being waived by the Borrower to the fullest extent permitted by law, to
set off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held by, and other indebtedness at any time
owing by, such Bank to or for the credit or the account of the Borrower against
any and all Obligations owing to such Bank, now or hereafter existing,
irrespective of whether or not the Agent or such Bank shall have made demand
under this Agreement or any Loan Document and although such obligations may be
contingent or unmatured and each such Affiliate is hereby irrevocably authorized
to permit such set-off and appropriation. Each Bank agrees promptly to notify
the Borrower and the Agent after any such set-off and application made by such
Bank; provided, however, that the failure to give such notice shall not affect
the validity of such set-off and application.
10.11 Notification of Addresses, Lending Offices, Etc. Each Bank shall
notify the Agent in writing of any changes in the address to which notices to
the Bank should be directed, of addresses of any Lending Office, of payment
instructions in respect of all payments to be made to it hereunder and of such
other administrative information as the Agent shall reasonably request.
10.12 Counterparts. This Agreement may be executed in any number of
separate counterparts, each of which, when so executed, shall be deemed an
original, and all of said counterparts taken together shall be deemed to
constitute but one and the same instrument.
10.13 Severability. The illegality or unenforceability of any provision of
this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or
79
<PAGE>
enforceability of the remaining provisions of this Agreement or any instrument
or agreement required hereunder.
10.14 No Third Parties Benefited. This Agreement is made and entered into
for the sole protection and legal benefit of the Borrower, the Banks, the Agent
and the Agent-Related Persons, and successors and assigns and no other Person
shall be a direct or indirect legal beneficiary of, or have any direct or
indirect cause of action or claim in connection with, this Agreement or any of
the other Loan Documents.
10.15 Governing Law and Jurisdiction.
(a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT THE AGENT
AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA
OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF CALIFORNIA, AND BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF The Borrower, THE AGENT AND
THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE
NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF The Borrower, THE AGENT AND
THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE
LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY
NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH
JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. The
Borrower, THE AGENT AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS,
COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY
CALIFORNIA LAW.
10.16 Waiver of Jury Trial. THE CREDIT PARTIES, THE BANKS AND THE AGENT
EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST
ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER
WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE CREDIT PARTIES,
THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL
BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE
PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED
BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF
THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF.
THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
80
<PAGE>
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS.
10.17 Entire Agreement. This Agreement, together with the other Loan
Documents, embodies the entire agreement and understanding among the Credit
Parties, the Banks and the Agent, and supersedes all prior or contemporaneous
agreements and understandings of such Persons, verbal or written, relating to
the subject matter hereof and thereof.
81
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered in Los Angeles by their proper and duly authorized
officers as of the day and year first above written.
GENTLE DENTAL SERVICE CORPORATION
By: MICHAEL THOMAS FIORE
------------------------------------
Title:
GMS DENTAL GROUP MANAGEMENT, INC.
By: MICHAEL THOMAS FIORE
------------------------------------
Title:
GMS DENTAL GROUP MANAGEMENT OF
SOUTHERN CALIFORNIA, INC.
By: MICHAEL THOMAS FIORE
------------------------------------
Title:
GMS HAWAII ACQUISITION COMPANY
By: MICHAEL THOMAS FIORE
------------------------------------
Title:
GMS DENTAL GROUP MANAGEMENT OF
HAWAII, INC.
By: MICHAEL THOMAS FIORE
------------------------------------
Title:
82
<PAGE>
GMS DENTAL GROUP MANAGEMENT OF THE
MOUNTAIN STATES, INC.
By: MICHAEL THOMAS FIORE
------------------------------------
Title:
IMPERIAL BANK, as Agent
By: JOHN S. HARRIS
------------------------------------
Title: SVP
IMPERIAL BANK, as a Bank
By: JOHN S.HARRIS
------------------------------------
Title: SVP
83
Exhibit 21.1
List of Subsidiaries
GMS Dental Group Management, Inc., a Delaware corporation
GMS Hawaii Acquisition Company, a Delaware corporation
GMS Dental Group Management of Hawaii, Inc., a Hawaii corporation
GMS Dental Group Management of Southern California, Inc., a California
corporation
GMS Dental Group Management of the Mountain States, Inc., a Delaware corporation
Gentle Dental Management--Pacific Northwest, Inc., a Delaware corporation
EXHIBIT 23.1
CONSENT OF ACCOUNTANTS
The Board of Directors and Shareholders
Gentle Dental Service Corporation:
We consent to incorporation by reference in the registration statements on Form
S-8 (Nos. 333-25315 and 333-25319) of Gentle Dental Service Corporation of our
report dated February 20, 1998, except as to note 14 which is as of March 16,
1998, relating to the consolidated balance sheets of Gentle Dental Service
Corporation and subsidiaries as of December 31, 1996 and 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the two year period ended December 31, 1997, which report
appears in this Annual Report on Form 10-KSB of Gentle Dental Service
Corporation. Our report refers to the report of other auditors for the separate
financial statements of Gentle Dental Service Corporation included in the 1996
financial statements restated for the 1997 pooling of interests between Gentle
Dental Service Corporation and GMS Dental Group, Inc. and subsidiaries.
KPMG PEAT MARWICK LLP
Orange County, California
March 30, 1998
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-25315 and 333-25319) of Gentle Dental Service
Corporation of our report dated February 28, 1997 which appears in Gentle Dental
Service Corporation's Annual Report on Form 10-KSB for the year ended December
31, 1997.
Price Waterhouse LLP
March 30, 1998
Portland, Oregon
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GENTLE
DENTAL SERVICE CORPORATION'S FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 2,220 302
<SECURITIES> 0 0
<RECEIVABLES> 4,826 6,331
<ALLOWANCES> 1,706 4,159
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,843 11,199
<PP&E> 5,766 10,084
<DEPRECIATION> 1,149 2,273
<TOTAL-ASSETS> 26,396 44,408
<CURRENT-LIABILITIES> 7,571 8,361
<BONDS> 0 0
13,254 2,130
2 0
<COMMON> 2,890 21,784
<OTHER-SE> 194 (2,405)
<TOTAL-LIABILITY-AND-EQUITY> 26,396 44,408
<SALES> 14,413 43,403
<TOTAL-REVENUES> 14,413 43,403
<CGS> 0 0
<TOTAL-COSTS> 15,958 45,944
<OTHER-EXPENSES> 48 74
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 749 653
<INCOME-PRETAX> (2,342) (3,268)
<INCOME-TAX> (655) (81)
<INCOME-CONTINUING> (1,687) (3,187)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,687) (3,187)
<EPS-PRIMARY> (1.18) (1.17)
<EPS-DILUTED> (1.18) (1.17)
</TABLE>
